Border patrols

With the continuing growth of cross-border investment, dispute settlement must maintain uniformity. Alejandro Escobar and Norah Gallagher report

International investment is central to the world economy. The legal environment for foreign investment has changed quite dramatically, largely as a result of changes in the global economy after the end of the Cold War. The nation states and reformed economies that emerged at the end of the 20th century were eager to encourage foreign investment for development, although the overall effect of this new environment is not yet entirely clear.

What is certain, however, is that foreign investors need stability and predictability to manage risk and increase value. The legal framework, including dispute settlement, is of paramount importance. Effective remedies preserve business cooperation and allow redress if necessary.

Today there is an international legal framework for investment protection, developed in various stages. First, countries established a specialised dispute settlement mechanism, while supporting international arbitration in general. Second, countries have concluded numerous bilateral investment treaties, which often make international arbitration available directly to the investor and the host state. Finally, countries have concluded multilateral treaties with provisions on investment, such as the North American Free Trade Agreement (Nafta) and the Energy Charter Treaty (ECT), with a view to bringing uniformity to international investment law. There are now a growing number of arbitral decisions under both bilateral and multilateral investment treaties.


The Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 (ICSID Convention) entered into force in October 1966, creating the International Centre for Settlement of Investment Disputes (ICSID). The ICSID Convention establishes an international system for submitting investment disputes to conciliation or arbitration. It ensures that consent, once given, is binding; that procedures can be instituted and taken forward by a diligent party; and that arbitral awards can be enforced in any member country, subject only to limited international review mechanisms.

Although ICSID has been referred to as the 'sleeping beauty' of investment arbitration, it is much relied upon by bilateral and multilateral investment treaties. As a result, the number of cases being processed through ICSID has increased dramatically within the past 10 years.

Bilateral investment treaties

Bilateral investment treaties (BITs) have been concluded since 1959, deriving from more general friendship, commerce and navigation treaties. The number of BITs has grown significantly as states seek a more structured and secure investment environment.

The 1990s saw a huge increase in BITs, from 385 at the end of the 1980s to 1,857 a decade later (according to the UN Conference on Trade and Development). BITs are not only entered into between developed and developing countries, but also between developing countries, as these become both capital exporters and importers. The provision of BITs usually follows a standard pattern. The contracting parties agree to grant national, most-favoured-nation and fair and equitable treatment, as well as constant protection and security, to investors and investments from the other state. Expropriation of covered investment is subject to compensation only. In addition, there will be dispute resolution provisions that in most cases provide for arbitration directly between the investor and the host state.

BITs now play an important role in the planning and development of international investment relations. In the event of a dispute, they offer a wide range of possible causes of action for foreign investors and their subsidiaries, which may potentially overlap. This is evident in two cases against the Czech Republic, CME Czech Republic BV v Czech Republic and Lauder v Czech Republic. These cases were based on the same facts though brought under two separate BITs, one US-Czech and the other Netherlands-Czech. The Czech Republic refused a request for consolidation of the proceedings. In their awards, the tribunals came to different conclusions. This has raised some concerns about the certainty and finality of the process. The dilemma raised in these and other cases becomes all the more relevant when considered in the light of over 2000 BITs concluded to date. Will this lead to a more detailed drafting of dispute resolution provisions by states' parties, or will investors (and governments) be seeking some form of contractual commitment in order to avoid such a situation if a dispute arises?

Multilateral investment treaties

NAFTA entered into force in January 1994 between Canada, Mexico and the US. It created the world's largest free trade area and was designed to foster increased trade and investment among the parties.

NAFTA encourages the use, wherever possible, of arbitration and alternative dispute resolution for settling commercial disputes. Chapter 11 of NAFTA governs investment and provides a right of redress against a state party where there has been an alleged breach of its terms. The central elements of Chapter 11 are the minimum standard of treatment and expropriation provisions. State parties must treat covered investment in accordance with international law, including fair and equitable treatment. They must also compensate for the direct or indirect expropriation of covered investment. As in most BITs, Chapter 11 allows for arbitration of disputes at the choice of the investor, either before ICSID or under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules (1976).

There have been a number of arbitral decisions given under NAFTA. Metalclad Corporation v Mexico was the first case taken under Chapter 11, and it offered a broad interpretation of indirect expropriation. The most recent decision, which was given in Mondev International v US, upheld jurisdiction over intangible forms of investment and discussed the implications of the minimum standard of treatment.

The 1994 ECT entered into force in April 1998. It has been signed by 51 states (46 ratifications), spanning Eastern and Western Europe, former CIS states, the EU itself as well as Japan and Australia. The aim of the treaty is to establish, maintain and promote long-term cooperation in the access to, and development of, the energy sector.

This was a major step, because before this the energy industry was exclusively controlled by the host government. Clear and distinct interests were evident during negotiations: the West wanting security for foreign investments in the energy industry and the East wanting access to developed Western markets.

The ECT investment provisions are structured along similar lines to BITs and were influenced by NAFTA. They create similar conditions for establishment, protection of investment and resolution of both investor-state disputes and state-state disputes. Investors can compel a state party to go to arbitration for an alleged breach of obligations under the ECT. The ECT provides a choice of arbitration rules similar to NAFTA (ICSID and UNCITRAL), with the addition of the Arbitration Institute of the Stockholm Chamber of Commerce. There have thus far been no arbitral decisions under the ECT. One case, AES Summit Generation v Hungary, was commenced but settled quickly. The dispute concerned the extent of obligations of a generating company following privatisation.


The rapid change to the public international law regime on investment protection has resulted in a body of arbitral decisions over the past five years. They address various issues of substance, including the scope of covered investment and the extent of host state obligations. They present, in addition, important issues of procedure. The parallel proceedings against the Czech Republic under two separate BITs highlight the complexities that can now arise. The implications of the new regime must now be carefully considered.

Alejandro Escobar is an associate and Norah Gallagher a professional support lawyer at Herbert Smith