CPEC A ROADMAP TO PAKISTAN’S
ECONOMICPROSPERITY BUT BITS MAY BITE: DISCOVERING THE UNDISCOVERED LEGAL
ASPECTS
By:
DR.
MUHAMMAD RAHEEM AWAN
Advocate[1]
SALMA YASMEEN
Advocate
Abstract
China-Pakistan
Economic Corridor (“CPEC”) is deemed to be economic and political game changer
in the South Asian region.[2]The high-ups and experts of the Government of Pakistan (“GOP”)
frequentlyclaim that the CPEC will engendernew economic and political world
order by building new regional alliances based upon reciprocal economic
interests.[3] Theyportray CPEC as something exceptional or perhaps out of this world
having unshakable foundations in time-tested Pak-China friendship. The ray of
hope for economic prosperity and independence and improvement in foreign
relations have developed an emotional attachment for CPEC in entire nation
including political elite comprising government and opposition parties,
economic experts, print and electronic media. It appears that anything said or
written to highlight drawbacks and negativity of CPEC is considered to be an
international conspiracy to deface CPEC and fatal to Pak-China strategic
partnership.[4] However, at the same time the major political parties of Pakistan and
some media persons quite often raise their voices against alleged corrupt
practices in CPEC projects.[5]These allegations could not be simply thrown away as they may provide
foundation for regulatory and policy changes and adverse actions against
foreign investors in the future enabling foreign investors to escalate their
dispute to international arbitral tribunals accusing GOP guilty of direct
regulatory and creeping expropriation.
This paper asserts that there
are number of ignored grey areas such as economic, social, legal and treaty
obligations which require due diligence approach and indulgence of Pak-China
high-ups and regulators for their timely solution, failure to which may ruin
their friendly relations and likely benefits of CPEC. Therefore, this paper
urges for prompt and meaningful dialogue at appropriate level to nip any likely
disagreement or problem in bud in the larger interest of both the nations and
CPEC. Besides, it suggests that instead of adopting intolerant approach and
believing in so-called international conspiracy theories responsible quarter
must come out of CPEC hysteria and focus on neglected areas having strength to
undermine sovereignty of Pakistan and interests of foreign investors
simultaneously.
Following
the background of study below, the first part of this paper highlights the
universally recognised key features of a Bilateral Investment Treaty(“BIT”) and
its important aspects which play key role in attraction and protection of
Foreign Direct Investment (“FDI”). The second part investigates GOPs
traditional approach of negotiating and signing BITs. The third part of this
essay provides precise debate on key features of Pak-China BIT 1989 which may
allow the foreign investors to directly recourse toarbitral tribunals
challenging and questioning the legality and validity of any regulatory, policy
or monitory action of GOP. The paper intends to examine the key features and
provisions of Pak-China BIT 1989 in CPEC scenario hence due to scarcity of
space third part carries debate on two BIT provisions i.e what comprises an
investment and dispute resolution clause. The author aims to examine rest of
Pak-China BIT provisions, economic and social policies and other aspects of
CPEC in upcoming research papers providing a fruit for thought of watchdogs of
GOP being capital importing State.
Key Words: Investment
Treaty Arbitration, Open-ended BIT phrases, Pre-Shipment Inspection Agreement,
Concessions, Direct and Creeping Expropriation
Background of Study
As mentioned above that for instant study
in the context of CPEC, the author has chosen Pak-China BIT relations and
obligations out of number of ignored grey areas which include economic, social,
legal and treaty obligations. The rationality for selecting BIT relations is
that, it is internationally recognised primary legal instrument and basic
document which grants extra ordinary protection to foreign investors and FDI. Violation
of any treaty provision may provide direct recourse to foreign investors to
international treaty arbitration against the host State. It is also significant
because the author in his doctoral research has already found following
deterring factors discourage foreign investors and undermining sovereignty of
Pakistan simultaneously; inconsistency in the economic policies, signing BITs
without meaningful negotiations in haphazard manner, judicial activism and weak
protection under outdated domestic investment laws.[6] It
has been observed that these BITs represent will of investment exporting
countries and contain open-ended legal phrases which had been defined by the
arbitral tribunals inconsistently and conflicting with the sovereignty of the
host States.[7]These
treaties were found somewhat problematic instruments for host States i.e
Pakistan in the CPEC scenario given that there is no evidence that investment
importing States were meant to adopt such vast and liberal interpretations at
the time of signing those BITs.
The
verdict of arbitral tribunal in the Reko Diq[8] case
has now affirmed the apprehensions of the author regarding likely outcome of
said case. After examining key treaty provisions and their interpretations
author was of the view that in Reko Diq and Rental Power[9]
cases provisions of Pak-Australia and Pak-Turkey BITs were broad enough to
empower arbitral tribunals to hold Pakistan in breach of its treaty
obligations. It is reiterated here that the GOP and its political and
bureaucratic responsible completely lack the required knowledge, expertise,
skills and will to understand such legal terminology,
their interpretations, latest development in treaty regime and their pros and
cons. Resultantly, they do not have requisite know how and expertise to
negotiate and conclude such treaties and foresee consequences of BIT
obligations being capital importing State. This argument is not farfetched
seeing that Pakistan is executing CPEC since 2015-16 onwards but Pak-China BIT
dates back to 1989 which was enforced in 1990[10]
but, the GOP and its regulators have completely ignored the bitter lesson
learnt during these three decades from BIT claims against Pakistan[11]under
International Centre for Settlement of Investment Disputes (“ICSID”) and
commercial arbitration regimes.
