Customary international law in respect of the treatment and taking of foreign investment before the era of the bilateral investment treaty customarily was contentious.

Capital-exporting States generally maintained that host States were bound under international law to treat foreign investment at least in accordance with the 'minimum standard of international law'; and where the host State expropriated foreign property, it could lawfully do so only for a public purpose, without discrimination against foreign interests, and upon payment of prompt, adequate and effective compensation. Capital-importing States maintained that, in matters of the treatment and taking of foreign property, host States were not bound under international law at all; that the minimum standard did not exist; and that States were bound to accord the foreign investor only national treatment, only what their domestic law provided or was revised to provide. The foreign investor whose property was taken was entitled to no more than the taking State's law afforded.

The gulf between the positions of the capital-exporting States and those of the capital-importing States reached its extremity with the adoption by the United Nations General Assembly in 1974 of the Charter of Economic Rights and Duties of States.

That Charter excluded international law in the treatment and taking of foreign property and asserted the sole governance of the domestic law of the host State as interpreted and applied by its tribunals. 1The industrialized democracies voted against the Charter, but developing countries and the Communist bloc voted for it. As a General Assembly resolution not adopted as declaratory of[Page815:]

international law, which plainly was not declaratory of international law, and whose terms were sharply contested, the Charter could neither make nor reflect international law. Yet it demonstrated that the majority of the States of the international community then were not, collectively, prepared to sustain the traditional rules of international law respecting the treatment and taking of foreign property. That majority did not equate with economic power. It evidenced bloc voting rather than considered, sovereign decision-making. But it was sufficient to raise the question of whether the General Assembly, if it cannot make international law, can unmake it.

Yet at the very time of the adoption of the Charter of Economic Rights and Duties of States, the tide was beginning to turn. Universal, multilateral agreement on the treatment and taking of foreign property, expressed in a single instrument, remained unachievable, not only in the United Nations, but even in the Organization for Economic Cooperation and Development. But what is extraordinary is that, in the last thirty-five years, some 2,200 bilateral investment agreements have been signed and more than two-thirds of those BITs are in force. Those agreements, first negotiated at the initiative of European industrialized democracies such as Switzerland, the country of which Robert Briner is a distinguished citizen, as well as Germany, the Netherlands and the United Kingdom, today are virtually universal in their reach. Bilateral investment agreements run not only between countries of the North and the South; they run East and West, between developing countries, and include former Communist States as well as the People's Republic of China.

By the terms of these bilateral investment treaties (and a few multilateral treaties, notably the European Energy Charter and the North American Free Trade Agreement), foreign investment is assured of fair and equitable treatment, full security and protection, and no less than national and most-favored nation treatment. The foreign investor is assured of management authority and control. The terms of commitments entered into in respect of the foreign investment are, as a matter of treaty law, to be observed. If there is a taking by the State of the foreign investment, by means direct or indirect, the State must pay prompt, adequate and effective compensation.

Moreover, if there is a dispute between the host State and the foreign investor, the investor is authorized to pursue a direct, binding international arbitral remedy against the government of the host State. This innovation displaces the unpredictable intervention of States in exercise of their right of diplomatic protection of the interests of their nationals by according the foreign investor[Page816:] standing under international law directly to pursue arbitration against the host State. While there was significant precedent for such direct recourse in many concession agreements and other contracts between States and aliens, institutionalization of this arbitral right in BITs is one of the most important progressive developments in the procedure of international law of the twentieth century. It has produced about 160 such arbitrations to date and, today, constitutes the principal source of the activity of the World Bank's International Centre for the Settlement of Investment Disputes (ICSID). It is appropriate to note that Robert Briner has presided over or participated in BIT international arbitral tribunals with characteristic distinction.

The author has elsewhere maintained that the concordant terms of some 2,200 bilateral investment treaties have reshaped the body of customary international law in respect of the treatment and taking of the foreign investment. 2In any event, they have dramatically altered the international debate. The Calvo Clause, insistence by capital-importing States that foreign investors are entitled to no more than national treatment, and repeated resolutions of the United Nations on 'Permanent Sovereignty over Natural Resources', the 'New International Economic Order' and the Charter of Economic Rights and Duties of States have, for purposes both practical and legal, been displaced and discredited by the multiplicity and universality of concordant bilateral investment treaties, treaties that manifest the objective of developing and developed States alike to attract foreign investment. BITs set out and specify provisions governing the promotion and protection of foreign investment far clearer and more detailed, and more positive, than the standards maintained by capital-exporting States to comprise the relevant principles of customary international law. They equally and for like reasons constitute a significant advance on earlier treaties of friendship, commerce and navigation, whose provisions on foreign investment were often nil or confined.

The United States of America has concluded a cascade of bilateral investment treaties as well as NAFTA. They represent the culmination of a policy of the promotion and protection of foreign investment vigorously pursued by the USA for some 150 years. The United States, a great exporter of capital during the[Page817:]

twentieth century, has benefited as much as any nation from the import of foreign capital, not only during the eighteenth and nineteenth centuries, but to this very day.

