International Investment Agreements
International Investment Agreements (IIAs) are treaties negotiated between governments which set legal standards of protection for foreign direct investments (FDI). (Although the term IIAs is sometimes used to include contracts negotiated between a particular investor and a host government, the term is used in the narrower sense here). A core function of these agreements is to ensure that foreign investors will not suffer expropriation or nationalization without financial compensation. However, the agreements also offer a range of other legal protections to foreign investors, including protection against discrimination and capricious bureaucratic interference.
While advantageous to foreign investors, the agreements have proven controversial in some cases because of limits placed on the sovereignty of governments and their capacity to remove legal disputes out of domestic courts and into often closed-door international arbitration processes.
For journalists, one of the most interesting features of IIAs is that they permit individuals or companies to directly sue a state for breaches for the treaty. This is highly unusual. By contrast, the World Trade Organization offers no direct legal recourse to aggrieved businesses. Under the WTO system, only governments may bring legal claims against other governments for alleged breach of WTO agreements. This rule dampens significantly the number of lawsuits filed under the WTO system.
Not surprisingly, the litigation opportunities afforded by investment treaties have opened the floodgates to a wave of investment-related lawsuits by multinational companies against their host governments. These lawsuits are handled on the international playing-field, by arbitrators specially convened to hear a given dispute – and are subjected to very limited review and scrutiny by national courts. The damages sought in these investor-state arbitrations frequently run into the hundreds of millions of dollars, and even billions of dollars. Just as crucial, the subject-matter of these disputes is often extremely news-worthy. While some disputes relate to egregious mistreatment or abuses suffered by foreign investors, at other times investors are objecting to sensitive policy measures, such as new taxes, more stringent environmental regulations, or expanded health & safety policies.
However, the often-secretive nature of these arbitrations presents formidable challenges for journalists. Simply uncovering the existence of an investor-state arbitration – much less reporting on the issues at stake – can require adept and persistent investigation.
A short history of IIAs
Modern investment agreements were inspired by frequent diplomatic disputes over the legal standards and protections to be accorded to foreign capital. These debates took on a particularly sharp edge in the post-colonial era, as newly-independent states jousted with former colonial masters over control of natural resources and other assets. A wave of nationalizations in newly-independent states – particularly in the oil and mining sectors – led foreign investors to demand more extensive international law protections for such investments.
Starting in the late 1950s, developed countries proceeded to develop special international treaties to protect their outward investments. Germany was the first to do so, and many other European powers followed suit in the 1960s and 1970s. The United States launched its own bilateral investment treaty (BIT) program in the early 1980s. Currently, the U.S. has bilateral treaties with more than 40 countries (and as explained below, a further number of free trade agreements with others). Many European countries have concluded upwards of 100 such treaties, generally since they have been doing so longer.
IIAs proliferated especially rapidly during the 1990's – when the number of these agreements quintupled to more than 1800. This resulted in a complex web of bilateral and multilateral agreements protecting foreign investors. Today, there are well over 2,500 such bilateral treaties. Moreover, it is now commonplace for international law firms to advise corporate clients to structure FDI transactions with protection under one or more of these treaties. For instance, US investors compensated for the lack of an IIA with Venzeuela by routing their Venezuela-bound investments through the Netherlands, which did have a bilateral investment treaty with Venezuela until Caracas terminated it in late 2008. (As is discussed later, this practice of treaty-shopping has engendered some controversy).
The most common form of IIA are bilateral investment treaties which are narrow instruments focusing on FDI protection. However, IIAs are often embedded into broader international trade agreements, such as the North American Free Trade Agreement (between the United States, Canada and Mexico) or the Central American Free Trade Agreement (between the United States, Guatemala, El Salvador, Costa Rica, Honduras, Nicaragua and the Dominican Republic).
