Hearing What You Want: Surveying Creative Decision-making in The Meaning of Silence in Investment Treaties

Based on the article "The Meaning of Silence in Investment Treaties"

By Simon Batifort and Andrew Larkin

Most investment treaties say little.  For decades, major model bilateral investment treaties (BITs) were ten pages or fewer. They would define protected investors and investments, list a few core substantive protections (generally in broad, vague terms), and provide for investor-State and State-State arbitration. This landscape is changing.  New FTAs can be well over fifty pages with detailed annexes and complex sets of interlocking provisions.  But this changing landscape underscores what was obvious to lawyers in the early days of the field: what treaties do not say can be as or more important than what they do.

Our article proves that point, offering the first unified study of silence in investment treaties. It shows that silence is a recurring and important issue in the interpretation of investment treaties, and that in the adversarial setting of an arbitration, parties’ positions fall into predictable patterns.  Claimants tend to say that States bear the burden of specifying the limits of their treaties, and that in the absence of express limitations, tribunals can exercise jurisdiction and find liability.  We characterize this as a “creative” approach to silence.  On the other hand, States often argue that in the absence of a textual basis for a tribunal’s jurisdiction or a restriction on States’ freedom of action, investment treaties do not create international obligations.  We characterize this as a “restrained” approach. In many instances, issues that arise in investment treaty arbitrations also arise elsewhere in international law. We characterize looking to the solutions identified in international law as a “systemic” approach.  As we show, tribunals tend to prefer the creative approach.

We discuss nine examples of significant issues where tribunals have adopted a creative approach to situations where they have identified treaty silence:

• Mass Claims: Several tribunals have found that in the absence of an express limitation, investment treaties permit an unlimited number of claimants to bring a claim together in a single proceeding. Tribunals have argued that certain categories of investment, such as bonds, will be better protected through collective relief, although the result departs from basic principles of consensual multiparty proceedings in commercial arbitrations.
   
• Indirect Investments: Some commentators consider it settled that investment treaties allow shareholders to bring “indirect” claims for losses to subsidiaries of companies in which they hold shares. Despite the weight of caselaw on the issue, the result is surprising, allowing a potentially unlimited number of upstream entities in a corporate chain to initiate claims in respect of a single investment. Arbitrators’ reasoning on this point is also surprising. In the words of the Siemens Tribunal, if “[t]he Treaty does not require that there be no interposed companies between the investment and the ultimate owner of the company,” no such restriction exists.

• Dual Nationality: The international law of diplomatic protection has evolved to prohibit claims on behalf of dual nationals against their home State, unless their other nationality is their “dominant and effective” nationality. These well-established background principles were adopted by the Iran-U.S. Claims Tribunal in proceedings akin to investment arbitration.  Yet a number of investment treaty awards have gone the other way, finding that because treaties are “silent” on whether dual nationals can sue their home State, no restriction could apply.  While the caselaw on this issue is unsettled, the result operates as a departure from what had previously been a well-established international norm.

• Reflective Loss: Arbitrators have similarly departed from general principles of international law recognized repeatedly by the International Court of Justice as well as from basic features of the corporate form recognized in most jurisdictions and in other international fora by allowing company shareholders to sue without restriction and recover compensation for harms suffered by the company in which they hold shares.  Once again, the absence of language precluding this result in investment treaties has often formed a key justification cited by arbitrators.

• Denial of Benefits: Denial-of-benefits clauses in investment treaties are express provisions, and they generally provide that States can deny treaty protections to “mailbox” companies with no business activities in their home State. Since an unlimited number of “investors” can exist with respect to any particular investment, States as a practical matter can invoke these clauses only once a claim is filed.  For some arbitrators, this has given rise to anxiety because the clauses are supposedly “silent” about the timing of their invocation.  On that basis, several tribunals have found that States cannot invoke denial-of-benefits clauses after a dispute arises.  The theory, in other words, is that the clauses should have specified that they were not limited in a way that certain arbitrators thought they should be. The effect of these rulings has been to practically nullify express treaty clauses on the basis of what they do not say.

