What the BG Group v. Argentina Decision Means for Developing Countries

Today, Bilateral Investment Treaties (BITs) have grown to become an indispensable part of the international investment regime.[1] As of 2013, there were 2816 BITs in existence in the world,[2] compared to 1010 BITs in July of 1996.[3] Typically, BITs are between investors in developed countries, or sometimes the developed countries themselves, and developing countries that act as host countries when accepting these investments.[4] The rapid success of BITs has not come without controversy. The recent controversy surrounding BITs embodies the issue of whether the investment protection provisions of the BITs put the sovereignty of host countries at risk. This issue gained momentum after the United States Supreme Court’s 2014 decision in BG Group PLC v. Republic of Argentina.[5]

The Rise of BITs

The era of the Hull rule, an international law principle that called for prompt, adequate, and effective reimburse of expropriated property,[6] officially ended when the first BIT was signed between West Germany and Pakistan in 1959.[7] Considering that the Hull rule was not popular amongst developing countries, and developing countries had successfully protested against it,[8] the goal of the BITs was to protect the foreign direct investments that developed countries made in developing countries. It can be speculated that these developed countries realized that as developing countries continued to protest old foreign investment standards such as the Hull rule and subsequent principles derived from the rule,[9] they would be left without protection from expropriating developing countries.

BG Group v. Argentina

Consequently, almost fifty years after the first BIT was signed,[10] the U.S. Supreme Court’s decision in BG Group seems to have more than fulfilled developed countries’ goals of protecting their foreign investments when they first created BITs. That is because BITs operate as contracts, and arbitral tribunals like the International Centre for the Settlement of Disputes (ICSID), are tasked with interpreting BITs and imposing sanctions on breaching parties.[11] Also, as we have seen in BG Group, it is clear that BITs favor developed countries more than the Hull rule ever did because unlike the Hull rule, a BIT operates as a contract, and a BIT can abolish any protection that host countries could reserve for themselves when they sign a BIT. Especially since although the ICSID and other arbitral tribunals allow host countries to set protective provisions such as having disputes that arise under BITs settled by local litigation before going to arbitration, in the BG Group decision, the Supreme Court ignored the importance of such protectionist provisions.[12]

In BG Group, Argentina had attempted to protect itself by including an eighteen-month local litigation clause in its treaty with the United Kingdom (UK) that had to be exhausted before its dispute with the UK investors went to arbitration. However, the arbitrators determined that the eighteen-month provision was a stalling technique, and that it was unacceptable.[13] By the Supreme Court of the United States upholding the arbitrators’ decisions on the local litigation clause, the Supreme Court is saying that arbitrators can review BITs to determine what provisions of the BITs are acceptable.[14] The fact that arbitrators have been given this power should be a red flag to host countries. This is especially true because nowadays, BITs are like contracts in that if parties breach the agreements set in their BITs, they expose themselves to proceedings before arbitrators who have the ability to sanction them. However, in a case like BG Group where arbitrators allow a party to go against the very text of a BIT that the party signed because the arbitrators find the text to be unacceptable, the purpose of the BIT gets undermined. That is because a Bilateral Investment Treaty is a treaty in which two contracting parties set their[15] terms of an agreement. Also, because BITs always involve states, the U.S. Supreme Court’s decision in BG Group implies that arbitrators could deny a state from the lawful protectionist provisions it sets for itself in a treaty.

Accordingly, as we have seen in the BG Group case, developing countries need to acknowledge that arbitrators reign supreme in the interpretation of BITs when they decide to sign these BITs. Also, BG Group has shown us that sovereign states act as commercial entities when they sign BITs, and that in acting as commercial entities, sovereign states give up some of their state sovereignty. For example, in 1989, while attempting to attract foreign investors, Argentina signed fifty BITs that required them to denationalize their natural resources.[16] However, when their economic situation began to suffer because of the promises they had made in signing these BITs, and they could no longer afford to keep their promises because they claimed to be under a state of national emergency, the arbitral tribunal refused to hear their claims of national emergency, and determined that Argentina was still bound by the promises they made to their foreign investors.[17] An arbitrator being able to make such a determination is not only problematic because it ignores the well-established concept of international law that, states are not bound to follow certain agreements when they are under national emergency, but also because under many arbitral tribunals including the ICSID, seeking an annulment is the only way for parties to escape an arbitral award.[18] This is significant because an annulment cannot be granted simply because of an arbitrator’s mistake in law. Accordingly, the arbitrators failing to consider the international law on national emergency when deciding on Argentina’s national emergency claim has no bearing on an annulment, therefore, the arbitrator’s award still stands.[19]

