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Termination of bilateral investment treaties: Alternatives for Least Developed Countries

IELPO / Tradelab | 29 September 2018

International Economic Law Clinic

Termination of bilateral investment treaties: Alternatives for Least Developed Countries

Submitted by:
Anastasiia Koltunova, Etale Reagan & Marina Trunk-Fedorova

To:
Professor Jane Kelsey, Faculty of Law, The University of Auckland, New Zealand

Downloads:
- Full study
- Consolidated table of LDCs BITs

Executive summary

Bilateral Investment Treaties (BITs) have proliferated dramatically as one of the main instruments to shield foreign investments. However, their operation has generated discontent in a number of States (including least developed countries, or LDCs) and caused discussions about their termination. LDCs [1] might have specific reasons for terminating their BITs, including not only the rapid recent growth in investment disputes (which also includes disputes against LDCs), but also limited legal capacity and lack of bargaining power at the time of the conclusion of their BITs.

The Project team takes no position on the desirability of terminating BITs. The goal of the present study is to outline the choices LDCs have at their disposal for terminating their BITs and the legal questions arising from termination. The Project team has analyzed the theoretical background outlining possible ways for terminating BITs; mapped 213 BITs concluded by LDCs (that are currently in force) and identified common features and potential problems of their termination; formulated policy options for LDCs regarding termination of their BITs; and addressed legal questions arising from such termination.

Ways of Termination of BITs

Bilateral investment treaties, being treaties under public international law, are subject to the rules of the Vienna Convention on the Law of Treaties [2] (VCLT), which also apply to termination of BITs. According to Article 54 of the VCLT, the termination of a BIT can take place: 1) in conformity with the termination provisions of the treaty or 2) at any time by consent of the parties. If these options are not available, States may resort to other modes of termination generally available in public international law and specified in the VCLT.

Unilateral termination according to a BIT termination clause. The majority of BITs incorporate provisions that contain information on the duration of the initial validity period of the BIT, which enables determining the earliest possibility to terminate the treaty, requirements for the notice of termination to the other Party, and the provision on the extension of the BIT.

As a general rule, a BIT can be terminated by the end of its initial validity period provided that a proper timely notice is given to the other Party. After the expiration of the initial period, one approach provides that the BIT can be terminated at any time, upon issuance of a prior written notice. Another approach, however, incorporates provisions for tacit renewal for successive defined periods after the lapse of the initial validity period and upon expiry of a fixed term window for notifying termination. The next moment of possible termination of such a BIT is the date of expiry of the next period of validity, provided that notification was sent before the deadline indicated in the BIT.

Bilateral termination is possible at any time, even while the initial validity period is still running. By so doing, parties can mutually agree to vary the requirements for termination specified in the BIT. Moreover, pursuant to Article 59(1) of the VCLT, a BIT termination can be implied, if a new BIT between the same Parties covering the same subject matter is concluded, subject to certain conditions.

If neither a unilateral termination under a BIT provision, nor bilateral termination is possible within the desired time period [3], there are still possibilities, under certain circumstances, to terminate a treaty unilaterally. Article 62 of the VCLT codifies the customary international law principle of rebus sic stantibus, which provides that where there has been a fundamental change in the circumstances which formed the basis of the parties’ acceptance (consent) to the treaty, and where such change in circumstances has radically transformed the extent of obligations, any affected party may, under certain conditions, invoke the change as a ground for termination of the treaty.

Pursuant to Article 61 of the VCLT, the performance of the obligations of a treaty may be rendered impossible by the permanent destruction or disappearance of an object that was indispensable to the execution of the treaty. Another possibility for unilateral termination of treaties, including BITs, under special circumstances is termination as a result of material breach (Art. 60 of the VCLT).

Survival Clauses in BITs

Termination of a BIT does not mean, however, that former Contracting Parties are free from any obligations in respect of the investors of the other Contracting Party. Most investment treaties include a ‘survival clause’ which prevents termination of the treaty with immediate effect. Survival clauses prolong the exposure of the host state to international responsibility by extending the treaty’s application for a further period in relation to existing investments covered by the BIT.

