Little Has Changed in the New US Model Bilateral Investment Treaty

Abstract

After an extensive review process by the US Government, the 2012 US Model Bilateral Investment Agreement (BIT) is not so very different from the 2004 version of the US Model BIT. This article reviews the material changes made and the material proposals that were not accepted by the US Government. The 2012 US Model BIT will be the template for the US position with respect to future US bilateral investment treaties and investment chapters of US free trade agreements, including the proposed Trans-Pacific Partnership.

I. INTRODUCTION

The US Government released in April 2012 a newly revised version of its model bilateral investment agreement (the 2012 US Model BIT).² Notwithstanding a long-running political battle royale between many critics of investment treaties, such as environmental and labour groups, and proponents of such treaties in the business community, the 2012 US Model BIT is not so very different from the 2004 version of the US Model BIT. Critics of investor–State arbitration were particularly disappointed, as the US Government determined to maintain the provisions of the 2004 Model BIT with few changes.

Investor–State arbitration and the most prominent substantive investment protections remained effectively untouched in the new Model BIT. Proposals by anti-investment treaty critics to eviscerate or greatly narrow those provisions were not adopted. Some clarifying changes were made to the financial services provisions of the BIT, but none that appear controversial. Similarly, small changes were made to assure that the exercise of government authority by State-owned enterprises (SOEs) did not fall outside the scope of investment protection. The ‘performance restrictions’ obligation in the Model BIT was expanded to prohibit protectionist practices preferring local technology over technology of nationals from the other State. Environmental and labour obligations of the State parties were enhanced, but not nearly to the extent sought by environmental and labour interests. Most controversially, the 2012 US Model BIT did not incorporate binding State–State dispute resolution for environmental or labour disputes.

Competing press releases issued by advocacy groups illustrate the reaction to the 2012 US Model BIT. Opponents of US trade and investment agreements were deeply disappointed by the absence of roll-back in the 2012 US Model BIT:

the same in all major respects as the deeply flawed ‘old’ Model Bilateral Investment Treaty … text will allow companies to challenge public interest regulations outside of domestic court systems before tribunals of three private sector trade attorneys operating under minimal to no conflict of interest rules … can order governments to pay corporations unlimited taxpayer-funded compensation for having to comply with policies that affect their future expected profits, and with which domestic investors have to comply … the administration is exposing the anti-public interest agenda … using BITs to evade justice and get out of environmental remediation obligations … privilege the rich at the expense of the 99 percent.³

Proponents of US trade and investment agreements, on the other hand, welcomed the new Model BIT but were disappointed by the absence of additional investment protections. Those groups criticized the expansion of labour and environmental coverage even if only backed by the right to State–State consultation:

applauds the Obama Administration’s commitment to open markets, eliminate foreign barriers and protect U.S. investment overseas … urges forward movement on a robust U.S. BIT negotiating agenda … highly concerned about whether the expanded Model BIT language relating to labour and environment could be counterproductive … is very disappointed that the new 2012 Model BIT does not strengthen core protections for U.S. investors overseas.⁴

The 2012 US Model BIT was the product of a public, inter-agency consultation process begun by US President Barack Obama just a few months after he was sworn in as Chief Executive in January 2009. Then-Senator Obama campaigned for the presidency on a platform that was highly critical of US free trade agreements (FTAs) and investment agreements, particularly the North American Free Trade Agreement (NAFTA). After taking office and in the midst of the international financial crisis, the Obama Administration commenced a review of the US Model Bilateral Investment Agreement. The Model BIT is the template document used by the United States as a starting point when contemplating the negotiation of a new BIT. The terms and conditions of the Model BIT also signal the approach of the United States towards the comparable investment chapters of US FTAs, although such chapters and related provisions are often more complex in the end than BITs. As a result, the 2012 US Model BIT is important not only as the baseline for US bilateral investment treaties with such prospective partners as China, India and Vietnam, but it may also foreshadow the US position on investment issues in the Trans-Pacific Partnership (TPP) FTA negotiations involving at least nine Pacific Rim countries.⁵

As part of the BIT review process, the US Department of State and the Office of the US Trade Representative (USTR) asked the State Department’s private sector Advisory Committee on International Economic Policy in June 2009 to establish a Subcommittee to review the US Model BIT. The scope of the Subcommittee’s proposed review was not limited. However, the State Department and USTR asked the Subcommittee to consider in particular three topics: dispute settlement provisions, SOEs and financial services issues. On the Subcommittee, critics (especially labour and environmental groups) pressed for changes to eliminate or significantly limit the treaty’s substantive obligations and investor–State arbitration mechanism. In contrast, business groups pressed for additional protections for US investors abroad. A handful of the members of the Subcommittee were unaffiliated with any particular interest or advocacy group.

The Subcommittee issued its report in September 2009.⁶ That report demonstrated the continuing divide between critics and proponents of investment treaty protections. Indeed, the annexed separate statements of individual members far exceeded in length the consensus report itself.⁷ A public consultation organized by the State Department and USTR around the same time also illustrated the significant differences among interested parties. In addition to a well-attended open meeting, 36 written comments were submitted in the public consultation process, demonstrating both considerable attention from interest groups and considerable disagreement as to the way forward.⁸

Terms such as ‘critics’ and ‘proponents’, as used in this article, may oversimplify matters, as if only two competing perspectives exist. Opinions of interested observers in fact stretch across a wide range of positions. However, the Model BIT review process undertaken by the Obama Administration, as well as the organized and intensive lobbying campaigns at the commencement of the Obama Administration over the fate of NAFTA and the Colombia, Korea and Panama FTAs, did trigger coalescence of public policy positions by advocacy and interest groups into unified competing visions on the Advisory Subcommittee and in public policy debates. Illustratively, nine anti-treaty critics and their organizations joined in a 17-page Collective Statement appended to the final Report of the Advisory Subcommittee. Once the 2012 Model BIT was released, the same nine joined in a common Public Interest Critique of the new Model BIT. Those organizations included the American Federation of Labour and Congress of Industrial Organizations (AFL-CIO), the United Steelworkers and the Machinists and Aerospace Workers trade unions, the Sierra Club, Earthjustice and others. Similarly, the separate statements from business interests on the Subcommittee were coordinated, and a common statement was issued by several of them. Those organizations included the US Chamber of Commerce, the US Council for International Business, the National Association of Manufacturers and others. The coordination of policy positions and specific proposals is obvious.

Following the public advisory process, the Obama Administration turned to an internal inter-agency process to consider the results of the public process. Naturally, the various interest groups lobbied hard for their own proposals.

At the same time as the inter-agency process was proceeding, the US Senate ratified in 2011 a BIT with Rwanda⁹ that had been negotiated in 2008, one of only two BITs the United States has entered into since 2000. Additionally, the Administration successfully pressed in October 2011 for Congress to ratify FTAs with Colombia, Panama and Korea, all of which had languished after conclusion of their negotiation during the Bush Administration. The United States further aggressively pursued negotiations with a number of trade partners for the multi-state TPP. Moreover, to the evident disappointment of investment treaty critics, the Administration did not publicly propose any changes to NAFTA. The United States also continued consultations with a number of countries over the prospects for bilateral investment agreements, most prominently with China, India and Vietnam. That pattern of conduct signalled to the world that the Obama Administration was far less critical of US trade and investment agreements than had been the Obama election campaign. The course of the Administration was confirmed when the 2012 US Model BIT was released in April 2012, showing few changes from its predecessor 2004 Model BIT.

The direction taken by the Obama Administration could perhaps have been predicted with 20/20 hindsight by reviewing the significant changes in US investment agreements after NAFTA was concluded in 1995. Many of those changes from 2001 to 2012 were responses to criticisms first voiced during the mid- and late-1990s by observers of the ultimately failed negotiations for a Multilateral Agreement on Investment (MAI) and following the initial NAFTA Chapter 11 arbitral awards. The scope of the expropriation and other investment protections being considered in the MAI negotiations had triggered extensive critical commentary from many non-governmental organizations (NGOs) and some States. The language chosen by Tribunals with respect to expropriation and the international minimum standard/fair and equitable treatment for the first three NAFTA Chapter 11 Awards, Pope & Talbot, Inc v Government of Canada, Metalclad Corporation v United Mexican States and SD Myers, Inc v Government of Canada (all released in 2000), had occasioned considerable complaints from observers concerned that NAFTA might impede legitimate regulatory actions by the State parties. State parties largely won those disputes in any event, but critical observers focused on selected language from the Awards that could be construed broadly to restrict State regulatory conduct.

The United States and the other NAFTA parties responded with interpretations and statements relating to NAFTA itself. The US Congress and US Administrations responded as well with changes in the texts of BITs and investment chapters of subsequent FTAs. The three-country NAFTA Free Trade Commission (FTC) issued its ‘Notes of Interpretation concerning Article 1105(1)’ on 31 July 2001 making clear, inter alia, that the substantive protections of NAFTA Article 1105 [Minimum Standard of Treatment] are based on customary international law.

Since the release of the 2001 Interpretation, the language employed by tribunals in the second wave of NAFTA Chapter 11 jurisprudence (post-2001) has been noticeably more deferential to the State parties, not only with respect to Article 1105 but also with respect to Article 1110 [Expropriation]. Indeed, investors have been almost uniformly unsuccessful in asserting indirect expropriation claims under NAFTA Chapter 11:

As of 31 December 2011, there have been 21 NAFTA cases to reach the merits stage. 18 of those cases have dealt with claims of expropriation. The claimant has argued in 17 cases that the measures taken were either indirect or tantamount to expropriation. Only one claimant has been successful.¹⁰

The US Congress also took seriously the concerns arising out of the first three NAFTA Awards. Reacting to those criticisms, the terms of US investment agreements changed significantly by virtue of the 2002 Trade Promotion Act. In section 2(b)(3)(D) of that Act, Congress set out ‘no greater substantive rights’ and ‘comparable to United States legal principles’ negotiating objectives for future investment agreements:

the principal negotiating objectives of the United States regarding foreign investment are to reduce or eliminate artificial or trade-distorting barriers to foreign investment, while ensuring that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States, and to secure for investors rights comparable to those that would be available under United States legal principles and practices. …¹¹

In the course of negotiating all US investment agreements after 2001, as well as drafting the 2004 and 2012 Model BITs, succeeding US Administrations of both political parties have added considerable language to US investment agreements in an effort to respond to those instructions and their motivating concerns. Investment agreements that once took 10 pages now cover 50 or more.

The 2001 FTC Interpretation regarding the international minimum standard and NAFTA Article 1105 is embodied in Article 5, paragraphs 1–3 of the US Model BIT and similar provisions of recent US investment agreements, as well as Exhibit A to the Model BIT and similar agreement provisions. While NAFTA Article 1110 [Expropriation] was not itself modified, pursuant to the Congressional negotiating instructions that ‘foreign investors in the United States are not accorded greater substantive rights’ and ‘to secure for investors rights comparable to those that would be available under United States legal principles and practices’, the ‘regulatory takings’ language from the US Supreme Court Decision in Penn Central Transportation Co v New York City¹² was incorporated as the description of the relevant factors for an ‘indirect expropriation’ in Annex B to the Model BITs and similar agreement provisions.

Thus, US treaty negotiators arguably pared back the substantive protections with respect to expropriation and the international minimum standard of treatment/fair and equitable treatment from the texts employed by the United States in the 1990s. In numerous other respects as well, the 2004 Model US BIT and post-NAFTA investment chapters in US FTAs like the Dominican Republic-Central America FTA (DR-CAFTA) adopted provisions intended to integrate the ‘no greater substantive rights’ and ‘comparable to US legal principles’ negotiating instructions from the 2002 Trade Promotion Act into US investment agreements.

If the objective was to minimize the risk that the United States would be held liable for breach of an investment agreement, that approach has been successful. There have been at least 17 cases filed against the United States under NAFTA Chapter 11, and five claims that reached final award. The United States has never lost any of those disputes. Moreover, the United States has never even been sued in a claim under any investment treaty other than NAFTA.

Turning from substance to questions of transparency and public access, in 2003 the NAFTA FTC issued a Statement on Non-Disputing Party Participation. That Statement recommended specific guidelines to be adopted by NAFTA tribunals when considering proposed amicus curiae submissions. The United States also issued its own ‘Statement on Open Hearings in NAFTA Chapter Eleven Arbitrations’.¹³ In that individual statement, the United States announced that it ‘will consent, and will request the consent of disputing investors and, as applicable, tribunals, that hearings in Chapter Eleven disputes to which it is a party be open to the public, except to ensure the protection of confidential information’.

The 2004 US Model BIT and subsequent US investment agreements made those transparency provisions mandatory for US participation in investment treaty arbitration. The Model BIT included provisions mandating publication of documents and open hearings, excluding only certain business and government protected information. The Model BIT also made explicit the authority of the tribunal to consider amicus curiae submissions. The 2012 version of the Model BIT added further provisions requiring the State parties to consult with each other regularly as to transparency matters and to include transparency procedures in any future appellate mechanism for investment arbitration.

With the introduction of these public access and transparency measures into US investment treaty arbitral proceedings, arbitrations with the United States have become the most open in the world, rivalling the transparency of US federal court proceedings.¹⁴ The days of ‘secret NAFTA tribunals’ famously decried by Bill Moyers on PBS have been gone for a decade.¹⁵

The 2004 Model BIT and recent US FTAs also significantly expanded the ability of the State parties to mutually agree on a binding resolution of various disputed matters, particularly disputes over financial services measures.

In sum, the 2001 NAFTA FTC Interpretation, the 2003 NAFTA FTC Statement (and subsequent individual actions by the State parties), the 2002 Trade Promotion Act and the 2004 US Model BIT proved to be watershed events in the development of US investment agreements and NAFTA Chapter 11 arbitration awards. In the view of many (but not all) observers, the concerns of the treaty critics had been met. Indeed, voices from the US business community argued that the US Government had gone too far in cutting back on substantive investment protections. The revised 2012 US Model BIT, with its limited changes, reflects the apparent conclusion by the Obama Administration that the US adaptations to investment treaties subsequent to the early NAFTA awards prove an older maxim: ‘if both sides are angry at you, you must be doing something right’. In light of that history, the story of what changed in the 2012 US Model BIT does not occupy a large portion of the rest of this article. The toll of what treaty critics and treaty proponents sought, but did not obtain, is the larger part of the story that remains to be told.

II. INVESTOR–STATE ARBITRATION

The 2012 US Model BIT made no material changes to the provisions of the model treaty concerning investment arbitration. Investment treaty critics had requested changes in the US Model BIT to replace investor–State arbitration with State–State dispute resolution (‘Replace investor-state dispute settlement with a state-to-state mechanism’).¹⁶ That proposal failed. More realistically, but in the end equally unsuccessfully, critics sought to scale back investment arbitration in a number of ways.

