Say what you mean: improved drafting resources as a means for increasing the consistency of interpretation of bilateral investment treaties.

• Author: Connolly, Kelley

ABSTRACT

Following the demise of international recognition of the Hull Rule as the standard governing foreign direct investment, countries throughout the world have turned to bilateral investment treaties (BITs) to govern direct investment relationships. BITs allow countries to bind themselves credibly to commitments by granting substantive rights to investors and offering remedies for violations of those rights, thereby incentivizing new investments and facilitating economic ventures. The recent dramatic increase in disputes arising under BITs has shaken the legitimacy of these agreements. Arbitration panels interpret these documents inconsistently, which disparately impacts developing nations negatively. The inconsistent interpretations rob BITs of clarity and transparency as to the nature and extent of the commitments. Consistency in interpretation can be achieved through reform of the arbitration process or reform of the drafting process. Reform of the arbitration process would fly in the face of the nature and character of the arbitration process, and it cannot alleviate the interpretive difficulties the panel faces. Reform of the drafting process can improve the documents themselves, as well as the interpretive process. BIT drafters must conquer the inherent difficulties of communicating intentions through language, as well as the additional problems created by the existence of multiple authoritative texts in different languages. This Note concludes that improved drafting is the key to providing consistency in interpretation, thereby increasing the credibility of BITs. To that end, this Note proposes a multilingual compilation of key BIT terminology, as provided by each individual country, to serve as a resource to drafters and interpreters.

TABLE OF CONTENTS I. INTRODUCTION II. DEFINITION OF AND HISTORICAL CONTEXT FOR BILATERAL INVESTMENT TREATIES A. Definition B. Historical Context: The Hull Rule--Its Importance and Its Demise III. BIT DEVELOPMENT AND CURRENT CONFLICTS A. Introduction to the Conflict of Inconsistent Interpretations in Arbitration B. The Conflict of Inconsistency as Particularly Problematic for Developing Countries IV. DRAFTING A BILATERAL INVESTMENT TREATY: TRADITIONAL PROVISIONS V. PROBLEMS OF CONSISTENCY: ARBITRATION REFORM AND INTERPRETATIVE DIFFICULTIES A. Arbitration Restructuring as a Means to Improving Consistency of Interpretation B. The Interpretative Process--Background for Drafters 1. Interpretive Issues Inherent in the Difficulty of Communicating Intentions through Language 2. Multiple Authoritative Texts in Different Languages as the Impetus for Additional Problems VI. PROPOSAL FOR A COMPILATION OF KEY TERMINOLOGY TO SERVE AS A MULTILINGUAL "THESAURUS" FOR THE PURPOSE OF DRAFTING IMPROVEMENTS A. Why Multilateral Investment Treaties Are Not the Solution B. Characteristics of an Improved Draft C. A Compilation of Key Terminology as a Resource for Improved Drafting and Interpretation VII. CONCLUSION I. INTRODUCTION

"Foreign investment is a vital tool for economic development and global prosperity." (1) Developing countries rely on foreign investment to infuse their local industries with capital and to improve their infrastructure, while investors simultaneously receive financial returns and a "foothold in the markets of the future." (2) Historically, direct investment was governed by very loose international customary law, in particular the Hull Rule. (3) Following joint lobbying in the United Nations by developing countries opposed to the Hull Rule, and generally multilateral regulation of direct investment, investors were provided no protection when investing and, therefore, assumed myriad risks. (4) In response to the free market for investment, developing countries turned to contract, in the form of Bilateral Investment Treaties (BITs), as a means to attract investment. (5) These treaties influence "the initial decision to invest in a developing nation, the structure of the investment, and the methods of maximizing commercial benefits if there are difficulties with the investment." (6)

In recent years, foreign direct investment (FDI) has shown dramatic growth. Total FDI grew twenty-nine percent in 2005, following a twenty-seven percent growth in 2004. (7) FDI includes not only investors from developed countries investing in developing countries, but investments in developed countries as well. (8) Although individual countries and regions have regulations that impact direct investment, no general customary international law exists governing these relationships. (9) Therefore, countries and investors continue to rely heavily on BITs to provide reliability and stability for investments.