Despite some differences, IIAs typically guarantee compensation in cases of nationalization or expropriation. Indeed, one of the key goals of developed countries was to ensure that high standards of compensation (e.g. full market-value) was guaranteed, rather than a less generous standard favoured by many countries nationalizing foreign investments. The treaties also ensure that foreign investors can transfer cash and profits out of a host country, and that foreign investors will not be treated less favourably than local businesses. In addition, these agreements promise foreign investors “fair and equitable treatment” – an ambiguous concept which is subject to sharply divergent interpretations in practice – and “full protection and security” which obliges states, at a minimum, to show due diligence in providing physical protection for foreign investments, for example shielding them from seizure by mobs or destruction by armed forces.
At times, the agreements will also place certain restrictions on the types of obligations or duties that may be imposed by governments on foreign-owned enterprises. For example, U.S., Canadian and Japanese treaties typically prohibit host-governments from obliging foreign investors to source materials and inputs from within the domestic market. Some recent agreements pushed by the government of Japan prohibit host-countries from obliging foreign investors to hire a given percentage of local employees.
Fair & Equitable Treatment
Restrictions on Expropriation and Indirect Expropriation
Free Transfer of Funds
Notably, investors may sue states for cash damages when any of these treaty protections are perceived to have been breached. Because there are no comprehensive data on the lawsuits that arise under these treaties (see discussion below about transparency) it is difficult to judge what constitutes a typical outcome of such lawsuits. However, in some cases, investors have failed to recoup any of the substantial damages claimed, whereas in other cases, foreign investors have secured awards in the low-hundreds of millions of dollars. Based on publicly available information, Argentina appears to have borne the largest brunt of such lawsuits, having been ordered to pay upwards of half a billion dollars to date in a series of claims brought by foreign investors with legal grievances. Most of these disputes arose after the country’s financial crisis in the early 2000s and involve charges that emergency measures taken to stabilize the economy and cap the cost of public utilities breached contractual and treaty undertakings made to foreign investors, for example, the right to peg prices for public services to US cost-of-living indices.
Apart from the legal protections offered by IIAs, a major attraction of these agreements is their capacity to remove legal disputes with host governments from domestic courts, and to elevate them to international arbitration. At times, this process is a life-line for foreign investors confronted with systematic corruption or other barriers to justice. The sweeping scope of such arbitration provisions has ensured that foreign investors can routinely evade local legal systems, marginalizing the role of domestic courts in resolving important business and policy disputes. In practice, however, a variety of factors, including the nature and scale of a dispute and the desire of the investor to continue to practice business in the host country may determine whether an investor resorts to international arbitration as provided under an investment protection treaty. Ultimately, it is the investor – not the state – that will determine whether it wishes to resort to international arbitration, as treaties are geared to provide legal protections for investors without imposing counter-obligations or responsibilities on those investors.
Indeed, dozens of multinational corporations opted for international arbitration in the aftermath of the Argentine financial crisis, in order to sue the Argentine government for breaching public utilities contracts, and international investment treaties. The Argentine government has long insisted that such disputes should have been resolved in the Argentine courts; however, foreign investors have maintained that they can get a more favourable hearing in international arbitration. Where investors, such as the multinational firms, Vivendi, Suez and BP could choose between the terms of concession contracts, which offered access to the Argentine courts, or international treaties, which opened a path to international arbitration, these firms have tended to opt for the latter route. Although the treaties themselves may also offer the ability for foreign investors to pursue alleged treaty breaches in the local courts, investors are unlikely to trust those courts over an international arbitration process where they may choose one of the adjudicators.
Where a treaty provides for access to international arbitration, the local courts of the host country will have limited oversight over the dispute. Local courts may issue an injunction in a bid to halt the arbitration process, but international tribunals often simply choose to ignore such domestic rulings, reasoning that the parties have consented to the international process and cannot withdraw that consent after an arbitration has been put in motion. Otherwise, the local courts may only intervene, to a limited extent, where they are asked by a party to enforce or invalidate the final ruling (“award”) of an arbitration tribunal.
