Tag Archives: BIT

TPP is signed with ISDS provision

Two globes of EarthOn 4 October 2015, twelve countries representing 40% of the world’s economy signed the Trans-Pacific Partnership agreement. These countries consist of the United States, Mexico, Canada, Chile, Peru, Japan, Singapore, Brunei, Vietnam, Malaysia, Australia and New Zealand.

The text is yet to be released but official information about the agreement can be found among others on the U.S government website and the Canadian government website.

The signing of the TPP means that twelve countries with significant share in the world’s economy have been able to agree on one set of investment protection rules. As summarized on the U.S Trade Representatives website, the investment chapter will replicate the terms in the US 2012 Model Bilateral Investment Treaty. The rules require non-discriminatory investment policies and provide terms that assure basic rule of law protections. At the same time the rules ensure governments’ ability to achieve legitimate public policy objectives.

According to the Department of Foreign Affairs, Trade and Development of Canada, the investment chapter provides access to “an independent ISDS mechanism that is prompt, fair and transparent, and subject to appropriate grounds”.

This means that signing countries find ISDS to be relevant and necessary, not least between developed states. It may be noted that ISDS under the US 2012 Model Bilateral Investment Treaty includes a transparent proceeding and a possibility of a third party to participate in the proceeding. There is a good reason to guess the TPP will include these features too.

Why ICSID was established

national flags of the different states against the blue skyIt is challenging to reach an agreement on a global level on key issues, as shown in the global efforts to regulate greenhouse gas emissions. The investment law regime has long had the same problem. Many attempts to agree on a global standard for the protection of foreign investments have failed because of the countries’ different ideas about which rights to be provided for foreign investors.

It was this failure that motivated the World Bank to establish ICSID (International Centre for Settlement of Investment Disputes). Instead of regulating the level of protection that foreign investors can rely on – and therefore had proved to be very difficult – the solution was to establish a purely procedural framework for settling disputes by way of the ICSID Convention, which was signed in 1965. The Convention does not provide substantive investment protection. This matter has instead been left to countries to agree among themselves, often at a bilateral level.

By focusing on the procedural aspects rather than on substantial, ICSID has gained great support from countries. In addition, a big problem in the mid-twentieth century could be fixed: State’s intervention in economic matters. Previously, disputes between governments and foreign investors could only be solved by government intervention. In a world where major former colonial powers often faced the newly independent countries, the country with the power often won. In addition, some part of world trade took place with countries with a negative view on market economy, such as those who belonged to Soviet’s sphere of interest. By the establishment of ICSID, the playing field could be evened out and independent dispute resolution was first introduced in world trade. Instead of political power, rule of law would decide the disputes.

In hindsight, this has proven to be a recipe for success for ICSID. The Convention has now been signed by 159 countries and the centre in Washington has administered hundreds of disputes. Furthermore, while global attempts to regulate investment protection have failed, ICSID remains strong. The reason was largely because the majority of the thousands of bilateral investment treaties (BITs) refers to the center to solve disputes. Even in modern times new investment agreement continuously refer to ICSID for the settlement of investment disputes.

Today, there have been ideas to create a global system for settling investment disputes. It may be worthwhile to remember that there is already such a system, which for decades has been accepted by the overwhelming majority of the countries, and that this system was established with the aim of creating a neutral playing field for dispute resolution that otherwise tend to be politicized.

Case Summary No. 9: Compaña de Aguas & Vivendi v. Argentina

The water pipe which is connected to the pump swinging a foamy liquid.Our next case summary is Compañiá de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic. The summary was prepared based on the award rendered on 20 August 2007.

The investor was a French company and its Argentine affiliate who entered into a concession agreement with the Province of Tucuman to provide water and sewage services.

According to the investor, the Tucuman authorities – the legislature, the governor and the province’s regulatory authorities – relentlessly “attacked” the investor and the concession agreement almost from its inception. Investors claimed that these actions were taken with a view to pressuring them to renegotiate the tariffs of the concession.

Among other things, the investor pointed out to the statements made by the government that the water could cause cholera, typhoid and hepatitis and that the customers should not pay their bills. Further, the investor argued that the government used their regulatory powers to impose unilaterally modified tariffs, contrary to the terms of the concession agreement. In the end the investor terminated the concession agreement.

The investor brought the claim under the Argentina – France Bilateral Investment Treaty (BIT).

The tribunal found that there was a violation of fair and equitable treatment standard under the BIT. It noted that while it would have been entirely proper for a new government to seek to renegotiate a concession agreement in a transparent and non-coercive manner, it was unfair and inequitable to bring the investor to renegotiation table through threats of termination based on colourable allegations. The evidence did not show the existence of health risk from the water provided by the investor.

