Multilateral Liberalization Through Bilateral Treaties Workshop on by alicejenny



                                                                                                                                                       Globalization and Finance Project
                                                                                                                                                                                      supported by the Ford Foundation

                                                                                             MULTILATERAL LIBERALIZATION
                                                                                             THROUGH BILATERAL TREATIES?
                                                                                             A WORKSHOP ON GLOBAL INVESTMENT GOVERNANCE
                                                                                             28 June 2012

                                                                                             CONTENTS                                                       List of participants
                                                                                                                                                            Ahmad I. Aslam:Counsellor in the Permanent Mission of Pakistan
                                                                                             Foreword                                                             to the WTO, and Charles Wallace Fellow, Global Economic
                                                                                                                                                                  Governance Programme,Oxford University
                                                                                             »   Ngaire Woods                                           2   N Jansen Calamita:Director of the BIICL Investment Treaty Forum
                                                                                                                                                            Xavier Carim:Deputy Director General, International Trade and
                                                                                             Summary of Proceedings                                                 Economic Development Division, Department of Trade and
                                                                                                                                                                    Industry,Republic of South Africa
                                                                                             »   Taylor St.John                                         3   Jayant Dasgupta:Ambassador and Permanent Representative of
                                                                                                                                                                   India to the WTO
                                                                                             (1) Free Transfer of Funds Clause                              Ana Gallo:Senior Director, Trade and EU Government Affairs,
                                                                                                                                                                   Dechert LLP
                                                                                             »   Xavier Carim                                           6   Anna Joubin-Bret:partner at Foley Hoag, formerly Senior Legal
                                                                                             »   Moataz Hussein                                         8          Adviser at UNCTAD
                                                                                                                                                            Alexandra Koutoglidou:European Commission DG Trade
                                                                                             »   Anna Joubin-Bret                                      10
                                                                                                                                                            Vaughan Lowe:Chichele Professor of Public International Law and
                                                                                             »   James Mendenhall                                      15         Fellow of All Souls College, Oxford University
                                                                                             »   Prabhash Ranjan                                       16   James Mendenhall:counsel at Sidley Austin LLP, and former General
                                                                                                                                                                  Counsel at the USTR
                                                                                             »   Elisabeth Tuerk and Cree Jones                        18
                                                                                                                                                            Santiago Montt:Professor of Law at the University of Chile, and
                                                                                                                                                                   Senior Manager, Group Legal, Base Metals, BHP Billiton 
                                                                                             (2) MFN Clause                                                 Charles Nevhutanda:Deputy General Manager in the Financial
                                                                                                                                                                   Surveillance Department of the South African Reserve Bank
                                                                                             »   Alexandra Koutoglidou                                 20
                                                                                                                                                            Veniana Qalo:Economic Advisor, Commonwealth Secretariat
                                                                                             »   Santiago Montt                                        23
                                                                                                                                                            Thomas Sebastian:Advocate (formerly Counsel at the ACWL and
                                                                                             »   Charles Nevhutanda                                    24         Senior Associate at Allen & Overy LLP)
                                                                                             »   Michael Waibel                                        25   Elisabeth Tuerk Officer in charge of the IIA Section of the Division on
                                                                                                                                                                    Investment and Enterprise at UNCTAD
                                                                                                                                                            Kenneth J Vandevelde:Professor of Law, Thomas Jefferson School
                                                                                             (3) National Security Exceptions                                     of Law
                                                                                             »   N Jansen Calamita                                     27   Ngaire Woods:Dean of the Blavatnik School of Government,
                                                                                                                                                                   and Professor of International Political Economy, Oxford
                                                                                             »   Thomas Sebastian                                      28          University
                                                                                             »   Kenneth J Vandevelde                                  29   Additional memos
                                                                                             »   Robert Volterra                                       30   Moataz Hussein:International Investment Agreements Specialist at
                                                                                                                                                                  The General Authority for Investment and Free Zones(GAFI)
                                                                                                                                                                  of Egypt
                                                                                                                                                            Prabhash Ranjan:Associate Professor, National Law University-
                                                                                                                                                                  Jodhpur, India and PhD Candidate at King’s College London
                                                                                                                                                            Robert Volterra:Partner at Volterra Fietta
                                                                                                                                                            Michael Waibel:University Lecturer in Law and Fellow of the
                                                                                                                                                                   Lauterpacht Centre, Cambridge University

                                                                                             Globalization and Finance Project, University of Oxford                                                               28 JUNE 2012 / 1
Ngaire Woods
Dean of the Blavatnik School and Professor of International Political Economy, Oxford University
This workshop is one of a series which form part of           prudential measures to prevent finance from being
the Globalization and Finance project sponsored by            destabilizing.  Bilateral Investment Treaties are often
the Ford Foundation. Previous meetings focussed on            referenced as either helping or exacerbating this
cross-border capital flows, global financial regulation       trade-off. 
and the financing of development. This meeting turned
                                                              The memos in this document explore the experience
attention to Bilateral Investment Treaties and their
                                                              of a number of countries and the constraints and
relationship to global finance. The concern driving the
                                                              opportunities they have experienced as a result
meeting was expressed by Charles Nevhutanda of
                                                              of Bilateral Investment Treaties.  The conclusions
South Africa’s Reserve Bank in his memo: “BITs may
                                                              are sobering for any policy-maker. BITs need to be
constrain the ability for countries to use prudential
                                                              entered into with great care. Their impact on inward-
or other regulatory measures to deal with the current
                                                              investment is not uniform. The constraints they can
global economic crisis”. We drew together a group of
                                                              impose – including for future policy - are important
top policy-makers and scholars to explore the extent
                                                              to consider. That said, Moataz Hussein presents the
to which BITs have in fact constrained policy, and to
                                                              new Egyptian model BIT as an example of a dynamic
what extent there is an international regime or standard
                                                              process which responds to new developments and
in relation to BITs which countries can draw upon or
                                                              balances the protection of investors’ and states’ rights
                                                              and responsibilities.
The problem is a straightforward one. As countries
across the world seek to galvanize growth in the
aftermath of the global financial crisis, they need
to balance measures which attract investment                       Thank you
into their economy, with their ability to apply                    Enormous thanks go to Taylor St John for organizing the
                                                                   meeting, editing the memos, and preparing this publication,
                                                                   and to Emily Jones for her assistance and impressive summary.
                                                                   I would also like to thank Ahmad Aslam, Visiting Fellow at the
                                                                   Global Economic Governance Programme for inspiring us to
                                                                   hold this meeting and helping to plan its overall direction and
                                                                   focus. Finally, thanks to Toby Whiting from the Blavatnik School
                                                                   of Government for his support on publications, and to Leonardo
                                                                   Burlamaqui from the Ford Foundation for making the whole
                                                                   exercise possible.

Globalization and Finance Project, University of Oxford                                                                 28 JUNE 2012 / 2
Taylor St.John
Research Associate, Globalization and Finance Project, Blavatnik School of Government, Oxford University
With the support of the Ford Foundation, on 28 June                      provisions may work against macroeconomic stability.
the Blavatnik School hosted a workshop on global                         An IMF report argued, “the limited flexibility afforded by
investment governance. This workshop was unique                          some bilateral and regional agreements in respect to
because it brought a wide range of perspectives                          liberalization obligations may create challenges for the
– negotiators, arbitrators, domestic policymakers,                       management of capital flows.”2 The IMF also argues
private-sector lawyers, and academics – together                         that BITs “in many cases do not provide appropriate
around one table, and prioritized broader political                      safeguards or proper sequencing of liberalization,
economy questions raised by investment treaties.                         and could thus benefit from reform to include these
Some of the key debates and themes that emerged                          protections.”3 This suggests that free transfer clauses
during the workshop are summarized below.                                should be made less absolute, or exceptions be
                                                                         added to protect policy flexibility.
Free transfer of funds clause
                                                                         Some participants in the workshop went further, and
The free transfer of funds clause, which guarantees
                                                                         questioned if free transfer clauses were needed in BITs
investors the right to repatriate their capital, is a central
                                                                         at all. One participant argued free transfer clauses
pillar of the bilateral investment treaty (BIT) regime.
                                                                         should be removed from BITs entirely, and that states
Most participants seemed to agree the content of
                                                                         should “return the system to its feet.” Returning the
free transfer clauses is clear, and there is a certain
                                                                         system to its feet means returning to customary
degree of harmony in the way most of these clauses
                                                                         international law, in which states have a sovereign
read. They have not been contentious in the past; out
                                                                         right to regulate flows of capital into and out of their
of 300 known investment treaty cases, only 4 cases
                                                                         territory. In BITs, states consent to abandon their right
have been based on a violation of free transfer of funds
                                                                         to regulate capital flows, and then add exceptions
clauses. What remains unclear is the implication of free
                                                                         that suggest states still retain the right to regulate
transfer clauses, particularly during a financial crisis.
                                                                         flows in certain circumstances. This is akin to a state
Do free transfer clauses unduly limit the ways a state
                                                                         choosing to walk on its head, and then adding pillows
can respond to a financial emergency?
                                                                         (exceptions) around so that it is more comfortable.
Many participants seemed to agree that free transfer
                                                                         For some participants, domestic legal codes have
clauses constrain policy choices and structure state
                                                                         evolved in most states to the point where they can
decision making. The crux of the debate is if these
                                                                         guarantee the free transfer of funds, without a BIT.
constraints push states in more predictable and
                                                                         Other participants still see considerable value in free
productive directions, or if they preclude the use of
                                                                         transfer clauses, perhaps with a balance of payments
helpful policy tools. While most BIT provisions focus
                                                                         exception to provide policy space in financial
on discriminatory action toward a single company, free
                                                                         emergencies. The range of views among participants
transfer clauses pertain to a broad government policy.
                                                                         about the desirability of free transfer clauses suggests
If the free transfer clause becomes a more common
                                                                         the debate on these provisions has only just begun.
basis for disputes, many fear that fiscal and monetary
policies of host states will increasingly be under review                Policy space
by arbitration tribunals. On the other hand, these fears
                                                                         For some participants, the metaphor of policy space
have not materialized yet and may be misplaced.
                                                                         triggers alarm bells. One participant outlined a
It was noted that some states have conditions that
                                                                         spectrum running from legitimate policy space on
must be met before capital can be transferred, for
                                                                         one side to political cover on the other, illustrating that
instance getting the approval of the central bank,
                                                                         not all requests for policy space are in good faith.
which tribunals have not found to be tantamount to
                                                                         Another noted that the purpose of every treaty is to
                                                                             Managing Outflows. March 13, page 41.
There is evidence that attitudes toward capital controls                     pp/eng/2012/031312.pdf
                                                                         2    It is worth noting that unlike most World Trade Organization (WTO)
are becoming more favourable, which may attract                              agreements, BITs and preferential trade agreements often do not
more attention to free transfer of funds clauses. The                        reference the IMF Articles of Agreement in their free transfer provisions.
                                                                             In theory, at least, Article XV section 9 of GATT 1994 supports state
International Monetary Fund (IMF) has recently begun                         members having a right to regulate capital flows, although many
to advocate that capital flow management measures,                           questions remain about capital controls and WTO policy remain. GATT
more commonly known as capital controls, may be                              1994 is framed so that capital controls in accordance with the IMF
                                                                             Articles of Agreement are permissible. Article VI, Section 3 of the IMF
useful in crisis conditions to prevent damaging reserve                      Articles of Agreement gives state members the right to “exercise such
depletion and currency depreciation, as well as to                           controls as are necessary to regulate international capital movements.”
                                                                             Of course, IMF policy advice on capital controls has varied over time, as
“provide breathing space while fundamental policy                            is well known.