While the rules differ in each jurisdiction, local courts may be limited by the terms of domestic arbitration laws to exercising only minimal review. Often these laws were drafted so as to show deference to arbitration proceedings and outcomes on the ground that such proceedings are consensual processes dictated by the two parties. Thus, even where governments are involved in such cases, or where issues of great public interest come into play, local courts may be permitted to intervene only where there is evidence of some egregious failing, for example corruption on the part of arbitrators or an invalid agreement to arbitrate.
Anecdotal evidence suggests that parties are rarely successful in overturning or undoing the outcomes of IIA arbitrations by turning to domestic courts. For example, a number of parties have turned to the Canadian courts following arbitrations under the investment chapter of NAFTA; but, in only one instance did a court overturn any part of an arbitration ruling – and this had no impact on the financial consequences for the country concerned – Mexico.
Even where local courts are given an opportunity to scrutinize an arbitration award, this domestic judicial process may not be fully transparent. The rules differ across legal systems, but some countries, for example Switzerland or the U.K., may hold certain hearings in private or refuse to release the arbitral award to the public although it is part of the court record. Again, these situations have been tailored to the needs of business actors who desire privacy and finality in the arbitration of disputes; however, it is less clear that this level of judicial deference is appropriate in arbitrations where government policies are at issue.
Lack of Transparency
Perhaps the most controversial feature of this investor-state arbitration process is the lack of transparency surrounding it. In sharp contrast with most domestic legal systems, investors filing arbitrations are under no uniform duty to disclose the existence of such lawsuits, nor to reveal the claims and arguments being presented. Indeed, under some rules of procedure which govern these arbitrations, governments are prevented from disclosing such information on their own – without the consent of the investor. Some suits may be filed by simply notifying the government which is to be sued, and then jointly selecting a panel of arbitrators to hear the dispute. Proceedings may take place in a given country, but in legal terms they are governed primarily by international law and the applicable investment treaty. As such, these proceedings float above domestic legal systems and the rulings or awards of these panels are subject to only a very limited review or supervision by domestic courts.
Investment treaties may offer various types of arbitration to aggrieved investors, including those of the World Bank, UN and International Chamber of Commerce. The most commonly-offered form is that of the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). This is the most transparent option insofar as all cases handled by ICSID are listed on a publicly-accessible docket. But only where both parties to a dispute give their consent will the arbitration process (and related documents) be opened to public and media scrutiny.
In contrast with the World Bank option, other forms of arbitration are even less transparent. Where treaties offer the UN’s ad-hoc arbitration rules (those of the UN Commission on International Trade Law), these can be invoked without any public disclosure whatsoever; the investor initiates an arbitration lawsuit simply by notifying the host government, and signaling who the investor wishes to nominate as its appointee to the tribunal. The proceedings typically play out in-camera, unless both parties wish to open them to the public. Similarly, the rules of the International Chamber of Commerce (ICC) and the Stockholm Chamber of Commerce (SCC) operate so that new arbitrations are not disclosed by these Chambers – and the proceedings are always held in-camera. Unless a given party discloses that it is involved in an arbitration at these latter venues, it will not be a matter of public record.
Remarkably, in spite of the exceedingly high stakes of such lawsuits, it is unknown how many of these claims are being heard worldwide. Nor, are journalists or the public permitted access to most such proceedings – even when the existence of certain arbitrations is a matter of public record. Despite such limitations, it is known that a multitude of sensitive issues are being arbitrated:
- European mining investors in South Africa have filed an arbitration claiming that the latter country’s Black Economic Empowerment social policies violate the terms of IIAs signed by South Africa.
- Various governments have been sued by foreign investors when privatization plans are halted or reversed. For example, Poland was held liable in 2005 for treaty breaches following a decision to renege on an earlier pledge to privatize that country’s largest insurance company (PZU). The affected Dutch investors, Eureko B.V., are claiming more than 1 Billion Euros in compensation for this policy change.
