What Are BITs (Bilateral Investment Treaties)?

Bilateral Investment Treaties (BITs) are agreements between two countries that outline the terms and conditions under which foreign investments from one country will be protected in the other country. These treaties are designed to provide legal guarantees for foreign investors, such as protection against expropriation, assurance of fair and equitable treatment (FET), and access to dispute resolution mechanisms like Investor-State Dispute Settlement (ISDS). BITs play a vital role in fostering international investment flows by promoting a stable, predictable, and non-discriminatory environment for foreign investors.

What Are Bilateral Investment Treaties (BITs)?

Definition of BITs

A Bilateral Investment Treaty (BIT) is an international agreement between two sovereign states that governs and protects the interests of investors from one country when they invest in the other country. BITs establish a legal framework for the treatment and protection of foreign investments, creating a more predictable environment for investment.

Key Provisions of BITs

• Protection Against Expropriation: BITs typically protect foreign investors from expropriation, or the forced seizure of property by the host state, unless it is done for public purposes and with prompt, adequate, and effective compensation.
• Fair and Equitable Treatment (FET): BITs often include provisions requiring the host state to treat foreign investors fairly and equitably, providing a stable and transparent regulatory framework and protecting the investor's legitimate expectations.
• National Treatment (NT): The National Treatment provision ensures that foreign investors are treated no less favorably than domestic investors. Host states are not allowed to discriminate against foreign investors based on their nationality.
• Most-Favoured-Nation (MFN) Treatment: BITs often contain an MFN clause, which guarantees that foreign investors will receive treatment as favorable as the best treatment given to investors from any other country.
• Full Protection and Security: BITs may include provisions guaranteeing the physical security of investments, requiring the host country to provide adequate protection to foreign investments against threats, including physical damage or interference.

Dispute Resolution Mechanisms

One of the key features of BITs is the Investor-State Dispute Settlement (ISDS) mechanism, which allows foreign investors to directly sue the host state in an international forum, usually through arbitration, if their rights under the BIT are violated. ISDS provides investors with an alternative to the domestic court systems of the host state, which may be seen as biased or unreliable.

• International Arbitration: Many BITs provide for dispute resolution through institutions like the International Centre for Settlement of Investment Disputes (ICSID), the Permanent Court of Arbitration (PCA), or other international arbitration bodies.
• Arbitration Clauses: These treaties include clauses outlining the procedures for resolving disputes between the investor and the host state, providing a neutral platform for settling claims.

Types of Protections in BITs

• Non-Discrimination: The treaties typically prohibit any discriminatory treatment, ensuring that investors from one country are not treated less favorably than those from the host country or other countries.
• Free Transfer of Funds: BITs often ensure that foreign investors can freely transfer their profits, dividends, and capital out of the host country without restrictions.
• Transparency: Many BITs mandate that host states maintain transparency in their regulatory processes, ensuring that foreign investors have access to relevant information about laws and regulations affecting their investments.

BITs in Practice

BITs provide a stable legal environment for foreign investors, which increases their confidence and willingness to invest in a host country.

They typically reduce the risks for investors by offering legal recourse through ISDS if the host country violates any of the treaty's provisions, such as denying the investor fair treatment or national treatment.

Advantages of BITs for Foreign Investors

• Legal Protection: Foreign investors benefit from the legal protections provided by BITs, which shield them from arbitrary state actions and ensure their rights are upheld even in a foreign jurisdiction.
• Access to ISDS: BITs often provide investors with the ability to access international arbitration mechanisms such as ICSID or UNCITRAL for the resolution of disputes with the host state. This provides a level of neutrality and impartiality that domestic courts may lack.
• Encouragement of Investment: By offering protections and assurances, BITs encourage more foreign direct investment (FDI), as investors are more likely to invest in countries where their rights are guaranteed and there is a neutral process to resolve disputes.
• Stability and Predictability: BITs help create a stable legal and regulatory framework, which is particularly important for long-term investments in sectors such as infrastructure, energy, and natural resources.

BITs and Host States

Attracting Foreign Investment: For host countries, BITs serve as a tool to attract foreign investment by providing investors with security and protections that enhance the investment climate. Countries with a strong network of BITs may be seen as more favorable destinations for international capital.

Balancing Sovereignty and Investor Protections: While BITs provide important protections for foreign investors, they may also limit the host state’s regulatory sovereignty, particularly in cases where investors challenge new laws or policies through ISDS mechanisms. Some host states have begun to review or renegotiate BITs to limit the scope of investor protections and preserve the ability to regulate in the public interest (e.g., environmental, health, or social policies).

Legal Cases Involving BITs

• Metalclad Corporation v. Mexico (2000): Metalclad, a U.S. corporation, claimed that Mexico had violated the terms of the North American Free Trade Agreement (NAFTA), a type of BIT, by refusing to grant an environmental permit for its waste management facility. The arbitral tribunal ruled in favor of Metalclad, stating that Mexico's actions violated the FET and National Treatment standards under the agreement.
• Eureko v. Poland (2005): In this case, a Dutch investor challenged Poland’s refusal to honor a privatization agreement. The tribunal ruled that Poland's actions were in violation of the FET standard under the applicable BIT, and awarded damages to Eureko.

Legal Protections and Consumer Actions

Due Diligence

Investors should carefully review the BITs between their home country and the host state to understand the protections and dispute resolution mechanisms available to them. This ensures that they are fully aware of their rights and remedies in case of a dispute.

Protecting Investment Interests

Investors should consider including BIT clauses in their contracts and agreements, ensuring that the host country’s commitment to protecting foreign investments is clearly outlined.

Dispute Resolution

If an investor believes their rights under a BIT have been violated, they should immediately consider ISDS as a potential remedy. By doing so, they can initiate arbitration and potentially secure compensation for damages incurred as a result of the host country’s actions.

Example

Suppose an Indian tech company invests in an African country to build a software development hub. After making a significant investment, the government unexpectedly imposes new laws that increase taxes on foreign firms and limit market access.

Steps the Indian tech company might take:

• The company reviews the India-Africa BIT to assess the legal protections it offers, especially in terms of National Treatment and Fair and Equitable Treatment (FET).
• The company files for ISDS under the BIT, claiming that the new laws breach the FET provision, as they are arbitrary and discriminatory against foreign investors.
• The tribunal reviews the case and, if it finds the host country violated the BIT, may award compensation for the financial loss caused by the new laws.