International Investment Arbitration

Today, over 3000 treaties deal with investment issues, in particular through Bilateral or Multilateral investment treaties (BITs and MITs). These treaties use investor-state arbitration as the primary method to resolves investment disputes caught by these treaties. Investor-state arbitration is in the news, almost daily. But what is this fancy-sounding process all about? And what are these BITs, MITs and other funny acronyms? In fact, it’s quite straight forward, although some of the terms are technical and even off-putting!

In its simplest form, an investment treaty is a contract between States. In these contracts, the State promises to the other State (BIT), or States (MIT), that nationals of the other will receive protection for any investments their nationals make in the territory of the other State, provided the alleged investment meets the definition of investment found in the treaty.

Generally then, to take advantage of these investment treaties an individual must meet the following:

  • the investor must come from a State that has entered into one of these treaties with another State;
  • the investment must meet the definition of investment found in the treaty;
  • the investor must have made the investment in the territory of the State to which the investor is not a national; and
  • finally, if the treaty contains the promise that arbitration may be used to resolve investment disputes, then the investor may commence an arbitration to receive compensation.

What is an investment? Although these treaties take the time to define what is meant by “investment”, the term investment is generally understood to require long term commitments, with sunken costs aimed at creating long term relationships with host States.

To attract this type of investment from nationals of other States, a State will make certain promises intended to allay an investor’s fears of a fruitless investment, or worse still, taken by the very State the investor has selected to invest in. These promises can take many forms, but usually include promises not to treat investors or their investments differently than local investors or investments (non-discrimination), not to treat investors arbitrarily and not to take their investments (expropriate), without prompt and proper compensation.

A critical promise, included in a vast number of these treaties, is the promise that an investor may use arbitration as the method to resolve an alleged breach of a State promise made to the investor.

A case that offers insight into both the promises a State makes and the method an investor may use to enforce those promises is William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc. v. Government of Canada, UNCITRAL, PCA Case No. 2009-04 – (See more at “Bilcon”.

Bilcon, a US national, argued that Canada (via the province of Nova Scotia) had made promises that encouraged Bilcon to invest in Nova Scotia’s mining industry. The investment included developing a quarry and marine terminal. Both these projects met the long term definition of an investment, which requires significant costs and creates a long term relationship with the host State.

Trouble arose, however, when Bilcon was denied an environmental permit to actually build the quarry.   Bilcon argued on many fronts, including that the process to receive and review these permits was so flawed that Bilcon could not realize on its investment. In Bilcon’s view, this broken promise made to it by state officials breached its rights under the North American Free Trade Agreement (NAFTA).

Bilcon could have used the Canadian court system to seek a remedy for what it deemed a breach of the promises, but because Bilcon is a United States corporation (and therefore a US national) it also had access to NAFTA, in particular, its Chapter 11, which houses Canada’s (and the US and Mexico’s) promise to investors that they may use arbitration to resolve investment disputes.

The arbitral tribunal set up to resolve the dispute was made up of no less than two law scholars, as well as a former judge of the International Court of Justice. In a 2-1 decision, the tribunal sided with the Bilcon. The tribunal agreed that promises were made, which led Bilcon to make an investment, as investments are defined under NAFTA. In particular, the tribunal agreed that Nova Scotia encouraged the investment by specifically supporting the quarry. The tribunal also found that state officials had promised Bilcon that it could count on a fair chance to remedy any alleged environmental matters related to receiving environmental permits. The tribunal found that Nova Scotia breached its promises surrounding the permits and consequently, owed Bilcon compensation for these breaches.

This example demonstrates, broadly, the process by which investors may use arbitration to resolve their disputes with States, where these states make promises, set down in treaties, to protect investors that investment in the State’s territory. It is another example of how alternatives to the court are used to address and resolve serious matters.