- Argentina has faced Billions of Dollars in claims by foreign infrastructure investors related to losses occurring during the Argentine financial crisis. The investors allege that harsh emergency measures taken by Argentina are contrary to treaty protections owed to foreign investors. Recently an arbitral tribunal ruled in favour of the UK energy company National Grid against the government of Argentina. Of particular note, the tribunal rejected Argentina’s “necessity” defence, yet nodded to the gravity of the Argentine financial crisis by declaring that Argentina was not liable for treaty breaches at least during the (six-month) peak of the crisis. It will be a long time before we know whether the global economic crisis of 2008-09 (and perhaps beyond) will give rise to similar arguments about “necessity” at such difficult times.
- The ability of several African and Latin American countries (Paraguay, Venezuela, Namibia, South Africa) to embark upon land reform has been challenged by foreign property-owners as contrary to trade and investment agreement undertakings.
- In 2007-2008, a series of arbitrations were filed against Canada, touching upon various environmental or public health issues. A U.S. based company is suing following an unfavourable environmental review of a controversial Nova Scotia quarry scheme; another U.S. investor is suing over a thwarted scheme to dispose of Toronto’s municipal waste in an abandoned mine site elsewhere in Ontario; and another challenge has been filed by a U.S. chemical company following Canada’s ban on the hazardous insecticide Lindane.
Transparency, Clarity and Refinements
In recent years there have been various efforts to increase the level of transparency in IIA arbitrations, particularly in view of the sensitive matters of public policy which may be at stake. In the face of public and media outcry, both Canada and the United States have taken steps to introduce more transparency into the arbitration processes set out under new investment and trade agreements. While neither country has yet moved to amend earlier treaties, their efforts to date have exceeded those of most other countries. Recently, the government of Norway also proposed that future agreements ensure that dispute settlement is an entirely public process.
At the same time, there have been efforts to amend the procedural rules under which any arbitration take place, so that these also oblige parties using those rules to disclose the existence of disputes, and the details of any legal arguments. A debate has been taking place at the UN Commission on International Trade Law as to whether its ad-hoc arbitration rules, which are often used to resolve IIA disputes, should provide for mandatory transparency, including public disclosure of all lawsuits and public access to the proceedings.
In terms of the actual substance of IIAs, there is vigorous debate as to where arbitrators should draw the line between legitimate government regulation and those interferences which are so destructive of an investment that they amount to expropriation for which financial compensation must be paid. In the absence of such clarity, there is also debate as to whether this uncertainty has “chilled” important new policy measures by governments for fear of expensive investor lawsuits.
Debate has also surrounded treaty provisions which limit government restrictions on transfers of money in and out of developing countries. Economists Jagdish Bhagwati and Daniel Tarullo have criticized those agreements which restrict government ability to use capital controls in financial emergencies or balance of payments crises (See “selected media coverage” below). The agreement terms differ, with some ensuring government latitude to use such measures without risking lawsuits from foreign investors, while other agreements seem to place priority on the utmost freedom for capital transfers.
Another major debate centers on whether practicing lawyers (who may represent corporate or government clients) should also sit in the quasi-judicial role of arbitrator, and pass judgment as to whether governments have violated the terms of international treaties. Criticisms have been voiced as to the conflicts of interest inherent in a system where arbitrators can make rulings which could have implications for other cases where they act as advocates. Those in favor of the status quo point to the value in having experienced individuals serve as arbitrators, rather than those with no prior background in litigating or defending such cases.