                                                                             Managing Outflows. March 13, page 8.
is adjusted.”1 Recent IMF reports suggest rigid BIT                      3    International Monetary Fund (2012) Liberalizing Capital Flows and

1    International Monetary Fund (2012) Liberalizing Capital Flows and       pp/eng/2012/031312.pdf

Globalization and Finance Project, University of Oxford                                                                              28 JUNE 2012 / 3
constrain state action. By itself, the idea that a state is     governance is very slippery. Tribunals, particularly in
constrained is not problematic; one must be specific            cases where the state uses a necessity defense, have
about the harm.                                                 often written judgments with very specific, detailed
                                                                treatment of the relevant economic policy.
Other participants argued policy space should
automatically be part of the discussion, given that             Over the course of the day, two interesting twists to
investment treaties may affect taxation, employment             the arguments in the preceding paragraph emerged.
law, and other domestic policy issues. Policy space             The first is that BITs reflect good policy in the year
was defined as flexibility plus the right to re-connect         they were signed. It is impossible for negotiators to
some of these issues with the domestic political arena.         fully anticipate what policies they should save space
The political process gives contesting interests the            for, which becomes more serious as BITs get more
space to fight it out, which gives outcomes legitimacy.         specific about economic policy. The second relevant
By design, investment treaties and arbitration remove           point is that investment treaties may do a better job
certain issues from messy public and political debates.         of balancing the interests of states and investors than
As one participant asked, is it time to repoliticize some       it appears. This is because the countervailing law is
of these disputes?                                              not written in the treaty, but is held in the sovereignty
                                                                of the state, in obligations on the investor in national
Some participants were concerned about regulatory
chill, while others argued that the jury is still out - it is
not clear that BITs prevent states from taking particular       Has the MFN clause created de facto
prudential measures. Examples were given of ways                multilateralization?
states have been strategic and pro-active in managing
                                                                Even though persuasive arguments exist
economic problems, while abiding by their treaty
                                                                characteriszng the investment treaty regime as
obligations. In particular, a striking example was given
                                                                effectively multilateral,4 there was wide agreement
of an Organization for Economic Cooperation and
                                                                among participants that this is inaccurate. The
Development (OECD) state structuring its takeover of a
                                                                differences between BITs are too important. Even if
private enterprize in a way that did not violate any of its
                                                                two treaties have mostly similar standards, they often
treaty obligations. Another participant suggested that
                                                                differ in scope. The presence of a pre-establishment
in the future, states could set up claims commissions
                                                                clause, for instance, is enough to make two treaties
after economic emergencies, instead of having to
                                                                meaningfully different.
litigate details in scores of simultaneous arbitrations.
These examples suggest there are ways to make                   At the same time, participants actively discussed
policy around BIT obligations, but this ingenuity               if the Most-Favored Nation (MFN) clause creates
requires capacity that not all states have.                     a situation of de facto multilateralization for many
                                                                states. One participant noted that the MFN clause
For states without the capacity to strategically
                                                                is invoked mostly to seek favorable treatment, to put
design policies within their obligations, what are the
                                                                together a collection of the strongest provisions that
consequences of behaving with one eye on their
                                                                a given state has signed. This has the potential to
treaty obligations? One participant pointed out that the
                                                                create a “Frankenstein Treaty.” Another noted that
presence of disputes actually tells us very little about
                                                                the uncertainty surrounding the application of the
the effect of clauses. The more important question is:
                                                                MFN clause makes it “a real headache for states.”
do policymakers understand certain BIT clauses as
                                                                The overlapping network of treaties is so complex
binding constraints and pre-emptively modify their
                                                                that it injects the entire system with a degree of
behaviour to fit them? Another participant framed
                                                                unpredictability. One participant noted that whereas
this question in a positive light: do certain provisions
                                                                the WTO dispute resolution system generates very
steer countries away from bad policies? Both framings
                                                                predictable outcomes, the unpredictability of the BIT
suggest BITs have a meaningful impact on economic
                                                                system makes it difficult to be confident when giving
                                                                legal advice. Unpredictability and inconsistency
Participants disagreed on the degree to which                   are serious issues for any legal order, and while the
BITs should or do influence economic policy. For                MFN clause has the potential to provide increased
some participants, BITs are inherently tied up with             predictability, it has not been used in practice to
economic policy. These participants tend to see BITs,           smooth out the inconsistencies between treaties.5
particularly those with pre-establishment clauses, as
                                                                Participants remarked how differently the MFN clause
a liberalizing force. For others, BITs just provide a set
                                                                is used in investment when compared to trade,
of good governance norms; the provisions outline a
                                                                where it has provided a cornerstone principle of
baseline standard of treatment for foreign investors.
                                                                multilateralism. The MFN clause has a clear meaning,
Liberalization as such is not a political value that drives
                                                                but that meaning is easier to apply in trade; it is
BITs, according to one participant. The BIT regime,
                                                                relatively straightforward to compare tariffs across
in this view, provides a sort of global administrative
                                                                4    Most notably S. Schill (2009) The Multilateralization of International
law that guides states, preventing wrong actions                    Investment Law, New York: Cambridge UP.
and fostering the rule of law. Most participants,               5    For more discussion, see the recent OECD scoping paper on arbitration,
                                                                    where consistency was one of eight key issues. See Gaukrodger, D.
however seemed to agree that the distinction between                (2012) “Investor-State Dispute Settlement Public Consultation: 16 May-23
influencing economic policy and supporting good                     July 2012.” Organization for Economic Cooperation and Development,
                                                                    Investment Division, Directorate for Financial and Enterprise Affairs.

Globalization and Finance Project, University of Oxford                                                                   28 JUNE 2012 / 4
states. In investment, it can be difficult to determine                         requires consensus on the contents of the treaty text.
what constitutes most favorable treatment. As trade                             This consensus does not yet exist, and is unlikely to
and investment are increasingly interwoven through                              arise unintentionally; this consensus will likely be hard-
services negotiations at the WTO and investment                                 fought, if and when it does emerge.
chapters in free trade agreements, it is likely that key
                                                                                Are BITs dead?
points of rupture will emerge between the two regimes.
One participant pointed out a similarity in the two                             According to one participant, BITs are dead. They
regimes; in both trade and investment, the binary is                            are an instrument of the past, made obsolete by the
not “MFN versus no-MFN” it is “MFN versus narrower                              evolution of domestic legal systems. For another
preferential treatment.”                                                        participant, it is the BITs themselves that are evolving,
                                                                                and in particular becoming more sensitive to the
Comparisons were also drawn between the culture
                                                                                policy and regulatory concerns of states.7 A different
of the WTO and the culture of investment treaties.
                                                                                participant predicted that states would keep entering
One comparison highlighted a disconnect between
                                                                                into BITs because they want to “keep up with the
the negotiators of BITs and the lawyers who interpret
                                                                                Joneses.” Implicit in this prediction was that states
the treaties. Everyone who works in trade has a
                                                                                were unlikely to undertake a thorough review of their
good sense of the bargain; WTO lawyers know what
                                                                                BIT policies, but would keep adding reservations and
was negotiated and why. BIT lawyers, in contrast,
                                                                                exceptions to ameliorate their concerns.
don’t have any information about the bargaining or
negotiation; they interpret the text without a sense                            One question was raised early in the day but went
of the negotiating history. The BIT system is lawyer                            unanswered. It was: why should states ratify BITs?
driven, whereas the WTO has a policy emphasis. The                              The premise is ambiguous. The empirical correlation
arguments made in the WTO must make sense from a                                between ratifying a BIT and receiving more investment
policy perspective, cases are public and the decisions                          is weak. Infrastructure, natural resources, human
become precedents. BIT awards, by contrast, may                                 skills, domestic regulation, there are many other
never become public and are one-off remedies; they                              determinants of investment that are far more influential
are not designed to ensure policy consistency.                                  then BITs. Why don’t states put aside BITs, and focus
                                                                                on these other determinants?
Furthermore, one participant noted, the term
multilateral connotes many states intentionally taking                          This question about the purpose of BITs brings to mind
part in one process of negotiation, framed in a formal                          some of the larger questions driving the Blavatnik
organization. By contrast, each BIT emerges out of its                          School’s Globalization and Finance Project: why
own process of negotiation. Theoretically, every time                           are there different types of legal arrangements for
a treaty is negotiated its scope and dispute resolution                         different types of international economic law? For
options are up for debate, alongside debates on the                             instance, as one participant pointed out, while binding
presence and wording of substantive standards.6 In                              bilateral treaties that protect foreign investment have
practice, many treaties closely resemble each other                             proliferated, prudential regulation has proceeded
because they were negotiated off the same model                                 more slowly, through multilateral standards that
treaty. The international investment regime is growing                          tend to be non-binding. What purposes are these
through clusters of model treaties. There are often                             arrangements designed to serve, and secondly, are
stark differences between clusters. According to                                these arrangements fit for purpose? This workshop
many participants, to elide the gaps between these                              provided interesting insights related these questions,
different clusters and view the BIT regime as effectively                       but more work is needed to explore the contours of the
multilateral is misguided. De facto multilateralization                         BIT regime and its implications.
6    There is evidence that treaties do change slightly based on the relative
    power of the negotiating parties. See (a) Simmons, B.A. (2011) The
    International Investment Regime since the 1980s: A Transnational
    “Hands-Tying” Regime for International Investment. Annual Meeting           7    Sauvant and Alvarez also make this point. K. P. Sauvant and J. E.
    of the American Political Science Association, September 1-4, and               Alvarez. (2011) “Introduction: international investment law in transition”,
    (b) Allee, T. and Peinhardt, C. (2010) Delegating Differences: Bilateral        in J. E. Alvarez, K.P. Sauvant, with K. Ahmed and G. Vizcaino, eds.,The
    Investment Treaties and Bargaining Over Dispute Resolution Provisions.          Evolving International Investment Regime: Expectations, Realities,
    International Studies Quarterly 54, 1-25.                                       Options New York: Oxford UP.

Globalization and Finance Project, University of Oxford                                                                                       28 JUNE 2012 / 5
Xavier Carim
Deputy Director General, International Trade and Economic Development Division,
Department of Trade and Industry, Republic of South Africa

Context                                                                            of investment as they relate to technology transfer,
                                                                                   skills development, research, establishing local
South Africa’s position on bilateral investment treaties
                                                                                   economic linkages etc., need to be purposefully built
(BITs) has been informed by the outcome of its Review
                                                                                   into the investment regime, and not taken for granted.
of BITs in 2010. The Review highlighted risks that BITs
pose to the Government’s Constitutional obligations                                The ISD model would suggest that investment policies
and to its transformational agenda that aims to address                            be embedded into countries’ overall development
the socio-economic legacies of apartheid.                                          strategies. In this context, the blunt prescriptions
                                                                                   underpinning BITs do not meet the requirements for
Aside from the fact that there is no unambiguous
                                                                                   a broader, more intricate policy agenda that serves
evidence that BITs lead to increased investment flows,
                                                                                   sustainable development objectives at national and
there is a growing sense that BITs, conceived in an
                                                                                   global levels.
earlier period, are increasingly out of touch with shifts
in policy thinking aimed at meeting the complex global                             South Africa’s updated approach would aim to achieve
economic challenges of the 21st century. New thinking                              an appropriate balance between the rights and
and practice in international economic policy-making,                              obligations of investors, the need to provide adequate
notably with respect to the role of state in economic                              protection to foreign investors, while ensuring that
development, finance and industry, also need to find                               constitutional obligations are upheld, and that
expression in international investment policy.                                     government retains the policy space to regulate in the
                                                                                   public interest.
Other concerns about BITs are well-documented.
Imprecise standards for investor protection that
                                                                                   South Africa’s BIT Review
encourage expansive, inconsistent interpretations
by Panels - even on similar matters - have a chilling                              South Africa’s three-year BITs review by the
impact on, and impose unacceptable risks to,                                       Department of Trade and Industry was concluded
otherwise legitimate and reasonable government                                     in 2010. This intensive and extensive consultation
policy. Investor-state dispute resolution that opens the                           involving national constituencies, and national
door for narrow commercial interests to subject matters                            and international experts, culminated in a set of
of vital national interest to unpredictable international                          recommendations to the Executive. The Executive
arbitration is of growing concern to constitutional and                            recognized the risks and limitations posed by
democratic policy-making.                                                          BITs on the ability of the Government to pursue its
                                                                                   Constitutional-based transformation agenda.
In discussions on investment policy, a broad distinction
between a Freedom of Investment Model (FOI), on                                    The Executive concluded that South Africa should
the one hand, and an Investment for Sustainable                                    refrain from entering into BITs in future, except in cases
Development Model (ISD), on the other, can be                                      of compelling economic and political circumstances.
discerned. The FOI model tends to assume that all                                  It instructed that all “first generation” BITs which South
investment is good, and that all investment promotes                               Africa signed shortly after the democratic transition
development. The derived policy implications are                                   in 1994, many of which have now reached their
that Governments should continue to liberalize their                               termination date, should be reviewed with a view to
investment regimes, reduce or limit regulations and                                termination, and possible renegotiation on the basis
conditions on investors and, in so doing, realize the                              of a new Model BIT to be developed. The Executive
benefits of FDI. “First generation” BITs tend to reflect                           further decided that South Africa should strengthen its
this approach.                                                                     domestic legislation in respect of the protection offered
                                                                                   to foreign investors by, amongst other things, codifying
By contrast, while the ISD approach recognizes
                                                                                   typical BIT-provisions into domestic law.
that investment can make a positive contribution to
sustainable development, it suggests the benefits                                  Importantly, too, the Executive elevated all decision-
to host countries are not automatic. It posits that                                making in respect of BITs to an Inter-Ministerial
regulations are needed to balance the economic                                     Committee of Cabinet Ministers tasked with oversight
requirements of investors with the need to ensure that                             of investment, international relations and economic
investments make a positive contribution to sustainable                            development matters.
development in the host state. The associated benefits

1   This note is without prejudice nor purports to represent the future position
    of the South African Government on investment policy.

Globalization and Finance Project, University of Oxford                                                                         28 JUNE 2012 / 6
Some of the objectives which are sought to be
achieved through domestic legislation on investment
»     Codifying BIT protections into South African law;
»     Where relevant, clarifying the meaning of
      provisions such as “expropriation”, and “fair and
      equitable treatment” within the context of the South
      African Constitution
» Providing legitimate exceptions to BIT protections
      in cases where warranted by public policy
      considerations including for example national
      security, health, environmental or addressing
      historical injustice, and meeting developmental
It is in this context that the “free transfer of funds”
clause in BITs would be considered. South Africa’s
first generation BITS contained unfettered clauses
on the repatriation of funds. The risks have been
made apparent by recent panel interpretations of
such clauses. In updating our approach, therefore,
South Africa would reaffirm the right of investors to
freely repatriate their investment-related funds (as an
essential element of an open investment regime,) but
it would also provide for safeguards that would limit
that right by permitting measures to mitigate risks
arising from unforeseen circumstances where capital
movements may cause, or threaten to cause, serious
balance of payments problems.
In this respect, it is noteworthy that recent policy
discussions in the International Monetary Fund
reaffirm that tailored capital controls may, in certain
circumstances, be necessary to address the risks
associated with capital movements, particularly in
emerging economies.
We would also seek to ensure that the South African
Reserve Bank regulations relating to the protection
of creditors; protection against criminal and penal
offences and the proceeds from crime, financial
reporting; taxation; and other such requirements, can
be fully enforced.
None of this should not be construed to mean that
South Africa will impose capital controls but, rather,
that the policy option of capital controls is not
foreclosed in advance by international commitments.