For aforementioned reasons this paper
aims to investigate the significance of BITs in international investment regime
and GOP’s trend of signing and executing BITs. In this context significant and
open-ended provision of Pak-China BIT 1989 and their consequences in the event
of any likely investment dispute will be examined in the light of
interpretations adopted by the international treaty tribunals. It is argued
that Pak-China BIT 1989 is an outdated legal instrument incapable of addressing
novel issues and disputes likely to arise out of CPEC projects. Especially,
when allegations of bribe, kickbacks and corruption are echoing every where and
the opposition parties are openly threatening to probe these allegations in
future meaning that opening corruption cases and adverse actions during new
political regime are not very unlikely. This argument finds it roots from
Pakistan’s political history where Pakistan has proven track record of
investigating mega corruption scandals either by the upcoming government
through regulatory changes[12]or by invoking
Suo Moto jurisdiction of the Supreme Court of Pakistan (“SCP”).[13]Consequently, it
is maintained that grey areas in CPEC may give rise to fatal controversies
between GOP and Chinese investors which would be fatal to CPEC and Pak-China
strategic partnership hence both the States are required to discover the
undiscovered and ignored grey areas to nip the disputes in bud.
Significance of BITs in International Investment Regime
Protection
of FDI has been addressed mainly in three instruments: bilateral or
multilateral treaties, agreements between host State and investor, and foreign
investment laws of the host State. These instruments provide certain assurances
to foreign investors, violation of which could be considered as breach of such
instrument and may result in legal proceedings.
An instrument which deals with the
reciprocal relationship of two States regarding
investment is called a BIT[14] which is a primary source to define
the rights and obligations of the signatory States and their investors. It is
one of the legal instruments which guarantee certain rights to investors of
contracting States. According to Andrew[15] BITs are meant to encourage, promote
and protect FDI in alien economy therefore, more or less all BITs cover similar
features such as describing investment,
its scope and time element. BITs also contain provisions describing the level
of treatment afforded to FDI, safeguard against direct or indirect
expropriation and dispute resolution mechanism. BITs are used for improving the
confidence and trust level of foreign investors in the host economy by offering
a pre-defined and more protectionist regime to the investors of signatory
States than international law ever has.[16]BITs
assure special handling and added protectionab ove the domestic laws of the
host State including possibility for investors to bring arbitration proceedings
directly against a host state in the event of an alleged breach of treaty
provisions.
The effect of the BITs may well be
said to increase investor’s trust to a higher level than for non-BIT States.
According to Sornarajah,[17] BITs serve for ‘knowing the confused
state of the law’; they clarify the ambiguous rules in advance which are likely
to be applied in the event of any investment dispute. He considers BITs as a
satisfactory development in treaty jurisprudence as they are the outcome of
negotiation and reduce uncertainty regarding rules applicable to investment
disputes. Since a BIT creates reciprocal rights and obligations for both the
signatory States, it gives rise to an interesting debate, whether BITs are
really the product of meaningful negotiation between two equals.
Almost all major capital-exporting
States usually negotiate BITs after their own model BIT and exploit FDI needs
of developing countries. To minimize the threats and inconvenience to their
investors, they seek added protection and additional facilities for their
investors.[18] Apparently, BITs are negotiated
between two States; however, they hardly represent a product of balanced
negotiation between equal parties.[19]
Aaken[20] argues that over-protection granted
to FDI through BITs negotiated between unequal parties may affect FDI
protection and would weaken it in the future. He further asserts that perhaps
international investment jurisprudence has crossed the limits of FDI
protection, which has jeopardized the entire arrangement and consequently would
reduce FDI protection in the future. Guzmán argues[21]that, notwithstanding that BITs offer
reciprocal protection and incentives to the investors of signatory States, the
real beneficiary of the BITs are seen to be investors of capital-exporting
States.[22]
It may well be said that BITs
demonstrate the will of the signatory States to promote and encourage FDI by
assuring that host State would not interfere in treaty rights of the investors.
To attract more FDI and to boost its economy, a State earns credibility by
trading its sovereignty by means of such assurances and submitting to
international arbitration.[23]
However, this does not in itself indicate whether or not BITs have helped the
host States to attract FDI.
Studying relationships between BITs
and flow of FDI, Seriki points out Argentina’s shaky position where it has had
to face 40 BIT claims in ICSID tribunals since 1992, whereas it attracted only
US$2 billion FDI in 2005. In contrast, Brazil has attracted US$11.37 billion
FDI though it did not have even a single BIT enforced. Hallward-Driemeier’s World
Bank research group’s study on twenty years of FDI flow from OECD States to
developing States concluded that they could find ‘…little evidence that BITs
have stimulated additional investment.’[24]
Rose-Ackerman
and Tobin’s study,[25]
highlighted by Seriki, indicates that the relationship between BITs and FDI is
subject to the level of risks in the host market. The report suggested that in
a riskier environment the relationship between FDI and BITs is very weak and
BITs are found beneficial only for those financial markets which were already
stable. However, Neumayer and Spees found some positive effects of BITs in the
improvement of FDI flow and the economy of developing countries. They examined
the BIT–FDI relationship of 119 countries between 1970 and 2001. According to
this study, BITs do what they were signed for and the ultimate result of BITs
is that they foster the host economy.[26]
It is important to note that that study did not preclude other important
factors which play significant and vital roles in attraction of FDI, such as
natural resources, market size, location and risk. These factors have immense
importance in the context of Pakistan as due to said aspects author in his
early study had found Pakistan as best location and perfect market for FDI. [27]
As
discussed earlier, BITs can only stimulate FDI in developing countries where
favourable associated elements, such as natural resources, location and market
size, were present. Otherwise, BITs have cost too much compared to the benefits
they bring for the host economy. Under alleged breach of BIT provisions several
host States faced costly investment treaty arbitration. Figures suggest that
treaty arbitration against the host State, which were almost nil in 1994
reached 250 cases in 1996. Similarly, by 2013, treaty arbitration supervised by
ICSID involving 95 States has reached 430 cases; in addition, it has also
supervised 40 cases under the United Nations Commission on International Trade
Law (“UNCITRAL”).[28]
In
the light of aforementioned discussion the advisable vigilant approach is to
incorporate BIT provisions with full understanding and after meaningful
negotiations. In this context the following section examines Pakistan’s trend
of negotiating and signing BITs and will explore; whether BITs signed by
Pakistan were product of meaningful negotiations?