As opposed to unilateral termination, it is not always clear-cut whether the survival clause is equally abrogated together with the termination of the respective BIT in cases of mutual termination. Considering the lack of certainty in this regard, when jointly terminating a BIT States are well advised to clarify their intention with regard to the survival clause, either by explicitly neutralizing the survival clause prior to its termination, or explicitly confirming that they wish for the survival clause to apply after the termination.

Analysis of BITs of LDCs

The analysis has revealed that 116 out of 213 BITs of LDCs [4] (in force) with both developed and developing countries have already outlived their initial periods and remain in force indefinitely unless terminated at any time by issuance of a written termination notice.

Further, 84 BITs have their initial validity periods expiring before 2025, and 13 BIT will have expiry of their initial validity periods after 2025. They can therefore be terminated by proper notice given within a certain period of time specified in the respective BIT termination clause. It is important to keep an eye on termination notification deadlines in order to issue timely notice since many BITs can get renewed for definite periods of time, and the next opportunity to terminate them will be in 2, 5,10, 20 or even 30 years after the expiration of the initial validity period.

The BITs covered by the present research have 5, 10, 15 or 20-year term survival clauses with half of them having 10 years as the survival clause term. The analysis has revealed that BITs of certain countries have longer than an average duration of survival period (20 years), which can diminish the results of BIT termination.

Suggestions for LDCs’ planning to terminate their BITs:

a) LDCs are invited to take specialist advice [5] along with the attached table that contains essential information about termination clauses and survival clauses of BITs of LDCs. Irrespective of the intent to terminate BITs in the near future, States are advised to have a clear picture of possible time periods to terminate them and also to monitor this timeline.

b) If a state intends to terminate a BIT unilaterally, it needs first to look at the initial validity term and the deadline for sending a notice of termination to the other Contracting Party. In any case, LDCs which intend to terminate BITs should not hesitate to give notice of termination prior to or on the deadline for issuing the termination notice, regardless of the date of expiry of initial validity period and clause on renewal of a BIT (indefinitely or for definite periods of time), in order to terminate the BIT on the earliest possible date.

c) Regarding survival clauses, if States want to terminate BITs and absolve themselves from obligations, it is necessary to start the process of termination as soon as possible. LDCs are advised to try to persuade their BIT partners to neutralize survival clauses by mutual consent before terminating BITs or at least advocate for reduced periods in cases when the survival clause is essential for the other party to the BIT. The reduction of the period of a survival clause provides an option for LDCs in BITs that have very long survival clauses and not enough bargaining power to persuade the other party to neutralize the survival clause.

d) In any case, if parties to a BIT decide to terminate a BIT by mutual consent, they are advised to make a clear and transparent statement as to the exact date of termination and the conditions of termination (for example, by exchange of notes or letters).

Downloads:
- Full study
- Consolidated table of LDCs BITs

Footnotes:

[1The United Nations Committee for Development Policy (CDP) defines LDCs as low-income countries confronting severe structural impediments to sustainable development. They are highly vulnerable to economic and environmental shocks and have low levels of human assets, https://www.un.org/development/desa/dpad/least-developed-country-category.html accessed 29 September 2018.

[2‘Vienna Convention on the Law of Treaties (1969) http://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e1498 accessed 29 September 2018.

[3There might be different reasons for that. For example, one Contracting Party does not agree to terminate a BIT, Contracting Parties failed to agree on the conditions of the mutual termination etc.

[4The Project team used the UN LDC’s list as at September, 2018. The list of LDCs is reviewed each three years by the UN Committee for Development Policy based on the following criteria: income, human assets, economic vulnerability.

[5LDCs might well benefit, e.g., from the support of different international intergovernmental and non-governmental organizations, such as the UNCTAD, IISD, South Centre etc.


 source: IELPO / Tradelab