Way forward
International jurisprudence is no substitute for
multilateral cooperation to strengthen global economic
governance. UNCTAD provides a transparent and
universal platform for wide-ranging inter-governmental
consultations on investment policy that can also draw
on the views of other, relevant multilateral institutions
and concerned sectors of civil society. UNCTAD’s
Investment Policy Framework for Sustainable
Development offers a useful starting point for
international cooperation in the area of international
investment policy-making within a universally-accepted
human rights framework.

Globalization and Finance Project, University of Oxford      28 JUNE 2012 / 7
Moataz Hussein
International Investment Agreements Specialist at The General Authority for Investment and Free Zones(GAFI) of Egypt
This memo is not the tale of the Egyptian BITs, rather                role of foreign investment in achieving sustainable
it is the story of generations of those investment                    development of the host state, respecting its rules,
treaties, actually born with the emergence of the first               regulations and security concerns, and abiding by the
BIT signed between Germany and Pakistan in 1959,                      principles of CSR and human rights.
that maintained for decades a state of imbalance in
                                                                      This kind of balance in the new Egyptian model
favour of the foreign investors at the expense of the
                                                                      came in the framework of the international and
host country. This kind of bias, especially flagrant in
                                                                      regional commitments of Egypt including those in the
those BITs signed between developed and developing
                                                                      “OECD Declaration on International Investment and
countries, deviated most BITs from one of the
                                                                      Multinational Enterprises” that Egypt acceded to in
essential objectives usually stipulated in preambles
concerning the contribution of the BIT to the economic
development of contacting states.                                     Thus, the main features of the new model BIT, that
                                                                      represents the main guide for Egypt in its negotiations,
The Egyptian experience with BITs consequently came
                                                                      can be demonstrated through the following points:
in this historical context starting with the conclusion
of its first BIT with Switzerland in 1973 and persisting              1. Providing precise definitions of the main terms in
throughout four decades to reach a total of around                       BITs especially those of “investment” and “investor”
111 BITs, occupying a rank between the fifth and sixth                   that represented real sources of disputes and
among the top ten signatories of BITs worldwide.8                        claims. This includes going against the traditional
However, analysing the nature of the world top 10                        broad asset-based definition of “investment”
demonstrates that Egypt is the only mainly investment                    through imposing limitations and linking covered
recipient country among a list comprising nine huge                      investment with satisfying certain economic
FDI exporters.                                                           characteristics. In addition, the new definition of
                                                                         “investor” uses multiple criteria in defining natural
This fact was accompanied by another two facts. The
                                                                         persons and legal entities in order to exclude non-
first relates to the high percentage of Egyptian BITs
                                                                         welcome investors.
which didn’t enter into force; this is around 44% of the
above-mentioned total. On the other side, the review                  2. Promoting and facilitating investments of
of many BITs showed that they lacked a clear pattern                     foreign investors and providing them favourable
identifying the economic priorities of Egypt behind its                  treatment, protection and security according to the
signature. These deficiencies were mainly attributed                     international standards of treatment and ensuring
to the dominance of the political objectives over the                    that the investor’s rights and assets are guaranteed
economic ones during the process of negotiation and                      and protected in a manner that is legitimate,
signature of many BITs.                                                  transparent and accountable.
                                                                      3. Recognizing more widely the values of
The challenges posed by the Egyptian BITs
                                                                         transparency and exchange of information and
encouraged the adoption of a new Egyptian model BIT
                                                                         experiences between the BIT contracting states
in 2007. The new model was adopted after three years
                                                                         on investment laws, regulations, policies and
of work and consultations with all the stakeholders
including governmental entities, investors, law firms
and arbitration centres, depending on the technical                   4. Enhancing the role of BITs in achieving sustainable
assistance of UNCTAD. In addition, a new policy was                      development and maintaining national and human
adopted regarding the process of concluding new                          security for the host country, through ensuring that
BITs, based on seeking real economic interests with                      the objectives of FDI attraction and promotion are
Egypt’s partners instead of leaving it all to political                  implemented without relaxing the environmental,
considerations.                                                          health and safety standards of general application
                                                                         and the internationally recognized human rights
The main objective of the new model - besides                            especially those relating to labour. In addition,
achieving consistency and conformity between                             recognizing the indispensable role of BITs in
Egyptian BITs - was restoring the sustainable balance                    combating corruption, money laundering, and
in those BITs. The balance sought is between the                         other kinds of crimes related to investment
objectives of liberalization of foreign investment and                   activities.
regulation in the territories of the host country, through
                                                                      5. Guarantee the free transfer of funds without
admitting the state’s right to regulate and to maintain
                                                                         delay in a freely convertible currency, while
policy space. The new model also highlights the
                                                                         acknowledging the host state’s right to take
                                                                         safeguard measures to deal with serious short-
8   Source: UNCTAD database on International Investment Agreements,      term balance of payments difficulties or monetary
    available at

Globalization and Finance Project, University of Oxford                                                          28 JUNE 2012 / 8
    policy difficulties. However, these safeguard
    measures - derived from the GATS commitments -
    shall be pursued through respecting the following
    principles: non-discrimination, avoidance of
    unnecessary damage, proportionality, phasing out
    and conformity with the IMF Articles of Agreement.
6. Developing a convenient and flexible mechanism
    for Investor-State Dispute Settlement that pays
    substantial attention to the settlement by amicable
    ways and administrative review within a cooling
    off period. After this period, the investor is granted
    the right to choose between multiple tools for
    settlement of the dispute, including national
    litigation and international arbitration, in addition to
    the respect of dispute settlement mechanisms in
    state contracts between foreign investors and host
The adoption of the new Egyptian model BIT
represents a dynamic process that should always
respond to new developments in the international
investment policies and rulemaking to retain the right
balance between protecting investors and states’
rights and obligations in the manner that restores the
right track for BITs.

Globalization and Finance Project, University of Oxford        28 JUNE 2012 / 9
Anna Joubin-Bret
Partner at Foley Hoag, formerly Senior Legal Adviser at UNCTAD
The Provision of free and unconditional transfer of          Conditions to free transfer:
funds, whether returns or invested capital, is one
                                                             Some treaties attach conditions to the freedom of
of the essential pillars of protection afforded under
                                                             transfer. For instance, some treaties require that clarify
International Investment Treaties (IIAs) to foreign
                                                             that investor has fulfilled all his tax and other financial
investors. Together with protection against unlawful
expropriation, it responds to the main risk faced by
foreign investors when investing in a host economy.          See example 3.
Under international law, it the right of a sovereign State   Few treaties refer to the application of the laws and
to regulate flows of capital into and out of its territory   regulations of each of the party however this provision
and therefore, IIAs are providing for this specific          tends to empty the Transfer of Funds provision of its
protection to the foreign investor against measures          raison d’etre.
taken by the host State that restrict this ability.
                                                             See example 4.
Most IIAs include provisions granting investors the
                                                             A less frequent approach is to attach exceptions to
right to make capital transfers in relation to their
                                                             Transfer of Funds provisions. For example, with this
investment without undue delay, in a freely convertible
                                                             approach the transfer provision does not prevent
currency and at a specified rate of exchange.
                                                             Contracting Parties from ensuring compliance with
The prevailing trend in BITs over the 5 past decades         other measures relating to matters such as bankruptcy,
has been for unconditional and open-ended transfer of        trading in securities, criminal acts or compliance with
funds provisions allowing freedom to transfer into and       resolutions of tribunals.
out of the territory of the host State payments related
                                                             In this case, it is expressly provided for under the
to an investment, whether the initial capital, additional
                                                             treaty that the freedom of transfers is the rule but that
amounts required for the maintenance or extension or
                                                             the States may, for given reasons and under certain
expansion of the investment, returns, proceeds from
                                                             conditions, not follow it.
the sale of liquidation of all or part of the investment,
funds relating to the repayment of loans relating to         Another exception commonly found in treaties
the investment, compensation as provided under the           concluded by Canada, Japan and the United States is
Expropriation article of the treaty, earnings of personal    designed to maintain the proper functioning of financial
as well as payments arising out of the settlement of         institutions. For example, the 2004 Canada model
investment disputes under the ISDS articles of the           treaty. The Energy Charter Treaty is another example of
treaty.                                                      the exception in order to protect the rights of creditors.
The list of operations and transfers for which the           See example 5.
freedom is guaranteed under the BIT vary but in most
cases the list is exhaustive and includes transfers of       A recent trend
payments for compensation or reparation as well as           A recent trend however is to include into the Transfer
transfer of payments of fees, expatriate personnel           of funds provision an exception in case of balance
wages, servicing of debt, etc.                               of payment problems or risk thereof, following the
See example 1.                                               WTO exceptions and the IMF articles. However, it is
                                                             important to note that both the WTO exception and the
Generally, in BITs, the freedom of transfer is               IMF articles apply to current transactions and not to
guaranteed for any outbound transfers. The inclusion         capital transactions.
of the right to make transfers into the host country is
more common in BITs or FTAs granting the investor            Example 6 and 6b.
a right of establishment. Some BITs contain transfer         The trend in the European Union, to ensure conformity
clauses that explicitly apply to inward and outward          with the Treaty of Rome is mandated by rulings of the
transfers of funds.                                          EU Court of Justice. In 2009, the EU Court of Justice
See example 2.                                               found that Finland had failed to comply with Article
                                                             351 §2 TFEU (ex Article 307 §2 EC) because it had
                                                             not amended the bilateral investment treaties it had
                                                             concluded with the Russian Federation, the Republic
                                                             of Belarus, the People’s Republic of China, Malaysia,
                                                             the Democratic Socialist Republic of Sri Lanka and the
                                                             Republic of Uzbekistan.

Globalization and Finance Project, University of Oxford                                                   28 JUNE 2012 / 10
It had failed to amend those agreements to include
stipulations to include possible exceptions, as required
by Articles 64 §2 TFEU (ex Article 57 §2 EC), 66
TFEU (ex Article 59 EC) and 75 §1 TFEU (ex Article
60 §1 EC). Those provisions confer on the Council
(and European Parliament now) the power to restrict
in certain circumstances movements of capital and
payments between the member States and non
member countries.
»   Tension between IIAs and the States right (need) to
    regulate transfers.
»   The Asian financial crisis and more recent global
    economic and financial crisis show the relevance
    of some policy space for the State in regulating
    outflows of capital. Example of Costa Rica and
»   Freedom of transfers and the IMF articles. Tension
    in global policies.
»   Some recent cases of ISDS (see attached list).
»   Relevance of the OECD Capital Movements
    Codes and some codes on capital movement

Example 1 Croatia-Lithuania BIT (2008)
Article 6 – Transfers
1. Each Contracting Party shall guarantee to investors of the other Contracting Party free transfer into and out of
   its territory of payments related to an investment, in particular:
   A. initial capital and additional amounts for the maintenance and extension or expansion of the investment,
   B. returns,
   C. proceeds from the sale or liquidation of all or any part of the investment,
   D. funds in repayment of loans directly related to the investment,
   E. compensation provided for in Articles 4 and 5,
   F. payments under a guarantee or insurance contract referred to in Article 7,
   G. earnings of personnel engaged from abroad in connection with an investment in its territory,
   H. payments arising out of the settlement of an investment dispute under Article 8 of this Agreement.

2. Without prejudice to measure adopted by the European Union, transfers shall be made in the currency in
   which the original investment was made or in any freely convertible currency if agreed upon by the investor, at
   the agreed applicable market rate of exchange prevailing on the date of transfer, and effected without undue

Example 2 BIT between Japan and Viet Nam (2003)
“Article 12
1. Each Contracting Party shall ensure that all payments relating to investments in its Area of an investor of
the other Contracting Party may be freely transferred into and out of its Area without delay. Such transfers shall
include, in particular, though not exclusively […]” (emphasis added)

Globalization and Finance Project, University of Oxford                                              28 JUNE 2012 / 11
Example 3 The Croatia-Bulgaria BIT
“Each Contracting Party shall permit investors of the other Contracting Party, after the fulfillment of all tax and
other financial obligations in accordance with the law, the free transfer of […]”

Example 4 Pakistan-China FTA (2006)
Article 51 Transfers
1. Each Party shall, subject to its laws and regulations, guarantee to the investors of the other Party transfer of
   their investments and returns held in its territory, including:
   A. profits, dividends, interests and other legitimate income;
   B. proceeds obtained from the total or partial sale or liquidation of investments;
   C. payments made pursuant to a loan agreement in connection with investments;
   D. royalties in relation to the matters in Paragraph 1 (d) of Article 46
   E. payments of technical assistance or technical service fee, management fee;
   F. payments in connection with projects;
   G. earnings of nationals of the other Party who work in connection with an investment in its territory.
2. Nothing in Paragraph 1 of this Article shall affect the free transfer of compensation paid under Article 49 and
   50 of this Chapter.
3. The transfer mentioned above shall be made in a freely convertible currency, at the prevailing market rate of
   exchange on the date of transfer in the territory of the Party accepting the investments.