Pakistan’s
Trend on negotiating and Executing BITs
Pakistan
is pioneer of modern investment treaties as the first ever BIT has been signed
between Pakistan and West Germany in 1959[29]since
then Pakistan has signed 48 BITs whereas the numbers of BITs worldwide have
grown to 2,860.[30] The
BIT history of Pakistan has witnessed a mushroom growth during 1990-2004
whereby GOP signed 42 out of total 48 BITs. It is pertinent to mention here
that some of the BITs signed during said era laid the foundation for investors’
treaty arbitral claims against Pakistan before ICSID tribunals. These treaties
include Pakistan’s BITs with Switzerland,[31]Turkey,[32]Australia[33] and
Kuwait[34]
whereas treaty claims include SGS v Pakistan[35],
Bayindir v Pakistan,[36]Agility
v Pakistan[37],
Tethyan Copper v Pakistan[38] and
Karkey vPakista.[39] Theforeign
investors’ recourse to treaty tribunal to initiate arbitral proceedings
contending on breach of treaty demonstrates that these BITs are somewhat
problematic devices for Pakistan. These BITs have posed Pakistan to costly
international arbitration on one hand and on the other; the treaty claims have
affected inward flow of FDI in Pakistan.
As
discussed earlier that Sornarajah,[40]
deems a BIT as a satisfactory product of negotiations which provides clarity to
the principles on international investment however the situation in Pakistan’s
context seems largely different. Executing BITs in haphazard manner and
without meaningful and proper negotiations has been identified as a
deterring factor and traditional approach practiced by GOP. This approach
firstly revealed in an interview of Makhdoom Ali Khan, former Attorney General
(“AG”) of Pakistan,[41] according to whom Pakistan used to
execute BITs without having any legal or financial consequences for decades,
hence everyone considered it a simple piece of paper. During their foreign
trips, the Prime Minister and President used to sign the BITs just for the
photo shoot. They did not take into account what they were signing or what the
likely consequences of signing such BITs would be. He recalled that; “The
Secretary of Law called me up in 2001 and asked what I knew about the
International Centre for Settlement of Investment Disputes (ICSID) and this
thing called a bilateral investment treaty (BIT). He informed me
that Pakistan was being sued by SGS at ICSID and asked how SGS could do
that. To be perfectly honest, I did not have a clue, so I had to look it up on
Google. I typed in ‘ICSID’ and ‘BIT’, and that’s how I learned about these
instruments for the first time.”[42]
He
pointed out some important dilemmas in the whole scenario such as, the foreign
missions and ministry were of consensus that BITs are ‘one of the doable’,
everyone considered it a ‘piece of paper’ which could be presented to the press
as utmost ‘good photo opportunity’. He revealed that after almost 46 years from
signing the first BIT, no one other than the Ministry of Industry even knew
that a BIT had ever been signed.[43] Even
real stakeholder departments that had direct links with the outcome of BITs had
no information about such BITs. Concerned ministries could not produce any
file, record or exchange of notes to establish that meaningful negotiations had
been conducted between the signatories. The maximum level of input to
negotiations which Pakistan had was proof-reading and no significant suggestion
was evident.[44]Considering
the aforementioned situation, the then Army government issued a directive from
chief executive secretariat in 2001-02 and directed to all relevant departments
to refrain from signing any new BIT without seeking advice and consent from the
AG and all other governmental stakeholders.
The
then learned AG also acknowledged that, to negotiate BITs many skills and
proficiencies, especially legal expertise, were required. Apart from a few
learned government officials, there was no shared understanding between
government officials on this point. Consequently, GOP continued negotiating
BITs without taking into account the serious repercussions of adhering to such
an approach. However, he shared his disappointment and anxiety about the
consequences in the future, as he could not witness any significant improvement
in this approach prior to his resignation in 2007. This led him to the
conclusion that due to this passive approach Pakistan is not in a position to
follow its treaty obligations which it pledged with other signatory States.
Understandably, such an approach would leave Pakistan prone to very expensive
investment treaty claims. His statement also raises several questions about the
good faith and intention of the GOP towards legitimacy and sanctity of the
contents and protections offered in such BITs.
Existence
of this approach is reaffirmed by BOI in terms of its Investment Policy 2013.
This implies that until now GOP and BOI have conducted negotiations in, as the
AG put it, a ‘whimsical’ manner. It has simply failed to consider the legal and
economic consequences involved the policy provides that;
3.1 … the existing BITs have been negotiated
over a period of 50 years by various ministries and there are great
inconsistencies between them, which create legal uncertainty for both investors
and the government. BOI will develop a model text with assistance of Law &
justice Division, which will ensure protection to investment on reciprocity
basis and that model BIT will replace the existing to possible extent while all
new BITs will be negotiated on new templates.[45]
The
above discussed significance of BITs in international investment regime and
Pakistan’s traditional approach of signing BITs necessitate to examine
Pak-China BIT as primary legal instrument which is evidently ignored by GOP in
CPEC context and would be most vital and persuasive document in the event of
any State-investor dispute in the future.