The tribunal further held that the actions of the government against the concession was equivalent to an expropriation as they had a devastating effect on the economic viability of the concession. The investor’s recovery rate declined dramatically over the life of the concession, among others because the government’s public statement asking the customers not to pay their bills. The tribunal reasoned that the investor had the right to expect that the government will not engage in damaging campaign against them. Therefore, according to the tribunal, the investor was radically deprived of the economic use of its investment.

More environmental languages in IIAs

green leaves background in sunny dayInternational investment agreements (“IIAs”) have increasingly addressed environmental concerns related to investment activity.

Based on a survey conducted by the OECD, inclusion of environmental languages in IIAs is becoming more common. The sample in this survey consists of 1,623 international investment agreements, thus covering roughly half of the global investment treaty population.

The first treaty to include environmental language in the sample is the 1985 China – Singapore BIT. In 2008, 89% of newly concluded treaties includes such language. Further, as we have written before, sustainable development is at the heart of the newly-adopted IIAs in 2014 where most of these treaties include a sustainable development-oriented features.

The most common environmental language is a provision which preserves policy space for environmental regulation. For example, Hungary – Russia BIT provides that the agreement does not preclude the application of measures to protect the environment and public health. Another type is a provision which discourages state parties to lower their environmental standards to attract investments.

Some IIAs have referred to international environmental treaties. The Energy Charter Treaty in its preamble specifically recalls the United Nations Framework Convention on Climate Change. The preamble of the new Norwegian BIT draft also recognizes that international environmental treaties are to be interpreted in mutually supportive manner.

Overall, 30 of the 49 countries covered by the survey have included environmental language in at least one of their IIAs. Canada is the country with relatively highest tendencies to include such language (83% of its sample treaties), followed by New Zealand, Japan, the United States and Finland.

 

Case Summary No. 6

Image of blurred store for backgroundOur sixth example of an ISDS case is Franck Charles Arif v. Moldova, a case filed with the International Centre for Settlement of Investment Disputes (ICSID) in Washington, D.C. The summary is based on the facts as described in the award rendered in April 2013.

The claimant, Mr. Franck Arif, a French national, was the sole owner of a company that had won a state tender to operate a series of duty-free stores at five locations along the Romanian border. The company had also secured the exclusive right to operate a duty-free store at the country’s main airport. In filing for arbitration, Mr. Arif argued that the success of his investments had been obstructed by a series of government delays, unnecessary inspections, and domestic judicial decisions that invalidated both the tender for the border-stores and the lease agreement for the airport store. Mr. Arif argued that the Moldovan state’s actions had violated several provisions of the bilateral investment treaty (BIT) between France and Moldova.

The arbitral tribunal rejected most of the claimant’s claims (e.g. expropriation, denial of justice, discrimination), but granted one of his claims based on the fair and equitable treatment standard set forth in the BIT. In short, the tribunal found that the state’s actions had frustrated the investor’s legitimate expectation of a secure legal framework in which to operate the airport store. For this breach, the investor was awarded USD 2.8 million in damages, significantly less than the USD 44 million he had requested. The tribunal also gave Moldova the option of further reducing the damages owed to Mr. Arif by offering restitution instead—in effect allowing him to re-open the store at issue.

Mr. Franck Arif also sued Moldova at the European Court of Human Rights in Strasbourg, on the grounds that the Moldovan government’s actions breached the European Convention on Human Rights. Disputes before European Court last many years; no verdict has yet been reached in the case filed by Mr. Arif.

The Evolution of BITs

CogwheelInternational investment regime, like any other field of international law, is not static. It continues to evolve and adapt to the present day needs and situation. States as the primary actors of the regime maintain full control in its evolution.

Historically, bilateral investment treaties (BITs) emerged as a response to the inadequacies of international law on protection of property of foreigners. Western states also sought to obtain better market access for their nationals to invest in developing states. See more explanation on the history of BITs here.

Germany is the first state to sign the first BIT, with Pakistan, in 1959. Other states quickly followed this effort: Switzerland in 1961, the Netherlands in 1963, Italy in 1964 and Sweden in 1965. BITs in this period were generally quite short – approximately five to six pages. These BITs focus on core protection such as the obligation to accord non-discriminatory and fair and equitable treatment to foreign investors.

Early on, BITs began providing for binding ISDS in the form of international arbitration. However, international arbitration has been used to resolve claims from foreign investors with respect to their property since the 18th century.