Example 5
Canada model BIT of 2004.
“Article 14
Transfer of Funds
6. Notwithstanding the provisions of paragraphs 1, 2 and 4, and without limiting the applicability of paragraph
   5, a Party may prevent or limit transfers by a financial institution to, or for the benefit of, an affiliate of or
   person related to such institution, through the equitable, nondiscriminatory and good faith application of
   measures relating to maintenance of the safety, soundness, integrity or financial responsibility of financial
   institutions. […]”

Example 6 ASEAN Comprehensive Investment Agreement (2009)
Article 13 - Transfers
1. Each Member State shall allow all transfers relating to a covered investment to be made freely and without
   delay into and out of its territory.  Such transfers include:
   A. contributions to capital, including the initial contribution;
   B. profits, capital gains, dividends, royalties, license fees, technical assistance and technical and
       management fees, interest and other current income accruing from any covered investment;
   C. proceeds from the total or partial sale or liquidation of any covered investment;
   D. payments made under a contract, including a loan agreement;
   E. payments made pursuant to Articles 12 (Compensation in Cases of Strife) and 14 (Expropriation and
   F. payments arising out of the settlement of a dispute by any means including adjudication, arbitration or
       the agreement of the Member States to the dispute; and
   G. earnings and other remuneration of personnel employed and allowed to work in connection with that
       covered investment in its territory.

Globalization and Finance Project, University of Oxford                                                  28 JUNE 2012 / 12
2. Each Member State shall allow transfers relating to a covered investment to be made in a freely usable
   currency at the market rate of exchange prevailing at the time of transfer.

3. Notwithstanding paragraphs 1 and 2, a Member State may prevent or delay a transfer through the equitable,
   non-discriminatory, and good faith application of its laws and regulations relating to:

    A.   bankruptcy, insolvency, or the protection of the rights of creditors;
    B.   issuing, trading, or dealing in securities, futures, options, or derivatives;
    C.   criminal or penal offences and the recovery of the proceeds of crime;
    D.   financial reporting or record keeping of transfers when necessary to assist law enforcement or financial
         regulatory authorities;
    E.   ensuring compliance with orders or judgments in judicial or administrative proceedings;
    F.   taxation;
    G.   social security, public retirement, or compulsory savings schemes;
    H.   severance entitlements of employees; and
    I.   the requirement to register and satisfy other formalities imposed by the Central Bank and other relevant
         authorities of a Member State.

4. Nothing in this Agreement shall affect the rights and obligations of the Member States as members of
   the IMF, under the Articles of Agreement of the IMF, including the use of exchange actions which are
   in conformity with the Articles of Agreement of the IMF, provided that a Member State shall not impose
   restrictions on any capital transactions inconsistently with its specific commitments under this Agreement
   regarding such transactions, except:
   A. at the request of the IMF;
   B. under Article 16 (Measures to Safeguard the Balance-of-Payments); or
   C. where, in exceptional circumstances, movements of capital cause, or threaten to cause, serious
       economic or financial disturbance in the Member State concerned.
   D. The measures taken in accordance with sub-paragraph 4(c)
   E. shall be consistent with the Articles of Agreement of the IMF;
   F. shall not exceed those necessary to deal with the circumstances described in sub-paragraph 4(c);
   G. shall be temporary and shall be eliminated as soon as conditions  no longer justify their institution or
   H. shall promptly be notified to the other Member States;
   I. shall be applied  such that any one of the other Member States is treated no less favourably than any
       other Member State or non-Member State;
   J. shall be applied  on a national treatment basis;  and
   K. shall avoid unnecessary damage to  investors and covered investments, and the commercial, economic
       and financial interests of the other Member State(s).

Example 6b Australia-Chile FTA (2008)
Article 22.4 on Restrictions to Safeguard the Balance of Payments

1. Where a Party is in serious balance of payments and external financial difficulties, or under threat thereof, it
   may adopt or maintain restrictive measures with regard to trade in goods and in services and with regard to
   payments and capital movements, including those related to direct investment.
2. The Parties shall endeavour to avoid the application of the restrictive measures referred to in paragraph 1.
3. Any restrictive measure adopted or maintained under this Article shall be nondiscriminatory and of limited
   duration and shall not go beyond what is necessary to remedy the balance of payments and external
   financial situation. They shall be in accordance with the conditions established in the WTO Agreement and
   consistent with the Articles of Agreement of the International Monetary Fund, as applicable.
4. The Party maintaining or having adopted restrictive measures, or any changes thereto, shall promptly notify
   them to the other Party and present, as soon as possible, a time schedule for their removal.
5. The Party applying restrictive measures shall consult promptly with the other Party within the Joint FTA

Globalization and Finance Project, University of Oxford                                                28 JUNE 2012 / 13
    Committee. Such consultations shall assess the balance of payments situation of the Party concerned and
    the restrictions adopted or maintained under this Article, taking into account, inter alia, such factors as:
    A. the nature and extent of the balance of payments and the external financial difficulties
    B. the external economic and trading environment of the consulting Party; and
    C. alternative corrective measures which may be available.
The consultations shall address the compliance of any restrictive measures with paragraphs 3 and 4. All
findings of statistical and other facts presented by the International Monetary Fund relating to foreign exchange,
monetary reserves and balance of payments shall be accepted and conclusions shall be based on the
assessment by the Fund of the balance of payments and external financial situation of the consulting Party.”

Investor-State dispute cases relating to transfer of funds provisions
1. Metalpar S.A. and Buen Aire S.A. v. Argentine Republic, Award, 6 June 2008, ICSID Case No. ARB/03/5
    (O.Blanco (P), D. Cameron & J. P. Chabaneix);
2. Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, Award, 24 July 2008, ICSID Case No.
    ARB/05/22 (B. Hanotiau (P), G. Born & T. Landau);
3. Continental Casualty Company v. Argentine Republic, Award, 5 September 2008, ICSID Case No. ARB/03/9
    (G. Sacerdoti (P), V. Veeder & M. Nader).
In CMS Gas Transmission Company v. The Argentine Republic, Award, 12 May 2005, ICSID Case No. ARB/01/8,
the investor had initially claimed that Argentina breached a free transfer of funds provision, but this claim that
was later withdrawn.
Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic, Decision on
Preliminary Objections, 27 July 2006, ICSID Case No. ARB/03/13

Globalization and Finance Project, University of Oxford                                              28 JUNE 2012 / 14
James Mendenhall
Counsel at Sidney Austin LLP, and former General Counsel at the USTR
International investment agreements (IIAs) serve the         There is thus a legitimate (and divisive) policy debate
dual purpose of protecting cross-border investments          about the extent to which IIAs should address capital
while at the same time promoting economic integration        account liberalization, but the debate is often infused
and efficiencies that contribute to growth. In seeking       with emotional political overtones.
to craft agreements that achieve these objectives,
                                                             Investors, of course, view free transfers as essential
however, negotiators of IIAs face two countervailing
                                                             to their operations and investment decisions. These
points of resistance. First, the agreements must
                                                             interests must be balanced by the need for good
accommodate the regulatory discretion necessary to
                                                             governance, but the correct policy path is poorly
protect fundamental social interests, including financial
                                                             understood. Economists have debated whether
stability. Second, negotiators must be cognizant of
                                                             capital controls are a necessary part of the cure for
the need to “sell” the agreement to legislators or
                                                             the financial crises that have intermittently stricken
other constituencies whose support is critical but
                                                             economies for the past two decades, or whether
who may be motivated more by politics than policy. In
                                                             capital controls prolong and exacerbate those very
some cases, locating a particular concern along this
                                                             same crises. At the same time, the fallout of those
spectrum between policy and politics is clear. In many
                                                             economic difficulties has provided an opportunity for
cases, however, it is largely subjective.
                                                             politics to enter the arena, with some quarters calling
Negotiators can manage these tensions through                for a dismantling or significant paring back of the
general or specific exceptions to an IIA’s substantive       legal structures, including IIAs, that have flourished in
obligations. Indeed, some exceptions may be                  recent years and provided the framework for global
necessary given that IIAs tend to blunt instruments,         FDI. In times such as these, there is a risk of a knee-
incorporating broad guarantees of non-discrimination,        jerk backlash against free flows of capital that could
fair and equitable treatment, free transfers, and            be damaging to economic recovery and growth in the
the like. The particular modalities for incorporating        long run.
exceptions vary widely among agreements and over
                                                             The investment community has just started to come
time. Some IIAs incorporate few exceptions on the
                                                             to grips with these issues over the past decade.
theory that the substantive protections are inherently
                                                             Consensus is still a long way off, but models have
flexible. Some IIAs contain sweeping carve outs from
                                                             begun to emerge. Certain recent U.S. IIAs have tried
certain obligations that may cover entire sectors
                                                             to strike a balance through creative manipulation of the
of the economy. Others contain a long and highly
                                                             dispute settlement mechanism, i.e., they preserve the
prescriptive list of excepted measures, as is the case
                                                             underlying free transfer obligations but limit the options
with modern U.S. IIAs. Still others wall off particular
                                                             for enforcement through investor-state arbitration. This
areas of regulation, such as national security. The
                                                             mechanism had been sufficient to allow necessary
effect of these exceptions also varies. Some provide
                                                             constituencies to support the agreements. However, it
complete immunity for a defined scope of government
                                                             has not been stress-tested to determine whether it will
action, while others appear to be more symbolic than
                                                             help or hinder countries dealing with severe economic
Capital account liberalization is an excellent case
                                                             Further thought should be given to whether existing
study for examining these dynamics. Traditionally, IIAs
                                                             models are sufficient, whether there are better
have incorporated an obligation to allow free transfers
                                                             ways (including multilateral solutions) to address
of currency and capital across borders. Free transfers
                                                             the problem, or whether it is simply too early to tell.
are critical for attracting and maintaining foreign direct
                                                             Unfortunately, the same phenomenon that brought
investment, and in periods of prosperity, the obligation
                                                             these important questions to the fore, i.e., the most
to allow free transfers is not particularly controversial.
                                                             recent global economic crisis, may make it difficult to
In times of economic difficulty, however, the obligation
                                                             have a meaningful policy debate outside the hothouse
is viewed by some as eliminating or limiting the utility
                                                             of politics. In such conditions, negotiators must
of capital controls, which some believe is an important
                                                             be wary of politically expedient positions that may
tool for preserving a country’s balance of payments
                                                             ultimately do more harm than good.
position, protecting the value of the country’s currency,
or preventing the sudden flight of capital or “hot
money” that can contribute to economic volatility.