Examination of vital clauses and latest developments in treaty
jurisprudence along with vital issues that Pakistan has faced or is facing in
international forums will help to find discrepancies in the text of said treaty
and to combat any likely complications in the future. This will also enable
creating steady investment friendly environment, build the confidence of
foreign investors and uphold Pakistan’s sovereignty which in turn will
stimulate the desired amount of FDI in the required sectors.
Pak-China BIT 1989 an Outdated and
Problematic Legal Instrument
Desiring to reciprocally encourage,
protect and create favourable conditions for investors of signatory States Pakistan
and China had executed a BIT in 1989.[46] Understandably, CPEC was not in the
mind of executors of both the countries while signing said BIT three decades
ago.
Given that CPEC is nothing other than
inward flow of foreign investment to Pakistan hence
Pak-China BIT will be a driving instrument for CPEC in all aspects as BITs are
worldwide recognised instrument which exclusively deal with foreign investment
and connected issues. Since in CPEC scenario Pakistan is at FDI recipient end
thus contrary to the BIT provisions the obligations contained in this treaty
will have unilateral effects on Pakistan rather bilateral. Therefore, it is
vital to examine some important treaty provisions which will enable to
understand likely reaction of international arbitral tribunals in the event
dispute is escalated to them. It is to reiterate here that due to scarceness of
space this part only deals with two aspects of Pak-China BIT whereas rest of
the key provisions will be examined by the author in his impending articles.
What
comprises investment?
Article 1
of Pak-China BIT 1989 provides that ‘investment’ means movable and immovable
properties and right in rem, share and interests of the companies, money claim
or performance having economic value, copy rights including know-how and
technical process and concessions including concessions to search and exploit
natural resources. Apparently ‘investment’ is appeared to be simply drafted
however its significance is that, it includes copy rights, claims having
economic value and the concessions for search and extract or natural resources
within the ambit of ‘investment’. The definition enshrined in instant BIT
provides one prerequisite stipulating ‘in accordance with law and regulations
of contracting party accepting investment’. However, treaty is silent about
addressing the problem if host State’s law does not provide definition of
investment. With regard to Pakistan the term ‘investment’ came under discussion
before the SCP in Société General de Surveillance[47]case
whereby the SCP dismissed SGS’s appeal to grant injunction against domestic
arbitration proceedings. The SCP dismissed said appeal on grounds that;
Pakistani law does not recognise ICSID Convention and pre shipment services did
not comprise investment under Pak-Swiss BIT. However, the arbitral tribunal did
not concur with SCP’s interpretation, while widely interpreting term investment
it held that; it has jurisdiction to hear the matter as it is a legal dispute
arising out of investment under ICSID Convention.[48]Though
verdict of the tribunal was a relief for foreign investors but it was worrying
for GOP seeing that the tribunal stretched the definition of ‘investment’
beyond intention of the signatory parties and had overridden SCP’s decision
despite the following facts; the investment was not made within Pakistani
territory in pursuant to Pak-Swiss BIT, the commercial contract with SGS
obligated signatory parties to submit their dispute to domestic arbitration in
Pakistan under its domestic laws and the ICSID Convention was not ratified by
the Pakistani parliament. The tribunal, while doing so broadly interpreted the
term ‘concessional agreement’ and held that, “Pre-Shipment Inspection
Agreement (“PSI”) is equivalent to concessional agreement and satisfies the
requirements of investment within the meaning of BIT.”
Similarly,
in Bayindir v Pakistan[49],
the tribunal held that, Bayindir successfully met the definition of
investment and its essential features. Pakistan vehemently contested the scope
of investment in terms of the claimant’s contribution in know how and
equipment, and asserted that these objects have no economic value, and
therefore do not fall within the definition of ‘every kind of assets’. The
tribunal rejected all the arguments of
National Highway Authority’s (“NHA”)
by acknowledging the Salini’s test[50] and
held that,[51]
‘…Bayindir did contribute “assets” within the meaning of the general definition
of investment set forth in Article I(2) of the BIT.’[52]In Fedax
v Venezuela[53]
and CSOB v Slovak Republic,[54] the
tribunal held that financial instruments, eg loans and promissory notes qualify
as investment under BIT and ICSID conventions equally. Likewise, in Kaiser v
Jamaica[55]and
in Alcoa v Jamaica,[56]
the tribunal held that where a foreign national investor invested by trusting
in the agreement of the host State, such investment is within the meaning of
the ICSID convention. Moreover, the amount spent on development of the
concession and other undertakings based on the concession agreement also
qualifies as investment under the meaning of the convention. The aforementioned
discussions reveals that arbitral tribunals gave broad meanings to ‘investment
by stretching open-ended phrases used in investment clause such as concessions,
know how, loan, promissory notes, assets, expenditures of development of
concessions etc. The Pak-China BIT reveals that it had embedded identical
phrases in its investment clause capable of covering and protecting variety of
assets and unproductive investment which Pakistan had never meant to include
whilst executing this BIT. Therefore, this paper foresee a problematic and
uncomfortable situation for Pakistan in the event of any dispute arising
between GOP and investors of CPEC projects in the international arbitral
tribunals on definition of investment.