Critical observers made a number of proposals to cut back on the jurisdiction of investment treaty arbitration or to impose additional procedural hurdles before arbitration could be triggered. None of those proposals were accepted by the US Government. The most significant of those proposals are described below.

A. Imposing a Procedural Exhaustion of Local Remedies Requirement

The 2004 Model BIT and recent US investment agreements do not contain a procedural requirement that a claimant exhaust local remedies in the host State before commencing investor–State arbitration, in contrast to the customary international law requirement that a State’s nationals exhaust such remedies before the State may assert that national’s claims internationally. Instead, those agreements have contained a ‘no u-turn’ provision, under which the claimant (and, if the claimant is bringing the claim on behalf of a controlled local enterprise, that enterprise) must irrevocably waive any right to initiate or continue in any administrative tribunal, court or other dispute settlement procedures any proceeding with respect to any measure alleged to constitute a breach of the investment agreement.¹⁷ Some investment chapters of US FTAs have also contained a one-way ‘fork-in-the-road’ provision, under which a US claimant’s choice between local proceedings and investor–State arbitration is exclusive and irrevocable.¹⁸ US investment agreements had rejected the application of an exhaustion requirement in light of concerns over the reliability of local courts in many treaty parties and the impact of delay.

Treaty opponents sought to include in the 2012 Model BIT the procedural requirement of exhaustion of local remedies, subject only to a ‘futility’ exception. Those critics argued that,

[i]f the administration continues to include an investor-state dispute settlement mechanism, investors should be required to exhaust domestic remedies before filing a claim before an international tribunal. That mechanism should also provide a screen that allows the Parties to prevent frivolous claims or claims which otherwise may cause serious public harm.¹⁹

Treaty proponents, on the other hand, responded that many of the States sued in investment treaty arbitrations engage in governance practices that are very poor indeed. Based on the list of States in Annex 1 to Professor Susan Franck’s 2007 article,²⁰ about 76 per cent of the investment treaty cases in which awards were rendered up to June 2006 involved States that fell at or below number 50 on Transparency International’s (TPI) 2008 Corruption Perception Index (about 84 per cent if cases involving the United States and Canada are excluded). Over 69 per cent involved States at or below number 70.²¹ Similar results can be derived from the World Bank’s Worldwide Governance Indicators, where 25 of the 37 States (68 per cent) identified in Professor Franck’s Annex 1 are in the bottom 60 per cent of the World Bank’s WGI index for ‘rule of law’.²²

Treaty advocates argued the fact that over 69 per cent of cases involved States at or below number 70 on TPI’s Corruption Perceptions Index (even before excluding the US and Canadian cases) and 68 per cent involved States in the bottom 60 per cent of the World Bank’s ‘rule of law’ index cast a harsh light on proposals for mandatory exhaustion of local administrative and judicial remedies in such States.

Moreover, those advocates asserted that the out-of-pocket costs of an exhaustion requirement are extraordinarily large and fall on the claimant. Illustratively, for a project with $500 million of borrowed debt, interest charged at 10 per cent per annum and payable annually, and no amortization of debt, the additional interest amount the project would pay to its lenders just as a result of the delay caused by an ‘exhaustion of local remedies requirement’ will be $50 million per year.

The US Government declined to add a procedural exhaustion of remedies requirement into the 2012 US Model BIT. Instead, the ‘No U-Turn’ provision found in Model BIT Article 26.2 remains unchanged. The continued existence of the ‘No U-Turn’ provision does not signal, however, that the United States is abandoning use of a one-way fork-in-the-road provision as well, where appropriate.

B. Narrowing the Definition of ‘Investment’

The definition of ‘investment’ in the 2004 US Model BIT²³ and the more recent US investment agreements is an asset-based test, under which an investment must have significant characteristics such as the commitment of capital or other resources, the expectation of gain or profit or the assumption of risk. That definition further sets out a non-exhaustive list of forms that an investment may take, including inter alia an enterprise, shares, debt instruments, loans, derivatives, turnkey, construction, management, concession and revenue-sharing contracts, intellectual property rights, government authorizations and other tangible and intangible property.

Treaty critics sought to ‘[n]arrow the definition of investment to include only the kinds of property that are protected by the US Constitution. This would mean excluding the expectation of gain or profit and the assumption of risk.’²⁴

Treaty proponents asserted in reply that the definition of ‘investment’ in the 2004 Model BIT was unexceptional. The references in that definition to ‘the expectation of gain or profit and the assumption of risk’ were descriptions of elements to be considered in determining if any particular property constituted an ‘investment’ under the BIT, rather than ‘investments’ themselves. In any event, the items of property covered by the term ‘investment’ did not in fact exceed the scope of property protected by the Takings Clause of the Fifth Amendment to the US Constitution.²⁵

The US Government rejected the proposal to alter the definition of ‘investment’ in the 2012 US Model BIT. As treaty critic Public Citizen noted, ‘nary a word was changed’.²⁶ That conclusion may have been motivated in part by the fact that US jurisprudence has broadly construed the coverage of the Takings Clause in the US Constitution, a matter of some relevance in light of the Congressional instruction to secure for US investors abroad comparable protections as are found in domestic US law. As the US Court of Appeals for the Federal Circuit, the appellate panel with jurisdiction over the great bulk of Takings Clause cases, declared in the 1994 case of Florida Rock Industries, Inc v United States (Florida Rock IV):

Property interests are about as diverse as the human mind can conceive. Property interests may be real and personal, tangible and intangible, possessory and nonpossessory. They can be defined in terms of sequential rights to possession (present interests—life estates and various types of fees—and future interests), and in terms of shared interests (such as the various kinds of coownership). There are specially structured property interests (such as those of a mortgagee, lessee, bailee, adverse possessor), and there are interests in special kinds of things (such as water, and commercial contracts).²⁷

Thus, both tangible and intangible rights and interests are entitled to protection under the Fifth Amendment, including operating businesses, personalty, contract rights, bank accounts, financial instruments and intellectual property rights. Takings claims are not limited to real property assets, even in the context of ‘regulatory takings’. The circumstances in which governmental permits and authorizations are treated as ‘property’ of the holder under the Fifth Amendment Takings Clause are determined on a case-by-case basis.²⁸

C. Explicitly Incorporating into the BIT a High Standard of Proof Required to Demonstrate a Breach of the Fair and Equitable Treatment Standard under Customary International Law as Set Out in the State Department’s Submissions in Glamis Gold Ltd v United States of America

Advocates of limiting investment arbitration proposed the new US Model BIT provide that ‘a foreign investor has the burden of demonstrating that a purported standard of protection under customary international law is based on actual State practice rather than on the unsupported assertions of previous investment tribunals’.²⁹ The position of the State Department on behalf of the United States in Glamis Gold Ltd v United States of America was that:

• The claimant has the burden of demonstrating both the existence of a rule of customary international law and of demonstrating that the respondent State has violated that rule with regard to the investor, and

• The awards of arbitral tribunals that do not examine relevant state practice are insufficient to demonstrate the content of customary international law.³⁰

Treaty proponents, in contrast, claimed that the standard set out in Glamis Gold set the bar too high and prevented the evolution of customary international law. Business interests also argued that codifying into treaty language the litigation position of one disputing party in an independent dispute resolution process was inappropriate.

The position of the US Government in NAFTA arbitrations as to the need for a showing of actual State practice rather than arbitral precedents has, of course, remained unchanged from its successful advocacy in Glamis Gold. However, the Administration chose not to try to codify its position into the model treaty text.

D. Revising Article 17 to Ensure that Foreign Subsidiaries are Not Allowed to Bring Investment Claims Against a Nation that is the Home of Their Parent Company

Article 17 of the 2004 US Model BIT and similar provisions of US investment agreements authorize a State party to deny the benefits of the investment agreement ‘to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Party and persons of a non-Party, or of the denying Party, own or control the enterprise’. Treaty critics argued that the 2004 Model BIT’s language on denial of benefits in Article 17 ‘contains a loophole that allows corporations to bypass their own country’s domestic courts by filing investor–State claims through foreign subsidiaries located in a BIT partner nation. This is explicitly permitted in Article 17.2, so long as the corporation has “substantial business activities” in the other Party. Global corporations will inappropriately use this provision to avoid the normal “diversity of nationality” requirement for investor–State arbitration.’³¹

Treaty proponents responded that there is no record of investor claimants actually using the language of Article 17.2 or similar provisions under recent US treaties in such an inappropriate fashion or of tribunals accepting such arguments. Non-US treaties, where critics pointed to purported treaty-shopping conduct by claimants, did not contain the ‘substantial business activities’ requirement found in the US treaties. Accordingly, said the investor community, the critics were chasing phantoms.

Again, the US Administration made no changes in the 2012 Model BIT from the language in the 2004 Model.

E. Appellate Mechanism

The 2004 US Model BIT had included a requirement in Article 28.10 that:

If a separate, multilateral agreement enters into force between the Parties that establishes an appellate body for purposes of reviewing awards rendered by tribunals constituted pursuant to international trade or investment arrangements to hear investment disputes, the Parties shall strive to reach an agreement that would have such appellate body review awards rendered under Article 34 in arbitrations commenced after the multilateral agreement enters into force between the Parties.

Several investment chapters in US FTAs altered that provision to require that the State parties commence negotiations over an appellate mechanism for investor–State arbitration within three years. The period was reduced to three months in DR-CAFTA, but then restored to three years in the United States–Rwanda BIT. That annex has now been deleted from the 2012 US Model BIT in favour of a provision in Article 29.10 of the BIT about appellate mechanisms. That new provision, in contrast to clauses in recent US FTAs, does not contain a deadline for the State parties to commence discussions. It does obligate the States to ‘strive to ensure’ that any such appellate mechanism contain transparency procedures similar to those obtaining in arbitrations under the US Model BIT:

10. In the event that an appellate mechanism for reviewing awards rendered by investor–State dispute settlement tribunals is developed in the future under other institutional arrangements, the Parties shall consider whether awards rendered under Article 34 should be subject to that appellate mechanism. The Parties shall strive to ensure that any such appellate mechanism they consider adopting provides for transparency of proceedings similar to the transparency provisions established in Article 29.

The removal of the deadline to commence discussions was apparently motivated by the lack of interest by State counterparties to pursue such negotiations under investment treaties and investment chapters of FTAs containing the prior annex.

III. SUBSTANTIVE INVESTMENT LAW PROTECTIONS

It was not only investor–State arbitration that survived unscathed in the 2012 US Model BIT. There were similarly no changes to the core substantive investment law protections in Articles 3 to 10 of the Model BIT—encompassing national treatment (NT), most-favoured-nation (MFN) treatment, minimum standards of treatment (including fair and equitable treatment, full protection and security, and no denial of justice), expropriation and compensation, free transferability of payments, performance requirements, composition of senior management and boards of directors and publication of investment measures. The only exceptions were changes related to financial institutions and financial systems, discussed below, and an extension of the prohibition on performance restrictions to covered protectionist conduct with respect to local technology, also discussed below.

Supporters of investment arbitration had requested a rollback of the 2004 changes, particularly the reliance on ‘customary international law standards’ and the inclusion of ‘self-judging’ language in the ‘essential security’ provision, to return to earlier versions of the US model investment treaty. Those requests were rejected by the United States. Critics of investment treaties made a larger number of requests, but in general they too failed to secure approval from the US Government.

A. Limit the Scope of Conduct Considered to be an Indirect Expropriation Solely to Direct Appropriations of Property for the Use of the Host State

The 2004 US Model BIT and recent US investment agreements require compensation for ‘indirect expropriations’, in which conduct by the host State has ‘an effect equivalent to direct expropriation without formal transfer of title or outright seizure’.³² Advocates of restricting investor–State arbitration asked the United States to modify the Model BIT to ‘[c]larify that an “indirect expropriation” occurs only when a host state seizes or appropriates an investment for its own use or the use of a third party, and that regulatory measures that adversely affect the value of an investment but do not transfer ownership of the investment do not constitute acts of indirect expropriation.’³³ The effect of that proposal, if adopted, would have been to eliminate coverage of ‘indirect expropriations’, known in the United States as ‘regulatory takings’.

Treaty proponents objected to the proposal, asserting that international law makes clear that an expropriation will occur if the acting State by its conduct destroys the value of the property even though the State does not seize or appropriate ownership of the investment. The US Government declined to make the proposed change in the 2012 Model BIT, instead leaving the description of ‘indirect expropriation’ in the Model BIT unchanged. Here too, the Government may have been motivated by the Congressional negotiating instruction in the 2002 Trade Promotion Act to ‘secure for investors rights comparable to those that would be available under United States legal principles and practices’. Limiting expropriations solely to takings that seize or appropriate the property of the owner is not consistent with US Supreme Court takings judgments for at least the past 100 years.

Thus, Justice Holmes wrote for the Supreme Court in the 1910 case of United States v Welch,³⁴ a real property easement case: ‘[b]ut if it [the easement] were only destroyed and ended, a destruction for public purposes may as well be a taking as would be an appropriation for the same end.’ In the 1945 case of United States v General Motors Corporation,³⁵ the Court went out of its way to make the same point Justice Holmes had made 35 years earlier—it is the deprivation of the property, not the transfer of rights to the state, that constitutes the taking. The Supreme Court then repeated that instruction in United States v Causby³⁶ in 1946, dealing with military overflights of a farm, and again in Penn Central,³⁷ the leading Fifth Amendment regulatory takings case, in 1978. Six years later, in 1984, the Court once more restated the ‘deprivation’ holding of United States v General Motors in its FIFRA trade secrets decision, Ruckelshaus v Monsanto Co.³⁸ Moreover, in 2005, the unanimous Court in Lingle v Chevron USA Inc³⁹ said that, ‘[b]eginning with Mahon [1922], however, the Court recognized that government regulation of private property may, in some instances, be so onerous that its effect is tantamount to a direct appropriation or ouster—and that such “regulatory takings” may be compensable under the Fifth Amendment.’

Thus, more than a century of US Supreme Court precedent clearly establishes that the proper test for a Taking under the Fifth Amendment to the US Constitution is whether the government conduct at issue has deprived the owner of the value of his or her property, not whether ownership of the property was transferred by the government measure. As a result, if the US Government is seeking in its BITs and FTA investment chapters to ‘secure for investors rights comparable to those that would be available under United States legal principles and practices’, then limiting expropriation coverage solely to direct seizures and appropriations would have been contrary to that instruction from Congress.

