Indonesia Research Update #16: Utilizing Effective and Efficient Legal Drafting in Investment Treaty by Surya Oktaviandra

20180125_002009

 

The greater purpose of Foreign Direct Investment (FDI) is to bring substantial benefit to states involved and the world through the expansion of international trade. At the time when host state can increase the level of its capital and economic growth, the investor may also obtain benefits such as lower cost in the production and further profit by expanding the business into new market.

Despite the empirical statistic of the impact of foreign direct investment is, unfortunately, inconsistent since researchers have different result due to method`s disparity, the practice of FDI is obviously fruitful in the world economic activity. Furthermore, the framework of FDI is usually covered by two mechanisms; first, by Treaty with Investment Provisions (TIPs) and second, by Bilateral Investment Treaty (BIT).

BIT is conceived as a vigorous commitment between two countries since the first discussion until the execution stage. In International Law context, the principle of Pacta Sunt Servanda stipulated a contract or an agreement between two or more sides should be respected as a law for the contracting parties.

The concept of BIT arises because of the concern of risk in foreign investment. A BIT is deemed as a device or mechanism to attract inward investment of investor by offering host state`s commitment in accordance with property rights. Moreover, BIT sets to define the minimum standard of behaviour towards the investor to reduce the risk of expropriation or regulatory measure. Furthermore, the original purpose of BIT is, undeniably, to ensure adequate or, in some occasions, full protection for the investment of the investor.

In many BITs, investment protection clauses such as Most Favoured Nation (MFN), National Treatment (NT), Indirect Expropriation (IE), Full Protection and Security (FPS), sunset/survival clause or even, umbrella clause become an international standard and widely adopted by many countries to govern their BIT.

However, the recent development shows many states raise their concern to the application of BIT by terminating, or at least, evaluating their BIT in a drastic path. Many reasons emerge, two of them are crucial, the lack of regulatory space and the concern of dispute settlement mechanism. Those factors are interdependent and contribute to the investment dispute in recent years. Therefore, many legal scholars attempt to impart some recommendations on how to balance between regulatory space and the investment protection.

When it comes into Bilateral Investment Treaty, the challenge is even higher for host state in regulating a fair protection compare to Multilateral Agreement because there is only two state face to face to determine what law they will establish.

Surya’s research will exert to provide the practical recommendation on fair BIT`s provisions and states will be advised in drafting them for a better balance in their investment agreement.

Surya believe we can exercise specific instrument to improve our regulation in Bilateral Investment Treaty. A tool which he propose is through the language of legal drafting in the agreement. Surya will examine how prompt language in a Bilateral Investment Treaty can produce a narrower interpretation, clearer understanding and how this is beneficial in reducing dispute settlement.

A quick example how this works is in the term of Full Protection and Security Clause. Some BITs adopted this language, and the word of ‘Full’ creates broad interpretation on the application and can sometimes confuse even before the international court. When we shift the language of ‘Full’ into “Adequate’, the interpretation becomes narrower.

In his research, Surya will attempt to provide that type of method, especially for all important provisions that may lead to the opportunity for a dispute. The effectiveness of this approach, in my opinion, is fruitful and legitimate. In the case of Bilateral Investment Treaty where both parties delegate their consent to apply for their agreement, it governs as ‘treaty contract’. The application of this law will be based on the Pacta Sunt Servanda principle whereby what parties have been agreed must be respected.

 

Surya Oktaviandra is currently studying Master degree Law at Maastricht University, Netherlands and is on his way to finishing his research thesis.

 

Indonesia Research Update is an initiative by GoLive Indonesia that aims to promote and disseminate knowledge and information obtained through research completed by Indonesian students outside of Indonesia.

We sincerely thank Surya and wish the best for his future endeavours in career and life.

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