Dispute Resolution Clause
The
formation of Dispute Resolution Clause (“DRCs”) in a BITs are split into five
types which may contain different methods to resolve investment disputes such
as no reference type, fork in the road, no u-turn, parallel proceedings and
local remedy first.[57]The
BITs which do not provide DRC at all are referred to as ‘no reference’ type;
BITs giving choice to prefer one forum over other are called ‘fork in the
road’. Provisions requiring the disputant to give up his right to recourse to
the municipal jurisdiction before referring the dispute to an international
arbitral forum are named ‘no u-turn’; whereas provisions that allow
side-by-side proceedings are called ‘parallel proceedings’. Treaty provisions
which prefer the municipal courts as the first chosen forum are named ‘local
remedy first’.[58]
Pak-China BIT Art 9 requires that on dispute
arising on interpretation or application of the instant treaty both the parties
shall first try to resolve by consultation through diplomatic channels. On
failure to resolve, either party within two months may issue notice to submit
its dispute and constitute adhoc arbitral tribunal comprising of three
arbitrators. However, on failure to constitute arbitral tribunal within four
months of issuance of notice by either party may invite President of
International Court of Justice (“ICJ”) to constitute arbitral tribunal for
dispute resolution. The provisions reveals that in the event of resolution of
State-State dispute and failure to constitute arbitral tribunal both the
parties have agreed to delegate right to appoint the tribunal to the President
ICJ. The arbitral tribunal will determine its own procedures and decide the
case in accordance with law of the host State, provisions of BIT and principles
of international law recognised by both the States. The denotation, ‘such rules
of international law as may be applicable’, demonstrates the possibility to
attract international law by arbitrators which may be more favourable to the
investor compared to the domestic law of the host State.[59]
Such phrases are preferred by the FDI-exporting States and are incorporated by
the FDI-importing States because of the lack of possibility to assert otherwise
or lack of capability to understand the consequences.
Article
10 of the Pak-China BIT provides that, if the investor is dissatisfied upon
amount of compensation for his expropriated assets in pursuant to Art. 4 he may
file complaint before competent authority of contracting party. However, on
failure to resolve such dispute within one year he may prefer to challenge such
compensation before the competent court of contracting party or international
arbitral forum.
Instant
clause appears to be a ‘fork in the road’ provision as it unambiguously vests
entire authority in foreign investor to prefer any forum to file his complaint.
Simple construction of DRC indicates that the GOP has agreed to surrender its
sovereignty and to submit to international arbitral tribunal accepting final
and exclusive jurisdiction of arbitral forum over a dispute arising within
Pakistan and otherwise tri-able under Pakistan’s domestic legal system. This
BIT also contains ‘cooling off period’ provisions to settle such disputes
amicably within one year, before recourse to international forums. It may well
be argued that such clause lessens the probability of immediate escalation of a
dispute to international jurisdiction.[60]
However, verdict in Ronald S Lauder v The Czech Republic[61]shatters
this argument given that the arbitral
tribunals took cognizance despite the cooling-off period clause embedded in the
treaty not being exhausted. Similarly, in
Maffezini v Spain,[62]
the tribunal allowed the claimant to recourse international arbitration
directly and seized the jurisdiction despite the underlying Argentina-Spain BIT
contained a six-month cooling-off period and eighteen months for exhausting
local remedy.[63]
While doing so, the tribunal relied on MFN clause of the treaty and allowed the
more favourable dispute resolution mechanism embedded in the Chile-Spain BIT.[64]
Pak-China
BIT also contains other clauses such as umbrella clause, provision requiring
fair and equitable treatment, most favourable treatment, protect and promote
investment within territory of contracting parties etc. These provisions allow
the foreign investors to emphasis and drive most suitable and favourable
provisions including DRC out of other 47 BITs signed by GOP. The BIT provisions
containing these phrases appeared to be most controversial hence contested by
the host States in the treaty tribunals. It may be observed that the arbitral tribunals whilst dealing with such open-ended
and tricky provisions, reached to divergent and inconsistent outcomes on
similar matters such as SGS v Pakistan and SGS v Philippine. The divergent and
inconsistent interpretation created further uncertainty in likely outcome of
State-investor dispute.
It
is important to refer investment and dispute resolution clauses together here
as Pak-China BIT also include
‘interest’ under the scope of investment which would be considered by the
international arbitral tribunals for
assessment of compensation in the event of State-investor dispute. The effect
of such a clause and the scope of interest could be seen in Asian
Agricultural Products v Sri Lanka[65]. The
tribunal disagrees on the grant of compensation of likely profit in future;[66]
however, it has been held that, interest is an essential element of the
compensation which must be calculated from the date of expropriation to the
date of payment.[67]
In Middle East Cement v Egypt[68]
the tribunal relied on Art 4(c) of Egypt-Greece BIT holding that, interest is a
fundamental component of the compensation. It concluded that, for the purpose
of effective and adequate compensation it is appropriate to award compound
interest on the compensation from the date of expropriation until the date of
payment of the award.[69]
The tribunals took into account the rule of international law and disregarded
the municipal law which prohibited the compound interest.[70]
The latest
developments in the treaty regime suggests that for direct or indirect
expropriation or measure having same effects the principle of full compensation
can only be satisfied by awarding compound interest until the award is fully
satisfied. After investigating the scope of the phrases discussed above it
seems necessary to examine the Pakistan’s second-generation BITs.
Nagan
and Root,[71] argue
that State’s legislation to confiscate investors’ property may amount to a
violation of other protections afforded by the investors. Moreover, regulatory
intervention with investments may also be a violation of the pre-arranged and
agreed provisions of fair and equitable treatment, most favoured nation
treatment, and national treatment. According to Nyombi most of the arbitration
claims were escalated to international arbitration on alleged expropriation and
violation of FET and MFN standards provided to foreign investors under BITs and
International Investment Agreements (“IIAs”).[72]
He contends that BITs have largely failed to strike a balance between
investor-State rights and obligations which could undermine the sovereignty of
the host State; “the storm have been gathering for decades” as modern
investment instruments have largely failed to balance the treaty rights and
obligations in favour of host State. Santiago Montt[73]
contends that a number of modern investment treaties provide direct cause of
actions to foreign investors before international arbitration forums to seek
damages against the host State. According to him, direct cause of action along
with standard of fair and equitable treatment and obligation to compensate for
indirect expropriation have changed the States’ responsibilities to protect
private property under international law. Whilst developing and proposing his
theory of updated Calvo Doctrine, Montt vehemently critiques the arbitral
tribunals’ approach to stretch “super protection”. Portraying his
updated Calvo Doctrine Montt suggests that, “BIT jurisprudence should not
crystallize rules of protection of investments that are more demanding than
those which developed countries’ courts apply in favour of their own national
investors.”