B. Limit ‘Minimum Standard of Treatment/Fair & Equitable Treatment’ Claims to the Standard Articulated by the US State Department in Glamis Gold

Critical observers sought to have the US Model BIT modified to ‘[c]odify the State Department’s position in Glamis Gold regarding the content of the minimum standard of treatment’.⁴⁰

Critics of investment treaty protections for investors have been concerned over the prospect that the ‘fair & equitable treatment’ provision of an investment treaty could be broadly construed to undermine legitimate regulatory conduct of the host State. That concern was fuelled by broad language in the first three NAFTA Awards (Pope & Talbot, Metalclad and SD Myers) with respect to the reference to ‘fair and equitable treatment’ in NAFTA Article 1105. In Pope & Talbot, the Tribunal concluded that it was not limited under Article 1105 to the ‘international minimum standard of treatment’. The international minimum standard to which the Pope & Talbot Tribunal referred is often equated with the famous statement in the 1926 case of Neer v Mexico, a Decision of the US–Mexico Mixed Claims Commission addressing the failure of the Mexican Government diligently to pursue the murderers of a US national:⁴¹

[T]he treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.

Critics and the three NAFTA Governments saw language in the Pope & Talbot Award as potentially leading to a subjective interpretation by arbitrators of the commitment in NAFTA Article 1105 to ‘fair’ and ‘equitable’ treatment. The Metalclad Tribunal also utilized language seen as proposing an autonomous ‘fair and equitable’ standard and employing principles similar to the ‘legitimate expectations’ test—‘acting in the expectation that it would be treated fairly and justly in accordance with the NAFTA’.⁴²SD Myers, the third early NAFTA Award, relied on international law generally to interpret NAFTA Article 1105, again seen as permitting a broad interpretation.⁴³ Treaty opponents urged the Obama Administration to codify in the new Model BIT the narrow ‘minimum standard of treatment’ that the US State Department had advocated in the Glamis Gold dispute.

As pointed out above, the NAFTA FTC, an organ of the three NAFTA State parties, reacted to the three early Awards by issuing its ‘Notes of Interpretation concerning Article 1105(1)’ on 31 July 2001.⁴⁴ Paragraph B of that FTC Interpretation states:

B. Minimum Standard of Treatment in Accordance with International Law

1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.

2. The concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.

3. A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1).

This Interpretation tied the understanding of NAFTA Article 1105 protections to ‘customary international law’.⁴⁵ The FTC Interpretation narrowed the ability of the tribunals to find a breach of Article 1105. As the NAFTA Tribunal in Merrill & Ring Forestry LP v Government of Canada recently explained, the Interpretation had ‘the effect of linking fair and equitable treatment with customary law only and . . . the effect of de-linking it from breaches of other NAFTA articles or separate treaties’.⁴⁶

The ‘customary international law’ approach taken in the 2001 FTC Interpretation has been codified in all subsequent US investment agreements, as well as in Annex A (Customary International Law) to the 2004 US Model BIT:

The Parties confirm their shared understanding that ‘customary international law’ generally and as specifically referenced in Article 5 [Minimum Standard of Treatment] and Annex B [Expropriation] results from a general and consistent practice of States that they follow from a sense of legal obligation. With regard to Article 5 [Minimum Standard of Treatment], the customary international law minimum standard of treatment of aliens refers to all customary international law principles that protect the economic rights and interests of aliens.

From the perspective of the US Government, that approach has been successful in a decade-plus string of NAFTA awards subsequent to the first three Awards. In those later awards, and in light of the 2001 FTC Interpretation, NAFTA tribunals have uniformly adopted standards of review under Article 1105 that are far more deferential to State conduct than the language employed by the earliest tribunals, although the later tribunals have not always expressed themselves in the same manner.⁴⁷ Indeed, the Tribunal in Glamis Gold, to which treaty critics pointed, in fact had adopted the very ‘minimum treatment standard’ advocated by the US Government.

Contrary to treaty critics, the business community argued that, instead of codifying Glamis Gold, the revised Model BIT should return to the less deferential ‘fair and equitable treatment’ standard found in earlier US model BITs such as the one on which the United States–Argentine Republic BIT is based, rather than the ‘customary international law’ approach taken in the 2001 FTC Interpretation and the 2004 US Model BIT.

Moreover, several public international law voices, most prominently former International Court of Justice President Stephen Schwebel, asserted that the ‘customary international law’ approach taken by the United States in the 2001 FTC Interpretation and subsequent investment agreements was flawed as a matter of public international law. For those commentators, the sharp disagreements between States over the proper standards of protection under international investment law principles made clear that even the existence of a customary international law standard was highly contentious.⁴⁸

In the end, the US Government chose not to copy the Glamis Gold language into the 2012 Model BIT. Instead, the US Government determined to continue with the ‘customary international law’ approach taken in the 2001 NAFTA FTC Interpretation and codified in the 2004 US Model BIT and recent investment agreements. The US Government may have been persuaded in that regard by the record of post-2001 NAFTA tribunals of disregarding the language of the earliest NAFTA awards in favour of more State-deferential approaches, but still allowing space for a successful investor claim when the circumstances warranted.

C. Ensure that Foreign Investors May Not Use the MFN Principle to Assert Rights Provided by Other Investment Agreements or Treaties

Treaty critics requested that the Model BIT be revised to prevent investors from ‘us[ing] the most favoured nation principle [MFN] to assert rights provided by other investment agreements or treaties’. It appears that this proposal was aimed at preventing incorporation of substantive protections from other agreements, not procedural arrangements such as the ability to commence arbitration immediately rather than awaiting expiration of a waiting period or a local recourse—the result obtained in the controversial Award in Emilio Agustín Maffezini v Kingdom of Spain.⁴⁹

Unlike MFN clauses in treaties of other States, US investment agreements carefully limit the obligation of the State to accord to investors of the other party and covered investments ‘treatment no less favorable than that it accords, in like circumstances, to investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments’.⁵⁰ That language does not address procedural aspects of arbitration proceedings, such as the requirement in investment treaties like the United Kingdom–Argentine Republic BIT that an investor pursue its claim in national courts of the host State for 18 months before commencing arbitration under the BIT. As illustrated by DR-CAFTA, the negotiating records for the investment chapters of the most recent US FTAs also make abundantly clear that the State parties reject the application of the Maffezini Award to the MFN clause in the investment chapter:

The final draft text of the US-Central America Free Trade Agreement (CAFTA) resulting from the negotiations concluded in December 2003 and dated 28 January 2004 contains an interpretation footnote on the scope of application of the MFN treatment clause in the Investment Chapter of the Agreement (Chapter 10) which reads:

‘The Parties note the recent decision of the arbitral tribunal in Maffezini (Arg.) v. Kingdom of Spain, which found an unusually broad most-favoured-nation clause in an Argentina-Spain agreement to encompass international dispute resolution procedures. See Decision of Jurisdiction §§38-64 (25 January 2000), reprinted in 16 ICSID Rev.-F.I.L.J. 212(2002). By contrast the Most-Favoured-Nation Treatment Article of this Agreement is expressly limited in scope to matters “with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.” The Parties share the understanding and intent that this clause does not encompass international dispute resolution mechanisms such as those contained in Section C of this Chapter, and therefore could not reasonably lead to a conclusion similar to that of the Maffezini case.’

This footnote would be deleted in the final text of the Agreement but the Parties agreed that it is to be included in the negotiating history as a reflection of the Parties’ shared understanding of the Most-Favoured-Treatment Article and the Maffezini case.⁵¹

Moreover, no NAFTA award has ever extended the MFN clause to incorporate procedural arbitration provisions of another investment agreement. Consequently, there is little scope for an argument that the MFN clause in recent US investment agreements will produce a result incorporating procedural provisions such as occurred in the Maffezini Award.

Therefore, it appears the critics’ proposal was not aimed at the possibility of a Maffezini-like incorporation of more favourable procedural provisions from another investment agreement. Instead, the proposal appears to have been an effort to defang MFN clauses completely, by preventing the incorporation into a US treaty of more favourable substantive treatment to investors afforded by a host State under a different treaty. Such a result would, of course, eliminate the use of an MFN clause entirely. Moreover, the proposal appears to have the effect of preventing investor claimants from asserting claims incorporating protections from treaties such as the European Convention on Human Rights or the Inter-American Convention on Human Rights, while leaving State respondents free to argue defences based on those very same treaties.

Treaty proponents predictably objected to this proposal. Notably, the business community did not argue that the existing language of the US MFN clause be modified to permit incorporation of Maffezini-style more favourable procedural provisions from other international agreements, such as the ability at issue in BG Group Plc v Republic of Argentina to commence an investment treaty arbitration immediately rather than awaiting the expiration of 18 months in a domestic litigation. They argued instead that substantive non-discrimination between foreign parties was a bedrock principle of international investment and trade law.

The US Government left unchanged the scope of the MFN clause in the 2012 US Model BIT, and declined to accept the critics’ proposal to prevent the MFN principle from being used to assert substantive rights provided by other investment agreements or treaties.

D. Explicitly Limit the NT Obligation to Instances in Which a Regulatory Measure is Enacted for a Primarily Discriminatory Purpose

Treaty opponents were concerned that the NT non-discrimination principle in investment treaties ‘leaves the principle open to interpretations by international tribunals that could have negative consequences for environmental, health and safety laws’.⁵² The critics argued that:

[a]s has been the case in World Trade Organization (WTO) jurisprudence, the principle can be interpreted by tribunals as prohibiting regulatory actions that result in ‘de facto’ discrimination, even when there is no facial or intentional discrimination involved. For example, an otherwise neutral regulatory action to protect the environment that results in a disproportionate impact on a foreign investor could run afoul of this standard.⁵³

To counter this concern, the critics proposed that the scope of the NT provision in the US Model BIT be limited solely to ‘instances in which a regulatory measure is enacted for a primarily discriminatory purpose’. In addition to excluding cases of discriminatory effect but not intent, that proposal would also have excluded measures enacted with a benign purpose, but applied with discriminatory intent.

Treaty proponents responded with several different arguments in reply: (i) as implicitly admitted by treaty opponents by arguing only that the language of the NT clause ‘leaves the principle open to interpretations … ’, no investment arbitration tribunal had ever actually interpreted the NT obligation in the manner that concerned the critics; (ii) investment tribunals had instead regularly interpreted the NT provision of NAFTA, and its sister MFN provision, to require express or implicit discriminatory intent; (iii) governments are generally not foolish enough to expressly state that trade or investment enactments are being adopted for a discriminatory purpose, so an express ‘intent’ requirement would de facto gut the NT obligation; and (iv) most trade and investment enactments grant regulatory authorities discretion, so that the risk of discrimination on the basis of nationality is commonly a matter of improper application of a facially neutral requirement.

The US Government left unchanged the existing NT provisions of the US Model BIT.

E. Remove the ‘Except in Rare Circumstances’ Introduction to the ‘Public Welfare’ Provision in Annex B (on Expropriation) and More Generally Exclude from Liability all Regulatory Conduct Motivated by Public Welfare Objectives Regardless of Impact

Treaty critics have remained concerned that the substantive protections of an investment agreement may be applied to reject regulatory conduct of the host State motivated by legitimate public welfare concerns. The US Government sought to respond to those concerns, which were raised following the Metalclad, Pope & Talbot and SD Myers NAFTA Awards in 2000,⁵⁴ in a number of ways:

1. specifying in the 2001 FTC Interpretation and annexes to subsequent investment agreements that the ‘international minimum standard’ obligation in NAFTA Article 1105 and similar articles of the subsequent agreements incorporates solely ‘customary international law’ standards rather than an autonomous ‘fair and equitable’ standard;

2. arguing before NAFTA tribunals (successfully in Glamis Gold and elsewhere) that the ‘customary international law’ standard essentially required an investor to show that the regulatory conduct of the State was ‘manifestly arbitrary and irrational’ to make out a breach of NAFTA Article 1105, a very high standard to meet;

3. expressly incorporating into investment agreements a definition of ‘indirect expropriation’ that copied the Penn Central/Lingle standards of existing US Supreme Court jurisprudence for regulatory takings under the 5th Amendment; and

4. expressly providing as part of the indirect expropriation provisions of the investment agreements that, ‘[e]xcept in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.’⁵⁵

While those responses satisfied some of the critical commentators, other treaty opponents were not mollified. In connection with the revision of the US Model BIT (and in connection with other investment agreement negotiations), some critical observers have sought to (i) remove the reference to ‘except in rare circumstances … ’ found in the public welfare exclusion from the indirect expropriation provision, thereby insulating from review any measure motivated and applied for legitimate public welfare objectives without exception,⁵⁶ and (ii) more broadly, to include in US investment agreements a ‘general exception’ along the lines of the General Exceptions for public welfare measures found in various WTO agreements and a number of recent Asian bilateral and regional investment agreements.⁵⁷

With respect to the ‘except in rare circumstances’ language, treaty proponents noted that language faithfully followed US Supreme Court precedent. Thus, the Congressional negotiating instruction to ‘secure for investors rights comparable to those that would be available under United States legal principles and practices’ had been honoured. The ‘except in rare circumstances’ language is consistent with US Supreme Court takings jurisprudence in the Penn Central,⁵⁸Lucas v South Carolina Coastal Council,⁵⁹Loretto v Teleprompter Manhattan CATV Corp⁶⁰ and Dolan v City of Tigard and Nollan v California Costal Comm’n line of cases.⁶¹

Public welfare objectives underlying a government measure play an express role in the Penn Central balancing test, but are clearly not by themselves decisive. As the Supreme Court stated in its unanimous opinion in Lingle⁶² affirming the continuing validity of the Penn Central formula as the core test for a regulatory taking under the US Constitution, ‘the Penn Central inquiry turns in large part, albeit not exclusively, upon the magnitude of a regulation’s economic impact and the degree to which it interferes with legitimate property interests’. In addition, Penn Central enjoins courts to review the ‘character of the governmental action’—for instance whether it amounts to a physical invasion or instead merely affects property interests through ‘some public program adjusting the benefits and burdens of economic life to promote the common good’. All of those factors are balanced in the Penn Central regulatory takings analysis. As a result, the presence of legitimate public welfare objectives clearly is not sufficient by itself to prevent regulatory conduct from becoming a taking under Penn Central—it is a factor to be taken into account along with the economic impact of the measure and the degree of interference with property interests.

Moreover, the existence of legitimate public welfare objectives do not play any role at all, let alone a decisive role, with respect to per se takings under Lucas (total deprivation of value) and Loretto (permanent physical invasions) or the narrower Dolan/Nollan line of cases (‘dedications of property so onerous that, outside the exactions context, they would be deemed per se physical takings’).

Lucas was a case of environmental regulation—coastal land use and protection against erosion. The Lucas Court found that South Carolina coastline protection legislation effected a taking because it ‘denie[d] all economically beneficial or productive use of land’. In reaching that conclusion, the Supreme Court in effect held that even the purest of public policy motives will not save a regulatory enactment from triggering the duty to provide Fifth Amendment compensation if the measures denied all such beneficial use, because a total deprivation of value carries with it a ‘heightened risk that private property is being pressed into some form of public service under the guise of mitigating serious public harm’.⁶³ The Court confirmed the continuing validity of Lucas in its Lingle Decision in 2005. Thus, the US Supreme Court recognized in Lucas, as reaffirmed in Lingle, a takings rule that triggers the Fifth Amendment duty to compensate for a ‘total deprivation’, notwithstanding legitimate environmental land use protection objectives.

