Exits from investment treaties: an omen for APAC


More than 3,000 investment treaties have been entered into by states in order to ensure investments of foreign investors enjoy a certain level of protection. However, in the late 2000s, an increasing number of states (such as Bolivia, Venezuela, Ecuador and South Africa) have unilaterally withdrawn from some of their investment treaties. This trend has since spread to the Asia-Pacific region, with Indonesia and India announcing their intentions to terminate or withdraw from many of their investment treaties.

In March 2014, Indonesia announced it would not renew its bilateral investment treaty (BIT) with the Netherlands with effect from 1 July 2015. This was followed by another announcement that it would allow all 67 of its BITs to expire, including those with Australia, China, Singapore, and the UK. Indonesia may have made this move in response (at least in part) to cases brought against it by foreign investors; including the Churchill Mining v Indonesia and Planet Mining v Indonesia cases, brought under the UK-Indonesia and Australia-Indonesia BITs, respectively, which concerned expropriation claims arising from a coal project in Borneo.

The timing of the announcements suggest a connection: one month beforehand, the International Centre for Settlement of Investment Disputes (ICSID) Tribunal had issued its decision on jurisdiction, rejecting Indonesia’s arguments that the tribunal had no jurisdiction to hear the investors’ claims for damages of more than US$1 billion (excluding interest).

While these moves may cause concern for some foreign investors, they certainly do not spell the end of investor protection in Indonesia for the time being. First, the immediate impact of Indonesia’s termination of its BITs is limited. For instance, while the Indonesia-Netherlands BIT has been terminated, its investment protections will continue for another 15 years due to the so-called “sunset” provision. Other BITs include similar provisions, ensuring that investment protections will continue to apply to investments for a period of usually 10 or 15 years.

Second, there has been media commentary suggesting that Indonesia will negotiate new BITs with its trade partners in an attempt to recalibrate the protections afforded to investors. For instance, Indonesia has announced plans to wait until the Indonesia-Singapore BIT is eligible for renewal to renegotiate a new BIT with Singapore.

Third, and most importantly, foreign investors may be eligible to seek protection under Indonesia’s multilateral treaties, including various ASEAN treaties. Indonesia is a member of ASEAN and a signatory to the ASEAN Comprehensive Investment Agreement, which provides protection to foreign investors which are from other ASEAN countries.

In July 2016, India sent notices to 58 countries announcing its intention to terminate (or not renew) its BITs. This heralded a shift from India’s previous foreign investment policies, where India signed close to four or five investment treaties a year from 1994 to 2011.

While these BITs may be terminated, many include “sunset” provisions such that existing investors will continue to receive investment protections for a further period of about 10 or 15 years.

There are, however, 25 BITs unaffected by this announcement. These BITs cannot yet be terminated until certain terms have expired. India has circulated a proposed joint interpretative statement to the states counterparty to these 25 BITs, proposing a non-expansive interpretation of the terms of these BITs.

The growing number of claims being brought by foreign investors against India is a significant factor in explaining why India is now looking to exit its BITs. More than 10 cases have been brought against India in the past five years.

India’s termination of its existing BITs has been followed by the introduction of a new Model BIT, which attempts to recalibrate the balance between the state and foreign investors, addressing the concerns of India (and other states) that previous BITs overly favoured the rights of foreign investors. The new Model BIT restricts the standards of protection given to investors. In particular, in the new Model BIT:

  • Most favoured nation treatment is excluded;
  • Fair and equitable treatment is excluded and replaced with a list of measures, such as denial of justice, fundamental breach of due process and discrimination, or manifestly abusive treatment, each of which must constitute a violation of customary international law; and
  • Full protection and security provisions are restricted to physical security of investors.

In addition, a foreign investor’s right to commence arbitration is also limited, as the investor must first attempt to exhaust local remedies for a period of five years.

While India and Indonesia may have withdrawn from existing BITs, this does not necessarily leave foreign investors without protection.

New investors may be eligible to claim protection under multilateral treaties, and existing investors have the benefit of protection pursuant to the sunset clauses in at least some of the terminated BITs. In addition, both India and Indonesia are negotiating new bilateral and multilateral treaties that provide for some form of investment protection.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by emailing: Danian Zhang at danian.zhang@bakermckenzie.com, or for general enquiries contact Anand Ramaswamy at anand.ramaswamy@bakermckenzie.com