As has been discussed, the instant DRC provides
fork in the road type mechanism; however, it has not differentiated treaty and
contractual choice of forums, choice of domestic law may well lose its
significance as applicability of international law overshadows the choice of
domestic law as has already been discussed above. Besides, instant provision also does not
provide time limitation for escalating dispute to international forums giving
liberty to the investors to recourse to international forum at any time which
appears to be a hanging sword upon GOP. Besides, this DRC has also failed to
distinguish disputes arising out of violation of contractual and treaty
obligations. This has proven one of the most controversial, tricky and problematic
provision in the history of Pakistan’s investment disputes which is not very
unlikely in the future too.
Conclusion
This study has examined Pakistan’s BIT history in
the light of variety of arbitration cases which reflects GOP’s tradition of either
executing BITs without meaningful negotiation or negotiating on standard terms
and models brought by the capital-exporting States. It is revealed that GOP
used to sign BITsin a haphazard manner and without taking into account the
likely consequences resultantly Pakistan had to face and is still facing number
of costly treaty arbitration before ICSID tribunals. Reflection of this fact may well be observed
from the Investment Policy 2013 promulgated by BOIPakistan which acknowledges
the “inconsistencies in the text of BITs signed over the last fifty years
and the legal uncertainty created by such texts for investors and States
equally.” The policy has exposed the drawback in the negotiation of BITs in
the last five decades affirming that during different periods different
ministries negotiated these BITs, meaning that there was never a uniform text
for Pakistan’s BIT negotiations, nor was there a single department or ministry
responsible for negotiating the BITs.
Keeping in mind specific scenario of CPEC and
definitions of investment adopted by different BITs executed by GOP and their
wider interpretation by the ICSID tribunals, the definition contained in
Pak-China BIT specially ‘every kind of asset’ seems very broad. Definition
appears to be capable to stretch unproductive investment having no monetary
contribution in Pakistan’s economy within the domain of investment. Examination
of number of Arbitral awards and arbitration cases against Pakistan also reveal
how some simple but open-ended phrases can be interpreted broadly which may
change the entire fate of the case. The arbitral award in Reko Diq case,
indicates the disposition of arbitral tribunals in likely State-investor
disputes in futurewhereby tribunal may interpret these open-ended phrases more
broadly.
It is to reiterate that GOP has given full
guarantee to protect FDI flowing in all CPEC projects, majority of them relate
to concessions and mining upon which Chinese investors would spend huge amount
on development. Resultantly, the protection accorded under thirty years old and
outdated Pak-China BIT 1989 would be extended to projects came in the limelight
under CPEC. Admittedly, Pakistan never meant to grant BIT protection to CPEC
projects whilst executing said BIT.
Pak-China BIT also failed to distinguish forums to resolve dispute upon
violation of treaty obligations and contractual obligations. It is completely
silent about exhausting local remedy first and does not differentiate
categories of investment and nature of disputes bestowing exclusive
jurisdiction to domestic courts or try able before international arbitral
tribunals. Consequently, violation of any of the treaty provision would give
rise to breach of treaty obligations empowering foreign investors to drag GOP
in international arbitration which would cost billions of rupees on each
arbitral proceedings.
It appears that GOP has ignored the lesson learnt
from treaty claims against Pakistan. This reckless and condemnable attitude is
evident from stipulations of new Pak-Kuwait BIT which provided an opportunity
to a Kuwaiti company ‘Agility’ to commence ICSID arbitration against Pakistan.[74] Similarly, Karkey
relying on Pak-Turkey BIT and Tethyan[75] relying on Pak-Aus BIT,
have already escalated their disputes to ICSID tribunals.
It will be
correct to suggest that to date, for determination of rights and obligations of
host States and investors BITs are proven to be most effective, dominant and
globally recognised legal instrument. Therefore, in the event of any likely
State-investor dispute arising out of CPEC projects thirty years old treaty
would be one and only instrument to ascertain rights and obligations of China,
Pakistan and their investors.
This research concludes that, Pak-China BIT is an
outdated treaty incapable of addressing novel issues arising in international
investment arena. There is lack of interest, know how, skills, no serious
attitude and inability of GOP’s regulators to foresee and overcome likely
problems. Consequently, it is suggested that, though CPEC is a roadmap for
Pakistan’s economic prosperity but Pak-China BIT may bite their friendly
relations and GOP’s desires to become a miracle economy.
----------------------------
[1]. Author has completed his PhD and Master’s
degree from University of Bedfordshire UK. He has conducted first ever doctoral
research focusing on legal issues concerning foreign direct investment in
Pakistan which is main essence of CPEC.
For any query please contact raheemawaan@yahoo.com: 0092-313-8550044;
0092-314-779955
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[14]. United Nations Conference on Trade and
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[15]. Andrew T Guzmán, ‘Explaining the
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Them’ part VI (The Jean Monnet Center for International and Regional Economic
Law & Justice at NYU School of Law 26 August, 1997)
<http://centers.law.nyu.edu/jeanmonnet/archive/papers/97/97-12.html>.