Globalization and Finance Project, University of Oxford                                                  28 JUNE 2012 / 15
Prabhash Ranjan
Associate Professor, National Law University- Jodhpur, India and PhD Candidate at King’s College London
As of December 2011, India has entered into                                        regulatory power to impose capital controls because
International Investment Agreements (IIAs) with 86                                 these 58 “free-transfer” MTPs do not recognize any
countries out of which 73 have already come into                                   exception to the investor’s right to transfer funds.
force. India’s latest IIAs that came into force in 2011
                                                                                   The exception in the MTPs in these ‘regulatory-transfer’
are with Bangladesh and Lithuania.9 All these 73 Indian
                                                                                   type IIAs are worded differently. The exceptions are of
IIAs contain the monetary transfer provision (MTP). The
                                                                                   all the three types mentioned above – first, some IIAs
MTPs in these 73 Indian IIAs follow the same structure.
                                                                                   state that funds will be repatriated in accordance with
They all provide a general obligation that all funds
                                                                                   domestic laws and policies; second, some IIAs state
related to investment can be freely transferred followed
                                                                                   that India, as a host country, can impose restrictions
by a list of transactions that are allowed. Barring a few
                                                                                   on the transfers of funds in situations of BoP difficulty
exceptions, in all IIAs, this list is inclusive.
                                                                                   (monetary objectives); and third, restrictions can be
Anatomy of MTPs in Indian IIAs                                                     imposed for other non-monetary objectives. Some IIAs
                                                                                   contain both ‘monetary’ and non-monetary’ objectives.
The MTPs in all these 73 Indian IIAs can be divided
in two categories on the basis of exceptions to the                                Out of these 15, 5 Indian IIAs subject transfer of funds
right of the foreign investor to freely transfer funds.                            related to investment, to domestic laws and policies.
These two types are “free-transfer” and “regulatory-                               The other 10 Indian IIAs (India-Slovakia; India-Iceland;
transfer”. The key difference between these two types                              India-Mexico; India-Singapore, India-Korea, India-
is that the “free-transfer” MTPs do not contain any                                Japan, India-Malaysia, India-Bulgaria, India-Romania
exception to the right of the foreign investor to transfer                         and India-Czech Republic) contain express exceptions
funds whereas “regulatory-transfer” MTPs recognize                                 to MTPs. For example, Article 6(3) of the India-Slovakia
exceptions to free transfer of capital. 58 IIAs have                               IIA states ‘notwithstanding paragraphs 1 and 2 above,
“free transfer” MTPs whereas 15 IIAs have “regulatory-                             a contracting party may prevent or restrict transfer
transfer” MTPs.                                                                    through non equitable, non-discriminatory and good
                                                                                   faith application of its laws…’. The India-Slovakia
Table 1 - MTPs in 73 Indian IIAs
                                                                                   IIA then provides that this restriction could be for
                                                                                   adoption of safeguard measures in circumstances
    Type                                    Number of IIAs
                                                                                   such as macroeconomic or serious BoP difficulties.
    ‘Free-transfer’ type                                       58                  These restrictions are to be imposed for a limited
    ‘Regulatory-transfer’ type                                 15                  duration and may not go beyond what is necessary
Source – Author’s study of 73 Indian IIAs
                                                                                   to remedy the BoP situation.10 This IIA also allows the
                                                                                   host country to impose restrictions on capital transfer
MTPs in 58 Indian IIAs neither subjects capital                                    for non-monetary policy objectives like protection of
transfers to domestic laws and regulations; nor                                    rights of creditors, criminal or penal offences and the
contains any “monetary” or “non-monetary”                                          recovery of proceeds of crime. However, this IIA does
exceptions. Thus, the “free-transfer” MTPs give                                    not mention anything regarding the IMF obligations.
an absolute right to the foreign investor to transfer
funds related to investment. While this is certainly                               The MTP in India-Iceland IIA is different from India-
advantageous for the foreign investors because it                                  Slovakia in the sense that it only allows imposition
gives them maximum freedom to transfer funds related                               of restrictions on transfers in case of serious BoP
to investment; it will not serve India’s interests as a host                       difficulty or the threat thereof.11 It does not recognize
nation. Adoption of capital controls by India on those                             situations of macroeconomic difficulty (there could be
transfer of funds related to investment that fall under                            situations of macroeconomic difficulty different from
these 58 IIAs can be challenged by foreign investors in                            BoP difficulty like appreciating currency). On the other
arbitration even if such capital controls have been duly                           hand, the MTPs in the other three IIAs - India-Mexico,
adopted by India under its domestic legislation called                             India-Singapore and India-Korea, contain both the
Foreign Exchange Management Act (FEMA Act).                                        monetary and non-monetary objectives and also talk
Important to note that the “free-transfer” MTPs do not                             of consistency of the measures adopted with the IMF
prohibit India from adopting capital controls. However,                            articles. For example, the MTP in India-Mexico IIA
if such controls are adopted, the “free-transfer” MTPs                             allows for preventing a transfer in cases of bankruptcy,
are capable of interpretation where investor’s right to                            insolvency, or the protection of the rights of creditors
transfer funds will get precedence over India’s                                    and similar other situations provided this prevention is
                                                                                   applied through equitable, non-discriminatory and
9       Ministry of Finance, Government of India, Bilateral Investment Promotion
       and Protection Agreement available at       10   Article 6.4 of the India-Slovakia IIA.
       index.asp?pageid=3.                                                         11   Article 7(4) of the India-Iceland IIA.

Globalization and Finance Project, University of Oxford                                                                          28 JUNE 2012 / 16
good faith application of laws of the country adopting
these measures.12 Apart from this, India-Mexico IIA
also allows the host country to adopt restrictions on
transfers in cases of serious balance of payments
crisis or an external difficulty provided the restriction
imposed is consistent with the Articles of the IMF;
avoid unnecessary damage to commercial interest
of the investor; are no more than necessary to deal
with the problem; are temporary and are phased out
progressively; are applied on an equitable and non-
discriminatory basis; and are promptly notified to the
other country.13 Similar sort of provisions exist in India-
Korea and India-Singapore IIA. On the other hand,
India-Japan and India-Malaysia recognize exceptions
to MTP only for non monetary objectives and not for
serious macroeconomic difficulties or for balance of
payments related problems.
MTPs in majority of Indian IIAs provide a broad and
unqualified right to foreign investors to transfer funds
without recognising any restrictions on this right. Only
a handful of Indian IIAs contain provisions on monetary
transfer that recognize India’s right to restrict transfer
of funds in certain monetary and non-monetary related
situations. As a result, adoption of capital controls by
India can be challenged as a violation of the provision
on monetary transfer by foreign investors in 58 out of
73 Indian IIAs.

12   See Article 8(3) of India-Mexico IIA.
13   See Article 8(4) of India-Mexico IIA.

Globalization and Finance Project, University of Oxford       28 JUNE 2012 / 17
Elisabeth Tuerk and Cree Jones
Officer in charge of the IIA Section of the Division on Investment and Enterprise at UNCTAD
Legal intern at the IIA Section and a concurrent JD/MPP candidate at the University of Michigan.
On June 12, 2012 the United Nations Conference
for Trade and Development (UNCTAD) launched                                   Box 1: IPFSD
its Investment Policy Framework for Sustainable
Development (IPFSD).14 The IPFSD is a framework to                            Section 4.7: Transfer of funds
support sustainable development friendly investment
                                                                              4.7.0   Grant foreign investors the right to freely
policymaking at both the national and international
                                                                                      transfer any investment-related funds
level. It consists of a set of core principles for
                                                                                      (e.g. open ended list) into and out of the
investment policymaking, guidelines for national
                                                                                      host country.
investment policies, and guidance (in the form of
options) for the design and negotiation of international                      4.7.1   Provide an exhaustive list of types of
investment agreements (IIAs). Its purpose is to provide                               qualifying transfers.
a point of reference for stakeholders of the investment-
development community. The IPFSD includes a section                           4.7.2   Include exceptions (e.g. temporary dero-
on free transfer of funds provisions and presents four                                gations):
policy options for IIAs (see Box 1).
                                                                                      »   In the event of serious balance-of-
IIAs virtually always incorporate a State obligation to                                   payments and external financial
allow foreign investors free transfers of currency and                                    difficulties or threat thereof
capital related to their investments. This obligation
                                                                                      » Where movements of funds cause or
facilitates investment flows by ensuring that, at the
                                                                                          threaten to cause serious difficulties
end of the day, a foreign investor will be able to enjoy
                                                                                          in macroeconomic management, in
the financial benefits of a successful investment.
                                                                                          particular, related to monetary and
Historically, free transfer of funds provisions in IIAs
                                                                                          exchange rate policies.
offered expansive protections to investors and did
not grant exceptions to the free-transfer-of-funds                                    Condition these exceptions to prevent
obligation.15 This formulation is presented in policy                                 their abuse (e.g. application in line with
option 4.7.0. Policy option 4.7.1 is a more selective                                 IMF rules and respecting conditions of
variation of this unqualified formulation.                                            temporality, equity, non-discrimination,
                                                                                      good faith and proportionality).
Recent developments in international investment law
indicate, however, that an unqualified free transfer                          4.7.3   Reserve the right of host States to restrict
of funds provision in IIAs may pose challenges to                                     an investor’s transfer of funds in connec-
the sustainable development of a host State. The                                      tion with the country’s (equitable, non-
primary concern is that such a provision may reduce                                   discriminatory, and good faith application
a host State’s ability to deal with sudden and massive                                of its) laws, relating to, e.g.:
outflows or inflows of capital, balance of payments
                                                                                      »   Fiscal obligations of the investor/
(BoP) difficulties and other macroeconomic problems.
                                                                                          investment in the host country
This is illustrated by claims brought against Argentina
following the imposition of capital controls in response                              »   Reporting requirements in relation to
to the Argentine economic crisis of 2001.16                                               currency transfers
                                                                                      »   Bankruptcy, insolvency, or the
                                                                                          protection of the rights of creditors
                                                                                      »   Issuing, trading, or dealing in
*    This memo is based on the free transfer of funds section of UNCTAD’s                 securities, futures, options, or
     Investment Policy Framework for Sustainable Development and draws on                 derivatives
     aspects of other UNCTAD publications.
     The views expressed in this article are those of the authors and do              »   Criminal or penal offences (e.g.
     not reflect the views of the UNCTAD Secretariat or its member States.                imposing criminal penalties)
     The authors would like to thank Hamed El-Kady for his assistance in
     reviewing this article in preparation for publication.                           »   Prevention of money laundering
14    The complete text of the IPFSD is available in Chapter IV of UNCTAD’s           »   Compliance with orders or judgments
     2012 World Investment Report available at:               in judicial or administrative
15    Transfer of Funds (2000). UNCTAD Series on Issues in International                  proceedings.
     Investment Agreements.
16    For example, see CMS Gas Transmission Company v. Argentine
     Republic (ICSID Case No. ARB/01/8).

Globalization and Finance Project, University of Oxford                                                                28 JUNE 2012 / 18
Additionally, recent attention has focused on the need                         These policy options are meant to serve as a starting
for States to regulate cross-border capital flows in the                       point and not an end point for investment and
wake of the global financial crisis. The International                         development stakeholders. The IPFSD is a living
Monetary Fund (IMF) has now put significant                                    document and a dialogue regarding this framework
importance on the use of regulations to limit both the                         is already underway on UNCTAD’s online discussion
inflows and outflows of capital in order to prevent and                        forum.20 For example, Kevin Gallagher of Boston
mitigate financial crises.17 The IMF has also noted that                       University has suggested that policy options 4.7.2 and
many IIAs do not have the appropriate safeguards for                           4.7.3 do not go far enough to protect the regulatory
such regulation.18                                                             space of a host State.21 Gallagher recommends the
                                                                               use of interpretations or amendments to assure that
In light of these growing concerns, many recent
                                                                               the language “external difficulties or the threat thereof”
IIAs now include an exception that allows States to
                                                                               in 4.7.2 includes measures to regulate the inflow
impose restrictions on the free transfer of funds in
                                                                               and outflow of capital to prevent a crisis. He also
specific circumstances while qualifying the exception
                                                                               recommends that the good faith application of host
with checks and balances to prevent misuse. This
                                                                               State laws with respect to financial regulatory reform
formulation is aligned with similar provisions in
                                                                               and stability be added to the carve-outs listed in 4.7.3.
principal multilateral agreements that permit countries
to impose restrictions on transfers in circumstances                           Many States are now including free transfer of funds
where a member is confronted with a BoP crisis.19 A                            exceptions in new IIAs similar to the formulations
formulation of this exception is presented in policy                           presented in 4.7.2 and 4.7.3. For example, of the
option 4.7.2.                                                                  23 IIAs signed in 2011 for which complete text is
                                                                               publicly available, 17 (74 per cent) include a detailed
In addition to the BoP exception, another exception
                                                                               exception for BoP difficulties and/or enforcement of
incorporated into the free transfer of funds provisions
                                                                               national laws.22 This emerging trend is evidence of the
in recent IIAs is a reservation of the right of a State to
                                                                               timeliness of the policy options presented in the IPFSD
restrict transfers if such a restriction is required for the
                                                                               and illustrates the evolving nature of the IIA framework.
enforcement of the State’s laws (e.g. to prevent fraud
on creditors etc.). The purpose of this reservation is
to carve-out regulatory space and allow host States
to regulate transfers for this specific subset of cases.
This exception is similarly qualified by checks and
balances to prevent abuse. A formulation of this
exception is presented in policy option 4.7.3.

17    Liberalizing Capital Flows and Managing Outflows (2012). International
     Monetary Fund. Available at:
     eng/2012/031312.pdf.                                                      20    The IPFSD discussion forum can be accessed at: http://ipfsd.unctad.
18    Reference Note on Trade in Financial Services (2010). International           org/.
     Monetary Fund. Available at:           21    Kevin Gallagher’s recommendations can be viewed on the IPFSD
     eng/2010/090310.pdf.                                                           discussion forum at:
19    For example, see the Articles of Agreement of the International               =3&tocid=234#tocitem_234.
     Monetary Fund and the Organization for Economic Co-operation and          22    For a complete list of IIAs including these exceptions see UNCTADs
     Development’s (OECD) Code of Liberalisation of Capital Movements.              World Investment Report 2012, p. 90.

