Originally from Dispute Resolution Journal

The proliferation of direct foreign investments in developing countries and the increasing number of bilateral investment treaties (BITs) have resulted in the phenomenon called investor-State arbitrations brought by foreign investors against host States. As a result, States that are parties to BITs have had to defend government actions and policies in arbitration proceedings around the world. The BIT arbitration trend, which began in the 1990s, is particularly evident in Latin America, where political and civil unrest, as well as economic crises, have left many foreign investors with BIT claims.

This article provides an overview of the main issues arising in disputes between host States and foreign investors. It covers the types of claims that can be filed, who can bring them, and issues concerning the applicable law. It also discusses jurisdictional challenges to BIT claims.

What are BITs?

BITs are treaties between two countries aimed at promoting foreign investments and providing reciprocal protections for foreign investors. The first BIT was signed in 1959 by Germany and Pakistan, but it was not until decades later that BITs became commonplace.

Today, BITs are ubiquitous—over 2,000 of them have already been signed.1

In general, BITs cover four substantive issues: admission of foreign investors to the host State, equal treatment of investors, the problem of “expropriation” of an investment by the host State, and methods of settling disputes.2

BITs usually recite that the contracting States are committed to promoting investments made by citizens of one State in the territory of the other. They also provide that the host State will provide “fair and equitable treatment,” “full protection and security,” protection from expropriations and nationalizing actions except for a public purpose, and they extend “most-favored-nation treatment” to investments made by investors from the other State. A most-favored-nation clause typically provides that a foreign investor shall not be accorded treatment less favorable than that extended by each State party to foreign investors of another country.3 BITs also provide that each contracting State shall not institute discriminatory measures that would impair the management, maintenance, use, enjoyment or disposal of investments by investors from the other State.