Per se takings may also arise under existing US jurisprudence from permanent physical invasions (Loretto), no matter how minor, and from certain regulatory exactions (Nolan/Dollan)—in each case, regardless of the existence of an underlying public welfare objective. While these lines of cases are rarely called upon, they too demonstrate that legitimate public welfare objectives do not automatically insulate government conduct from inquiry under the Takings Clause. Accordingly, the Congressional negotiating instruction to ‘secure for investors rights comparable to those that would be available under United States legal principles and practices’ counsels against adopting the critics’ proposal to remove the ‘in rare circumstances … ’ introduction to the ‘legitimate public welfare objectives’ language in US investment agreements.

The US Government declined to remove the language in question from the Model BIT.

Similarly, the US Government declined to incorporate into its investment agreements a general exceptions clause along the lines of such provisions in WTO agreements like the General Agreement on Trade in Services (GATS). Illustratively, the GATS general exceptions article insulates, among other matters, regulatory measures ‘necessary to protect public morals or to maintain public order’ or ‘necessary to protect human, animal or plant life or health’ so long as not constituting a means of arbitrary or unjustifiable discrimination between countries or a disguised restriction on trade in services.⁶⁴

While some treaty critics have proposed the adoption of a general exceptions provision along the lines of the GATS and other WTO agreements, other treaty critics consider that the chapeau to the general exceptions provision (‘Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services … ’) offers too large of a shelter and undermines the effectiveness of the exception. Similarly, those critics consider that limiting the GATS general exceptions to only those measures ‘necessary’ for the protection of human, animal or plant life or health is a standard too strict, and should be relaxed to a reasonableness test rather than a necessity test.

Regardless of the approach taken by the various treaty critics, the US Government declined to include a general exceptions provision in the 2012 US Model BIT. That decision sets up an interesting negotiating dilemma, since potential US treaty partners such as China and ASEAN member States do include general exceptions along WTO lines in their investment agreements. For example, the exception for measures ‘necessary to protect public morals or to maintain public order’ will raise serious political issues in those discussions.

F. Essential Security Proposals

Observers made competing recommendations regarding the ‘essential security’ provision of the US Model BIT, which allows the host State to apply measures ‘that it considers necessary to the fulfillment of its obligations’ concerning international peace or security or its own essential security interests. Treaty opponents wished the provision be clearly expanded to make decisions in economic crises or prudential financial measures a matter for the State actor to unilaterally decide. Business voices wished instead to clearly limit the ‘essential security’ exception to exclude government measures advanced predominantly for economic reasons. In addition, business commentators urged replacing the ‘it considers necessary’ language that could be construed as making the issue self-judging with either investor–State or State-to-State dispute resolution. In the end, the US Government opted to leave the language of the 2004 US Model BIT unchanged in the 2012 Model.

G. Performance Requirements

Unlike investment treaties of most other countries, US investment treaties include substantive obligations limiting the ability of the host State to impose local content and similar ‘performance requirements’ on foreign investments beyond the restraints found in WTO agreements. The coverage of Article 8 (Performance Restrictions) of the revised 2012 US Model BIT was expanded to include a prohibition on conduct by a State party to ‘afford protection [to purchase, use, or accord a preference to technology] on the basis of nationality to its own investors or investments or to technology of the Party or of persons of the Party.’ Accordingly, Article 8.1(h) of the 2012 US Model BIT now provides:

1. Neither Party may, in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment of an investor of a Party or of a non-Party in its territory, impose or enforce any requirement or enforce any commitment or undertaking:

…

(h) (i) to purchase, use, or accord a preference to, in its territory, technology of

the Party or of persons of the Party¹²; or

(ii) that prevents the purchase or use of, or the according of a preference to, in

its territory, particular technology,

so as to afford protection on the basis of nationality to its own investors or investments or to technology of the Party or of persons of the Party.

12. For purposes of this Article, the term ‘technology of the Party or of persons of the Party’ includes technology that is owned by the Party or persons of the Party, and technology for which the Party holds, or persons of the Party hold, an exclusive license.

As a consequence of this addition, a host State accepting the prescriptions of Article 8 of the 2012 US Model BIT may not engage in protectionist conduct to prefer its own technology over that of its treaty partner in connection with investments. The host State thus will not be entitled to establish a requirement for the purchase, use or other preference in its territory of technology that will afford protection to its own investors or investments or to technology of its nationals on the basis of their nationality.

H. Territorial Seas

The phrase ‘territory of a Party’ is used in US investment agreements to identify the territorial reach of the substantive investment protections. That term was modified in the 2012 US Model BIT to expressly include territorial seas and further areas within which the State may, as defined by customary international law, exercise sovereign rights or jurisdiction. This clarification is aimed at avoiding any dispute that the BIT’s investment protections apply to, for example, off-shore oil and gas projects (and perhaps fish farms):

‘territory’ means:

…

(c) with respect to each Party, the territorial sea and any area beyond the territorial sea of the Party within which, in accordance with customary international law as reflected in the United Nations Convention on the Law of the Sea, the Party may exercise sovereign rights or jurisdiction.

In the case of a possible United States–China BIT, among others, the presence of this provision on the negotiating table signals a very interesting negotiation regarding oil exploration in the South China Sea.

IV. FINANCIAL INSTITUTIONS AND SYSTEMS

The Great Recession has triggered concerns by some that foreign investors might bring investment treaty arbitration claims alleging breaches founded on the US Government responses to the financial crisis. Indeed, the State Department and USTR expressly singled out financial services issues as one of the three topics on which they particularly sought the views of the private sector Advisory Subcommittee. No such claims were ever brought against the United States. However, critical observers nevertheless proposed a variety of changes to US investment treaties to avoid the possibility entirely.

A. Excluding Sovereign Debt from the Definition of ‘Investment’

NAFTA Chapter 11 excludes sovereign indebtedness and indebtedness of State enterprises from the definition of ‘investment’, but that was not the case in the 2004 US Model BIT and recent US investment agreements. An ‘investment’ is defined in NAFTA Article 1139 to cover inter alia debt of, and loans to, an ‘enterprise’. The term ‘enterprise’ is, in turn, defined in NAFTA Article 201 to effectively exclude the State itself (‘enterprise of a Party means an enterprise constituted or organized under the law of a Party’). Moreover, the definition of ‘investment’ in Article 1139 also specifically excludes debt of, and loans to, State enterprises.⁶⁵

However, subsequent to NAFTA, US investment agreements have removed the ‘enterprise’ limitation on the scope of the term ‘investment’. Thus, US investment agreements apparently contemplate that debt of, and loans to, a sovereign State itself (as well as its State enterprises) may indeed constitute an ‘investment’ covered by the investment protections of the agreement. For example, the 2004 US Model BIT defined ‘investment’ in the following terms:

‘investment’ means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include:

…

(c) bonds, debentures, other debt instruments, and loans;¹

…

1. Some forms of debt, such as bonds, debentures, and long-term notes, are more likely to have the characteristics of an investment, while other forms of debt, such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics.

That definition of ‘investment’ has also been used in investment chapters of recent US FTAs, thereby encompassing sovereign debt within the protections of the investment chapter. In those agreements, however, treaty partners have negotiated detailed provisions and annexes addressing the consequences of treaty claims by holders of sovereign indebtedness in investor–State arbitration proceedings. The provisions have differed from agreement to agreement, but the terms of the United States–Peru Trade Promotion Agreement (the Peru TPA) illustrate the complexity of the agreed provisions.

Article 10.28 of the Peru TPA contains a definition of ‘investment’ virtually identical to the definition found in the 2004 US Model BIT. Accordingly, the Peru TPA Investment Chapter appears to encompass sovereign indebtedness and indebtedness of State enterprises. That conclusion is reinforced by new provisions appended to the TPA Investment Chapter specifically addressing sovereign debt and restructurings, found in Annex 10-F of the Peru TPA.

Annex 10-F prohibits investor–State arbitration of an investor’s claim resulting from a restructuring of ‘debt issued by a Party other than the United State [ie Peru]’ if ‘the restructuring is a negotiated restructuring at the time of submission, or becomes a negotiated restructuring after such submission, except for a claim that the restructuring violates Article 10.3 [NT] or 10.4 [MFN]’. Regardless of the nature of the investor’s claim resulting from a restructuring (and whether or not that restructuring is ‘negotiated’), Annex 10-F imposes a 270-day waiting period.

The 2012 US Model BIT followed the 2004 Model BIT, permitting claims that sovereign debt holdings constitute an investment. The new Model BIT does not contain any annexes along the lines of Peru TPA Annex 10-F. However, the US Government has made clear in its briefings that such annexes may be incorporated in future investment agreements on a case-by-case basis.

B. Allowing the Use of Capital Controls by Adding a Temporary ‘Safeguards’ Provision in the Model BIT for Balance of Payments and Other Financial Crises Not Subject to Investor–State Dispute Settlement

C. Making Regulatory Decisions about Financial Matters Self-judging in a Manner Similar to Essential Security Protections

D. Rewording the Second Sentence of BIT Article 20.1 (‘Where Such Measures [Prudential Financial Services Measures] Do Not Conform with the Provisions of this Treaty, They Shall Not Be Used as a Means of Avoiding the Party's Commitments or Obligations under this Treaty’) to Make Clear that Anti-avoidance Sentence Does not Override the Operative Exclusion for Prudential Measures in the First Sentence of Article 20.1

With only limited exceptions, Article 7 of the 2004 US Model BIT and similar provisions of recent US investment agreements require ‘all transfers relating to a covered investment to be made freely and without delay into and out of its territory’, including inter alia, profits, dividends, capital gains, proceeds of sale of investments, principal and interest on loans, royalties and management fees.⁶⁶ The Model BIT review, of course, commenced in the midst of the international financial crisis. Many observers at that time wondered whether the investment protections in investment agreements might interfere with regulatory measures taken by the United States and other governments to address the crisis, including proposals for restrictions on outbound payments urged by some observers. Critics offered three related proposals to eliminate this possibility: (i) adding a temporary balance of payments safeguards provision; (ii) making regulatory decisions about financial services self-judging; and (iii) revising the ‘no avoidance’ language in Article 20.1 to eliminate any risk that language made the remainder of the BIT Article 20.1 ‘prudential measures’ financial regulation exception inapplicable. As explained below, none of those proposals was accepted by the United States.

In the past, the attitudes of the US Treasury Department and the International Monetary Fund (IMF) towards restrictions on currency transfers were similar, and consistently negative. However, the experience of the Asian financial crisis in the mid- to late-1990s has led to a divergence between the two institutions with respect to controls on capital transactions (often called ‘capital movements’). Capital controls are, as explained below, generally permitted under the IMF Articles of Agreement without the need for IMF approval. However, restrictions on payments and transfers for current transactions are prohibited under the IMF Articles unless approved by the IMF. While capital controls are legally permitted, the IMF has historically counselled States as a policy matter to not impose such restrictions. However, following the Asian financial crisis in the late 1990s, the IMF began to rethink its generic policy opposition to controls on capital transactions, even if those controls were permitted by the IMF Articles. Today, the IMF does not oppose temporary capital controls as a policy matter in certain limited circumstances. The IMF continues to believe, though, that capital controls should not normally be used. The US Treasury Department, as shown by the prohibition of any controls over currency transfers (whether current or capital) set forth in Model BIT Article 7, is even less inclined towards capital controls than the IMF.

Treaty critics sought to include in the US Model BIT an exceptions provision for temporary balance of payments measures along the lines of the safeguards provisions in WTO agreements like the GATS, NAFTA Article 2104.3(d), and the balance of payments safeguards clause in the last draft of the failed MAI. Thus, those groups proposed that the Model BIT should ‘[a]llow the use of capital controls by including a safeguard provision for balance of payments and other financial crises that is not subject to investor-state dispute settlement.’⁶⁷ That safeguards provision would both permit certain foreign exchange restrictions and exclude disputes over such restrictions entirely from investment treaty arbitration. As explained below, the impact of such an exception, if it followed the lines of similar WTO exceptions, would have been limited to ‘capital controls’. It would not cover ‘restrictions on current payments and transfers’ unless approved by the IMF.

Not only did the business community object to these proposals, but so did the US Treasury Department. The Treasury Department told the Advisory Subcommittee that the ability of the US Government to take measures to address the financial crisis had not been impaired by any investment treaty obligations. The Report of the Advisory Subcommittee notes that, ‘in Subcommittee meetings with the Treasury Department, representatives of the Department indicated that, even in light of the recent financial crisis, they did not feel that their ability to act was constrained by any obligations under BITs to which the US is a party, and, therefore, that no amendment for balance of payment purposes was, in their view, necessary.’⁶⁸

Before turning to existing international treaty law treatment of ‘capital controls’ and ‘restrictions on payments and transfers for current transactions’ under safeguards clauses and the IMF Articles, it is useful to catalogue the provisions in the 2004 US Model BIT and recent US investment agreements addressing financial regulatory conduct. The 2004 US Model BIT, for example, contains at least three potentially applicable exculpatory provisions: (i) the Essential Security clause in Article 18.2 (somewhat similar clauses have been construed, as we know, in several of the Argentine cases to cover economic crises); (ii) the ‘prudential measures’ exclusion relating to financial services in Article 20.1; and (iii) the exclusion in Article 20.2 for ‘non-discriminatory measures of general application taken by [the central bank or monetary authority] in pursuit of monetary and related credit policies or exchange rate policies’. The latter two provisions, found in BIT Article 20, were a focus of discussion in the Advisory Subcommittee:

Article 20: Financial Services

1. Notwithstanding any other provision of this Treaty, a Party shall not be prevented from adopting or maintaining measures relating to financial services for prudential reasons, including for the protection of investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial services supplier, or to ensure the integrity and stability of the financial system.¹⁴ Where such measures do not conform with the provisions of this Treaty, they shall not be used as a means of avoiding the Party’s commitments or obligations under this Treaty.

2. (a) Nothing in this Treaty applies to non-discriminatory measures of general application taken by any public entity in pursuit of monetary and related credit policies or exchange rate policies. This paragraph shall not affect a Party’s obligations under Article 7 [Transfers] or Article 8 [Performance Requirements].¹⁵

(b) For purposes of this paragraph, ‘public entity’ means a central bank or monetary authority of a Party.

14. It is understood that the term ‘prudential reasons’ includes the maintenance of the safety, soundness, integrity, or financial responsibility of individual financial institutions.

15. For greater certainty, measures of general application taken in pursuit of monetary and related credit policies or exchange rate policies do not include measures that expressly nullify or amend contractual provisions that specify the currency of denomination or the rate of exchange of currencies.