In recent years some states have begun adopting new model BITs which are more elaborate than older treaties. The most recent one is India, where its 2015 model BIT provides more detailed ISDS provisions, among others setting time limit of submitting a claim to ISDS and possibilities of counter-claims by a state against a foreign investor. And the Norway 2007 Model BIT provides for example that the unsuccessful party in ISDS shall bear the costs of arbitration.

The ISDS blog has previously discussed some ISDS reforms embodied in the Comprehensive Trade and Economic Agreement between the European Union and Canada (CETA) and the US 2012 Model BIT.

Comprehensive Empirical Study on Impact of BIT to the flow of FDI

isdsbitpostA recent empirical paper by CPB Netherlands Bureau for Economic Policy Analysis, a research institute under the Dutch Ministry of Economic Affairs, explains the effects of BITs (Bilateral Investment Treaties) on bilateral foreign direct investment (FDI) stocks for various regions and country income groups.

The sample in this paper is formed by 217 countries from 1985 to 2011, making it the largest and most recent period utilized in nearly all studies covering the effect of BITs on FDI. Other papers have often used a shorter period of time or a smaller sample. Reference can be made to a paper by the United Nations Conference on Trade and Development which reviews different studies on this issue. Our previous post has discussed this paper.

Below are some findings of the CPB paper:

  1. If countries have ratified a BIT then they invest on average 35% more in terms of stocks than country pairs without a ratified BIT.
  2. The effect differs between countries classified by income group (based on World Bank’s classification). Upper middle income countries seem to benefit the most from BITs. The impact on FDI stocks is about twice the average effect. Examples of upper middle income countries are Romania, Greece and Hungary.
  3. Region-wise, FDI impact is much larger if the host country is located in East Asia or Middle and Eastern Europe.
  4. The number of BITs among developed countries is about 500.

What caused the rise of ISDS claims?

In a recent report by the European Centre for International Political Economy, Demystifying Investor-State Dispute Settlement, the history of the rise of investment protection and ISDS claims is analyzed.

The report responds to the question whether the increasing use of ISDS is a signal that investors have too much power in challenging actions by States.

It concludes the following:

a. At its core, the number of ISDS cases reflects the amount of investment in the world. The growth of ISDS cases and the growth of foreign direct investment (FDI) largely follow the same trend.

b. The key explanation behind the rise of cases is that the volumes of FDI have grown enormously. A portion of such FDI is made in developing countries and transition economies, hence resulting to greater problems faced by investors.

c. There is a growing support of the principle of international rule of law in commerce, demonstrated by the rising numbers of Bilateral Investment Agreements (BITs), as well as the WTO agreements.

d. The most active claimants in ISDS are investors from EU countries. This is not surprising as the EU is by far the biggest source of FDI in the world, representing 43% of all global outward FDI.

e. ISDS cases are concentrated to specific sectors that are highly dependent on public buyers or political support, for example the electricity sector. This is also not surprising since sectors with significant government involvement naturally have a greater degree of political and regulatory risk.

The increasing number of ISDS cases may be described as an increase of trust and reliance on international law in general, and to international arbitration specifically, both by investors and States.

ISDS reform is already happening

Governments of both sides of the Atlantic have made significant policy revisions of ISDS mechanism over the past few years, as concluded in this recent article.

A decade ago, the U.S introduced transparency and third-party participation in ISDS as provided in its 2004 Model BIT. The current US BIT model, the 2012 model, contains these provisions as well. The 2012 model further provides an opportunity for the investors to discuss the effects of change of regulations with the host government, which may prevent the initiation of ISDS by investors. This model serves as the template for US’ position in the negotiation of future investment agreements.

The European Union has also introduced new elements to the ISDS regime, most notably in the Comprehensive Economic and Trade Agreement between the EU and Canada (“CETA”). The ISDS provision under this agreement contains among others:

  1. Prohibition of parallel proceedings in domestic court or other international tribunals;
  2. Introduction of a fast-track system for rejecting frivolous claims; and
  3. Full transparency in ISDS proceedings.

In addition, the CETA is the first trade and investment agreement which contains a binding code of conduct for arbitrators. The code of conduct obliges arbitrators to continuously disclose any possible conflict of interest as well as to maintain their independency and impartiality. This code of conduct is also included in the draft free trade agreement between the EU and Singapore.

The negotiations of the CETA have been completed and the text will now undergo a legal review followed translation into all official languages of the EU. The agreement will, at the later stage, need to be approved by the Council and the European Parliament.