Re-discovering the Origins of Bilateral Investment Treaties

[Danilo Ruggero Di Bella is a lawyer at Bottega Di Bella.]

Tracing back the origins of Bilateral Investment Treaties (BITs) may have a bearing on contemporary arbitral practice. Contrary to common belief, BITs may not originate directly from Friendship, Commerce and Navigation Treaties (FCN treaties). Arguably, the so-called bilateral Conventions of Establishments (BCEs) – at times referred to as Treaties of Establishment – might instead be their closer precursors and thus have inspired their formation.

Scope of BCEs

These ante litteram BITs were concluded between the 19th and 20th centuries to establish and protect the rights of foreign nationals with respect to their property, approximately around the same period during which FCN Treaties were also negotiated. However, unlike the FCN treaties (that dealt predominately with trade and shipping), BCEs were meant to encourage reciprocal investments between States through the “establishment provisions”. These provisions provided for the right of nationals of a country to establish and carry on business activities within another country and to receive due protection there for their persons and property, thus effectively creating foreign investors’ rights. FCN treaties dealt with these issues only incidentally to international trade, as a by-product thereof. On the other hand, Conventions of Establishment pivoted on establishment provisions (hence, their name). To quote Professor and US Diplomat Herman Walker Jr. – differentiating BCEs from FCN treaties – “Here the context is different: “investment” rather than trade and shipping”. Professor Walker Jr. was one of the drafters of the 1959 Convention of Establishment between France and USA.

These Conventions were not focused exclusively on foreign investments protection, though. They had a broader scope than BITs, covering for instance also consular rights. Possibly, the reason why BCEs were not focused exclusively on investment protection lies with the intent of reaching a fair bargain between capital-exporting and capital-importing countries. Otherwise, only the nationals of capital-exporting countries would have reaped the benefits of the provisions dealing with investors’ rights. That’s why investment protection was balanced out with other rights that capital-importing countries’ own nationals could have actually benefited from (such as visa or work permits). In the face of the current criticism surrounding contemporary BITs, these ancient BCEs may still have something to teach us in terms of brokering a fair deal. Nevertheless, investment protection was already at the core of these earlier instruments and so they laid the foundations for today’s BITs. The main object and purpose of BCEs are indeed reflected in the preamble of every BITs. The 1959 France-USA BCE is a good case in point. Upon ratification of this instrument, French Prime Minister Debré expressed his desire that the Convention would have encouraged American firms to set up subsidiaries in France (rather than elsewhere in the Common Market). Reportedly, French minister of finance paid even a visit to New York in May 1959 to reassure Wall Street that its capital would be safe in France and also set up a welcome center to encourage investors. This shows that BCEs responded to the same needs as BITs, chiefly, to attract foreign direct investments on the premise that they would be duly protected.

The Franco-American BCE has been regarded indeed as the first step in the development of French investment treaties. However, this finding is oblivious of the BCE between France and Italy concluded just nine years earlier. And of course, the latter wasn’t either the first BCE France or Italy ever concluded, as both Parties had a long tradition of negotiating these instruments.   

Standards and level of protection

Some of the typical substantive standards of protection of BITs can be traced back to these BCEs. This includes – word for word – the full protection and security standard (e.g. Article 4 of the 1929 Switzerland-Greece BCE) or the fair and equitable treatment (e.g. Article 1 of the 1959 France-USA BCE), or the prohibition of expropriation without compensation (e.g. Article 3 of the 1969 France-Iran BCE).

Drafted in a period of more liberal economic policies – spanning between the dawn of the second industrial revolution and the aftermath of WWII – these BCEs sometimes offered even higher guarantees with respect to foreign investments when compared to some BITs. This includes, for instance, rights to market access and unfettered national and most-favored-nation treatments.

Geographical application

Despite being predominantly a European phenomenon, BCEs were not concluded just between European States. Geographically speaking, these conventions were far-reaching. Some BCEs were concluded between European and African States (e.g. the 1896 Italy-Tunisia BCE), or between African States (e.g. 1965 Morocco-Senegal BCE), or between European and Asian States (like the 1957 Spain-Iran BCE). Not surprisingly, among the countries that nowadays have concluded the higher number of BITs are the same that had a tradition of entering into BCEs (such as Switzerland, France, Germany and Italy).

The missing link between FCN treaties and BITs

Intuitively, States may have first catered for traders’ rights and later on for investors’ rights, as usually the first contact between two States revolves around commerce and only at a more mature stage nationals from one country begin establishing business in the other. Hence, in some instances, an FCN treaty may have predated a BCE. However, at times, BCEs were signed on the same date as FCN treaties, proving that the practice of negotiating these conventions was contemporary to that of concluding FCN treaties. For instance, the treaty on commerce between Switzerland and Italy of 1868 was concluded on the same day as their BCE. On other occasions, the contents of Conventions of Establishment and FCN treaties was merged in one single instrument. This was the case, for example, of the 1855 Treaty of Friendship, Commerce and Reciprocal Establishment between Great Britain and Switzerland.

