This December will mark the 50th anniversary of what is commonly regarded as the first modern investment protection treaty, the “1959 Treaty” between the Federal Republic of Germany and Pakistan. It set out a series of substantive obligations assumed by each state party, and those obligations are now commonplace in investment treaties. As has been discussed in this Newsletter, in the decades that followed the 1959 Treaty, with particular acceleration since the 1990s, many countries negotiated bilateral investment treaties (“BITs”) or, starting with NAFTA, free trade agreements (“FTAs”) that contained investment protection chapters.

In comparison with more recent investment treaties, however, the 1959 Treaty differs in one material respect: its dispute settlement mechanism did not confer rights of private action upon nationals of the two states concerned. It provided for binding arbitration of disputes arising under the treaty but only between the two state parties, an approach similar to that taken under the World Trade Organization (“WTO”).

Providing the investor/claimant with a right of direct access to international arbitration became more common in later treaties up to the point where it became a fundamental premise in international investment arbitration (giving rise to so-called “investor-state” arbitration). It has been considered that a key feature of a modern BIT is to allow an investor to bring its international claim against the state which allegedly breached the treaty without having to convince its own state to make a claim on its behalf. Moreover, these treaties frequently vary or eliminate the customary international law requirement to exhaust local remedies before an international claim can be brought.

As BITs have burgeoned, so have claims

As might be expected, when a treaty creates a remedy—particularly the power to award monetary damages—parties will invoke this remedy when disputes arise. Therefore, just as we have seen a proliferation of treaties, we are now witnessing a proliferation of investment disputes. For example, for the first thirty years of its existence, the World Bank’s International Centre for the Settlement of Investment Disputes (“ICSID”) registered only a handful of claims. But after NAFTA entered into force in 1994 and other treaties began to be invoked by investors, ICSID’s caseload increased dramatically and it now regularly registers thirty or more investment treaty arbitration claims yearly. There is also an important number of investment claims that are submitted to ICSID and other arbitration centers which arise under investor-sovereign contracts.

Due to the large number of BITs/FTAs and the broadening possibilities of investors gaining legal standing to commence arbitrations against host states, there are now claims being filed that were probably unthinkable a decade ago. For example, a Hong Kong investor was able to successfully bring a claim against Peru. A Malaysian investor in Chile recently succeeded in a claim against Chile under the Malaysia-Chile BIT, as did an investor from Oman in a claim against Yemen. Had these countries not engaged in the trend of signing BITs, none of these claims could have been brought.

Sovereigns attempt to draw some lines

The foregoing, together with the substantial increase in the amounts claimed in arbitration, is currently having an important impact on states’ assessment and policy with respect to investment treaties.

To limit their exposure, some states have negotiated more precise treaty text in recent years. The U.S., for example, has opted for much more detailed language to try to ensure that tribunals do not give unduly broad interpretations to the substantive obligations.

When disputes arise, states also commonly argue against overly expansive interpretations of treaty rights, and sometimes this occurs even if such interpretations are against the interests of a state’s own investors. This has happened not infrequently under NAFTA. In a claim against Mexico, Bayview Irrigation v. Mexico, the U.S. intervened in support of Mexico’s interpretation of NAFTA Article 1101 (the chapter’s “scope and coverage” provision which sets out the types of measures to which the chapter relates and hence what sort of claims may be brought). In Bayview, the U.S. preferred Mexico’s interpretation of Article 1101 over that being advanced by its own nationals. The claimants, seventeen water districts in Texas, alleged that Mexico had breached a bilateral treaty regarding the utilization of waters at the U.S.-Mexico border by allegedly illegally retaining more water than permitted under the bilateral treaty. The water districts alleged violations of NAFTA provisions relating to national treatment and expropriation. The U.S. endorsed Mexico’s view that extending substantive NAFTA protections and the right to arbitrate under NAFTA to entities that were not seeking to make or had not made an investment in the territory of the NAFTA party whose measure was at issue would constitute a “radical expansion” of the rights granted under NAFTA. Had the U.S. claimants’ theory been accepted, persons who had invested in their own state but had not even set foot in the “would-be respondent” state would have been able to challenge some act or omission of that state in international arbitral proceedings.

Likewise, in GAMI Investments, Inc. v. Mexico, the U.S. intervened in support of Mexico’s view as to what rights and interests a minority shareholder had when it complained of injury suffered by the enterprise in which it had invested. It agreed with Mexico that a minority investor could assert a claim only in respect of harm suffered directly by it (e.g. that a minority non-controlling shareholder could not bring a claim on behalf of an enterprise) nor could it complain derivatively of injury to the enterprise when it did not own or control it). In the U.S.’s view (shared by Mexico), the minority investor could claim only in relation to its own investment (e.g. its shareholding in the Mexican enterprise), and its complaint had to be directed against a measure relating to that investment.

Back to the future?

Some states, however, are taking the view that investment arbitration creates a monetary exposure that is simply unacceptable from a political and fiscal standpoint. Some of these countries (most notably Brazil, which has never embraced investor-state arbitration) apparently have decided to explore alternative ways of protecting foreign investment. (Although Brazil has not followed the regional practice of signing BITs, it has received the largest share of foreign direct investment in South America. This has raised doubts as to whether BITs with private rights of action are as important to attracting investment as many have claimed.)

The approach taken by these countries includes returning to state-to-state dispute settlement mechanisms such as the one provided under the “old” 1959 Treaty. Although such an approach is still far from being a trend, it is interesting to note that even some members of the U.S. State Department’s advisory committee on the review of the current Model U.S. BIT have advocated doing away with investor-state mechanisms and using state-to-state dispute settlement structures instead.

It is clear, however, that most countries will not reverse their international agreements or their commitment towards investment treaties. It is more likely that countries will continue to sign BITs but will seek to implement measures that can enhance their capacity to defend arbitration claims. A number of countries, particularly those that have a constant flow of arbitration cases, have established medium-size government offices, often assisted by outside counsel, that take primary responsibility for preventing and defending arbitration claims. Other governments have opted to join resources to create common institutions to face arbitral lawsuits. In this respect, it is worth mentioning that several Latin American countries are currently working, with the support of the Inter-American Development Bank, the United Nations Conference on Trade and Development and the Organization of American States, to create an advisory center for investment disputes which will intend to provide legal assistance to member countries facing arbitration claims. Whether or not that center is finally launched remains to be seen. It is, however, illustrative of the new ways in which governments are trying to mitigate the risks of investment arbitration. ■


We invited Mariano Gomezperalta, General Counsel of Mexico’s Ministry of the Economy, to comment on sovereigns’ evolving views of international arbitration of investment disputes. In his official capacity, Mr. Gomezperalta has represented the Government of Mexico in several investor-state and state-to-state arbitrations. Prior to his current position he was a member of robert wray PLLC, where he participated in privatization projects and international arbitration, as well as numerous U.S. Export- Import Bank guaranteed financings. Mr. Gomezperalta is a graduate of Harvard Law School (LL.M.) and is licensed to practice in Mexico and the State of New York.