From Bilateral Conventions of Establishment to Bilateral Investment Treaties and back?

Published on Oxford Business Law Blog on 10 March 2021

Bilateral Conventions of Establishment (BCEs) – sometimes referred to as Treaties of Establishment or Establishment Treaties – are international instruments concluded between the 19th and 20th centuries to establish and safeguard the rights of foreign nationals with respect to their property and business undertakings. Can these BCEs be regarded as the predecessors of Bilateral Investment Treaties (BITs), relatively more modern instruments whose chief purpose is the protection of foreign nationals’ investment-like property? Should this be the case, can BCEs still have a role to play in investment arbitration contemporary practice? This opinion piece will attempt to answer these questions.

A Comparative Study on Treaty Practice

BCEs were concluded approximately around the same period during which Friendship, Commerce and Navigation Treaties (FCN treaties) were also negotiated. However, unlike the FCN treaties (that dealt predominately with trade and shipping), BCEs were meant to encourage mutual investments between States through the “establishment provisions.” These provisions stipulated the right of nationals of a country to establish and carry out business activities within another country and to receive due protection there for their persons and property, thus effectively coining foreign investors’ rights. FCN treaties dealt with these issues only incidentally to international trade, merely as a by-product thereof. On the other hand, Conventions of Establishment pivoted on establishment provisions (hence, their name). In the words of Professor and US Diplomat Herman Walker Jr. – contrasting BCEs to FCN treaties – “Here the context is different: "investment" rather than trade and shipping”.

Hence, contrary to common belief, BITs may not originate directly from FCN treaties. Arguably, these BCEs are instead BITs’ direct precursors. Indeed, the first-ever modern age BIT (the Germany-Pakistan BIT) expressly referred to a BCE – using the term “establishment treaty” – directly in its Protocol. In fact, the scope of application of BCEs and BITs was so intertwined that in the 1960’s the term “Convention of Establishment” was interchangeably used to designate both international bilateral treaties between two countries as well as genuine investment contracts between one country and the foreign private companies coming from another country.

These Conventions were not focused exclusively on foreign investments protection, though. They had a broader scope than BITs, covering for instance also consular rights. Yet, investment protection was already at the forefront in these earlier instruments and so they possibly planted the seed for today’s BITs. The main object and purpose of BCEs is echoed in the preamble of every BITs, whose chief function is the international legal protection of nationals’ investments abroad – predominately, private property and business undertakings – against political risks on a reciprocal basis.

Some of the typical substantive standards of investment protection of BITs can be traced back to these BCEs, which contain verbatim the full protection and security standard (e.g., Article 6 of the 1868 Switzerland-Italy BCE or Article 4 of the 1929 Switzerland-Greece BCE) or the fair and equitable treatment (FET) standard (e.g., Article 1 of the 1959 Franco-American BCE), or the prohibition of expropriation without compensation (e.g., Article 4 of the 1951 France-Italy BCE) , or the national treatment standard (e.g. Article 5 of the 1957 Spain-Iran BCE).

A role for BCEs?

Drafted in a period of more liberal economic policies – between the dawn of the second industrial revolution and the aftermath of the Second World War – these BCEs offered at times even higher guarantees in relation to foreign investments when compared to some BITs. This includes, for instance, rights to market access, no tax-measure carve-outs, and unfettered national and most-favoured-nation treatments.

Having overlapping objects and purposes as well as interchangeable provisions with existing BITs, BCEs 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.

Overlooked or forgotten by contemporary literature and arbitral practice, these ante litteram BITs may come into play either by operation of the most-favoured-nation clause (MFN clause) or by virtue of Article 31(3)(c) of the Vienna Convention on the Law of Treaties. Namely, BCEs could be used in conjunction with BITs to supplement or extend the investment protection provided by the latter.

Examples of BCEs application during the 20th century

On several occasions BCEs have been interpreted and applied by international tribunals, domestic courts, and also in State-to-State diplomatic consultations.

For instance, in 1922 in the ‘War Profits Tax Arbitration between France and Spain the sole arbitrator was called to apply the 1862 France-Spain BCE to determine whether Spanish nationals in France were exempt from the extraordinary excess war-profits tax introduced in 1916 in response to WWI. This tax served as a sort of war contribution and aimed at taxing exceptional profits made during the war by supplying the French army. The arbitrator came to the conclusion that such exceptional tax could not be levied on Spanish nationals established in France by virtue of Article 4(2) of the 1862 France-Spain BCE.

Interestingly, in light of the outcome of this arbitration Switzerland wondered whether its nationals in France could benefit from this precedent by in turn invoking the MFN clause contained in Article 6 of the 1882 France-Switzerland BCE. Nevertheless, it seems that Switzerland was advised against pursing the exemption of its nationals in France from the tax on war profits because this would have meant to grant the same exception on a reciprocal basis to the French nationals established in Switzerland.

In the aftermath of WWII, some Swiss nationals established in France invoked the application of Article 6 of the 1882 France-Switzerland BCE before French courts to disapply the legislation on the confiscation of illicit profits drawn from transactions with enemy Powers of France during the war. In giving effect to Article 6 of the 1882 France-Switzerland BCE, several courts ruled in favour of Swiss nationals, including the civil courts of Nancy, Seine and Versailles.

In the early 1990s, Italy successfully relied on the 1868 Switzerland-Italy BCE during diplomatic consultations with Switzerland to prevent the expropriation of Italian-owned real estate by several Swiss Cantons. In this case of diplomatic protection, Italy argued the application of the relevant BCE to disapply the ‘Lex Koller’ – which restricted the purchase of real estate by foreigners in Switzerland – vis-à-vis its own nationals in Switzerland.

Despite their ample scope of application to protect nationals’ property in foreign countries against political risks, BCEs appear to have been invoked sporadically so far (at least in comparison with BITs).

Conclusion: back to the future?

At the moment it is hard to tell whether BCEs will begin to being invoked by foreign investors as often as BITs. Certainly, the recent termination of intra-EU BITs may contribute to dusting off these ancient instruments in that the latter may re-open roads that have been once closed. To a certain degree, intra-EU BCEs may indeed make up for such termination to the extent that EU Member-States still have BITs in force with third States which may be clawed back by operation of BCE’s unusually wide MFN clauses.

A case in point of their most recent practical application is Human Rights Defenders Inc., as assignee of Mr. Natale Palazzo, Mr. Rodolfo Scodeller and Mr. Antonio Basile v. Swiss Confederation, registered by the ICSID Secretary-General on 17 August 2020. In this ICSID arbitration, the Claimant has invoked the application of the Switzerland-Italy BCE in conjunction with the Switzerland-Hungary BIT by relying on the broad MFN clause of the BCE at Article 10, which allows to import “all advantages”. This pioneering case goes to show how the re-discovery of these long forgotten international instruments may have a huge application in contemporary and future investment arbitration practice.

Copyright © 2017, 2018, 2019, 2020, 2021 Danilo Ruggero Di Bella. All rights reserved.