Originally from The American Review of International Arbitration (ARIA)

ABSTRACT

International investment agreements (IIAs) provide substantive protections to foreign investors based on the premise that these protections will promote FDI, which, in turn, will promote sustainable economic development. The key feature of such IIAs is that they contain provisions that aim to create stability in the investment legal framework by imposing restrictions on the host state’s regulatory power and restraining the host state’s interference with the rights of foreign investors. These stability guarantees can be provided explicitly through the express stabilization clause (IIA SC) or implicitly through the fair and equitable treatment standard (FET). While a significant number of the old generation IIAs, contained the express SCs, these clauses have attracted limited scholarly scrutiny. The present study seeks to appraise and investigate the issue of the IIA SC and its effectiveness in achieving the stability and predictability of the contractual regime. The study also aims to tackle the sensitive issue related to the question of whether the FET clause does indeed provide foreign investors legal stability equal to SCs in state contracts. In this vein, the argument advanced by this study is that unless there is an express SC in the IIA, which is rare and no longer found in the new generation IIAs, the FET clause is a poorer substitute as it does not provide legal stability equal to contractual stabilization clauses (“CSCs”), but merely provides that any changes will be fair, reasonable, and equitable. Therefore, the purpose of the FET clause should not be understood to extend to strict stability. Otherwise, the existence of SCs in state contracts would be redundant. We ultimately conclude that reforming these provisions in recent investment treaties would help make these standards more precise and subject to plausible interpretation by future tribunals.

I.     INTRODUCTION

Developing countries and emerging market economies are often vulnerable to political risks  affecting foreign direct investment (FDI) inflows.  A 2013 World Bank Group survey confirms that the host state’s breach of contract and adverse regulatory changes represent the most pressing political risks.  In mitigating such political risks, many developing countries and economies in transition created International Investment Agreements (“IIAs”) to provide international protection standards to foreign investors and their investments in these territories.  IIAs are investment agreements made between two countries (e.g., Bilateral Investment Treaties, hereinafter “BITs”) or multiple countries (e.g., Multilateral Investment Treaties, hereinafter “MITs”) to promote, encourage, and protect private mutual investment. The IIAs also can be in the form of a Free Trade Agreement (FTA), which often includes an investment chapter that provides protection standards to foreign investment between the contracting states.  Practically, there are other mechanisms that foreign investors can, and should, use to mitigate the host state’s political risks, such as contractual stabilization clauses, legislative stabilization clauses, and government-sponsored insurance programs.  However, the presence of an IIA, concluded between the host state and foreign investor’s home state, signals that a host state is obligated under international law to honor its obligations.