Globalization and Finance Project, University of Oxford                                                                                  28 JUNE 2012 / 19
Alexandra Koutoglidou
DG Trade, Investment Unit, the European Commission
In contrast to the other fields of international economic                       Second, bilateral investment treaties have been
law –trade and monetary law- efforts to multilateralize                         negotiated and concluded as reciprocal treaties.
substantive standards of investment law have up                                 Many of the EU Member States BITs even include
to now failed. Hence, investment protection has                                 this qualification in the title, while they have also
been developed through a great number of bilateral                              been criticized for not being genuinely reciprocal
investment treaties. Simultaneously, a number of                                when signed between a developed and a developing
other investment related instruments, negotiated                                country, where the investment protection standards
amongst states either within a multilateral (GATS) or                           –although reciprocal in theory- actually aim at
a bilateral context (FTAs) have been negotiated to                              guaranteeing legal security in only one way: for the
govern primarily the liberalization of investment flows.                        investors of the developed country establishing in
Evidently and in spite of having been negotiated in                             the developing country. What is interesting hence
different fora and serving divergent objectives, the                            is that MFN in bilateral investment treaties has not
ensemble of all of those treaties overlap in scope with                         been regarded or labelled as “the cornerstone” of
regards to provisions covering post-establishment                               the investment protection regime worldwide, as was
treatment. Moreover, all or the greatest majority of                            the case with MFN in the multilateral trade system.
those treaties contain MFN clauses, a fact that raises                          Nor has anyone ever questioned the compliance of
the following two questions:                                                    the reciprocal nature of obligations arising out of BITs
                                                                                with the existence of an MFN clause; in contrast, in
1. Has the inclusion of MFN clauses in almost all
                                                                                the multilateral trade system it is widely acceptable
    existing BITs led to a de facto multilateralization of
                                                                                that reciprocity is fundamentally incompatible with the
    investment protection (substantive and procedural)
                                                                                obligation to accord MFN treatment.
2. To the extent that the GATS, FTAs and BITs partially                         The aforementioned thoughts are useful in order
    overlap in scope, can the MFN clauses, contained                            to now turn into addressing the initial questions,
    therein, lead to either more liberalization or to                           starting from whether BITs MFN clauses have de facto
    unification of investment law in the broad sense?                           multilateralized the obligations arising from the legal
                                                                                instruments containing them. Although there exist well
Ahead of analysing these two queries, it is important to
                                                                                established arguments that this is indeed the case,
note certain observations, useful to explore both of the
                                                                                one can still be sceptical for the following reasons:
aforementioned issues.
                                                                                1. In spite the expanded network of BITs and the
First, the MFN concept as such is one of the oldest
                                                                                   similarity in their provisions, MFN clauses continue
in international economic law and there are not
                                                                                   to be part of bilaterally negotiated treaties which
doubts as to its meaning or rationale irrespective of
                                                                                   very often divert as to their subject, personal
the legal instrument containing it: the clause aims at
                                                                                   or temporal scope of application. Even though
levelling the playing field between foreign investors
                                                                                   an MFN clearly means that the “more favoured”
of different nationalities by according to each of them
                                                                                   treatment should be extended, the MFN cannot
the most favourable treatment available, within the
                                                                                   really be used to alter the scope of application of a
limits of the subject matter of the clause23. In practice,
                                                                                   BIT, hence, those important divergences between
nevertheless, the application of the clause seems to be
                                                                                   different treaties cannot be overcome.
more straightforward in the field of trade – for example
when it comes to comparing tariff rates or market                               2. Leaving aside those differences, if one tried to put
access concessions – than to “treatment” for the                                   in writing the “multilateral” consent of States on
purposes of investment protection. This discrepancy                                specific standards of treatment or other provisions
seems to be reflected in the investment protection                                 that are common in all BITs, one would have
case law, where investors mainly, if not exclusively,                              to embark in the exercise of building the “most
invoke the MFN clause in order to benefit from the                                 favourable”, i.e. the optimal text (comparing for
application of a more favourable provision included in                             example all fair and equitable clauses between
another treaty, than to claim for actual equal “on-the-                            BIT signatories and drafting the most favourable
ground” treatment. Having said that, this discrepancy                              of them all). Such an exercise would stumble on
is by no means justified by the text of the MFN clauses                            two difficulties: First, in certain cases, it would be
in trade and investment treaties.                                                  difficult to compare in absolute terms standards
*    The views expressed in this article are the author’s own views and by no
                                                                                   of protection, which do not contain strictly defined
     means do they reflect the formal European Commission’s position.              rules but rather imply that a State can comply
                                                                                   with them by acting in more than one ways. In
23   See Draft Articles on Most-Favored-Nation Clauses, ILC Report of 30th
     Session.                                                                      addition, for provisions that are more complex,
Globalization and Finance Project, University of Oxford                                                                    28 JUNE 2012 / 20
   such as dispute settlement clauses, would that               a kind of “legal imperialism”24, in the sense that
   comparison mean that the “most favourable”                   different groups of like-minded countries are
   treatment would consist in picking individual “more          seeking to attract consensus on their model texts
   favourable elements” from each one of them in                or on their doctrinaire stance towards the system
   order to construct the optimal and most favourable           and are, hence, less willing to compromize.
   to the investor treatment, or would one have to         In all, this is to argue that although technically the
   choose the most favourable dispute settlement           application of MFN may be invoked to claim for a case
   clause as a “package”? In both cases, but mostly        by case better treatment, this treatment cannot yet
   in the second one, it could be difficult for one        be translated into a particular text for the purposes of
   to compare and conclude whether the optimal             drafting the “most favourable” investment treaty. This
   dispute settlement clause should be one that            exercise would require above all the political drive and
   provides for a waiver obligation instead of a fork in   will of States themselves to multilateralize investment
   the road clause, UNCITRAL instead of ICSID etc.         law, something which does not seem to be the case at
   Second and most important, even if one managed          this point in time.
   to conclude the drafting of such a text, it would
   be highly unlikely for any State to consent to it,      With regards to the impact of an MFN clause on
   especially for States that have not been part of        investment law in the broader sense, i.e. beyond
   large BIT networks and those, whose conventional        protection, there are a number of challenging and less
   practice changed more recently to being “less           explored issues to look into:
   favourable” than their earlier approach.                1. Bilateral investment protection treaties covering
3. By all standards, investment tribunals have                pre-establishment treatment (market access,
   made considerable efforts to systematize the               national treatment, most favoured nation treatment)
   application of MFN clauses, even if the latter are         would overlap partially in scope with the GATS, but
   not part of a single but of many agreements and            they would probably not fall within the scope of
   hence arbitrators had no obligation to do so. This         Article V GATS and hence would not be exempted
   body of case law could potentially contribute to           from GATS MFN clause (Article II GATS). Would
   exploring a consensus as to determining what the           that mean that more favourable national treatment
   “more favourable treatment” is. However, arbitral          or market access concessions in such BITs should
   decisions are issued on the basis of circumstance-         be extended to all WTO members?
   specific cases, which cannot hence always               2. Neither the GATS MFN clause nor the MFN clause
   be used to establish a rule as to what the most            of most BITs specify in which legal instrument is the
   favourable fair or full protection treatment standard      most favourable treatment supposed to be found.
   is in the abstract and for all purposes.                   The Commentary of the ILC Draft Articles on Most
4. Finally, by objective standards, one can say that          Favoured Nation Clauses (Commentary to Article
   the law contained in investment protection treaties        8 para. 1) clarifies that the obligation to extend the
   is currently evolving rather than crystallising            most favoured nation treatment “…is not dependent
   in the sense of reflecting a consensus. A lot              on whether the treatment extended by the granting
   of new elements, such as notably sustainable               State to a third State, or to persons or things in a
   development provisions, are inserted in what               determined relationship with the latter, is based
   used to be pure legal protection treaties. Those           upon a treaty, another agreement or a unilateral,
   standards most probably escape the MFN test,               legislative, or other act, or mere practice.” It has
   since they do not alter the level of protection.           up to now remained unexplored what the impact
   However, the lack of consensus around them can             of this provision would be with respect to more
   prove to be even greater, since a lot of developing        liberal concessions granted by national law,
   or emerging countries are not necessarily willing          but not bound at the GATS level (the so called
   to embrace them. This type of evolution adds to            divergence between autonomous liberalization and
   the complexity of using MFN to define commonly             international commitments). Could investors from
   acceptable ground, since investment law                    a given WTO Member invoke GATS MFN to claim
   seems to be evolving around networks of model              more favourable treatment accorded to certain
   treaties whose divergences in approach are not             investors under the host state’s legislation?
   necessarily comparable, in the sense that they          3. Could the MFN in the GATS be invoked to brink
   do not instruct a better or a worse treatment, but         under the multilateral framework certain BIT
   simply a different treatment, reflecting a political       provisions that correspond to GATS Domestic
   stance that is difficult to modify by legal and            Regulation principles, such as fairness, equity,
   technical means. Consequently, even if ten years           transparency or non-arbitrariness? Is there any
   ago one could discern a relative consensus                 room for facilitation of agreement in the multilateral
   on principles that could potentially lead to               context on standards already embraced by a great
   multilateralization, the divergences in approaches         majority of States in their BITs?
   expressed during this last decade rather reflect
                                                           24    See for ex. Methanes v. USA, Submission in Response to Application
                                                                for Amicus Standing - Mexico, 10 November 2000, where Mexico claims
                                                                that the power of the tribunal to receive amicus curiae briefs is a well-
                                                                established one in US and Canadian, but not in Mexican law.

Globalization and Finance Project, University of Oxford                                                                28 JUNE 2012 / 21
Concluding remarks
The policy space question is inevitably implicit
throughout the above reflection, although not always
right so. As the ILC Articles specify the right of an
investor to claim MFN treatment arises at the moment
the more favourable treatment is extended to a third
state, i.e. a state other than the investor’s home state.
Hence, the granting of MFN is not a restriction to policy
space, but rather the exercise of sovereignty of the
State having undersigned the MFN clause and having
chosen to accord a better treatment to the nationals of
a third state, while knowing that it has already assumed
an MFN obligation. Moreover, States can very well
guarantee their policy space by other means, such as
inserting exceptions or certain restrictions to the scope
of application of either the agreement containing the
MFN or of the MFN clause itself. In sum, MFN is by no
means a threat to policy space of states; as Stephan
Schill25 rightly points out “States, unlike private parties,
do not have to be protected against the enforcement
of obligations under international law. On the contrary,
one of the major deficiencies in traditional investor-
State relations is the lack of effective enforcement
mechanisms under international law.”

25   St. Schill, Enabling Private Ordering-Function, Scope and Effect of
     Umbrella Clauses in International Investment Treaties, 18 Minn. J. Int’l L.,
     1, 23-26 (2009).

Globalization and Finance Project, University of Oxford                             28 JUNE 2012 / 22
Santiago Montt
Academic at Universidad de Chile Law School, and Senior Manager, Group Legal, Base Metals, BHP Billiton
Have obligations in bilateral investment treaties            when BIT awards started to be issued in the 1990s,
become multilateral? What is the driving force behind        there was no way to prevent their argumentative
this multilateral phenomenon? In my opinion, the             use in new cases under different treaties. Given the
answer for the first question is positive. But the driving   proximity of language, neighbour BITs constituted the
force behind it is not the MFN clause—as suggested           natural “concentric circles” that legal integrators would
by the title of the second session of this workshop—         necessarily look for in their instinctual search for fit.
but the network effects of a system of BITs and the
                                                             As a result, today investment arbitration is what
Dworkinian law-as-integrity instinct that mobilizes
                                                             Dworkin calls a “department”. In other words,
lawyers worldwide. Given this multilateral reality, the
                                                             investment treaty arbitration is a distinctive legal
question today is whether integrity as a political value
                                                             practice. As any other “department” of legal practice
justifies our common legal practice in investment
                                                             it can show treatises, books, law journal articles,
                                                             seminars, professional gatherings, comprehensive
In my book State Liability in Investment Treaty              courses in law schools, and units in law firms, among
Arbitration I claim that the thousands of BITs existing      other working proofs of what Dworkin calls “local
today constitute a virtual network. The substantive          priority”.
similarity of wording among the treaties’ main
                                                             This leads us to the key question today: what is the
provisions—particularly the expropriation and fair and
                                                             political value behind this law-as-integrity force that
equitable treatment (FET) clauses—is such that case
                                                             ties together the practice of investment arbitration?
law developed under one treaty influences the future
                                                             Is it merely “fetishism”, the obsession for elegance,
interpretation of all other treaties. This constitutes a
                                                             or a mechanistic lawyerly character trait? Or can we
true ‘network externality’—a positive demand side
                                                             find integrity as a political value in our common legal
externality, growing in magnitude with the number of
                                                             practice in investment arbitration? My claim here is that
existing treaties—which, effectively, defines the BIT
                                                             there is such a political value, and it is, as defended by
system as a virtual network.
                                                             Latin American publicists of the 19th century (mainly
This network theory assumes that investment treaty           among them, Andrés Bello), “equality among nations”.
lawyers and arbitrators take previous decisions
                                                             Open-ended BITs standards such as indirect
seriously and care about the coherence and
                                                             expropriations and FET should crystallize at a
consistency of the system. Today even more than
                                                             reasonable common level. As I defended in State
when I wrote the book, I have no doubt that this is the
                                                             Liability in Investment Arbitration, investment arbitration
case. Thousands of memos, briefs, awards, academic
                                                             should not protect property rights in terms more
articles prove it. The causal explanation does not
                                                             rigorous than those generally applied by domestic
lie in the MFN clause—which although contributes
                                                             courts in developed countries. The BIT system must
to this result, is not the controlling factor—but in the
                                                             produce a coherent and moderate common body of
unavoidable Dworkinian law-as-integrity instinct that
                                                             global law that defines what is arbitrary government
characterizes lawyers, by education and training,
                                                             conduct and what is the extent of the anti-redistributive
                                                             strength of investments. To have a flourishing
In Law’s Empire, Dworkin gives a description of              investment arbitration practice we are not forced to
our legal practices that I considered particularly           espouse “liberalization on a non-discriminatory basis”
illuminating. We lawyers are “legal integrators”. As         as its foundational political stone. “Equality among
ants are programmed to collect and transport leaves,         nations” is less demanding, but more persuasive,
we constantly look back to previous legal materials in       effective and necessary.
order to structure solution to legal questions. We feel
compelled to produce solutions that fit these materials
and that furthermore achieve the best and most
coherent outcome in terms of justice and fairness.
Incoherence is a declared enemy.
In terms of previous legal materials, the international
lawyer, as compared to its domestic colleague, is a
famished animal. Before BITs, international lawyers
in the area of protection of property of aliens were
among the most undernourished of all, particularly
given the extreme political division in the field. So
Globalization and Finance Project, University of Oxford                                                   28 JUNE 2012 / 23
Charles Nevhutanda
Deputy General Manager in the Financial Surveillance Department of the South African Reserve Bank
Bilateral Investments treaties (“BITs”) are agreements       The respective South African government departments
signed between two countries concerning the                  are responsible to negotiate and enter into the
reciprocal promotion and protection of investments.          relevant BITs with other respective countries. The
The signing of a BIT has an important symbolic value         South African Reserve Bank, in some cases, is
to prospective investors, as a formal welcome and            required to issue Currency Transfer Guarantees that
provides valuable publicity and an important symbolic        irrevocably and unconditionally guarantees that the
declaration of stronger diplomatic and commercial ties       transfer to the Fiscal Agent of all sums in the amount
between the two nations.                                     and in the currency required for the fulfilment of the
                                                             financial obligations arising from the Notes and the
BITs are more inclined to assist the FDI inflows of
                                                             Amended Fiscal Agency Agreement will be authorized
the host country as a part of broad Foreign Direct
                                                             in good time, under all circumstances and without
Investment (“FDI”) policy. Not only do the treaties
                                                             any limitations, notwithstanding any restrictions that
assist developing countries to attract scarce capital
                                                             may be in force at the time thereof in the Republic of
to finance liquidity constrains, they also help giving
                                                             South Africa, and without any obligation to submit any
signals to the multinational companies that the host
                                                             affidavit or to comply with any other formality.
government is committed in providing investments
protection and guarantees. BITs, thus, have positive         It can, therefore, be argued that in the case of capital
spill-over effects on FDI flows.                             flight during financial crises, it may be difficult to re-
                                                             impose capital controls on outward capital transfers by
Nevertheless, BITs may have negative consequences
                                                             foreign investors as a result of BITs. This is because,
for domestic investors if they are treated less well
                                                             the re-imposition of capital controls may require
relative to foreign investors, inter alia, repatriation
                                                             extended negotiations with respective multinational
of profits is an area that may have negative
                                                             creditors, which may be time consuming or too late to
consequences for developing countries. The majority
                                                             be effective. This delay in imposing capital controls
of treaties grant the investor the ability to repatriate
                                                             could intensify liquidity problems faced by the host
profits “without undue delay” unless there is a situation
                                                             countries during a financial crisis.
of economic emergency. If the treaties are interpreted
to give a narrow reading to the term “economic               Taking cognizance of the above, it is, therefore,
emergency,” the ability to repatriate profits could          justified to argue that BITs may constrain the ability
intensify liquidity problems face by host countries.         for countries to use prudential or other regulatory
                                                             measures to deal with current global economic crisis.
Since 1994, the South African government has
adopted the gradual liberalization of capital controls in
the form of exchange controls as opposed to the “Big
Bang” approach. This approach has been supported
by the International Multinational Bodies such as the
IMF. Significant progress has been made with regard
the liberalization of exchange controls to an extent
that as at today, there are no exchange controls on
non-residents. This means that non-residents can
freely invest in South Africa and freely repatriate their
earnings and profits with no restrictions. There are still
some capitals controls on South African residents that
are continuously being liberalized.

