Pakistan has decided to terminate 23 bilateral investment treaties (BITs) with different countries in order to avoid international arbitration with foreign firms on commercial contracts.
To date, as many as 10 cases had been lodged by foreign investors in different international arbitral forums, thus exposing the state of Pakistan to billions of dollars in compensation. There are nine other bilateral investment treaties. However, those nine treaties could be terminated or reformed by engaging the respective countries bilaterally.
Pakistan mulled over an option of taking up these nine treaties with the respective states to revise them in line with its revised BIT strategy.
There are 16 other treaties which the government does not want to ratify to avoid financial exposure in case foreign firms file cases in international courts due to litigation in commercial contracts with Pakistan.
According to the Board of Investment (BOI), under Section 9(m) of the Board of Investment Ordinance 2001, the BOI is mandated to negotiate and finalise agreements for promotion and protection of investments/bilateral investment treaties with other countries. To date, Pakistan has concluded 53 BITs with 48 countries.
BIT was a primary source to define the rights and obligations of signatory states and their investors. BITs were considered as tools for attracting foreign direct investment (FDI) through the provision of investment protection and facilitation to the foreign investors.
Pakistan was the pioneer of BITs and the first-ever BIT was signed between Pakistan and Germany in 1959. However, presently, due to rising Investor State Dispute Settlement (ISDS) cases, the signing of new BITs was on the decline and BIT terminations continued to rise.
A majority of Pakistani BITs contained standard provisions relating to expropriation, fair and equitable treatment (FET), national treatment, most favoured nation (MFN), ISDS and prohibition of performance requirements – thus shrinking the policy space for the government to adopt any measure of public interest.
Provisions relating to ISDS had exposed the state to international arbitration. Pakistan was also a signatory to seven treaties with investment provisions (TIPs). Out of these seven TIPs, four had ISDS provisions recognising the jurisdiction of international arbitration forums.
By signing only seven TIPs, Pakistan made commitments towards almost 56 countries. Majority of the developing countries, due to heavy cost of BITs, were reforming their BIT regime. Provision 3.1.3 of Pakistan Investment Policy 2013 provides, “BOI will develop a model text with the assistance of Law & Justice Division, and that model BIT will replace the existing BIT template to possible extent while all new BITs will be negotiated on new template.”
BOI had thus accordingly stopped negotiating BITs and developed a new BIT template with the active assistance of Law & Justice Division and Head of International Investments Dispute Unit, Office of Attorney General of Pakistan.
A detailed study of Pakistani BITs had been carried out. Out of 53 BITs signed with 48 countries; one BIT with Indonesia had already been unilaterally terminated by Indonesia in 2016; 16 BITs were signed but were ineffective due to non-ratification; 23 ratified BITs, which had completed the initial duration of 10, 15 or 20 years, could be terminated by giving notice of prescribed duration; and the remaining nine ratified BITs could not be unilaterally terminated at present.
However, those nine BITs could be terminated or reformed by engaging the respective countries bilaterally. Apart from BITs and TIPs, individual states entities also execute binding commercial agreements with the foreign investors posing the state a challenge of international arbitration.
To deal with the existing stock of BITs and to draw a roadmap for the future BITS, BOI prepared a strategy for reforming Pakistan’s existing and future BITs. A summary for the cabinet was accordingly prepared and circulated amongst the relevant ministries/departments and provincial governments for their views/comments.
In view of the best practices of developing countries, and in light of comments from the stakeholders, the following strategy to deal with the existing and future BITs/TIPs and commercial contracts of the state agencies with foreign investors, was proposed.
All 16 un-ratified BITs may not be further processed for ratification. In case of non-agreement by the other state(s); the following strategy may be adopted on case to case basis. The BOI proposed to engage the contracting states for signing the Joint Interpretation Protocol to mitigate its harmful effects; or it proposed to engage the contracting states in amending certain provisions like ISDS, FET, SBA, and expropriation etc. In case none of the above two options were possible, Pakistan would have to wait till the timeline of termination as provided in the respective BIT is reached.
