CHAPTER 1

BILATERAL INVESTMENT TREATIES

1.1. Evolution of International Investment Law

Be it ancient age of invention of a wheel; or period of the Greeks, Galileo,

Isaac Newton or Albert Einstein’s discoveries; or contemporary era of
scientific and technology revolutions; money, in its initial as well as modern
forms, has been considered indispensable part of every society. Being aware
of this importance of money, the people of every age, with their own
civilization, deemed inevitable devising mechanisms for its effective trading.
The trading activities became complex as the world became global village.
Consequently, the disputes between individuals and the like situations
paved way for the development of common laws whereas changes in
technology, demanding modification of trading patterns, resulted in
development of commercial laws.1

Moreover, there was need to fill lacunas in earlier international rules

dealing with aliens and their properties and to regulate relations between
States and foreign investors in more effective way. In the earlier
international rules relating to foreign investments and investors, only the
home States of the investors and the host States had legal standing. The
diplomatic protections were the main tool to get resolved issues concerning
foreign investments and, in case of any investment dispute, the home State,
without participation of the investor, used to deal with the host State
directly. Therefore, the United Nations Resolutions desiring establishment
of a New International Economic Order (NIEO) were adopted in 1970s.

1
Colin Bamford, Principles of International Financial Law (1st edn, Oxford University Press,
New York, 2011), pp. 2-3.
These resolutions demanded regulation of foreign investors and their
investments. At present, almost all the host States are willing to ensure
certain standards of treatment and to abide by the obligations imposed by
the treaties and allow the investors availing of international dispute
settlement mechanisms against the host States.2

1.2. Bilateral Investment Treaties

These days, where the world has become a global village, the States cannot
function independently and, rather, continuously strive for arrangements
ensuring smooth transition of modern businesses. Bilateral Investment
Treaties (BITs) were result of such efforts to maximize bilateral investments
while guaranteeing protection of investments as well as rights of foreign
investors and capital for home States.3 The BITs, in simple words, may be
termed the agreements setting forth terms and conditions of private
investments by the nationals or companies of one State in another State. 4

Investment opportunities in underdeveloped or developing countries do lure

the investors of developed countries. Such investments are beneficial for
both home and host State parties but also involve high risks. For example,
even the carefully chalked out plans would result in loss if the host State
expropriates assets of an investor without adequate compensation. In past,
an investor used to request its country to use military force against the host
2
Peter Muchlinski, Federico Ortino, et al., The Oxford Handbook of International
Investment Law (1st edn, Oxford University Press, Great Britain, 2008), pp. 4, 6.

3
Philip R Wood, Conflict of Law and International Finance (1st edn, Sweet & Maxwell,
London, 2007), p. 32.

4
Bilateral Investment Treaty
<http://www.law.cornell.edu/wex/bilateral_investment_treaty> accessed November 2,
2016.
State to force refunding of investor’s money.5 Even the investors of such
mighty nations were not secure because they had no idea whether their
government would find their specific complain worthy of taking action and,
even if the government got involved, whether there were chances of full
recovery of the amount. However, both the parties were somehow
managing their issues because host States needed capital and the investors
had the desires for profits. The era after Second World War witnessed
increase in foreign investments due to market stability, strengthening of
institutions for resolution of investment disputes and nationalization of
certain industries across the world. The investors started thinking
renegotiation of the already concluded treaties to meet the demands of
diverse economies. For instance, United States of America (USA) was
relying on Friendship, Commerce and Navigation (FCN) treaties to govern
its relations with different foreign countries. Most of the States had also
adopted such FCNs to regulate their economic relations. These FCN
treaties were not success in regulating relations between developed and
developing nations because the FCNs were designed for a scenario where
both the parties were developed countries. Consequently, issues arose such
as failure to accord equal treatment to all the investors and, especially,
where the investors from developed countries desired unrestricted entries
in the developing countries. These reasons compelled introduction of new
instruments governing the investor-State relations in an efficient and
effective manner.6
5
Holger H. Herwig, Germany’s Vision of Empire in Venezuela: 1871-1914 45-62 (1986)
[detailing the events leading up to one such confrontation between Germany and Great
Britain and the host country of investment, Venezuela] cited in Matthew Wendlandt, “SGS
v. Philippines and the Role of ICSID Tribunals in Investor-State Contract Disputes”, (Vol.
43:523), Texas International Law Journal
<http://www.tilj.org/content/journal/43/num3/Wendlandt523.pdf> accessed July 16, 2017.