It is accordingly unsurprising that the 1994 Prototype treaty between the Government of the United States and that of another State 'concerning the encouragement and reciprocal protection of foreign investment' provided:

Article II, 3(a) Each Party shall at all times accord to covered investments fair and equitable treatment and full protection and security, and shall in no case accord treatment less favorable than that required by international law.

Article II, 3(b) Neither Party shall in any way impair by unreasonable and discriminatory measures the management, conduct, operation, and sale or other disposition of covered investments.

What is surprising is that the 2004 Model BIT in comparable provisions provides:

Article 5: Minimum Standard of Treatment

Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security.

For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard to be afforded to covered investments. The concepts of 'fair and equitable treatment' and 'full protection and security' do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. . . .

The differences between the 1994 Prototype and the 2004 Model BITs are striking. 3The former directly, comprehensively-and flatly-provided (as bilateral investment treaties concluded the world over typically do) that the Parties shall at all times accord 'covered' (i.e. an investment of a national or [Page818:]

company of a Party in the territory of the other Party) investments 'fair and equitable treatment and full protection and security, and shall in no case accord treatment less favorable than that required by international law'. That is, the obligation to accord fair and equitable treatment and full protection and security is unqualified. The Parties, the 1994 Prototype adds, 'shall in no case accord treatment less favorable than that required by international law'. That latter provision provides a floor below which treatment cannot legally be applied. Such treatment not less favorable than that required by 'international law' may be interpreted to mean not only customary international law but treaty law. But what is critical is that the obligation of the host State to accord covered investment 'fair and equitable treatment' is not subjected to any lesser standard that may be found in international law.

The 2004 Model BIT retreats from these categoric prescriptions. Provision for fair and equitable treatment appears in an article entitled 'Minimum Standard of Treatment'. Each Party shall accord to foreign investments no more than 'treatment in accordance with customary international law, including fair and equitable treatment and full protection and security'. What was the floor has become the ceiling. The retreat is the more marked by specifying that, 'The concepts'-the concepts, not prescriptions-'of "fair and equitable treatment" and "full protection and security" do not require treatment in addition to or beyond that which is required by that standard and do not create additional rights'.

The profound, and startling, deficiency of the 2004 provision is that there is no agreement within the international community on the content of 'customary international law' on which the 2004 Model BIT relies. There was, and is, no agreement within the international community on the content of 'the customary international law minimum standard of treatment of aliens', or even on whether such a minimum standard existed or exists. Can it be confidently assumed that, when the United States concludes a bilateral investment treaty with a developing country, the parties are in agreement on the meaning and import of the reference to customary international law and its minimum standard? Can it be assumed that the developing country accepts the rendering of customary international law given by the capital-exporting States of the twentieth century? Or shall it be assumed that the United States accepts the strictures of the Calvo Clause and the grotesqueries of the New International Economic Order? Rather than concluding treaties that invite controversy over the content of a customary international law that concordant provisions of some 2,200 bilateral investment treaties have been in the process of reshaping, why not adhere to provisions[Page819:] that have been accepted more than two thousand times by the vast majority of States throughout the world, including, until 2004, the United States? Why jettison the characteristic protections of BITs against unfair and inequitable treatment, protections widely viewed as a fundamental advance on the prior confined if not confused state of customary international law, in favor of invocation of a minimum standard that is hardly accepted as such?

The 2004 Model BIT appends Annex A, captioned, 'Customary International Law'. It provides:

The Parties confirm their shared understanding that 'customary international law' generally and as specifically referenced in Article 5 [Minimum Standard of Treatment] and Annex B [Expropriation] results from a general and consistent practice of States that they follow from a sense of legal obligation. With regard to Article 5 [Minimum Standard of Treatment], the customary international law minimum standard of treatment of aliens refers to all customary international law principles that protect the economic rights and interests of aliens.

The first sentence of Annex A is unexceptionable. The difficulty, not addressed, is the absence of a general and consistent practice of States in respect of the treatment of foreign investments, apart from that reflected in the concordant terms of bilateral investment treaties. What the second sentence of Annex A is meant to achieve, and whether it achieves it, is unclear. Perhaps it is intended to indicate that the reference is not to customary international law relating to the physical security of aliens.

The 2004 Model BIT contains other perplexities and deficiencies as well. It revises the terms of Article 3(b) of the 1994 Prototype quoted above in respect of the management, conduct, operation and sale of foreign investment to provide that such authority shall be no more than that required by national and by most-favored nation treatment. In doing so, it omits the enjoinder of 'unreasonable and discriminatory measures'.