The goals of reliability and stability have been frustrated through the arbitration process. Dispute arbitrations under BITs have failed to provide consistent interpretations of the treaties. (10) Lack of consistent interpretations, combined with the ability to get out of obligations in the treaties, particularly through manipulating the text of the treaty, "create[] uncertainty in the global marketplace and can serve only to discourage foreign investment." (11) Two approaches for furthering consistent interpretation prevail: (1) reform of the arbitration system to provide increased transparency and develop monitoring through appellate review, and (2) reforms in the drafting process to improve the memorialization of the parties' intentions. (12)

Arbitrators confront several challenges when interpreting treaties. Multiple and sometimes conflicting interpretive methodologies and theories exist. (13) Language often serves as a poor communicator of intent, leaving the text hollow. (14) Additionally, BITs are written in multiple languages, accentuating the interpretive difficulties. (15) In particular, "the lack of precise linguistic equivalents and differences in legal systems throughout the globe make it virtually certain that multiple language versions will include terminological differences that lead to conflicting interpretations of the text." (16)

The difficulties of interpretation, however, serve to influence the drafter and encourage diligence and precision in drafting. The drafting process and final document should not be ignored as critical avenues to increasing the reliability of BITs. Further, multilateral discussion of terminology is critical to providing consistent understanding of parties' intentions. Part I of this Note lays the historical background for the development of BITs. Part II identifies some of the conflicts raised by the lack of consistency in interpretation. Part III examines the traditional common provisions included in BITs. Part IV further analyzes the problem of consistency. It briefly discusses current approaches to reforming the arbitration process and addresses the process of interpretation. Part V offers improvements that can be made through improved drafting and the collection of common terminology across languages to serve as a resource when drafting and interpreting BITs.

2. DEFINITION OF AND HISTORICAL CONTEXT FOR BILATERAL INVESTMENT TREATIES

   1. Definition

      BITs have become a universal tool for documenting foreign investment relationships, "detail[ing] ... legal rules for allowing and protecting foreign investment." (17) BITs are individually negotiated between sovereign nation-states who agree to encourage, promote, and protect the investments that Country A companies make in Country B. (18) These treaties define the scope and definition of foreign investment, including which investors and investments are covered by the agreement (the scope of application). (19) The main provisions typically "cover four substantive areas: admission, treatment, expropriation and the settlement of disputes." (20) Bilateral investment treaties developed to fill in the gaps where international law failed to provide a code of conduct for host nations, "promot[ing] national treatment and protect[ing] ... investors abroad." (21) BITs not only filled the gaps, but also expanded investor protection by allowing "for private parties (investors) to directly initiate arbitration with host states." (22) Such benefits of BITs have reduced the numbers signed between developed nations, particularly because investment relations between those countries operate according to various instruments adopted under the auspices of the Organization for Economic Cooperation and Development (OECD). (23)

      The Federal Republic of Germany (West Germany) and Pakistan signed the first bilateral investment treaty, focusing exclusively on the protection of investment, on November 25, 1959. (24) The number of BITs has increased dramatically since that first treaty signing. (25) Between 1959 and 1991 over 400 BITs were signed, which was followed by a flurry of treaty signing in the 1990s. (26) By 2005, 2,495 treaties had been signed, encompassing at least 176 countries. (27) The dramatic increase in BIT agreements reflects their "rise[] to prominence during a period in which the international regulation of foreign investment was the subject of great change, uncertainty, and controversy." (28) During this period, the Hull Rule, which had previously dictated international custom on compensation following expropriation, met its demise. (29) Developed and developing nations then began signing binding international agreements to govern investment relationships, ultimately offering investors more protection than the Hull Rule had. (30)

   2. Historical Context: The Hull Rule--Its Importance and Its Demise

      Traditionally, foreign investors were given limited rights under customary international law. (31) During the early twentieth century, host nations took the view that investors' property would be protected and property takings would be compensated according to a "prompt and adequate" standard. (32) This standard was termed the "Hull Rule" following a dispute between Mexico and the United States. (33) The...