• Coverage of Taxation Matters: Tribunals have similarly relied on the “silence” of early investment treaties to find that they discipline States’ taxing authority. They have adopted this view despite the fact that customary international law does not restrict States’ taxing power, and despite the fact that, outside of customary and investment law, international law does regulate taxation matters in some detail through double-taxation treaties, which are arguably lex specialis vis-à-vis investment treaties. Indeed, Canada and India have made clear that they view double-taxation treaties as lex specialis, and tax matters as outside the scope of investment treaties.

• Omitted Exceptions: The evolution of investment law over the past thirty years has been unpredictable.  Even the most cautious State could not have drafted a treaty in 1990 that addressed all contentious interpretive issues in play today.  But States are nevertheless being penalized for their failure to have done so, specifically where it comes to exceptions.  Many older treaties contain express exceptions, specifying, for instance, that MFN clauses do not extend to regional customs unions. Tribunals have relied on those exceptions to read MFN clauses and other treaty provisions in unexpectedly expansive ways, arguing, for instance, that MFN clauses must permit applications that are not expressly carved out, like the “importation” of dispute-resolution clauses from other treaties.  This approach is pernicious as States draft increasingly detailed treaties with more detailed exceptions.  For some arbitrators, these detailed carve-outs risk strengthening the inference that anything not addressed therein can give rise to liability. 

• Compensation Without Liability: The Eco Oro decision illustrates the problem of treaty silence, and of the limits of more detailed treaties in solving that problem.  The Eco Oro Tribunal found Colombia prima facie liable for an FET breach, but then recognized and gave effect to an express, applicable treaty exception for environmental measures, negating liability.  While that would seem to conclude the analysis, the Eco Oro arbitrators were more imaginative: they found that the exceptions clause did not say anything about compensation, and so compensation was still due.  How compensation could be due without liability remains mysterious, but the decision in this case, as in cases involving denial-of-benefits clauses, shows that it is difficult for even detailed treaties to ever say enough to preempt creative identifications of silence.

• Silence Displaces Treaties’ Express Compensation Standard: Most investment treaties expressly provide that the compensation that is owed to an investor who suffers an expropriation corresponds to the fair market value of the expropriated asset as of the time of the expropriation.  Nevertheless, because treaties include other conditions for permissible expropriations, arbitrators have inferred that expropriations that fail to fulfill those other conditions fall into a separate category unaddressed by the treaties: unlawful expropriations.  On the basis of this questionable distinction, arbitrators often find that treaties are silent on the applicable standard of compensation, providing a basis to override the treaty-based compensation standard and compensate investors for favorable post-expropriation market developments. 

In sum, the creative approach to silence has formed the basis for arbitral decisions on many critical issues.  This approach is in tension with basic principles of public international law.  Notably, States need to confer jurisdiction on international tribunals for jurisdiction to exist, States’ international obligations arise out of their consent, and treaties should ordinarily be read in light of relevant principles of international law.  These principles warrant renewed attention and weigh against basing jurisdiction, treaty obligations, or departures from background legal norms on silence.  These norms also have an interpretive role to play in situations of treaty silence, counseling against many results that have become commonplace in investment treaty interpretation.

As several cases show, it seems unlikely that more detailed treaties will remedy problems with creative arbitral decision-making, and institutional reforms to adjudicating investment disputes risk locking in the questionable approaches surveyed above. Ultimately, adjudicators should adopt better-reasoned approaches to interpreting investment treaties, which need not be read to silently depart from basic principles of public international law.

About the authors: Simon Batifort is a Partner at Curtis, Mallet-Prevost, Colt & Mosle LLP, New York, USA, and Brussels, Belgium; Adjunct Professor, Brooklyn Law School, New York, USA. Simon Larkin is an Associate at Curtis, Mallet-Prevost, Colt & Mosle LLP, New York, USA.

The opinions expressed in this blog are those of the authors. They do not purport to reflect the opinions or views of ICSID.