Clause 3 of Article 20 permits the two State parties to the BIT to jointly make a binding determination that the investor’s claim is excluded under one of these provisions.

Treaty critics considered the exculpatory provisions of BIT Article 20 to be inadequate. With respect to Article 20.1, those groups asserted ‘the U.S. government should consider including a stronger prudential measures exception. Specifically, the U.S. government should consider eliminating the arguably self-canceling second sentence of Article 20.1, and including language indicating that the prudential measures exception is self-judging (similar to the language in the essential security provisions of recent FTAs).’⁶⁹ As regards Article 20.2, treaty opponents objected that the provision did not provide an exemption for conduct constituting a breach of the ‘Payments and Transfers’ obligation in BIT Article 7 and similar provisions of US investment agreements. The same critics considered in any event that the ‘Payments and Transfers’ obligation should be modified to exclude ‘capital controls’.

Treaty proponents, and the US Treasury Department and the WTO Secretariat, argued otherwise. The purportedly ‘self-cancelling’ anti-avoidance language in the second sentence of Article 20.1 (‘[w]here such measures do not conform with the provisions of this Treaty, they shall not be used as a means of avoiding the Party’s commitments or obligations under this Treaty’) is taken virtually word-for-word from the ‘prudential measures’ exception for financial regulation in the GATS. The WTO completed a legal review of the substantially identical language in the GATS ‘prudential measures’ exception in February 2010. At that time, the WTO Secretariat circulated to member countries its review of the language at issue and thereafter made that review public.⁷⁰ The 2011 WTO review expressly rejected the argument that the provision was self-cancelling, concluding instead that this second part was ‘clearly intended to avoid abuse in the use of the exception’. The WTO’s review was prompted by NGO and treaty opponent Public Citizen, which lobbied the WTO about the exact same ‘self-cancelling’ concerns in connection with the GATS ‘prudential measures’ exception as treaty critics raised in the Model BIT review.

Public Citizen had argued that the second part of the GATS/Model BIT ‘prudential measures’ exception (that the carve-out could not be used ‘as a means of avoiding the Members’ commitments or obligations’) meant the ‘prudential measures’ exception might only applied if the measure in question did not conflict with other treaty commitments (GATS or BIT, as the case may be). If that interpretation was correct, then the effect would be to undermine the point of the exception in the first place—thus the concern that Article 20.1 was self-cancelling. However, that argument has never been raised in a WTO proceeding nor, to the best of the author’s knowledge, in any investor–State arbitration under an investment agreement with similar language. The WTO Secretariat emphatically rejected the argument in its review. The US Treasury Department has taken the same position as the WTO in its public discussions of Article 20.1 and the similar GATS language.

In one of the few changes adopted into the 2012 US Model BIT, the US Government expanded explanatory footnote 18 (formerly footnote 14) to Article 20.1. Footnote 18 contains the mutual understanding of the State parties about the term ‘prudential reasons’. The additional language makes express that covered prudential reasons include ‘the maintenance of the safety and financial and operational integrity of payment and clearing systems’. That footnote language was first included in the 2008 United States–Rwanda BIT and seems non-controversial. Financial payment systems like FedWire, CHIPS and SWIFT, which are operated by financial institutions for the banking and securities community, and securities clearing institutions, are prominent financial market participants. Experienced financial services lawyers would have in any event considered them as falling within the pre-existing ‘ensure the integrity and stability of the financial system’ and ‘safety and soundness of financial institutions’ language from, respectively, Article 20.1 and the original footnote.

18. It is understood that the term ‘prudential reasons’ includes the maintenance of the safety, soundness, integrity, or financial responsibility of individual financial institutions, as well as the maintenance of the safety and financial and operational integrity of payment and clearing systems.⁷¹

The US Government also added another new footnote (note 19) to Article 20.2 of the 2012 Model BIT, making clear that exchange restrictions imposed as part of debt moratoriums to ‘nullify or amend contractual provisions that specify the currency of denomination or the rate of exchange of currencies’ are not encompassed by the monetary, credit and exchange rate exculpatory language in Article 20.2:

19. For greater certainty, measures of general application taken in pursuit of monetary and related credit policies or exchange rate policies do not include measures that expressly nullify or amend contractual provisions that specify the currency of denomination or the rate of exchange of currencies.⁷²

That change demonstrates the intent of the US Government to not permit such currency and exchange rate nullifications to be excluded from investor–State arbitration by operation of Article 20.2.

In addition to those changes, the 2012 US Model BIT also includes new language in Article 20.8 exempting regulatory measures ‘related to the prevention of deceptive and fraudulent practices or that deal with the effects of a default on financial services contracts’. That addition was apparently motivated by the anti-fraud provisions of financial reform legislation in the United States. For such measures to obtain the benefit of this exception, they must satisfy requirements that the measures (i) be ‘necessary to secure compliance with laws or regulations that are not inconsistent with this Treaty’ and (ii) ‘are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on investment in financial institutions’. There is little concern the new US regulatory powers in financial reform legislation will fail to meet these requirements.

However, the US Government declined to make the Article 20.1 ‘prudential measures’ exception self-judging, as requested by treaty critics. That change would have had the effect of insulating all financial services regulatory measures from arbitral review in investor–State arbitration upon the unilateral determination of the host State. In light of this and other decisions by the US Government in drafting the 2012 US Model BIT, it is clear the United States rejected arguments by treaty opponents that debt moratoria and other financial crisis measures should be excluded entirely from investment treaty protections and investment arbitration.

In addition to the exclusions in Article 20, the investment chapters of recent US FTAs have also included individually negotiated provisions limiting investor claims relating to financial services measures. Those provisions too may appear in BITs, depending on the identity of the treaty partner and the course of negotiations. Annex 10-E of the Peru TPA, illustratively, imposes a one-year waiting period on US investor claims that Peru has breached a substantive Investment Chapter obligation (other than NT or MFN treatment) through the imposition of a restrictive measure with regard to financial payments and transfers. That waiting period does not apply if the investor’s claim relates to: (i) payments or transfers on current transactions; (ii) payments or transfers associated with equity investments or (iii) payments pursuant to a loan or bond, provided that such payments are made in accordance with the terms and conditions of the loan or bond agreement.

Paragraph 1(d) of Annex 10-E of the Peru TPA further limits recovery in investor–State claims with respect to measures affecting payments and transfers. Under that paragraph, a successful investor may only recover the reduction in value of the transfers. Paragraph 1(d) also excludes loss of profits or business and any similar consequential or incidental damages. Article 12.1.2 of the Peru TPA, quoted below, additionally limits the investment protections under the TPA’s Investment Chapter that are available for investor–State arbitration with respect to financial services measures:⁷³

2. Chapters Ten (Investment) and Eleven (Cross-Border Trade in Services) apply to measures described in paragraph 1 only to the extent that such Chapters or Articles of such Chapters are incorporated into this Chapter.

• Articles 10.7 (Expropriation and Compensation), 10.8 (Transfers), 10.11 (Investment and Environment), 10.12 (Denial of Benefits), 10.14 (Special Formalities and Information Requirements), and 11.11 (Denial of Benefits) are hereby incorporated into and made a part of this Chapter.

• Section B (Investor-State Dispute Settlement) of Chapter Ten (Investment) is hereby incorporated into and made a part of this Chapter solely for claims that a Party has breached Articles 10.7 (Expropriation and Compensation), 10.8 (Transfers), 10.12 (Denial of Benefits), or 10.14 (Special Formalities and Information Requirements), as incorporated into this Chapter.

• Article 11.10 (Transfers and Payments) is incorporated into and made a part of this Chapter to the extent that cross-border trade in financial services is subject to obligations pursuant to Article 12.5.

To make matters quite clear, Article 10.2.3 of the Investment Chapter itself expressly recognizes the priority of the Financial Services Chapter:

3. This Chapter [the Investment Chapter] does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter Twelve (Financial Services).

As a result of Article 12.1.2 of the Peru TPA, the investment protections in Chapter Ten relating to NT, MFN treatment, treatment in case of strife, the minimum standard (fair and equitable treatment), performance requirements and management/board of directors are excluded from investor–State arbitration under the TPA with respect to measures addressing financial institutions and cross-border trade in financial services. Measures relating to ‘financial institutions’ and ‘cross-border trade in financial services’ may, of course, include a number of the regulatory responses by the US Government and others to the international financial crisis of 2008–9.

After giving effect to Financial Services Article 12.1.2 in the Peru TPA, what remain for investor–State arbitration with respect to such financial services measures are, in substance, the protections related to expropriation and certain obligations with respect to the transfers and payments provision of the Investment Chapter, as limited by Article 12.5 of the Financial Services Chapter. In addition, the Financial Services Chapter itself contains NT and MFN treatment clauses specifically geared towards financial services: Article 12.2 and 12.3. Consequently, investment chapters in FTAs like the Peru TPA limit investor–State arbitration claims regarding financial services measures even more than the limits found in Model BIT Article 20. The US Government has not excluded the possibility of incorporating similar provisions in BITs on a case-by-case basis.

With that as background, let us now turn to the proposal by treaty critics to permit ‘capital controls’ under Article 7 of the Model BIT, the prohibition on restrictions on financial payments and transfers, by adding to the Model BIT a balance of payments safeguards provision. The legal framework surrounding the ‘capital controls’ issue is complex. It is useful to look first at the actual terms of the balance of payments exception found in GATS Articles XI and XII, which was the model for the similar exception proposed for the MAI.

GATS Article XI makes clear that GATS member States are prohibited from applying restrictions on payments and transfers for current transactions or restrictions on capital transactions except as specified in GATS Article XII.⁷⁴ Article XII of the GATS then sets out the actual balance of payments safeguards exception. That exception specifies exchange restrictions are permitted for ‘serious balance-of-payments and external financial difficulties or threat thereof’. The restrictions are not permitted to discriminate among GATS members, must avoid unnecessary damage to the commercial, economic and financial interests of any other Member, and must be temporary and phased out progressively as the situation improves. Importantly, the restrictions are also required to ‘be consistent with the Articles of Agreement of the International Monetary Fund’:

Article XII

Restrictions to Safeguard the Balance of Payments

1. In the event of serious balance-of-payments and external financial difficulties or threat thereof, a Member may adopt or maintain restrictions on trade in services on which it has undertaken specific commitments, including on payments or transfers for transactions related to such commitments. It is recognized that particular pressures on the balance of payments of a Member in the process of economic development or economic transition may necessitate the use of restrictions to ensure, inter alia, the maintenance of a level of financial reserves adequate for the implementation of its programme of economic development or economic transition.

2. The restrictions referred to in paragraph 1:

   • shall not discriminate among Members;

   • shall be consistent with the Articles of Agreement of the International Monetary Fund;

   • shall avoid unnecessary damage to the commercial, economic and financial interests of any other Member;

   • shall not exceed those necessary to deal with the circumstances described in paragraph 1;

   • shall be temporary and be phased out progressively as the situation specified in paragraph 1 improves.

3. In determining the incidence of such restrictions, Members may give priority to the supply of services which are more essential to their economic or development programmes. However, such restrictions shall not be adopted or maintained for the purpose of protecting a particular service sector.

4. Any restrictions adopted or maintained under paragraph 1, or any changes therein, shall be promptly notified to the General Council.

5. • Members applying the provisions of this Article shall consult promptly with the Committee on Balance-of-Payments Restrictions on restrictions adopted under this Article.

   • The Ministerial Conference shall establish procedures⁴ for periodic consultations with the objective of enabling such recommendations to be made to the Member concerned as it may deem appropriate.

   • Such consultations shall assess the balance-of-payment situation of the Member concerned and the restrictions adopted or maintained under this Article, taking into account, inter alia, such factors as:

     • the nature and extent of the balance-of-payments and the external financial difficulties;

     • the external economic and trading environment of the consulting Member;

     • alternative corrective measures which may be available.

   • The consultations shall address the compliance of any restrictions with paragraph 2, in particular the progressive phaseout of restrictions in accordance with paragraph 2(e).

   • In such consultations, all findings of statistical and other facts presented by the International Monetary Fund relating to foreign exchange, monetary reserves and balance of payments, shall be accepted and conclusions shall be based on the assessment by the Fund of the balance-of-payments and the external financial situation of the consulting Member.

6. If a Member which is not a member of the International Monetary Fund wishes to apply the provisions of this Article, the Ministerial Conference shall establish a review procedure and any other procedures necessary.

⁴ It is understood that the procedures under paragraph 5 shall be the same as the GATT 1994 procedures.

In contrast, Article 7 (Payments and Transfers) of the 2004 US Model BIT and recent US investment agreements prohibit foreign exchange payment and transfer restrictions regardless of whether they affect current transactions or capital movements. As explained below, under the IMF Articles of Agreement⁷⁵ ‘restrictions on the making of payments and transfers for current international transactions’ are in general prohibited absent IMF approval, while countries are free under the IMF Articles to impose capital controls.⁷⁶

A moratorium limited solely to capital movements would be ineffective, since most net outflows at the beginning of an exchange crisis are short-term debt lines (ie payments on current transactions) that are paid off and not renewed. The US Model BIT bars both kinds of restrictions, whether capital controls or restrictions on current payments. Modifying the US Model BIT, of course, has no impact on the long-standing IMF provision.

Article XXX(d) of the IMF Articles of Agreement defines ‘payments for current transactions’ as follows:

(d) Payments for current transactions means payments which are not for the purpose of transferring capital, and includes, without limitation:

1. all payments due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities;

2. payments due as interest on loans and as net income from other investments;

3. payments of moderate amount for amortization of loans or for depreciation of direct investments; and

4. moderate remittances for family living expenses.

The Fund may, after consultation with the members concerned, determine whether certain specific transactions are to be considered current transactions or capital transactions.

Under Article VIII.2(a) of the IMF Articles of Agreement, a member is not entitled to impose restrictions on ‘payments and transfers for current international transactions’ without IMF approval. That article states: ‘(a) Subject to the provisions of Article VII, Section 3(b) [after a declaration of scarcity by the Fund, which does not happen] and Article XIV, Section 2 [under Art. VIII transitional arrangements, which no one has any more], no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions.’⁷⁷

Consequently, pursuant to Articles VIII.2(a) and XXX(d), a member of the IMF is not entitled, without IMF approval, to lawfully impose exchange restrictions on the following financial flows:

• ‘All’ payments (whether principal or interest) due in connection with ‘foreign trade, other current business, including services, and normal short-term banking and credit facilities’. Thus, IMF approval is required for exchange control restrictions on any international trade-related payments and credit facilities to finance current international payments.

• ‘All’ payments due as ‘interest on loans’ (regardless of whether they are for foreign trade or current business or short- or long-term credit facilities). Whether or not a moratorium on foreign exchange payments is good economic policy, these interest payments on international debt, along with the principal payments addressed in the next bullet point, are the central focus of any such moratorium. The inability to lawfully prevent their payment without IMF approval guarantees a large breach in the financial dam intended to be created by the moratorium.