A number of governments in Latin America have expressed growing skepticism about investment protection treaties, and the balance that they strike between state sovereignty and investor protection. Ecuador and Bolivia have both announced moves to revise or annul some treaties entered into by earlier administrations. Other governments in the region have mooted similar moves. This came at the same time as governments in that region moved to alter the terms of earlier deals reached with energy and resource companies – or to demand a majority stake for government in ongoing energy and resource projects. Withdrawing from an IIA is not a straightforward exercise. Most such agreements stipulate that the terms apply for a minimum period of time after the treaty’s entry into force, for example 15 or 20 years. After this, a state wishing to withdraw from the treaty may be able to do so, but most treaties prescribe a further period during which pre-existing investments will continue to benefit from the treaty’s protections. Thus, for example, the rights and protections may “live on” in some cases for another 10 or 15 years after the treaty has been terminated.
As referred to above, in October 2008, the Venezuelan government terminated its bilateral investment treaty with the Netherlands. The agreement has been used by a number of multinational investors to sue Venezuela after moves to increase the Venezuelan state’s control of major oil projects.
A particular source of controversy with the Venezuela-Netherlands treaty has been the malleability of its protections, and its use by investors hailing from a multitude of different jurisdictions. U.S. and other companies have incorporated intermediary companies in the Netherlands, and used these to hold their investments in Venezuela. In so doing, the investments qualify as Dutch-owned even if a U.S. or other company sits at the top of the corporate chain. Thanks to such structuring, several multi-billion dollar arbitration claims have been initiated against Venezuela in relation to U.S. investments although there is no investment protection treaty in place between Venezuela and the U.S. government.
Tips for Journalists wishing to track the negotiation of new IIAs
Governments will have an official or officials charged with negotiating new IIAs. These individuals may work in government agencies or departments with foreign affairs or international trade responsibilities. Most governments maintain lists of the treaties that they have already negotiated; these may be found on the websites of the relevant Foreign Affairs or Economic Affairs ministry. For example, in the U.S., the State Department maintains information about all such treaties, and new negotiations with economic partners.
Meanwhile, the UN Conference on Trade and Development (UNCTAD) maintains global lists of such agreements, and compiles complete texts of as many of these agreements as possible (see links below).
Often, protections for foreign investors are wrapped into broader free trade agreements. Thus, when the U.S. negotiated a free trade agreement with the countries of Central America, that agreement included a chapter incorporating the same types of provisions found in narrower investment treaties. Similarly, a host of “Economic Partnership Agreements” negotiated by Japan with its trading partners, integrate similar provisions. Ordinarily, the existence of one of these broader trade agreements would obviate the need for the countries to pursue or maintain an IIA between them
Tips for Journalists wishing to track investor-state arbitrations
A few governments maintain public lists of all arbitrations mounted against them by foreign investors (see links). Journalists may wish to ask politicians and other public officials whether they face any such claims – and what is the state’s policy on disclosing information about such lawsuits.
Look for tensions between foreign investors and host states, and explore whether investors have alluded to arbitration options available to them. The stock exchange filings of publicly traded companies may contain information about lawsuits which are proceeding quietly.
Monitor the docket of cases being arbitrated at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). This facility is the only arbitration venue which publishes a list of all FDI disputes being arbitrated under its auspices.
Monitor list-serves and on-line forums of lawyers who specialize in investment treaty law. One key forum is the subscription-service OGEMID (Oil, Gas, Energy, Mining Infrastructure Disputes).
The strategic use of access to information laws may be useful in order to unearth information about foreign investor lawsuits faced by a given country. Journalists might seek a full list of all international arbitrations initiated against the state (and its state agencies) by foreign investors, or more specific information such as legal pleadings and documents related to a given case which is known to be under in-camera arbitration. In 2001, the Public Broadcasting Corporation (PBS) used the U.S. Freedom of Information Act in a successful bid to gain access to the arbitration file of one such case launched against the U.S. government by a Canadian corporation. In some arbitration proceedings, arbitrators have acknowledged that governments may be bound under such laws to provide interested members of the public with more information about such cases.
Try to uncover the public policy dimension of disputes. On the face of it, many investor-state disputes appear to be purely commercial matters. However, upon closer scrutiny, investors may be objecting to new taxes, environmental measures, labor law changes, or unfavorable rulings by a local court.