[16]. United Nations Conference on Trade and
Development XI (17 August 2004) <www.unctadxi.org/templates/Page 1006>.
[17]. M Sornarajah, The International Law on Foreign
Investment (2nd ed, Cambridge University Press 2004) pp. 205-08, 213.
[18]. Técnicas Medioambientales Tecmed,S.A. v
The United Mexican States,
ICSID Case No. ARB (AF)/00/2 para 154 Award Dated: 29 May 2003
<www.italaw.com/sites/default/files/case-documents/ita0854.pdf>.
[19]. Andrew T Guzmán, ‘Explaining the
Popularity of Bilateral Investment Treaties: Why LDCs Sign Treaties That Hurt
Them’ part VI (The Jean Monnet Center for International and Regional Economic
Law & Justice at NYU School of Law 26 August, 1997)
<http://centers.law.nyu.edu/jeanmonnet/archive/papers/97/97-12.html>.
[20]. Van Aaken A, ‘Perils of success? The case
of international investment protection’ (2008) 9(1) European Business
Organization Law Review 1.
[21] Andrew T
Guzmán, ‘Explaining the Popularity of Bilateral Investment Treaties: Why LDCs
Sign Treaties That Hurt Them’ part VI (The Jean Monnet Center for International
and Regional Economic Law & Justice at NYU School of Law 26 August, 1997)
<http://centers.law.nyu.edu/jeanmonnet/archive/papers/97/97-12.html>.
[22]. ibid.
[23]. Anne Van Aaken, ‘Perils of success? The
case of international investment protection’ (2008) 9(1) European Business
Organization Law Review 1.
[24]. Mary Hallward-Driemeier, ‘Do Bilateral
Investment Treaties Attract Foreign Direct Investment? Only a Bit … and They
Could Bite’ (World Bank Policy Research Working Paper No. 3121 June 2003).
[25]. Susan Rose-Ackerman and Jennifer Tobin, ‘Foreign
Direct Investment and the Business Environment in Developing Countries: the
Impact of Bilateral Investment Treaties’ (Yale Law and Economics Research
Paper No. 293 2005).
[26]. E Neumayer and L Spees, ‘Do Bilateral
Investments Treaties Increase Foreign Direct Investment to Developing
Countries?’ (2005) 33 World Development 1567; Büthe and HV Milner, ‘The
Politics of Foreign Direct Investment into Developing Countries: Increasing FDI
through Policy Commitment Via Trade Agreements and Investment Treaties?’
(Working Paper 2005) <http://polisci.ucsd.edu/calendar/ButheMilner_FDI_24mar05.pdf>.
[27]. Muhammad Raheem Awan ‘PROTECTION OF
FOREIGN DIRECT INVESTMENT IN PAKISTAN: IS IT TIME TO ADDRESS THE DETERRING
FACTORS?’ https://core.ac.uk/download/pdf/77037975.pdf
[28].
‘ICSID 2013 Annual Report’ (World Bank 2013)
<http://documents.worldbank.org/curated/en/2013/01/18410770/icsid-2013-annual-report>.
[29]. Pakistan and Federal Republic of Germany
for the Promotion and Protection of Investments (with Protocol and exchange of
notes). Treaty No. 6575, Signed at Bonn, on 25 November 1959 Official texts:
English and German . Registered by Pakistan on 26 March 1963
<www.iisd.org/pdf/2006/investment_pakistan_germany.pdf>
[30].‘InternationalInvestmentPolicymakinginTransition:ChallengesandOpportunitiesofTreatyRenewal’UN, UNCTAD No.4 June 2013
<http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d9_en.pdf>
[31]. Pakistan-Switzerland BIT dated 11 July
1995
[32]. Pak-Turkey BIT dated 16th March 1995
[33]. Pak-Aus BIT 1998
[34]. Pakistan and Kuwait signed their BIT in
1982 and renewed on 14 February 2011.
[35]. Société Général de Surveillance S.A. v
Pakistan, Decision on Jurisdiction, ICSID Case No. ARB/01/13 [2003]
<www.worldbank.org/icsid/cases/SGS-decision.pdf>
[36]. Bayindir v Pakistan ICSID Case No
ARB/03/29 Decision on Jurisdiction, dt. 14.11. 05
<https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC523_En&caseId=C27>
[37]. Agility for Public Warehousing Company
K.S.C. v Islamic Republic of Pakistan, ICSID Case No. ARB/11/8 <www.italaw.com/cases/documents/1787>
[38]. Tethyan Copper Company Pty Limited
v Islamic Republic of Pakistan, ICSIDCase
No.ARB/12/1
<www.italaw.com/cases/1631>
[39]. Karkey Karadeniz Elektrik UretimA.S. v Islamic
Republic of Pakistan, ICSIDCase
No.ARB/13/1
<www.italaw.com/cases/2024>
[40]. Ibid, M Sornarajah, The International Law on
Foreign Investment,
[41]. Lauge Skovgaard Poulsen and Damon
Vis-Dunbar, ‘Reflections on Pakistan’s Investment-Treaty Program after 50
Years: An Interview with the Former Attorney General of Pakistan, Makhdoom Ali
Khan’ (Investment Treaty News, International Institute for Sustainable
Development 16 March 2009)
<www.iisd.org/itn/2009/03/16/pakistans-standstill-in-investment-treaty-making-an-interview-with-the-former-attorney-general-of-pakistan-makhdoom-ali-khan>.
[42]. Ibid
<www.iisd.org/itn/2009/03/16/pakistans-standstill-in-investment-treaty-making-an-interview-with-the-former-attorney-general-of-pakistan-makhdoom-ali-khan>.