• Payments of ‘moderate amount for amortization of loans’ (in effect, most scheduled principal payments on foreign indebtedness, but not a lump sum payment of principal by acceleration or otherwise). Along with interest payments to foreign creditors, moratoriums aim to block these principal payments from being made in the midst of a liquidity crisis. Here too, exchange restrictions without IMF approval are internationally unlawful for any IMF member.

• ‘All’ payments due as ‘net income from other investments’ (ie ordinary dividends on equity investments for a return ‘on’ invested capital and royalty payments on licenses). Thus, ordinary dividends and royalty payments are treated as payments for current transactions under the IMF Articles of Agreement.

• Payments of ‘moderate amount for depreciation of direct investments’ (ie in effect, moderate amounts of ordinary dividends on equity investments for return ‘of’ invested capital, but not proceeds from the sale or liquidation of the investment). Consequently, periodic dividends and similar distributions constituting recovery by a foreign investor of invested capital are also treated as payments for current transactions under the IMF Articles of Agreement.

As noted above, NAFTA Article 2104.3(d) and the GATS and draft MAI safeguards clauses all provide that, to be excepted from the other obligations of the agreement for balance of payments reasons, any financial regulatory measure covered by the safeguards provision ‘shall be consistent with the Articles of Agreement of the International Monetary Fund’. Therefore, none of these ‘restrictions on the making of payments and transfers for current international transactions’ are permitted as a matter of international law for IMF members unless approved by the IMF under IMF Article VIII.2(a). That prohibition (absent IMF approval) applies even taking into account the existence of a balance of payments safeguards clause along the lines of the NAFTA, GATS and draft MAI clauses, because those safeguards clauses incorporate the above-mentioned restrictions from the IMF Articles of Agreement.

In comparison with current payments and transfers, the following are likely capital transactions, which may, consistent with the IMF Articles, be restricted by a host State without the need for IMF approval: (i) lump sum payments of principal of a loan (whether by prepayment or by acceleration) and (ii) proceeds from the sale or liquidation of an investment.

The difference in treatment under the IMF Articles between current and capital transactions is important in the case of a foreign exchange crisis. Current payments and transfers come out of a distressed economy very quickly (‘hot money’)—most significantly, ‘all payments of interest [and] moderate amounts for amortization of loans’ and ‘all payments [whether principal or interest] due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities’. Moreover, once local obligors have made the payments ‘due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities’, the country cannot thereafter easily compel a foreign creditor to make ‘new money’ short-term loans to in an equivalent amount (ie the State cannot compel a rollover of those sums by the foreign creditor). Without replacement loans for these payments on account of current transactions, the country in question faces a severe liquidity crisis—that is the case regardless of whether capital movements in foreign currencies can be controlled by the State. Consequently, despite what some advocacy groups might have thought, a distressed State cannot establish an effective foreign exchange moratorium without imposing restrictions on payments and transfers for current transactions, a circumstance that requires IMF approval under the IMF Articles of Agreement.

Some of the opposition to the Model BIT prohibitions in BIT Article 7 on restrictions of free payments and transfers, thus, seems to not understand the distinction under existing international financial treaty law between ‘capital controls’ and ‘restrictions on payments and transfers for current transactions’. For example, one public submission in connection with the Model BIT review, made by an NGO named the ‘Third World Network’, argued for the ‘capital controls’ exemption by offering illustrations of payments that are clearly current payments under the IMF Articles, not capital transactions:

Given the broad definition of ‘investment’ (see above), this requirement to allow free transfers can cause three main problems for development.

Firstly, it prevents developing countries from ensuring that profits etc are reinvested in the developing country. Such funds are an important source of finance during development when domestic savings rates may be low and realistically unable to be increased in the short-medium term.

Secondly, allowing outflows at such a rate can cause significant current account deficits. For example, Malaysia would have had a current account surplus every year but one, from 1990–96, but because of the outflow of FDI profits and royalties, it had a current account deficit every year from 1990–96.

Thirdly, it can make it more likely to experience financial crises according to the UN Commission, see ‘financial crisis implications’ below.⁷⁸

The author of that comment did not appear to be aware that ‘profits etc’ and ‘FDI profits and royalties’ are defined under IMF Article XXX(d) as current payments for which exchange restrictions are prohibited by the IMF Articles absent IMF approval. As pointed out above, the IMF definition of current payments includes ‘interest on loans and as net income from other investments’ (ie interest on loans and dividends/distributions on investments, which are the principal vehicles for repatriating profits on debt and FDI). Similarly, the comment in the Third World Network submission that ‘allowing outflows at such a rate can cause significant current account deficits’ also fails to appreciate that restrictions on current payments are prohibited by the IMF Articles absent IMF approval. Granting permission for ‘capital controls’ under US investment agreements would not affect at all the situation about which this commentator was distressed, whether or not that distress is economically justified.

The IMF does occasionally grant approvals under IMF Article VIII.2(a) for temporary restrictions on current payments. However, according to IMF officers, such approvals are granted only if at least three conditions are met: (i) the restriction is imposed for balance of payments reasons; (ii) the restriction is applied in a manner that does not discriminate between Fund members; and (iii) the restriction is temporary in the sense that there is a clear timetable for the measure's removal (generally one year).⁷⁹ Moreover, the IMF only grants such temporary approvals if the host State accepts IMF economic policy recommendations—the famous IMF ‘conditionality’.

V. STATE-OWNED ENTERPRISES

There has also been considerable discussion in the US about the application of the substantive investment protections of US investment agreements to conduct by SOEs. A significant portion of that discussion was motivated by the alleged conduct of Chinese SOEs, although other State enterprises were also of concern. As part of their instructions to the private sector Advisory Committee, the State Department and USTR specifically asked for the views of the Committee on the SOE subject.

Unlike other topics addressed in the BIT review, treaty critics and treaty advocates shared some common ground on the question of whether foreign SOEs should be permitted to freely invest in the United States on the same basis as foreign private enterprises. Therefore, both proponents and opponents made a number of proposals to include provisions in the 2012 US Model BIT regulating SOE investments in the United States. For example, treaty opponents requested insertion of ‘a provision to ensure that State-Owned Enterprises (SOEs) which invest in productive assets in the United States do not receive financing and inputs at below market rates or access to other anti-competitive subsidization by a foreign government.’⁸⁰ Some business observers requested the US Government to include in the revised Model BIT provisions (i) for a screening mechanism for investments by SOEs and (ii) to regulate the competitive activities of SOEs when acting in a commercial manner.

The US Government declined to employ its investment agreements as platforms to impose regulatory restrictions on foreign investors, rather than providing protections for investors from State regulatory misconduct. SOEs remain ‘investors’ for purposes of the Model BIT on the same basis as private enterprises. Thus, the Obama Administration did not accept these proposals, instead leaving regulatory control over investments into the United States to the normal processes of the legislative and administrative branches of the US Government.

In the end, the United States made only one addition to the 2012 US Model BIT with respect to SOEs. The 2004 Model BIT and other US investment agreements have provided that the substantive investment protections of the BIT apply not only to direct conduct of a State, but also ‘to a state enterprise or other person when it exercises any regulatory, administrative, or other governmental authority delegated to it by that Party’. Article 2.2(a) of the Model BIT sets out that scope of coverage:

2. A Party’s obligations under Section A shall apply:

(a) to a state enterprise or other person when it exercises any regulatory,

administrative, or other governmental authority delegated to it by that Party …⁸

A newly added footnote 8 to Article 2.2(a) in the 2012 US Model BIT made clear that coverage of an SOE’s conduct extended to government authority delegated through a wide variety of means, including the broad notion of ‘Party … action’:

⁸ For greater certainty, government authority that has been delegated includes a legislative grant, and a government order, directive or other action transferring to the state enterprise or other person, or authorizing the exercise by the state enterprise or other person of, governmental authority.⁸¹

Thus, the United States was unwilling to use investment agreements to regulate SOEs investing in the United States. The United States was, however, willing to make clear in the 2012 US Model BIT that a foreign State could be held liable under the substantive provisions of the BIT for conduct of one of its SOEs wielding governmental authority, even if the delegation of that governmental authority took place by informal means.

VI. OTHER NEW PROVISIONS

Several other provisions of the 2012 US Model BIT are new and deserve attention even if they were not controversial between treaty proponents and treaty opponents—they will surely be of interest to prospective treaty partners.

A. Standards-setting

The US Government included in the 2012 Model BIT new provisions in Article 11.8 requiring the host State to permit persons of the other State to participate in the development of technical and similar standards on the same basis as nationals of the host State. The Korea–United States Free Trade Agreement (KORUS) contains a provision covering the same concepts, but the 2012 Model BIT provision is far more detailed. There are exceptions for standards with respect to sanitary and phytosanitary measures and with respect to procurement specifications of a governmental body for its own requirements

8. Standards-Setting

• Each Party shall allow persons of the other Party to participate in the development of standards and technical regulations by its central government bodies.¹⁴ Each Party shall allow persons of the other Party to participate in the development of these measures, and the development of conformity assessment procedures by its central government bodies, on terms no less favorable than those it accords to its own persons.

• Each Party shall recommend that non-governmental standardizing bodies in its territory allow persons of the other Party to participate in the development of standards by those bodies. Each Party shall recommend that non-governmental standardizing bodies in its territory allow persons of the other Party to participate in the development of these standards, and the development of conformity assessment procedures by those bodies, on terms no less favorable than those they accord to persons of the Party.

• Subparagraphs 8(a) and 8(b) do not apply to:

  • sanitary and phytosanitary measures as defined in Annex A of the World Trade Organization (WTO) Agreement on the Application of Sanitary and Phytosanitary Measures; or

  • purchasing specifications prepared by a governmental body for its production or consumption requirements.

• For purposes of subparagraphs 8(a) and 8(b), ‘central government body’, ‘standards’, ‘technical regulations’ and ‘conformity assessment procedures’ have the meanings assigned to those terms in Annex 1 of the WTO Agreement on Technical Barriers to Trade. Consistent with Annex 1, the three latter terms do not include standards, technical regulations or conformity assessment procedures `for the supply of a service.

¹⁴ A Party may satisfy this obligation by, for example, providing interested persons a reasonable opportunity to provide comments on the measure it proposes to develop and taking those comments into account in the development of the measure.

This provision is enforceable in the Model BIT by State–State dispute resolution, not by investor–State arbitration. Business interests have applauded this new requirement. Although little in the revised 2012 US Model BIT will be satisfying to NGOs and others critical of investment treaties, those groups may find this provision to be useful not only for business interests but also for their own interests.

B. Regulatory Transparency

The transparency provisions of the US Model BIT relating to investor–State arbitration proceedings did not change, likely because there are currently no investor–State arbitration provisions mandating more transparency than the US provisions. However, the provisions of Article 11 of the 2012 US Model BIT addressing publication of regulatory actions and transparency in a host State's regulatory and administrative matters have been expanded. Here, too, NGOs that are treaty critics may find the new provisions to be useful.

VII. ENVIRONMENT AND LABOUR OBLIGATIONS

Among the most controversy-laden aspects of the US Model BIT review was whether, and if so to what extent, the US Model BIT would include environmental and labour obligations binding on the State parties. Treaty critics, led by labour unions and environmental NGOs, fought to expand the scope of binding obligations and to make those obligations enforceable by means of binding dispute resolution in a manner similar to the labour and environmental chapters of recent US FTAs. Business interests opposed those proposals.

The 2012 Model BIT controversially addressed environmental and labour obligations in a manner quite different from both NAFTA and recent US FTAs. NAFTA and the 2004 Model BIT contain exhortatory language regarding environmental and labour obligations, not enforceable in either State–State or interested party–State arbitration. DR-CAFTA began to move towards binding and enforceable environmental and labour obligations. The Peru TPA, KORUS and the Colombia and Panama FTAs all contained separate environmental and labour chapters, with significant obligations ultimately enforceable by State–State arbitration and financial penalties. Notably, no other country in the world has, to date, included anything like those binding and enforceable provisions in their own trade or investment agreements.

A. Environment Obligations

Environmental groups and their allies sought to:

transform the hortatory and aspirational language in the ‘Investment and Environment’ provision [of the BIT] into a legal obligation subject to State-to-State dispute settlement. In Article 12.1, the language ‘shall strive to ensure that it does not waive or otherwise derogate from’ should be replaced by a firm obligation: ‘shall not waive or otherwise derogate from’. The footnote to this article [limiting its scope, in the case of the United States, to federal legislation or regulation enforceable by central authorities] should be deleted to expand the scope of Article 12 to all environmental laws. The Investment and Environment Provision should be subjected to State-to-State dispute settlement … .⁸²

Those groups found their wishes met in part but not in whole. The 2012 US Model BIT does replace the 2004 Model ‘strive to ensure’ obligation with a stronger duty that ‘each Party shall ensure that it does not waive or otherwise derogate from or offer to waive or otherwise derogate from its environmental laws’. However, the new Model BIT does not provide for State–State binding dispute resolution, but only State–State consultations in the same manner as the 2004 US Model BIT.

The Obama Administration also rejected the proposal by environmental groups to delete a footnote limiting the environmental obligations in BIT Article 12 to federal measures enforced by federal authorities. Accordingly, environmental laws of the 50 States and their local bodies, as well as federal laws enforced by State or local authorities, continue to not be covered by the BIT Article 12 obligations.

Despite the absence of binding dispute resolution for environmental disputes, business groups were not pleased by the result either. The Emergency Committee for American Trade (ECAT), a business advocacy group, stated that ‘ECAT is highly concerned about whether the expanded Model BIT language relating to labour and environment could be counterproductive’.⁸³

B. Labour Obligations

Labour unions and their allies had sought expanded labour protections in Article 13 of the US Model BIT, enforceable directly by interested parties or by State–State dispute resolution as provided in the most recent US FTAs. Here, too, the picture was mixed, but notably State–State dispute resolution was not included.

The 2012 US Model BIT made several changes from Article 13 (Investment and Labour) of the 2004 Model. Language from earlier US FTAs, but less strong than the most recent FTAs, was included in Article 13 of the US Model BIT, under which the State parties ‘reaffirm’ their obligations as members of the International Labour Organization (ILO) and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up. The scope of covered labour laws under BIT Article 13 now includes the elimination of discrimination in employment and occupation.

In addition, Article 13 now further includes an obligation for a State ‘not to waive or otherwise derogate from’ its labour laws, or offer to do so, where doing so would be inconsistent with core ILO labour rights (whereas the State previously only had to ‘strive’ to do so under the 2004 Model BIT). Moreover, State parties are not permitted to ‘fail to effectively enforce their labour laws through a sustained or recurring course of inaction as an encouragement for the establishment, acquisition, expansion or retention of an investment in its territory’. Still, only State–State consultations exist as a platform for enforcing these obligations. If one State does request consultations over a labour practice, though, the other State must now respond within 30 days. And, the parties have an obligation to ‘endeavour to reach a mutually satisfactory resolution’. The enforceability of those more stringent provisions remains open to question, however, in the absence of more binding dispute resolution procedures.