Advice to Developing Countries

In light of these recent developments, developing countries need to be extremely careful when they sign BITs because there is no guarantee that they will get exactly what they agreed to in the treaty itself. Accordingly, developing countries that are signatories to BITs must start to ask themselves whether these BITs are worth the possible infringement on their state sovereignty. This is especially important because once host countries decide to sign BITs, they are automatically bound to arbitration because the very nature of a BIT is to have arbitration as the final dispute resolution mechanism. This is true because, while the ICSID and other arbitral tribunals allow host countries to include provisions in their BITs that any dispute arising under the BITs must be sent to their local courts prior to arbitration, BG Group has shown us that even with such provisions, arbitrators still rule supreme. While the BG Group case involved finances, in light of the current concerns of developing countries’ abilities to control their own natural resources, the worst may be yet to come in a situation where an arbitrator can make a decision on a developing country’s rights to its own natural resources.

Accordingly, it is best that developing countries begin to take steps to assure that they retain the exclusive control of their natural resources. These steps should be similar to what we saw in 2008 when the first South American Power Council meeting was held in Venezuela.[20] This Council consisted of Latin American countries that decided to come together to create their own convention for resolving conflicts that arose under their BITs in order to preserve their state sovereignty. Developing countries coming together to create such regional dispute resolution mechanisms is important because, similar to how they were able to abolish the Hull rule by coming together and protesting against it, developing countries should join forces in making the BITs more suitable for their state sovereignties.

In conclusion, instead of competing against one another and signing BITs for instant gratification, to effect the changes that they want to see in regards to BITs, developing countries must come together to make BITs more favorable to their interests. In coming together, they assure that their fates will not rest in the hands of arbitrators who do not have their best interests at heart.

Joyce Fondong is a 2L at the Pennsylvania State University-Dickinson School of Law and a Resident Student Blogger for the Journal of Law and International Affairs.

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[1]  Gary B. Born, International Arbitration: Law and Practice, 415 (2012).

[2]  International Investment Agreement Navigator, United Nations UNCTAD (2013), investmentpolicyhub.unctad.org/ IIA (stating that 2114 BITs were in force as of 2013).

[3]  Andrew T. Guzman, Why LCDs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 Va. J. Int’l L. 639, 640 (1998).

[4]  Andreas F. Lowenfeld, International Economic Law, 554 (2008).

[5]  BG Group PLC v. Republic of Arg., 134 S. Ct. 1198, 1213 (2014).

[6] Guzman, supra, at 645.

[7] Salacuse, supra note 40, at 655; see generally Kenneth J. Vandevelde, The BIT Program: A Fifteen-Year Appraisal, in the Development and Expansion of Bilateral Investment Treaties, 86 Am. Soc’y Int’l L. Proc. 532, 533 (1992); also see Guzman, supra, at 653.

[8] Guzman, supra, 649 (stating that in their desires to express their views against the Hull rule, and the “appropriate compensation” standard, developing countries participated in United Nations General Assemblies where they voiced their discontent.)

[9]  Charter of Economic Rights and Duties of States, United Nations General Assembly (December 1974), http://www.un-documents.net/a29r3281.htm. (calling for the promotion of economic development of developing nations, and development of ways to expand international trade).

[10]  Lowenfeld, supra, at 554.

[11] Id. at 537-538.

[12]  BG Group PLC v. Republic of Arg., 134 U.S. 1198, 1203-1222 (2014).

[13]  BG Group, supra, at 1205

[14] Id.

[15] Emphasis added.

[16]  Mary H. Mourra, Latin American Investment Treaty Arbitration, 10-53 (2008).

[17]  Mourra, supra, at 53.

[18]  ICSID Convention, Regulations and Rules, International Centre for Settlement of Investment Disputes, article 52 (April 2006), https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf.

[19]  Born, supra, at 424.

[20]  Mourra, supra, at 98.