Globalization and Finance Project, University of Oxford                                                  28 JUNE 2012 / 24
Michael Waibel
University Lecturer in Law and Fellow of the Lauterpacht Centre, Cambridge University
“Most favored nation” (MFN) sounds like a                    potentially more restrictive of domestic policy space
contradiction in terms. Historically, MFN did not mean       than trade agreement.
necessarily mean equal treatment. It implies some
                                                             In investment law, MFN clauses are the key ingredient
kind of special treatment to a particular trade partner,
                                                             that glues thousands of legally bilateral relationships
though in contemporary international economic law
                                                             into a de facto multilateral investment regime. In trade,
it is one of the two pillars of non-discrimination by
                                                             MFN underpins the multilateral character of the WTO.
                                                             MFN clauses function as a core engine of liberalization
Each WTO member is required to treat all other WTO           in international trade. In international investment law,
members as “most-favored” trading partner, thereby           they are a force for maximized investor protection.
multilateralizing market access concessions. If any          MFN clauses in trade law liberalize, while in investment
country lowers barriers to trade, it is generally obliged    law they protect investors.
to give the same treatment to all the other WTO
                                                             In modern international finance, MFN are a rare
members so that they all remain “most-favored”. Host
                                                             species, and even where they exist, they generally
states are obliged, by virtue of the MFN clause in BITs,
                                                             have limited impact on domestic policy autonomy.
to grant investors the higher standards of protection
                                                             They became largely obsolete with the widespread
extended under any other BIT to which the host state is
                                                             abolition of exchange restrictions in the 1970s. In
a party:
                                                             the 1930s, it was common to include MFN clauses in
                                                             financial treaties. The objective was to ensure that the
                                                             treatment in respect of exchange matters conferred
                                                             upon the nationals of either of the contracting parties
                                                             was at least as favourable as the treatment conferred
                                                             by either of the contracting parties on the nationals of
                                                             any third State.26
                                                             Their efficacy was however limited. In its standard
                                                             form, the MFN clause only prohibited discrimination
                                                             based on nationality - in the context of the
                                                             administration of exchange restrictions, they required
As a result of MFNs, BITs are arguably no longer
                                                             that the nationality of the prospective recipient of the
isolated bilateral bargains struck between two treaty
                                                             available foreign exchange be considered by the
parties, but part of a de facto multilateral framework.
                                                             restricting State to be irrelevant in its determination
Bilateral negotiations preserve the bargaining
                                                             of who will receive the foreign exchange. However,
advantages of powerful vis-à-vis weaker players, while
                                                             exchange restrictions typically attached to the
simultaneously multilateralizing higher standards of
                                                             residence of the recipient. No actionable discrimination
investor protection.
                                                             existed if the inequality of treatment resulted from
MFN clauses could contribute to regulatory chill, that       genuine reasons of exchange control.
is governments abandoning or modifying measures of
                                                             In modern times, countries have committed to a
general economic policy due to the threat of litigation
                                                             gradual liberalization of their capital accounts, BIT
or arbitration. They could increase the sovereignty
                                                             by BIT. Are variations in free transfer clauses, a
costs, potentially substantially, by extending more
                                                             substantive guarantee to foreign investors, or their
favourable treatment granted in one BIT to all BITs
                                                             absence in particular BITs swept away by operation
covered by the MFN clause. Both are ultimately
                                                             of MFN clauses in included as a standard feature of
empirical questions, and cannot be answered in the
                                                             virtually all BITs? According to the mainstream view
                                                             that applies MFN clauses to substantive investment
MFN clauses operate somewhat differently in trade,           standards, the answer is yes. Accordingly, host country
investment and finance, and so their implications            commit not to restrict the investor’s ability to freely
for domestic policy autonomy differ. The degree of           transfer earning and other proceeds of the investment
involvement in the host countries’ economic and social       out of the host country, not just vis-à-vis a particular
fabric is generally higher with investment than with         treaty partner, but with respect to all its BIT partners by
trade. Investment, due to its longer-term nature and         virtue of MFN clauses.
presence in the host country, is likely to leave a bigger
                                                             26   A common formulation was: “Should either of the High Contracting
footprint in the host country, positive or negative.              Parties introduce exchange or payment restrictions, it shall in such
BITs and investment chapters in PTAs are therefore                questions grant most-favoured nation treatment to the other Party.”

Globalization and Finance Project, University of Oxford                                                                  28 JUNE 2012 / 25
Consider how MFN clauses work in the context
of sovereign debt restructurings (taking as given
that sovereign debt constitutes an “investment” for
purposes of the BIT) and in international finance more
generally. MFN clauses in international finance have
limited impact on domestic policy space. This is one
reason why specific sovereign debt restructuring
annexes provide generally for only two substantive
treatment standards: MFN and national treatment. The
inclusion of a fair and equitable treatment guarantee
would have a much greater impact on the host
country’s policy space. Some recent restructurings
include most favoured creditor protections (e.g.
Argentina in 2005).
The primary fault line of discrimination in sovereign
debt restructurings is between creditors who
participate in a restructuring and those who choose
to retain their old bonds (rather than nationality).
Whether MFN clauses contained in BITs would have
any traction, depends on what type of discrimination
A. Within-instrument (only paying domestic or intra-
   EU/Eurozone creditors under a particular bonds,
   and defaulting on bonds held by third country
B. Similar debt instrument: potentially problematic if
   led to de facto discrimination of foreign holders
C. Dissimilar debt instruments: legal challenges
   by holders are unlikely to succeed; examples
   include: restructuring debt governed by the law of
   the debtor country, but not foreign-law governed
   debt (e.g. Greece in February/March 2012);
   restructuring only debt issued in a particular
   currency; restructuring only one type of debt (long-
   term debt vs. short-term; bonds vs. bank debt);
   preferentially paying official creditors
   (such as Paris Club creditors or the IMF), ahead
   of private creditors; remaining current on
   suppliers, while restructuring debt. There are some
   restructuring conventions, but few hard rules.

Globalization and Finance Project, University of Oxford   28 JUNE 2012 / 26
N Jansen Calamita
British Institute of International and Comparative Law; University of Birmingham School of Law
Investment treaties and investment chapters of broader                          character even if their effect (as contrasted with their
trade agreements increasingly contain provisions                                motive or intent) is discriminatory.”33
specifically addressing state fiscal and monetary
                                                                                Are such provisions necessary in the first place?
regulation, especially in times of crisis. Although the
                                                                                Do not states retain the right to regulate fiscal and
language of such provisions can vary significantly, it
                                                                                monetary matters during crises without concern
is possible to identify several principal types of these
                                                                                that the exercise of that right will result in liability to
                                                                                investors? The simple answer is that the state’s scope
»   “Prudential measures” taken by the state to                                 of action may depend upon the treaty text. In this
    maintain the safety, soundness and integrity of                             regard, one might consider Saluka Investments BV
    financial institutions, the financial system and                            v. Czech Republic, a case involving regulation of the
    capital markets as a whole27; and                                           banking sector where the applicable treaty did not
» “Temporary safeguards,” such as capital controls                              contain a prudential measures provision. There, the
    and exchange restrictions, adopted by the state                             investor claimed that the Czech authorities’ adoption
    to protect monetary reserves and the national                               of new, stricter capital requirements for the banking
    currency.28                                                                 sector, coupled with the authorities’ discriminatory
                                                                                refusal to provide it with financial assistance to
In addition to specialized provisions, contemporary
                                                                                meet those requirements constituted, inter alia, an
investment treaties may also contain a general
                                                                                indirect expropriation and a violation of the fair and
exceptions clause establishing the state’s right to
                                                                                equitable treatment standard. The tribunal rejected the
take action in its broad “essential security” interests
                                                                                expropriation claim, upholding the right of the Czech
without incurring liability to investors.29 Further, in a
                                                                                government to adopt general regulatory measures with
number of free trade agreements with investment
                                                                                respect to its banking sector, even if such measures
chapters, the provisions applicable to investments in
                                                                                effectively deprived the investor of its investment.
the financial services sector are carved-out from the
                                                                                However, the tribunal also held that it was a violation of
provisions applicable to investments generally.30 Thus,
                                                                                the fair and equitable treatment standard for the Czech
for example, an investment in financial services may
                                                                                authorities not to provide financial assistance to the
be subject to fewer protections than an investment
                                                                                investor when it had done so for other banks owned by
outside of the sector or redress for violations of certain
                                                                                Czech investors.
protections may only be available in state-to-state
dispute settlement.31                                                           Would Saluka have turned out differently for the
                                                                                Czech government had the applicable investment
How effective are these specialized provisions on
                                                                                treaty contained a “prudential measures” provision? It
prudential measures and temporary safeguards at
                                                                                depends, of course, on how that provision was drafted.
reserving to states the regulatory space to address
                                                                                Under NAFTA Chapter 14, for example, it seems as
crises without incurring liability? To date, such
                                                                                though the case would have turned out differently.
provisions have received limited application by arbitral
                                                                                Under Chapter 14, as interpreted by the tribunal in
tribunals. Temporary safeguards (i.e., balance of
                                                                                Fireman’s Fund Insurance, the investor’s only available
payments) provisions appear not to have factored in
                                                                                claim would have been for expropriation; complaints
arbitral decisions thus far, while a prudential measures
                                                                                about discrimination would have needed to be
clause seems to have been addressed only in one
                                                                                resolved at the state-to-state level.34
award.32 In that instance, a NAFTA arbitral tribunal
determined, obiter dicta, that Art. 1401(1) of the                              33    Id. para. 162.
                                                                                34    NAFTA Chapter 14 specifically addresses investments in financial
NAFTA “permits reasonable measures of a prudential                                   services. Several provisions of NAFTA Chapter 11 – the general
                                                                                     chapter on investment – are incorporated into Chapter 14, including the
27    See, e.g., US Model BIT (2004), Art. 20.1; Canada-Peru FTA (2009),             protection against uncompensated expropriation (Art. 1110) and certain
     Art. 1110; ASEAN-Austr.-N.Z. FTA (2009), Annex on Financial Services,           provisions on the procedural aspects of dispute resolution in investor-
     Arts. 3 & 4; Korea-India CEPA (2009), Annex 6-C, Art. 2; Japan-Mexico           state claims (Art. 1115-1138). Article 1102 on National Treatment and
     EPA (2004), Art. 110; Singapore-Japan EPA (2007), Art. 85; China-               Article 1105 on Minimum Standard of Treatment are not incorporated
     Japan-Korea Investment Treaty (2012), Art. 20 (“measures relating to            into Chapter 14. Notably, while the text of Chapter 14 contains no
     financial services for prudential reasons”); NAFTA (1994), Art. 1410(1)         counterpart to the Minimum Standard of Treatment provision of Chapter
     (“reasonable measures for prudential reasons”).                                 11, it does contain, in Article 1405, a counterpart to Chapter 11’s national
28    See, e.g., Japan-Vietnam BIT (2003), Art. 16; Greece-Mexico BIT (2000),        treatment provision. Article 1405, however, is not among the provisions
     Art. 7; Canada-Chile FTA (1997), Annex G-09.1.                                  to which the procedural provisions of Chapter 11 apply, and Article 1414
29    See, e.g., US Model BIT (2004), Art. 18.                                       makes clear that claims under Article 1405 are subject to state-to-state
30    See, e.g., ASEAN-Austr.-N.Z. FTA (2009), Annex on Financial Services.          dispute settlement pursuant to Chapter 20, not to investor-state dispute
31    See, e.g., NAFTA (1994), Ch. 14; Japan-Mexico EPA (2004), Art. 111.            settlement under Chapter 11.
32    Fireman’s Fund Ins. Co. v. Mexico, ICSID Case No. ARB(AF)/02/01,
     Award (17 July 2006).