In addition to not providing for State–State binding dispute resolution, the US Government also did not accept a proposal from labour interests to require a State party to amend its existing national laws to bring them into line with ILO minimum labour rights. Instead, as stated above, Article 13 requires the State to not waive or derogate from national labour laws already adopted and to not fail to enforce those laws. That result was not surprising. US labour unions have long maintained that some US labour legislation is inconsistent with ILO rights. No US administration, regardless of party affiliation, is likely to try to pre-empt the US Congress by de facto amending domestic US labour law through a trade or investment treaty with another country.

C. FTAs and Environment/Labour Obligations

In the end, the 2012 US Model BIT made some changes. Environmental and labour interests were disappointed by the limited nature of those changes, particularly the absence of binding State–State dispute resolution. The 2012 Model BIT remains stronger than NAFTA and the 2004 Model BIT with respect to environmental and labour obligations, but is clearly weaker than the four most recent US FTAs due to the absence of binding State–State dispute resolution. In the course of explaining the 2012 Model BIT provisions to interested parties, it has become apparent that the Obama Administration believes the United States does not have sufficient leverage to extract binding and enforceable environmental and labour obligations from counterparties in a BIT negotiation. That is the case largely because the United States is already one of the most open investment environments in the world. Thus, the United States has less to offer in a negotiation limited solely to investment issues.

However, that is not the situation in the broader context of FTA negotiations. There, the attraction to treaty partners of selling into the US domestic market offers powerful negotiating leverage to the United States. The US proposals for environmental and labour chapters in the TPP have not leaked like the investment chapter. Thus, we do not have public knowledge about the US negotiating proposal or the responses from prospective treaty partners. However, one might reasonably expect that the going-in position of the United States with respect to those chapters will be at least as strong as the four most recent FTAs, and perhaps even stronger. As for how the negotiating partners will respond, well … .

VIII. CONCLUSION

The bottom line is that the Obama Administration accommodated few, if any, of the changes demanded by critics of investment treaty arbitration during the US Model BIT review process. The 2012 US Model BIT mirrors closely its 2004 predecessor. Drafting a model agreement is one thing, however. Negotiating an investment treaty or an investment chapter in an FTA is quite another matter. Only time will tell the extent to which this document foreshadows the investment chapter of FTAs such as the proposed TPP or that Holy Grail of investment treaties, a United States–China BIT.

¹ International arbitrator; Adjunct Professor, Georgetown University Law Center; Senior Research Fellow, Vale Columbia Center for Sustainable International Investment; retired partner, Milbank, Tweed, Hadley & McCloy LLP.

² United States Department of State, ‘Bilateral Investment Treaties and Related Agreements’ <http://www.state.gov/e/eb/ifd/bit/index.htm> accessed 8 November 2012; 2012 US Model Bilateral Investment Treaty <http://www.ustr.gov/sites/default/files/BIT%20text%20for%20ACIEP%20Meeting.pdf> accessed 8 November 2012.

³ For example, from the opponent side, the Global Trade Watch arm of Public Citizen released the statement below:

April 20, 2012

Announcement of Flawed Investment Rules Show Agenda

Motivating Obama Trade Talks

Statement of Lori Wallach, Public Citizen

Instead of the reforms promised by candidate Obama, the Obama administration’s ‘new’ Model Bilateral Investment Treaty released today is the same in all major respects as the deeply flawed ‘old’ Model Bilateral Investment Treaty (BIT) and the investment chapters of U.S. free trade agreements.

Like the old U.S. investment model, the new text will allow companies to challenge public interest regulations outside of domestic court systems before tribunals of three private sector trade attorneys operating under minimal to no conflict of interest rules. These arbitrators can order governments to pay corporations unlimited taxpayer-funded compensation for having to comply with policies that affect their future expected profits, and with which domestic investors have to comply.

By revealing a fundamentally unchanged BIT (after pushing three Bush trade deals in 2011 based on the same flawed model), the administration is exposing the anti-public interest agenda motivating the nine-nation Trans-Pacific Partnership trade talks. In those negotiations, countries like Australia (who have been attacked in BITs by Philip Morris over their plain packaging tobacco policies) have criticized the U.S. model of investment rules.

At a time when multinationals like Chevron are using BITs to evade justice and get out of environmental remediation obligations, it is unthinkable that an Obama administration—post BP oil spill, post Wall Street crash—would privilege the rich at the expense of the 99 percent.

⁴ For example, from the proponent side, the Emergency Committee for American Trade (ECAT) released a statement as well:

April 20, 2012

ECAT APPLAUDS OBAMA ADMINISTRATION’S COMMITMENT TO OPEN MARKETS

AND PROTECT U.S. INVESTMENT THROUGH UPDATED MODEL BIT

AND URGES QUICK RESUMPTION OF NEGOTIATIONS

Expresses Serious Concerns on Lack of Improvements in Key Standards

and Expanded Labour and Environment Provisions

Washington, D.C., April 20, 2012: Calman Cohen, President of the Emergency Committee for American Trade (ECAT), issued the statement below on the release today of the updated Model Bilateral Investment Treaty (BIT) by the Obama Administration:

‘ECAT applauds the Obama Administration’s commitment to open markets, eliminate foreign barriers and protect U.S. investment overseas through its release today of an updated Model BIT and urges forward movement on a robust U.S. BIT negotiating agenda. At the same time, ECAT is highly concerned about whether the expanded Model BIT language relating to labour and environment could be counterproductive and is very disappointed that the new 2012 Model BIT does not strengthen core protections for U.S. investors overseas.’

‘ECAT has long championed the bipartisan U.S. BIT program as an important tool to foster more secure and open investment environments overseas that will create new opportunities and expanded exports and sales for U.S. industries in overseas markets. Given that the home countries of our chief competitors not only have a much more extensive network of BITs, with strong (and in some cases stronger) provisions, the revitalization of the U.S. BIT program is vital so that U.S. investors and their workers can compete successfully in key markets overseas. Today’s release of the updated 2012 Model BIT is, therefore, an important step forward that we hope will augur well for a robust U.S. BIT negotiating agenda.’

‘The 2012 Model BIT released today upholds many of the core provisions long sought by ECAT with regard to key provisions on national treatment/Most-Favoured-Nation treatment, the minimum standard of treatment, compensation for expropriation, the free transfer of capital, bans on performance requirements, and binding investor-state dispute settlement, among others. After an extensive, multi-year review during which it heard from supporters and opponents of the BIT program, the Obama Administration’s embrace of these core provisions should highlight for all that high-standard and enforceable BITs are strongly in our nation’s interest and that these core provisions, including investor-state dispute settlement, are fully consistent with and supportive of our country’s legal system and ability to regulate appropriately in the public interest.’

‘These provisions will help create new markets for U.S. exports and sales of agricultural and manufactured goods and services; protect U.S. property and investments, including intellectual property; and provide more transparent, predictable overseas opportunities for U.S. industries to grow their business. Such U.S. investment overseas strengthens the productivity and competitiveness of U.S. firms, enhancing their economic activity and their ability to offer higher wages in the United States on average than companies without foreign investments. Such investment is also important to promote other U.S. national objectives, from access to natural resources and economic development to the rule of law in countries around the world.’

‘New language in the 2012 Model BIT to better discipline forced technology localization mandates that are increasingly arising overseas represents a particularly welcome addition to ensure that U.S. innovative industries are not unfairly prevented from competing in foreign markets. Also highly important are new BIT provisions on transparency and standard-setting, as well as clarifications to the core BIT provisions that apply the same core obligations to state-owned enterprises when such enterprises are acting as a government entity.’

‘At the same time, ECAT is very disappointed that many proposed changes that ECAT sought through the BIT review process to strengthen core protections were not included in the updated 2012 Model BIT. Provisions requiring fair and equitable treatment and compensation for expropriation, among others, should have been clarified and improved, as ECAT sought to more strongly discipline unfair treatment and unfair barriers to U.S. industries that are engaged internationally.’

‘ECAT also has serious concerns that the expanded BIT language on labour and environment included in the new text will be counterproductive. The foreign investment and economic growth that BITs promote have long been recognized as important drivers of improved labour and environmental conditions in developing countries. The 2012 Model BIT’s labour and environmental provisions go well beyond the scope of prior U.S. BITs and the BITs of our major competitors. ECAT is concerned that these labour and environment provisions set a bad precedent and may well undermine the United States’ ability to conclude BITs with developing countries and the very improvements in labour and environmental objectives that increased foreign investment would bring. ECAT will be continuing to review these provisions carefully as BIT negotiations get restarted to ensure that such negative effects are minimized.’

‘As the world’s largest source and recipient of foreign direct investment, the United States has much to gain from advancing the rule of law and economic opportunity through a strong international investment system with BITs at its core. ECAT looks forward to working with the Obama Administration on a quick restart of pending BIT negotiations, including with China and India, and on beginning new BIT negotiations with other key countries.’

‘ECAT would also like to commend the many dedicated professionals at the Office of the United States Trade Representative and the Department of State, who co-lead the U.S. BIT program, as well as those at the Department of Commerce and the Department of the Treasury and other agencies who worked diligently since 2009 on this very complex and multi-year Model BIT review.’

The Model BIT is the template for US BIT negotiations with other countries that has been used successfully by Democratic and Republican Administrations over several decades. The rules of the Model BIT are based in substantial part on core US legal principles, such the Takings, Equal Protection and Due Process Clauses. There are over 3,000 BITs in the world of which the United States is party to BITs with only 40 countries, in addition to trade and investment agreements with 13 additional countries. The United States had launched BIT negotiations with China, India, Vietnam and Mauritius, but those negotiations have been on hold while the Obama Administration undertook its review of the Model BIT starting in 2009. ECAT provided detailed testimony and statements to the Administration and Congress on the Model BIT review.

⁵ A negotiating draft of the TPP investment chapter was leaked in June 2012, and significantly resembles US templates, with various open issues and competing proposals as well. See ‘Investment’ <tinyurl.com/tppinvestment> accessed 8 November 2012.

⁶ Advisory Committee on International Economic Policy, Report of the Subcommittee on Investment of the Advisory Committee on International Economic Policy Regarding the Model Bilateral Investment Treaty (30 September 2009) <http://www.state.gov/e/eb/rls/othr/2009/131098.htm> accessed 8 November 2012 (‘Report of the Subcommittee’). See also the covering letter to Secretary Hillary Clinton: Letter from the Advisory Committee on International Economic Policy to the Honorable Hillary Rodham Clinton, Secretary of State (1 October 2009) <http://www.state.gov/e/eb/rls/othr/2009/131096.htm> accessed 8 November 2012.

⁷ Advisory Committee on International Economic Policy, Report of the Subcommittee on Investment of the Advisory Committee on International Economic Policy Regarding the Model Bilateral Investment Treaty: Annexes (30 September 2009) <http://www.state.gov/e/eb/rls/othr/2009/131118.htm> accessed 8 November 2012 (‘Subcommittee Annexed Separate Statements’).

⁸ See BIT Review: Written Comments Concerning the Administration's Review of the US Model Bilateral Investment Treaty, Docket Id USTR-2009-0019, <http://www.regulations.gov/#!docketDetail;dct=FR%252BPR%252BN%252BO%252BSR%252BPS;rpp=25;po=0;D=USTR-2009-0019> accessed 8 November 2012.

⁹ Treaty Between the Government of the United States of America and the Government of the Republic of Rwanda Concerning the Encouragement and Reciprocal Protection of Investment (signed 19 February 2008, entered into force 1 January 2012) <http://www.ustr.gov/sites/default/files/uploads/agreements/bit/asset_upload_file743_14523.pdf> accessed 8 November 2012. See Office of the United States Trade Representative, ‘United States, Rwanda Ratify Bilateral Investment Treaty’ (2 December 2011) <http://www.ustr.gov/about-us/press-office/press-releases/2011/december/united-states-rwanda-ratify-bilateral-investment> accessed 8 November 2012.

¹⁰ Bray, Non-compensatory versus Compensatory Takings under NAFTA (advance publication 3 October 2012) <www.transnational-dispute-management.com> accessed 20 November 2012 (footnotes omitted). The only successful expropriation claim was Metalclad Corporation v United Mexican States in 2000, one of the three early Awards. Metalclad Corporation v United Mexican States, ICSID Case No ARB(AF)/97/1, Award (30 August 2000).

¹¹ Emphasis added. The 2002 Trade Promotion Act granted negotiating authority to the US Government for trade and investment agreements. With the Congressional approval of the Korean, Colombian and Panamanian FTAs in 2011, that authority finally lapsed. However, the negotiating parameters laid out in the 2002 Act remain potent political themes in US discussions of trade and investment agreements, since Congressional approval will be required for any new agreements.

¹²Penn Central Transportation Co v New York City, 438 US 104 (1978). In Penn Central, the Supreme Court identified several factors that have particular significance in the evaluation of ‘regulatory takings’ claims. Primary among those factors are ‘the economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations’. In addition, the ‘character of the governmental action’—for instance whether it amounts to a physical invasion or instead merely affects property interests through ‘some public program adjusting the benefits and burdens of economic life to promote the common good’—is relevant in discerning whether a taking has occurred. The Penn Central factors have thereafter served as the principal judicial guideline for resolving ‘regulatory takings’ claims under the Fifth Amendment. Penn Central was unanimously reaffirmed in Lingle v Chevron USA Inc, 544 US 528 (2005).

¹³ Canada issued the same statement; Mexico confirmed it by letter several months later. See Meg Kinnear, Andrea Bjorklund and John F G Hannaford, Investment Disputes under NAFTA: An Annotated Guide to NAFTA Chapter 11, 62-1120 ff (Kluwer Law International 2009).

¹⁴ See Mark Kantor, ‘The Transparency Agenda for UNCITRAL Investment Arbitrations: Looking in All the Wrong Places, presented at the Arbitration Forum of the NYU Center for Transnational Litigation and Commercial Law’ (7 February 2011) <http://www.iilj.org/research/documents/IF2010-11.Kantor.pdf> accessed 8 November 2012.

¹⁵ ‘Transcript: Trading Democracy—A Bill Moyers Special’ PBS (1 February 2002) <http://www.pbs.org/now/transcript/transcript_tdfull.html> accessed 8 November 2012.

