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As the number of arbitrations under the investment treaties increases and the perception of their legitimacy decreases with conflicting decisions, the adoption of expansionary techniques of interpretation increasing the jurisdiction of the tribunals and creating new substantive principles of liability, states have responded in three principal ways. The first has been one of withdrawal from the system of investment arbitration. Some states have announced that they will consider not extending the life of their investment treaties after they expire. This response is a calculated decision based on the belief that the costs of arbitration and disputes outweigh the benefits that investment treaties bring to a state. Withdrawal and termination are matters of sovereign prerogative, but such a withdrawal has to be effected through the manner prescribed in the treaty. The effectiveness of withdrawal depends on its timing. Such withdrawal is not possible as to existing disputes or disputes that arose while the treaties were pending. The termination provisions in the treaties are relevant in determining such issues. Treaties could be terminated by agreement between the parties at any time. The sunset clauses in the treaties keep alive the rights of the foreign investor after the end of the treaty. Whether these rights survive termination by consent of both parties to a bilateral treaty is a moot point.
The second response is to change at least future investment treaties so that there is an exclusion of certain sectors such as taxation from arbitration. The third has been to argue for new types of defences to liability. It is the third response that this chapter will focus on. The inclusion of defences in newer treaties is becoming frequent. There is also the toying with ideas of relinquishing investor-state dispute resolution or having a distinct system of courts to deal with foreign investment disputes. The treaties are referred to as ‘balanced treaties’ as there is no exclusive focus on investment protection. Instead, regulatory space is provided for the state. Its power to act in the public interest is recognized through defences.
It is a relatively new phenomenon that there should be such defences to responsibility in a system which was thought of as providing a virtually inflexible system of secure protection to foreign investors.
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