Article 6, its otherwise normal provision on expropriation and compensation, in the 2004 Model BIT imports a reference to the 'Minimum Standard of Treatment'. More improvidently still, Article 6 is elaborated by Annex B, captioned 'Expropriation', in which the Parties 'confirm their shared understanding'. No such Annex was appended to the 1994 Prototype. Paragraph 1 of Annex B provides: 'Article 6 [Expropriation and Compensation] is intended to[Page820:] reflect customary international law concerning the obligation of States with respect to expropriation.' That is a remarkable proviso, since it is incontestable that the content of customary international law on expropriation is contentious. The authors of this provision do not seem to have borne in mind the holding of the Supreme Court of the United States in Banco Nacional de Cuba v. Sabbatino: 'There are few if any issues in international law today on which opinion seems to be so divided as the limitations on a state's power to expropriate the property of aliens.' 4

Annex B then provides that, '[a]n action or series of actions by a Party cannot constitute an expropriation unless it interferes with a tangible or intangible property right or property interest in an investment'. It may be assumed that contractual interests are not excluded but rather covered by the reference to 'intangible' property rights, though that would be clearer if the word 'property' had been omitted. Under the law of some States, a narrow view of what is 'property' may be taken that would have the effect of unduly constricting the extent of the protection against uncompensated expropriation meant to be provided by Article 6.

Annex B goes on to deal with indirect expropriation, 'where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.' It rightly observes that such a determination requires 'a case-by-case, fact-based inquiry'. It specifies that such inquiry shall consider, 'among other factors':

(i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;

(ii) the extent to which government action interferes with distinct, reasonable investment-backed expectations; and

(iii) the character of the government action.

It adds:

Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations. [Page821:]

The specifications of subparagraphs (i), (ii) and (iii) are sound. But those of the foregoing proviso are more problematical. If actions by a government interfere with a foreign investor's investment to an extent that deprives the investor of the value of its investment, should the motivations of the actions be sufficient to insulate the government from liability under the BIT, 'except in rare instances'? Can it be plausibly maintained that the exception only for 'rare circumstances' is found in customary international law?

The 2004 Model BIT contains quite a number of other provisions which, in all, make it much more detailed than the 1994 Prototype. Many of these provisions are desirable (such as those on transparency of the arbitral process) or unobjectionable. Those for arbitration of disputes between the investor and the host State are particularly detailed. While on the whole these provisions seem sound, two call for comment.

Article 19, on 'Disclosure of Information,' provides:

Nothing in this Treaty shall be construed to require a Party to furnish or allow access to confidential information the disclosure of which would impede law enforcement or otherwise be contrary to the public interest, or which would prejudice the legitimate commercial interests of particular enterprises, public or private.

This proviso is subject to abuse by a Party that, in an arbitral proceeding, wishes to block disclosure of documents that, if revealed, may undermine its response to claims of the investor or prejudice the government's counter-claims. Cannot a Party plausibly claim that the public interest is served by it, rather than the investor, winning the arbitration, from which it follows that that Party is justified in declining to disclose information which, if disclosed, could lead to an award in the claimant's favor? Are not the elaborate provisions for investor-State arbitration contained in the Model BIT at risk of being neutered by such unequal provision?

Finally, Article 30, paragraph 3, of the 2004 Model BIT provides that:

A joint decision of the Parties, each acting through its representative designated for purposes of this Article, declaring their interpretation of a provision of this Treaty shall be binding on a tribunal, and any decision or award issued by a tribunal must be consistent with that joint decision. [Page822:]

A like provision is found in the North American Free Trade Agreement, and NAFTA parties have had recourse to it, even going so far as to declare such an interpretation in the midst of an arbitral proceeding with a view to influencing its outcome.

The parties to a treaty are its most authoritative interpreters. With or without such a proviso, they are free to agree upon an interpretation of it. Whether however so doing once a particular arbitral proceeding has been launched, in respect of interpretations of the treaty earlier made or acted upon in good faith without knowledge of the interpretation subsequently arrived at by the parties, is problematical. Moreover, recourse to Article 30 may, by raising elements of the dispute to the intergovernmental plane, tend to politicize a dispute whose depoliticization is an object of investor-State arbitration. It may even prejudice a pending, legitimate claim of the investor.

The deficiencies of the 2004 Model Bilateral Investment Treaty discussed above are not exhaustive of an exercise which, in the large, constitutes a regressive, rather than progressive, development of international law. [Page823:]

1
United Nations General Assembly Resolution 3281 (XXIX) of 12 December 1974.

2
S.M. Schwebel, 'The Influence of Bilateral Investment Treaties on Customary International Law' Proceedings of the 98th Annual Meeting of the American Society of International Law (2004), 27-30. In support of this thesis see Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF) 99/2, para. 117 (2002) and CME Czech Republic B.V. v. Czech Republic, Final Award of 14 March 2003, paras. 497-98.

3
The concerns of the US business community about the weakening of investor protections in the 2004 Model BIT as compared to the 1994 Model BIT are set out in the Report of the Advisory Committee on International Economic Policy Regarding the Draft Bilateral Investment Treaty, Presented to the Department of State on 11 February 2004. That Report equally contains concerns of environmental and labor interests that such protections have not been sufficiently weakened.

4
376 U.S. 398 at 428 (1964).