6
Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Kluwer Law
International, The Hague, Netherlands, 1995); R. Doak Bishop, James Crawford and W.
Michael Reisman, Foreign Investment Disputes, Cases, Materials and Commentary 9
(2005) cited in Matthew Wendlandt, “SGS v. Philippines and the Role of ICSID Tribunals in
Investor-State Contract Disputes”, (Vol. 43:523), Texas International Law Journal
<http://www.tilj.org/content/journal/43/num3/Wendlandt523.pdf> accessed July 16, 2017.
The BITs normally consist of three parts. The first part provides definitions,
especially of the words ‘investment’ and ‘investor’. The second part contains
substantive standards for protection of investments. The examples of
provisions in this part include fair and equitable treatment (FET), provisions
on admission of investments, guarantees against arbitrary and
discriminatory treatment, full protection and security, most-favored-nation
treatment (MFN), free transfer of payments and guarantees against
expropriation. The investment treaties are considered “admission tickets” to
international investment markets.7

1.3. Origin of BITs

The very first modern BIT was executed between Pakistan and Germany in
1959.8 As stated above, similar agreements having investor protection
provisions, known as FCN treaties, existed even before 1959. Such first
similar agreement was executed between USA and France in 1778. 9 Thus,
BITs may be considered successors to the FCN treaties. Besides France,
USA negotiated and signed FCNs with many European States including
Italy and Latin American States. The FCN treaties were not favorite of
investors and capital-importing States due to their failure to take into
account differences between economic conditions of developed and
developing States. The FCNs also lacked direct focus on various other

7
Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd
edn, Oxford University Press, UK, 2012), pp. 58-59.

8
Andrew T. Guzman and Alan O. Sykes (eds.), Research Handbook in International
Economic Law (Edward Elgar, UK, 2007), p. 215. For Pakistan-Germany BIT, please see
footnote 39 (below).

9
Vandevelde, United States Investment Treaties (Kluwer Law and Taxation, Deventer,
Netherlands).
investment issues. Due to these lacunas, the European countries were
finding out ways to have such instruments that specifically address
investment related issues and, therefore, started negotiating BITs. 10

New and independent developing countries, which emerged mainly between

the period 1945 and 1990, fascinated the capital-exporting States. The new
States needed capital and the investors wanted to invest for profits but the
existing FCNs were not representing and protecting interests of the
stakeholders of home and host States. Germany took the initiative and
planned a program to protect foreign investment of its companies and
successfully negotiated BITs in accordance with laws of the host States
while securing interests of the home States. The European countries
followed the example of Germany and Switzerland concluded its first
modern BIT in 196111, followed by France in 196312. The earlier versions of
BITs did not have settlement procedures for investor-State disputes, rather
the parties had to submit the disputes to the International Court of Justices
(ICJ) or had to make recourse to State-to-State arbitration. In 1969, the BIT
between Chad and Italy commenced the practice of arbitration between
foreign investors and host States.13 It may be noted that there is not much
10
Zeynep Akgul, The Development of International Arbitration on Bilateral Investment
Treaties, Disputes Between States and Investor, ICSID Cases Against Turkey Regarding
Energy Sector (Dissertation.com, Florida, USA, 2008), p. 9.

11
Switzerland-Tunisia BIT (1961)
<http://investmentpolicyhub.unctad.org/Download/TreatyFile/2982> accessed May 11,
2017.

12
France-Tunisia BIT (1963)
<http://investmentpolicyhub.unctad.org/Download/TreatyFile/3496> accessed May 11,
2017.

13
It appears that Article 7 of the BIT provides the mechanism for arbitration between
investors and States. The BIT is in French and the copy, which is available online, is not
legible. The Google Translator could not translate the whole Article due to illegible words.
Article 7 starts with the words “Any controversy, including investment, object of the
Priscilla Accardo, which could arise between one of the Parties with (sic)…” Chad-Italy BIT
(1969) <http://investmentpolicyhub.unctad.org/Download/TreatyFile/659> accessed May
11, 2017.
difference in the terms and conditions of BITs whether concluded between
the developing, the developed or the developing and the developed States. 14

14
Supra 7, pp. 44, 47, 50, 51, 52.