[43]. Up to 2013, Pakistan has already executed
47 BITs. One new BIT has been signed since then (which is out of scope). A few
older BITs have been superseded by the new ones.
[44]. Ibid, Poulsen and Vis-Dunbar, ‘Reflections
on Pakistan’s Investment-Treaty Program’
[45]. ‘Chapter 3
Investment Protection S 3.1.3’ in Investment Policy 2013 (BOI 2013)
<www.sbi.gos.pk/pdf/SEZA/INVESTMENT%20POLICY-2013.pdf> accessed 14 June
2014.
[46]. Preamble of Pak-China BIT 1989
[47]. Société General de Surveillance S.A. v
Pakistan [2002] SCMR 1694.
[48]. Société Général de Surveillance S.A. v
Pakistan, Decision on Jurisdiction, ICSID Case No. ARB/01/13 [2003]
<www.worldbank.org/icsid/cases/SGS-decision.pdf>
[49]. BayindirvPakistan ICSID Case No ARB/03/29
Decision on Jurisdiction, Dated: 14 November 05 https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC523_En&caseId=C27
[50]. SaliniCostrutorriS.P.AandItalstradeS.P.AvKingdomofMorocco
(Decision on Jurisdiction): International Centre for Settlement of Investment
Disputes (ICSID): [July 23, 2001]
<www.italaw.com/sites/default/files/case-documents/ita0738.pdf>
[51]. BayindirvPakistan ICSID, 14/11/05. para
116 ICSID Case No ARB/03/29 Decision on Jurisdiction, Dated: 14 November 05.
[52]. ibid
para 121.
[53]. Fedax N.V. vtheRepublicofVenezuela
Case No. ARB/96/3 para 43, Decision of the Tribunal on Objections to
Jurisdiction July II, 1997 <www.italaw.com/sites/default/files/case
documents/ita0315_0.pdf>
[54]. CeskoslovenskaObchodni Banka, A.S. v
The Slovak Republic, paras 90 & 91 Case No. ARB/97/4 Decision of the
Tribunal on Objections to Jurisdiction
<www.italaw.com/sites/default/files/case-documents/ita0144.pdf>
[55]. Kaiser Bauxite Company v Jamaica
(ICSID Case No. ARB/74/3), 6 July 1975.:Decision on Jurisdiction and Competence
of July 6, 1975, 1 ICSID Rep. 296 (1993); 114 I.L.R. 144 (1999)
http://internationalinvestmentlawmaterials.blogspot.co.uk/2011/09/kaiser-bauxite-company-v-jamaica-icsid.html>
[56]. Alcoa Minerals of Jamaica, Inc. v
Jamaica (ICSID Case No. ARB/74/2), 1975 Decision on Jurisdiction and
Competence of July 6, 1975, 4 Yearbook Commercial Arbitration (Y.B. Com. Arb.)
206 (1979) (excerpts)
<http://internationalinvestmentlawmaterials.blogspot.co.uk/2011/09/alcoa-minerals-of-jamaica-inc-v-jamaica.html>
[57]. ABE Yoshinori, ‘Relationships between
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Treaties/Economic Partnership Agreements’, translated from Japanese to
English <www.rieti.go.jp/en/publications/summary/07100002.html>
[58]. ABE Yoshinori, ‘Relationships between
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[59]. Philippe Pinsolle, ‘Compound interest in
international arbitration: the example of recent awards rendered in
expropriation matters’, International Business Law Journal, 2003
[60]. The Argentina-Spain BIT provides a
six-month negotiation phase before the dispute could be submitted to the
competent courts of the host state and, failing settlement of the dispute after
the expiry of 18 months, to international arbitration under the auspices of
ICSID or an ad-hoc tribunal under the UNCITRAL Rules.
[61]. RonaldSLaudervTheCzechRepublicUNCITRAL para 188-189 and decision para 1 at
page 74. Final Award Dated: Sep 3, 2001
<www.italaw.com/sites/default/files/case-documents/ita0451.pdf>.
[62]. Emilio AgustínMaffezini v The Kingdom
of Spain ICSID Case No.ARB/97/7
Decision on Jurisdiction paras 48-62
<www.italaw.com/sites/default/files/case-documents/ita0479.pdf>.
[63]. ibid paras 8, 10, 25.
[64]. ibid paras 39-40.
[65]. Asian
Agricultural Products Ltd. v Republic of Sri Lanka ICSID Case
No. ARB/87/3 Final Award Dated 27 June 1990
[66]. ibid 596.
[67]. ibid paras 112-115.
[68]. Middle East Cement Shipping and
Handling Co.S.A.v Arab Republic of Egypt,ICSIDCase
No.ARB/99/6,
Award Dated: 12 April 2002 <www.italaw.com/sites/default/files/case-documents/ita0531.pdf>
[69]. ibid paras 174-175.
[70]. Philippe Pinsolle, ‘Compound interest in
international arbitration: the example of recent awards rendered in
expropriation matters’, International Business Law Journal, 2003
[71]. Winston P. Nagan and Joshua L Root, ‘The
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Law, the U.N. Charter, and the Application of Modern Communications Theory’
(2013) 38(2) North Carolina Journal of International Law 375.
[72]. Chrispas Nyombi, ‘ EU Reforms of International
Investment Law in the Shadow of Brexit’ International and Commercial Law Review
vol. 27 Issue 10 (2016) Forthcoming
[73]. Santiago Montt, State Liability in Investment Treaty Arbitration Global Constitutional
and Administrative Law in the BIT Generation (Hart 2009).
[74]. Agility has been knocked out on technical
grounds
[75]. In the matter of Tethyan, the arbitral tribunal has already
held against Pakistan.