Bilateral Investment Treaties (“BITs”) private rights of actions need reform to be effective. BITs are an assortment of over 2,800 international agreements that provide key legal protections, as negotiated by countries[1]. These protections provide laws and ways to remedy legal wrongs that may not be available to a foreign investor in a host nation.[2] Additionally, BITs provide a private right of action to investors against a host government.[3] While awards under these private rights of actions created awards in the mere tens of millions, in recent times they have increased to tens of billions in arbitration.[4] However, there are numerous issues with these awards.[5]
For one the procedures were negotiated on the idea of a host nation seizing the assets of foreign owned assets.[6] However, recently there have been awards for regulatory interactions rather than asset seizure.[7] Another issue is that some awards are for interference with planned investments.[8] This means that the host nation is required to pay, a potentially large sum, for something that was never built.[9] Furthermore, this creates an incentive for corruption as the possibility of a large payout, increases the potential for investment without the intent to actually perform on a contract.[10] Thirdly, the arbitration courts depart from other international law practice by increasing compensation based on the “investment’s expected future income across its entire life cycle.”[11] This increases the payouts more than the World Bank’s guidelines and principles of international law previously accepted.[12] Additionally, the complexities of the awards mean that you need sufficient funds to litigate and arbitrate the matter.[13] Finally, the large compensations also make it more difficult for foreign investors to actually collect.[14]
An example of the final issue can be seen in Yukos.[15] Yukos oil company faced aggressive actions by Russia through tax related violation accusations that resulted in the Russia garnishing all of Yukos’s assets when they failed to pay.[16] Russia then auctioned the assets off but created strict requirements that only two bidders met.[17] In fact the entity that ended up winning at auction seventy-seven percent of the most valuable asset, Baikal Finance Group, was created a mere two weeks prior to the auction.[18] Furthermore, they paid a mere $9.35 billion for their shares despite the government acknowledging there valuation at $40 billion.[19] The original shareholders brought suit and were awarded $50 billion in arbitration awards.[20]
However, since this was awarded, Russia has failed to fulfill its payments.[21] The case was litigated in an Amsterdam court, a UK court, and has gone on for over eight years.[22] Additionally, these cases are often litigated by private large firms, that have high costs. The extremely large compensations increase the likelihood of expensive firms being used. “A survey from the Chartered Institute of Arbitrators estimated that legal costs account for around 80% of the overall cost of arbitration.”[23] Furthermore, there are significant costs associated with the arbitration system though the range varies.[24] This can be anywhere from $199,000 to $97,000. An example of an extreme cost is in Tethyan Copper v. Pakistan, where a party spent $17.5 million on legal fees and $4.5 million on financial experts.[25] This was the result of Pakistan’s refusal to grant approvals that were necessary for the creation of mines even though there were no mines actually built.[26] Therefore, there is a greater advantage to developed countries versus developing countries because the developing countries will face more economic hardship from the costs of litigating or arbitrating disputes.
One solution could be “capping compensation to the amount the investor actually invested.”[27] This could prevent larger firms from participating in the matter thus reducing the costs. Additionally, it may lead to an increase in countries paying the arbitrations. With reduced costs to just investor input it will also decrease the likelihood that corrupt contracts are entered into for the sole purpose receiving the award from arbitration courts. Furthermore, it should be the states that propose these reforms.[28] The states are most affected by these issues and prevent the money from going to the people of those nations and therefore should be the champion of this reform.[29] However, the private sector also has a significant reason to want reform.[30] The tribunal courts that operate “outside the sphere of domestic courts” and there is concern over the private investors ability to sue governments.[31] With both sides looking to reform in recent years, one of the reforms should be to hold costs to the amount that investors inputted.[32]
[1] Sidley, The Basics of Bilateral Investment Treaties (2025), https://www.sidley.com/en/us/services/global-arbitration-trade-and-advocacy/investment-treaty-arbitration/sub-pages/the-basics-of-bilateral-investment-treaties/.
[2] Id.
[3] Id.
[4] Jonathan Bonnitcha & Sarah Brewin, Compensation Under Investment Treaties: What are the problems and what can be done?, IISD pg. 1 (Dec. 2020) https://www.iisd.org/system/files/2020-12/compensation-investment-treaties-en.pdf.
[5] See Id.
[6] Id. at 2.
[7] Id.
[8] Id. at 3.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id. at 4.
[14] See, Hulley Enterprises Ltd. v. Russian Fed’n, No. CV 14-1996, 2023 WL 8005099 (D.D.C. Nov. 17, 2023).
[15] See, Brandon Rice, States Behaving Badly: Sovereign Veil Piercing in the Yukos Affair, SSRN (Oct. 14, 2015).
[16] Id. at 4-7.
[17] Id. at 10.
[18] Id. at 9-10.
[19] Id. at 9.
[20] De Brauw Blackstone WestBroek, Yukos Shareholders Secure Victory in $50 Billion Arbitration Dispute (Feb. 20, 2024) https://www.debrauw.com/matters/yukos-shareholders-secure-victory-in-50-billion-arbitration-dispute.
[21] See, Supra note 14.
[22] See, Hulley Enterprises Ltd; APNews, A Dutsch Court has rejected a final argument in a legal battle over former Russian oil giant Yukos (Feb. 20, 2024) https://apnews.com/article/yukos-russia-arbitration-khodorkovsky-1f460f350daa5b125f7ee0a917561853.
[23] MoloLamken LLP, What is the average cost of an international arbitration? (2021) https://www.mololamken.com/knowledge-what-is-the-average-cost-of-an.
[24] Id.
[25] Supra note 4, at 4.
[26] Id. at 3.
[27] Id. at 4.
[28] Id. at 6.
[29] Id.
[30] See, Philipp Kurek, Next Generation investment treaties, Arbitration Blog (July 21, 2021) http://arbitrationblog.practicallaw.com/next-generation-of-investment-treaties/.
[31] Id.
[32] See, id.