Globalization and Finance Project, University of Oxford                                                                                      28 JUNE 2012 / 27
Thomas Sebastian
Advocate (formerly Counsel at the ACWL and Senior Associate at Allen & Overy LLP)
1. Enforcement arrangements under economic                        B. WTO panellists are effectively chosen by the
   treaties display considerable variation. States                    Secretariat. The Appellate Body is chosen
   have a range of design options at their disposal                   by the WTO Membership as a whole. In
   when entering into treaties and the same                           BITs, at least one adjudicator is chosen by
   substantive obligation can be enforced through                     the parties. The ICSID Secretariat does not
   radically different arrangements. For example, the                 appear to have a comparable role to the WTO
   prohibition on discriminatory taxes is enforced in                 Secretariat (while in UNCITRAL arbitration
   the WTO Agreements using state-to-state dispute                    there is no secretariat support at all). Lawyers,
   settlement and prospective cessation orders                        in particular, private sector lawyers, have a
   while it is enforced in the EU Treaty arrangements                 smaller role in the WTO.
   through the grant of private rights of action and              C. Arguments advanced in the WTO should
   awards of monetary compensation. Similarly, the                    make sense in policy terms- if they curtail
   culture of adjudication can differ considerably                    widespread practices in Member States then
   across different treaty regimes. For instance,                     they are unlikely to succeed. Equally, if a
   “activism” in the sense of a willingness to depart                 large number of WTO Members are opposed
   from the expressed common intention of state                       to an interpretation it is less likely to succeed.
   parties in order to achieve regime objectives                      BIT tribunals do not have access to this
   appears to be more easily accepted in the culture                  type of feedback. For these reasons, WTO
   of the European Court of Justice than in the WTO.                  adjudication appears to be more sensitive to
2. It is worth dwelling on the variations in design as                the preferences of the state parties.
   well as culture between WTO dispute settlement              4. Arguably, these differences lead to different
   and investor-state arbitration. Although, both sets            outcomes:
   of treaties are concerned with protecting foreign
                                                                  A. Interpretation of fair and equitable treatment
   economic actors from adverse state conduct, I
                                                                      (FET) clause in comparison to Article X:3(a) of
   suggest that they utilize very different enforcement
                                                                      the GATT (“uniform, impartial and reasonable
   arrangements and involve very different cultures of
                                                                      administration of laws”). Article X:3(a) claims
   adjudication. Arguably, they also reach different
                                                                      rarely succeed. FET claims appear to have
   substantive outcomes as a consequence.
                                                                      fared better.
3. Differences in dispute settlement design:
                                                                  B. Reactions to authoritative interpretations.
   A. Inter-state enforcement in the WTO while                        Reception of the NAFTA FTC Interpretation in
         private enforcement under BITs                               comparison to the Doha Declaration.
   B. Dispute settlement is embedded in a                         C. Rejection of the use of legitimate expectations
         multilateral institutional setting in the WTO while          as an interpretative aid by the WTO’s Appellate
         BIT dispute settlement is ad hoc and separate                Body. Comparison to FET standard where
         from the state parties                                       frustration of legitimate expectations is a cause
   C. There is an Appellate Body in the WTO while                     of action.
         there is no centralized appeal system under
   D. ‘Public law remedies’ in the WTO - prospective           Questions
         and non-monetary. ‘Private law remedies’
                                                                  A. What lessons does each system hold for the
         under BITs – compensatory
5. Differences in dispute settlement culture:
                                                                  B. Why have states chosen such different models
   A. WTO dispute settlement is strongly connected                   of enforcement?
         to the negotiating forum. In comparison,
                                                                  C. Are these systems comparable? Are there
         BIT tribunals have limited awareness of the
                                                                     other comparisons, such as to domestic public
         underlying BIT bargain.
                                                                     law adjudication, which may be more useful?

Globalization and Finance Project, University of Oxford                                                   28 JUNE 2012 / 28
Kenneth J Vandevelde
Professor of Law, Thomas Jefferson School of Law
The national security exception in bilateral investment       In any event, all of the tribunals that have considered
treaties (BITs) is often traced to the General Agreement      the issue have rejected Argentina’s argument that the
on Tariffs and Trade (GATT) and the failed Charter of         exception is self-judging, given the absence of explicit
the International Trade Organization (ITO), although          self-judging language in the BIT. A question that
antecedents also may be found in U.S. friendship,             remains, however, is whether a self-judging exception,
commerce and navigation (FCN) treaties. The history           as Argentina has maintained, is subject to a good faith
of the national security exception suggests two               obligation, or, as the United States in at least some
features in particular.                                       contexts has maintained, upon invocation renders the
                                                              issue of its applicability completely nonjusticiable.
First, the drafters of the exception appear originally
to have been concerned primarily with preserving for          Despite the origins of the national security exception
the host state the ability to defend itself against hostile   in concerns about military defence, all of the tribunals
states. The drafters were not unaware of the threat           that have addressed the issue in the Argentina cases
of an economic crisis related to capital movements.           have been willing to treat the exception as potentially
They addressed such concerns principally by limiting          embracing measures necessary to address an
commitments to capital account liberalization and             economic crisis. The language that appears in many
by adopting exceptions for balance of payments                BITS is sufficiently vague that it does not explicitly
difficulties.                                                 preclude such a reading.
Second, the drafters did not regard the exception             Yet, the exception generally has not proved to an
as self-judging. While the GATT and ITO Charter               effective shield for Argentina. Precisely because it
language did authorize each party to determine in             was not drafted with economic crises specifically
its sole discretion whether measures that the party           in mind, the national security exception, unlike the
sought to justify under the exception were necessary,         balance of payments exception, does not set forth
the language imposed additional conditions on the             economic criteria that determine when it applies.
invocation of the exception that were not self-judging.       Because a bilateral investment treaty is meant to
The United States in proposing the language feared            discipline certain aspects of a state’s economic policy,
its abuse by other countries and believed that to make        a broad exception for economic crises potentially
it entirely self-judging would render the GATT and the        could undermine the central purpose of the treaty.
ITO Charter legal nullities.                                  Thus, tribunals appear to have been reluctant to allow
                                                              Argentina to rely on the vague language of the national
The exception, as it appears in most BITs, is much
                                                              security exception to escape liability for various
shorter than the language of the GATT or the ITO
                                                              measures taken during its economic crisis. Economic
Charter. It usually omits the self-judging language
                                                              crises are perhaps best addressed through exceptions
of the GATT and ITO Charter, but it also often
                                                              crafted with those kinds of crises in mind.
omits qualifying phrases that in the two multilateral
agreements had signalled the connection between the
exception and national defence.
The question of whether the exception is self-judging
might never have arisen in a BIT arbitration, had the
United States not argued before the International
Court of Justice (ICJ) in the early 1980s that the
national security exception of the U.S.-Nicaragua
FCN treaty was self-judging, despite the absence of
explicit self-judging language. The ICJ rejected the
U.S. argument. Nevertheless, when dozens of claims
against Argentina were submitted to arbitration in
the first decade of the twenty-first century, Argentina
adopted the U.S. argument that the national security
exception was self-judging, although Argentina’s
definition of the term “self-judging” was not the same
as the United States’ definition.

Globalization and Finance Project, University of Oxford                                                  28 JUNE 2012 / 29
Robert Volterra
Partner at Volterra Fietta
                                                                             4. In the absence of such clauses, States may
Introduction                                                                    rely on the customary international law principle
                                                                                of necessity in order to avoid liability for BIT
This memorandum contains our reflections on the
                                                                                breaches. However, customary international law
following two questions:
                                                                                establishes a highly restrictive test of necessity
i.  Some States and analysts are concerned that                                 and does not exempt States from the obligation to
    bilateral investment treaties (BITs) may constrain                          compensate for any material loss caused by their
    their ability to use prudential measures or other                           wrongful acts.37
    regulatory measures to deal with the current global                      5. Thus, BITs may indeed constrain States’ abilities to
    economic crisis. Are these concerns justified?                              use regulatory measures to deal with the economic
ii. How might the content, interpretation and                                   crisis, particularly when the applicable BIT does
    application of BITs affect the capacity of States to                        not contain an exception clause.
    regulate finance?
                                                                             How BITs might affect the capacity of states to
                                                                             regulate finance
BITs and states’ abilities to deal with the economic
                                                                             1. The significant textual variation in substantive BIT
                                                                                provisions makes it impossible to give a general
1. Since the 1990s, both the number and scope                                   answer to this question. However, there are at least
   of BITs has grown rapidly. In the context of                                 three groups of measures that States may need to
   the current global economic crisis, this growth                              take to regulate finance and mitigate the effects
   has set up a conflict between the objective of                               of the current economic crisis. These measures
   promoting and protecting foreign investment and                              could conflict with common BIT standards of
   the legitimate desire of States to retain their ability                      protection.
   to deal with situations that may endanger their                           2. The first group of measures is designed to ensure
   essential interests. This is because in situations                           the stability of the financial services industry and
   of economic crisis States often need to adopt                                the continuation of bank funding. They usually
   extraordinary measures that can affect investors’                            consist of liquidity support, recapitalization, capital
   rights under BITs.                                                           controls or lending guarantees. The standards of
2. There is limited and conflicting jurisprudence that                          “national treatment” and “no discrimination” may
   addresses the role of international law in a State’s                         prohibit such kind of measures if they are aimed
   management of a financial crisis. However, the                               at some but not all financial entities. Moreover,
   arbitral decisions derived from the 2001 Argentine                           a State’s nationalization of shares in banks may
   financial crisis demonstrate that BITs can restrict                          breach “expropriation” or “fair and equitable
   the range of measures with which States can deal                             treatment” clauses when the State does not pay
   with an economic crisis.                                                     the compensation required under the applicable
3. Only a minority of BITs contain clauses that limit the                       BIT. Measures such as capital controls could
   applicability of investor protections in exceptional                         breach these standards as well as a free transfer of
   circumstances. These include “national security”,                            funds clause.
   “prudential measures”, and other regulatory                               3. The second group of measures are seen as an
   measures exception clauses. Moreover, while                                  alternative to coordinated global bailouts. When
   it is generally accepted that an economic crisis                             a State cannot pay its debts, it may decide to
   can justify the invocation of a national security                            restructure its sovereign debt and swap out its
   exception,35 what remains uncertain is both                                  defaulted bonds for new bonds with lower interest
   the level of severity of the crisis as well as                               rates and longer maturities. Since a bond swap
   the conditions required to invoke that clause.                               reduces the value of bonds, bondholders could
   Regarding “prudential measures”, usually it is for                           invoke the “expropriation” and “fair and equitable
   the Arbitral Tribunal to decide whether the measure                          treatment” clauses against such sovereign debt
   in question qualifies as “prudential”.36                                     restructuring measures.38
                                                                             37     See Articles 25 and 27 of the Articles on Responsibility of States for
                                                                                  Internationally Wrongful Acts.
35    See CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No.
                                                                             38    See Abaclat and others v. Argentine Republic, ICSID Case No.
     ARB/01/8, Award (12 May 2005), paragraph 319; LG&E Energy Corp. v.
                                                                                  ARB/07/5, Decision on Jurisdiction and Admissibility (4 August 2011).
     Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability (3
                                                                                  The Tribunal decided that Argentina’s restructuring of debt during its
     October 2006), paragraphs 251 to 257.
                                                                                  financial crisis fell under its jurisdiction, inter alia, because bonds were
36    Fireman’s Fund Insurance Co. v. Mexico, ICSID Case No. ARB(AF)/02/1,
     Award (17 July 2006), paragraphs 166-167.                                    part of the definition of investment under the Argentina-Italy BIT.

Globalization and Finance Project, University of Oxford                                                                                     28 JUNE 2012 / 30
4. Finally, in order to increase the availability of credit
   to other sectors of the economy, States may need
   to impose conditions on banks benefiting from the
   first group of measures. Such conditions typically
   create an obligation or provide incentives to extend
   credit to local companies. “National treatment” and
   “no discrimination” clauses may impact a State’s
   ability to adopt such measures.

Globalization and Finance Project, University of Oxford       28 JUNE 2012 / 31

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