Generally, FCN treaties may have preceded BCEs. Nevertheless, between the conclusion of FCN treaties and the negotiations of BITs, there was historically another step – a missing link – represented by these BCEs, which undoubtedly inspired the formulation of BITs. Accordingly, it’s fair to say that BITs descend from these BCEs (rather than FCN treaties). Chronologically, the moment in which BCEs passed the baton to BITs can be accurately pinpointed in the late 50’s early 60’s, when BITs started to be concluded. The protocol of the first-ever BIT signaled this transition by referencing expressly to a BCE.

Possible novel applications

These BCEs – with overlapping objects and interchangeable provisions with existing BITs – were and remain relevant for the protection of foreign investments to the extent that they are still in force(or not expressly superseded by other BITs) and geographically far-reaching. Indeed, once that a link can be established between BCEs and BITs, the former may come into play either by operation of the most-favored-nation (MFN) clause or by virtue of the Vienna Convention on the Law of Treaties (VCLT). Namely, BCEs could be used in conjunction with BITs to supplement or extend the investment protection provided by the latter.

By operation of the broadly phrased MFN clause – common to many BCEs (e.g. Article 10 Italy-Switzerland BCE) – these instruments could be used in combination with their more modern versions (viz. theBITs), to attract the latter’s dispute resolution mechanism, notably investor-State conciliation and arbitration. Such an operation would be in keeping with the 1978 ILC Draft Articles on MFN clause, the jurisprudence of the International Court of Justice (ICJ) and arbitral precedents.

Synthesizing Article 10 of the Draft Articles on the MFN Clause, the ICJ’s take in Ambatielos I case, and arbitral tribunals’ findings along the lines of Ambatielos II case, an MFN clause of a treaty can attract the more favorable procedure contained in another one, provided that both treaties cover the same subject-matter. As illustrated, BCEs encompasses the same subject-matter – investment protection – as their fellow BITs. Therefore, the MFN clause of a BCE could import the more favorable provisions contained in another BIT, and vice versa.

After all these BCEs were not stand-alone international instruments existing in a legal vacuum. They are meant to operate in conjunction with other international treaties. For example, in 1991 Italy invoked the application of the 1868 Switzerland-Italy BCE together with the 1924 Italy-Switzerland Conciliation and Judicial Settlement Treaty.

In addition, these ancient conventions may become relevant by virtue of Article 31(3)(c) of the 1969 VCLT, according to which any relevant rules of international law applicable in the relations between the parties shall be taken into account when interpreting the meaning of a treaty.

BCEs’ ever-present heritage

Evidence of BCEs’ influence over modern BITs (and beyond) are scattered over the history of foreign investments protection. The first BIT that inaugurated the era of modern investment treaties was the one concluded between Germany and Pakistan which entered into force in 1962. Strikingly, the Protocol of the very first BIT makes reference to an “establishment treaty.” Namely, that Protocol contains a pactum de contrahendo to conclude a BCE within one year after signing the BIT to expand the scope and, accordingly, the protection provided by that BIT (also Germany had a long tradition to conclude BCEs). This indicates how the early days of BITs were intertwined with BCEs and how since their conception BITs were thought to be used in conjunction with BCEs, given their overlapping scopes of application.

It seems that also the travaux preparatoires of the ICSID Convention may have intended to refer to “establishment conventions” (as well as other subsequent investment treaties) as a basis for possible international claims, in the context of State-to-State disputes resulting from the exercise of diplomatic protection. Eventually, this preliminary draft of Article 27 of the ICSID Convention did not make it to the final cut, because too obscure. Still, this may suggest that also BCEs contributed to generating momentum for the drafting of the ICSID Convention in the 60’s.

Etymologically, BCEs may have influenced post-colonial Africa and the European Economic Community (EEC), too. For instance, after Senegal concluded a BCE with France in 1960, Senegal entered into many investment contracts with foreign private enterprises. Somehow curiously, Senegalese practice used to refer to these investment contracts as “establishment conventions.”   Interestingly, the concept of “establishment” inherently conveys the certain duration that a business endeavor shall possess in order to be regarded as a qualified investment under BITs.

As to the EEC which was founded in 1957, its constituting instrument (the Treaty of Rome) laid out what will become later as one of the pillars of the EU, i.e. the right to carry out an economic activity in a stable and continuous way in another (Member)-State. Article 55 of the Treaty of Rome referred to this freedom as the right of establishment, which at that time had strictly an entrepreneurial character (hence, resonating even more with foreign investors’ needs).

These historiographical and etymological hints may serve to reveal the footprints left by BCEs on the development of international, domestic, and regional legal frameworks for the protection of foreign investments.

Conclusion

A comparative analysis between FCN treaties and BCEs, on one hand, and a parallelism between BCEs and BITs, on the other, show that BITs might descend from BCEs, rather than FCN treaties, or at the very least have been substantially inspired by BCEs. Either way, in light of many points of convergence between BCEs and BITs, interactions between the two are possible. By means of these interactions, BCEs and BITs may expand and/or complement the application of each other, thus enhancing jointly the investment protection they both provide, with potentially a concrete impact on future investment arbitrations.