Definition of BIT
Bilateral investment treaty is an investment facilitation agreement between two countries whereby foreign investment from each other is regulated. UNCTAD defines BIT to be “an agreement between two countries for reciprocal encouragement, promotion, and protection of investment in each other’s territories by companies based in either country”1. As two countries are sovereign states and without compromising their sovereignty, both countries desire to exchange the arrangement to grow economically and to improve the lives of their subjects. As per the definition of International Monetary Fund’s Balance of Payments, foreign investment is defined to be as “an investment that is made to acquire the lasting interest in a firm or an enterprise operating in the county other than investor, thereby, the investors have effective voice in management of firm/enterprise.”
The countries commit themselves through internationally binding instrument to respect and honor the investment of each other nationals in their own country. Under the international investment regime, country from where investment is made is referred as the origin or home country, whereas the country where the investment is destined is referred as the host country.
Bilateral investment treaty also covers rights and liabilities in respect of investment. There are also set patterns of international investment law, which have to be abided by both the countries. The history of modern BIT dates back to 19592, where Germany after the devastation of Second World War first time felt the need of safeguarding and protecting their investment interests in another country, as their investment in other countries were ruined, ransacked, destroyed, and forcibly expropriated by allied countries and their forces. Therefore, it entered into an international agreement with Pakistan, which was then called the Bilateral Investment Treaty. Since then, the sharp rise in these sorts of agreement were witnessed. By now, it is estimated that there are 2500 Bilateral Investment Treaties and other international agreements globally on the subject [3][4]. In 19th Century, countries used to execute ‘Friendship, Commerce and Navigator Treaty’ (FCN)5.
A BIT begins with a preamble containing the purpose and information about the respective treaty. It normally has information about the promotion and protection of investment. The other provisions, like the definition of investment, clauses relating to investor are also incorporated in it. Thereafter, the main body of BIT contains the clauses of treatment and admission of investment, protection clauses (i.e., Standards of Treatment, Minimum Standards of Treatment, Fair and Equitable Treatment, Full Protection and Security, National Treatment, and Most Favoured Nation Treatment).
The exchange of investment proceeds and expropriation clause are also provided in modern BITs. The BIT also contains compensation clause in wake of expropriation of investment. The right to foreign investor is also provided in BITs to get his investment dispute resolved through ‘investor-state settlement’ mechanism6. The BIT has a life expectancy as to when it is terminated or extended7. Under the international investment law, the words as used in the treaty are given preference for interpretation of the treaty8. In practice, BIT is divided into three portions:
- 1.
The scope of the agreement.
- 2.
Substantive protections and treatment standards,
- 3.
Alternative dispute resolution.