¹⁶ Sarah Anderson and others, ‘The New U.S. Model Bilateral Investment Treaty: A Public Interest Critique’ (9 May 2012), 2 (produced by: Sarah Anderson, Institute for Policy Studies; Linda Andros, United Steelworkers; Marcos Orellana Cruz, Center for International Environmental Law; Kevin P Gallagher, Boston University and Global Development and Environment Institute; Owen Herrnstadt, International Association of Machinists and Aerospace Workers; Thea Lee, AFL-CIO; Matthew C Porterfield, Harrison Institute for Public Law—Georgetown Law; Margrete Strand Rangnes, Sierra Club; and Martin Wagner, Earthjustice) <http://www.ips-dc.org/reports/the_new_us_model_bilateral_investment_treaty_a_public_interest_critique> accessed 8 November 2012 (‘Public Interest Critique’).

¹⁷ See eg 2004 US Model Bilateral Investment Treaty art 26.2 <http://www.state.gov/documents/organization/117601.pdf> accessed 8 November 2012 (‘2004 US Model BIT’).

¹⁸ See eg Dominican Republic–Central America Free Trade Agreement ch 10 (Investment), annex 10-F (requiring US claimants to abide by a fork-in-the-road provision in bring claims in investor–State arbitration against the Dominican Republic or Central American Parties to the agreement).

¹⁹ ibid.

²⁰ Susan Franck, ‘Empirically Evaluating Claims About Investment Treaty Arbitration’ (2007) 86 N Car L Rev 1.

²¹ World Bank, ‘Worldwide Governance Indicators’ <http://info.worldbank.org/governance/wgi/index.asp> accessed 8 November 2012.

²² See Separate Statement of Mark Kantor appended to ‘The Report of the Subcommittee’ on Investment of the Advisory Committee on International Economic Policy Regarding the Model Bilateral Investment Treaty’ (30 September 2009) <http://www.state.gov/e/eb/rls/othr/2009/131118.htm#6> accessed 8 November 2012.

²³ 2004 US Model BIT (n 17) art 1 employs the following definition:

‘investment’ means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include:

• an enterprise;

• shares, stock, and other forms of equity participation in an enterprise;

• bonds, debentures, other debt instruments, and loans;¹

• futures, options, and other derivatives;

• turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts;

• intellectual property rights;

• licenses, authorizations, permits, and similar rights conferred pursuant to domestic law;^2,3 and

• other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges.

  1. Some forms of debt, such as bonds, debentures, and long-term notes, are more likely to have the characteristics of an investment, while other forms of debt, such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics.

  2. Whether a particular type of license, authorization, permit, or similar instrument (including a concession, to the extent that it has the nature of such an instrument) has the characteristics of an investment depends on such factors as the nature and extent of the rights that the holder has under the law of the Party. Among the licenses, authorizations, permits, and similar instruments that do not have the characteristics of an investment are those that do not create any rights protected under domestic law. For greater certainty, the foregoing is without prejudice to whether any asset associated with the license, authorization, permit, or similar instrument has the characteristics of an investment.

  3. The term ‘investment’ does not include an order or judgment entered in a judicial or administrative action.

²⁴ Public Interest Critique (n 16) 3.

²⁵ See generally Parvan Parvanov and Mark Kantor, ‘Comparing U.S. Law and Recent U.S. Investment Agreements: Much More Similar Than You Might Expect’ in Karl Sauvant (ed), Yearbook on International Investment Law and Policy 2010–2011, 747–9 (Oxford University Press 2011).

²⁶ Public Citizen, ‘2012 Model BIT Changes’ comment TNT2 <http://www.citizen.org/documents/2012-model-bit-changes.pdf> accessed 8 November 2012, at comment TNT2.

²⁷Florida Rock Industries, Inc v United States (Florida Rock IV), 18 F. 3d 1560, 1572 fn 32 (Fed Cir 1994).

²⁸ Parvanov and Kantor (n 25).

²⁹ Public Interest Critique (n 16) 2.

³⁰ Report of the Subcommittee (n 6) (footnotes omitted).

³¹ Public Interest Critique (n 16) 4.

³² The 2004 US Model BIT (n 17) annex B (Expropriation) provides in relevant part:

3. Article 6 [Expropriation and Compensation](1) addresses two situations. The first is direct expropriation, where an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.

4. The second situation addressed by Article 6 [Expropriation and Compensation](1) is indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.

• The determination of whether an action or series of actions by a Party, in a pecific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors:

  • the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;

  • the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and

  • the character of the government action.

• Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.

³³ Public Interest Critique (n 16) 3.

³⁴United States v Welch, 217 US 333, 339 (1910).

³⁵United States v General Motors Corporation, 323 US 373, 378 (1945).

³⁶United States v Causby, 328 US 256, 263 (1946).

³⁷Penn Central (n 12).

³⁸Ruckelshaus v Monsanto Co, 467 US 986 (1984). See also Tahoe-Sierra Preservation Council, Inc v Tahoe Regional Planning Agency, 353 US 302, 326 (2002).

³⁹Lingle (n 12).

⁴⁰ Public Interest Critique (n 16) 3.

⁴¹LFH Neer and Pauline Neer (USA) v United Mexican States, General Claims Commission (15 October 1926) 4 Rep Intl Arb Awards 60, 61–2 <www.untreaty.un.org/cod/riaa/cases/vol_IV/60-66.pdf> accessed 8 November 2012.

⁴²Metalclad (n 10) para 99.

⁴³ Although SD Myers, Inc v Government of Canada also contained deferential language: ‘A breach of Article 1105 occurs only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective. That determination must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders.’ SD Myers, Inc v Government of Canada, UNCITRAL, Partial Award, para 263 (13 November 2000).

⁴⁴ NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions (31 July 2001) <http://www.naftalaw.org/files/NAFTA_Comm_1105_Transparency.pdf> accessed 8 November 2012.

⁴⁵ Following issuance of the 2001 FTC Interpretation, NAFTA tribunals have unanimously found the Interpretation to be binding on them for purposes of determining the scope of protections under NAFTA Chapter 11.

⁴⁶Merrill & Ring Forestry LP v The Government of Canada, UNCITRAL, Award, para 189 (31 March 2010).

⁴⁷ Parvanov and Kantor (n 25).

⁴⁸ ‘What is the customary international law that governs the treatment and taking of foreign investment? That question was at the heart of United Nations debates over “Permanent Sovereignty over Natural Resources”, the “New International Economic Order”, and the “Charter of Economic Rights and Duties of States”. The resolutions adopted on those questions demonstrate that, while in the view of the industrialized democracies, there is a customary international law in this sphere—whose core provides for prompt, adequate and effective compensation for expropriated foreign property—in the view of the very large majority of UN Members no such customary international law exists. In their view, a State is free to treat foreign investment as its law and policy dictates without regard to alleged international obligations of which there are none.

Far from relying on a customary international whose existence, not to speak of its content, is contentious, the United States will do far better to rely on the terms of BITs, such as its Model 1994 BIT, which vault over this traditional divide of the international community and provide specific, progressive terms for the treatment and taking of foreign investment.’ Subcommittee Annexed Separate Statements (n 7) (Separate Statement of Judge Stephen Schwebel).

⁴⁹Emilio Agustín Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, Award (13 November 2000).

⁵⁰ Emphasis added.

⁵¹International Investment Law: A Changing Landscape 132 (OECD 2005).

⁵² The NT obligation in the 2004 US Model BIT and recent US investment agreements requires each State party to accord to investors of the other State and covered investments ‘treatment no less favorable than that it accords, in like circumstances, to [its own investors and investments] with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.’ 2004 US Model BIT (n 17) art 3.

⁵³ Public Interest Critique (n 16) 4.

⁵⁴Metalclad (n 10); Pope & Talbot, Inc v Government of Canada, UNCITRAL, Award by the Arbitral Tribunal (26 January 2000); SD Myers (n 43).

⁵⁵ See the operative text of Annex B. 2004 US Model BIT (n 17) annex B (Expropriation).

⁵⁶ Public Citizen, Backgrounder: CAFTA Investor Rights Undermining Democracy and the Environment: Commerce Group Case 12 (15 November 2010) <http://www.citizen.org/documents/CAFTA-investor-rights-undermining-democracy.pdf> accessed 8 November 2012 (footnotes omitted).

⁵⁷ For example, the China–ASEAN Investment Agreement, the China–New Zealand FTA and the Trilateral Investment Agreement among China, Japan and South Korea.

⁵⁸Penn Central (n 12).

⁵⁹Lucas v South Carolina Coastal Council, 505 US 1003 (1992).

⁶⁰Loretto v Teleprompter Manhattan CATV Corp, 458 US 419 (1982).

⁶¹Dolan v City of Tigard, 512 US 374, 384 (1994); Nollan v California Coastal Commission, 483 US 825, 831–2 (1987).

⁶²Lingle (n 12).

⁶³Lucas (n 59) 1018.

⁶⁴ Article XIV (General Exceptions) of the GATS provides:

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures:

• necessary to protect public morals or to maintain public order;⁵

• necessary to protect human, animal or plant life or health;

• necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement including those relating to:

  • the prevention of deceptive and fraudulent practices or to deal with the effects of a default on services contracts;

  • the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts;

  • safety;

• inconsistent with Article XVII [National Treatment], provided that the difference in treatment is aimed at ensuring the equitable or effective⁶ imposition or collection of direct taxes in respect of services or service suppliers of other Members;

• inconsistent with Article II [Most Favoured Nation Treatment], provided that the difference in treatment is the result of an agreement on the avoidance of double taxation or provisions on the avoidance of double taxation in any other international agreement or arrangement by which the Member is bound.

  • 5.

    The public order exception may be invoked only where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society.

  • 6.

    Measures that are aimed at ensuring the equitable or effective imposition or collection of direct taxes include measures taken by a Member under its taxation system which:

    • apply to non-resident service suppliers in recognition of the fact that the tax obligation of non-residents is determined with respect to taxable items sourced or located in the Member's territory; or

    • apply to non-residents in order to ensure the imposition or collection of taxes in the Member's territory; or

    • apply to non-residents or residents in order to prevent the avoidance or evasion of taxes, including compliance measures; or

    • apply to consumers of services supplied in or from the territory of another Member in order to ensure the imposition or collection of taxes on such consumers derived from sources in the Member's territory; or

    • distinguish service suppliers subject to tax on worldwide taxable items from other service suppliers, in recognition of the difference in the nature of the tax base between them; or

    • determine, allocate or apportion income, profit, gain, loss, deduction or credit of resident persons or branches, or between related persons or branches of the same person, in order to safeguard the Member's tax base.

    Tax terms or concepts in paragraph (d) of Article XIV and in this footnote are determined according to tax definitions and concepts, or equivalent or similar definitions and concepts, under the domestic law of the Member taking the measure.

  General Agreement on Trade in Services art XIV (entered into force 1 January 1995) (GATS).

⁶⁵

investment means:

…

• (c)

  a debt security of an enterprise

  • … , or

  • … ,

    but does not include a debt security, regardless of original maturity, of a state enterprise;

• (d)

  a loan to an enterprise

  • … , or

  • … ,

    but does not include a loan, regardless of original maturity, to a state enterprise; …

  …’

  North American Free Trade Agreement art 1139 (entered into force 1 January 1994) 32 ILM 289 and 605.

⁶⁶ The 2004 US Model BIT (n 17) art 7 (Transfers) provides:

1. Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory. Such transfers include:

• contributions to capital;

• profits, dividends, capital gains, and proceeds from the sale of all or any part of the covered investment or from the partial or complete liquidation of the covered investment;

• interest, royalty payments, management fees, and technical assistance and other fees;

• payments made under a contract, including a loan agreement;

• payments made pursuant to Article 5 [Minimum Standard of Treatment] (4) and (5) and Article 6 [Expropriation and Compensation]; and

• payments arising out of a dispute.

2. Each Party shall permit transfers relating to a covered investment to be made in a freely usable currency at the market rate of exchange prevailing at the time of transfer.

3. Each Party shall permit returns in kind relating to a covered investment to be made as authorized or specified in a written agreement between the Party and a covered investment or an investor of the other Party.

4. Notwithstanding paragraphs 1 through 3, a Party may prevent a transfer through the equitable, non-discriminatory, and good faith application of its laws relating to:

• bankruptcy, insolvency, or the protection of the rights of creditors;

• issuing, trading, or dealing in securities, futures, options, or derivatives;

• criminal or penal offenses;

• financial reporting or record keeping of transfers when necessary to assist law enforcement or financial regulatory authorities; or

• ensuring compliance with orders or judgments in judicial or administrative proceedings.

⁶⁷ Public Interest Critique (n 16) 6–7.

⁶⁸ See Report of the Subcommittee (n 6).

⁶⁹ Public Interest Critique (n 16) 6.

⁷⁰ World Trade Organization, Council for Trade in Services, Committee on Trade in Financial Services, Financial Services: Background Note by the Secretariat, S/C/W/312, S/FIN/W73, 8–9, paras 28–34 (3 February 2010).

⁷¹ Emphasis added.

⁷² Emphasis added.

⁷³ The measures to which Chapter Ten of the TPA (the Investment Chapter containing the provisions for investor–State arbitration) applies are set out in Article 12.1 of the Financial Services Chapter:

Article 12.1: Scope and Coverage

1. This Chapter applies to measures adopted or maintained by a Party relating to:

   • financial institutions of another Party;

   • investors of another Party, and investments of such investors, in financial institutions in the Party’s territory; and

   • cross-border trade in financial services.

United States–Peru Trade Promotion Agreement art 12.1 (signed 12 April 2006).

⁷⁴ GATS (n 64) art XI. Article XI (Payments and Transfers) provides:

1. Except under the circumstances envisaged in Article XII, a Member shall not apply restrictions on international transfers and payments for current transactions relating to its specific commitments.

2. Nothing in this Agreement shall affect the rights and obligations of the members of the International Monetary Fund under the Articles of Agreement of the Fund, including the use of exchange actions which are in conformity with the Articles of Agreement, provided that a Member shall not impose restrictions on any capital transactions inconsistently with its specific commitments regarding such transactions, except under Article XII or at the request of the Fund.

⁷⁵ The IMF Articles of Agreement are, of course, a multilateral treaty binding on all member States. The US undertook membership in the IMF pursuant to the Bretton Woods Agreement Act of 1945, 59 Stat 512, 22 USC ss 286 ff.

⁷⁶ See generally James G Evans, ‘Current and Capital Transactions: How the Fund Defines Them’ (1968) 3 Finance and Development 30. James G Evans was a member of the IMF Legal Department at the time he authored this article and later became Deputy General Counsel of the IMF.

⁷⁷ Emphasis added.

⁷⁸ David Woodward, Financial Effects of Foreign Direct Investment in the Context of a Possible WTO Agreement on Investment, Trade and Development Series 21 (Third World Network 2003).

⁷⁹ Email exchanges with the author in connection with the work of the Investment Subcommittee of the State Department’s Advisory Committee on International Economic Policy established to review the US Model BIT.

⁸⁰ Public Interest Critique (n 16) 7.

⁸¹ Emphasis added.

⁸² ibid 4–5.

⁸³ See n 3.