BITs, FTAs and damaging effects of their investment chapters

Original Publication Date: 
2 October, 2012

Published in SUNS #7449 dated 2 October 2012
Geneva, 1 Oct (Meena Raman) -- The damaging effects of Bilateral Investment Treaties (BITs) and the investment chapters of North-South Free Trade Agreements (FTAs) were highlighted at a World Trade Organisation (WTO) Public Forum held last week.
The WTO Public Forum on "Investment provisions and agreements: What is the right 21st century approach?" was organised by Our World Is Not for Sale Network, the International Trade Union Confederation, and Public Citizen and was held on Tuesday, 26 September.
Members of the panel were Ms. Sanya Reid Smith from the Third World Network (TWN); Ms. Melinda St. Louis of Public Citizen's Global Trade Watch from the US; South Africa's Deputy Director-General from the Department of Trade and Industry, Mr. Xavier Carim; Mr. Roberto Bissio from Social Watch in Uruguay; and Dr. James Zhan, Head of the Investment Policies and Capacity Building Branch at the United Nations Conference on Trade and Development (UNCTAD). The session was moderated by Ms Kinda Mohamadieh, from the Arab NGO Network on Development based in Lebanon.
(For the report on the presentation by Mr. Xavier Carim, see SUNS #7446 dated 27 September 2012 and the OWINFS webiste).
Sanya Reid Smith from TWN highlighted the provisions that commonly arise in the BITs and the investment chapters of North-South FTAs that have been problematic. She said that the purpose of the BITs is to protect the rights of foreign investors and traditionally have no protection for the rights of government and do not contain obligations of the foreign investors.
Smith explained that the BITs and the investment chapter of the FTAs, especially those based on the US model, generally have a very broad definition of investment which also includes stocks, shares, futures, options, derivatives, expected or future profits, market share of the investor, intellectual property (IP) etc. The provisions usually define an investor loosely where even companies from other countries (not just those countries involved in the BIT or FTA) can seek protection, merely by buying shares in a company in one of the BIT/FTA signatory countries or by opening a letter-box or setting up a subsidiary in one of the signatories to the BIT/FTA, she added.
Another provision relates to "fair and equitable treatment" (FET), which appears to sound good but actually has been interpreted by some tribunals to mean that there is a standstill on regulations and that the government is prevented from amending or passing new laws so as to ensure a "constant regulatory environment", said Smith. Even in cases where words were put into an agreement to limit the scope of this provision, tribunals have decided otherwise.
Citing a recent study by Public Citizen of US FTAs and BITs, Smith said that in instances where investors have raised a violation of the FET provision in tribunals, 81% of the time they have won, which indicates that the provision is very powerful to strike down government actions.
As regards the clause on "expropriation", she said that this is widely defined to cover any government action which reduces the value of the investment. Where disputes arise between an investor and a government under a BIT, arbitral tribunals are used to enforce the BITs and some of these tribunals do not have sufficient conflict of interest rules for judges, said Smith. This allows judges who have an interest in the company bringing the dispute to hear the case, she added, citing an example in one case where one of the judges in a dispute was on the board of a parent company which brought the case and the investor won.
In investor-state disputes, she said that the claims are often huge, with one of the largest being for billions of dollars (in the case of Philip Morris vs. Government of Australia).
[Philip Morris Asia, an enterprise registered in Hong Kong (with whom Australia has a BIT), has launched the suit under the BIT. However, according to a post at the IELP Blog, citing Andrew Mitchel at Lawyers Weekly, and Don Anton, an international law academic at the Australian National University, Philip Morris Asia acquired shares in Philip Morris Australia on 23 February 2011 - 14 months after the Government announced its intention to introduce plain packs. Hence, said Mr. Anton, Philip Morris Asia "faces hurdles" trying to prove that investors' legitimate expectations have been violated. - SUNS]
The largest known pay-out was almost $1 billion but in two-thirds of the cases, the disputes are a secret, with no information on which government was sued, for what violation and for how much and what was paid out, Smith explained further.
On the type of cases that have arisen, Smith explained that investors have successfully challenged health and environmental measures taken by governments. There have also been cases by investors challenging government measures related to government procurement, state-owned enterprises, taxation, financial regulation, industrial policy, sovereign borrowing, agriculture etc.
She gave examples of several cases where governments have been sued by investors and governments have lost even if these measures were legitimate and taken for environmental or health reasons. Many cases involve the mining sector, and where an investor breaks a law in a country it invests in, and the host government revokes the company's mining permit (as it is permitted to do under its domestic law), the investor sues under the treaty and the investor wins with the host government having to pay monetary compensation to the wrongdoer.
Smith gave examples of developed country governments who have been thus sued such as Germany, Canada and Australia. She said that in the case of Germany, a Swedish energy company called Vattenfall sued the German government twice when the government took measures to address climate change in one case and the other in relation to the German government's decision to phase out nuclear power, following the Fukushima disaster. In the first case, the German government settled the case for an undisclosed sum (Vattenfall had claimed Euros 1.4 billion plus interest) while the second case is pending, with a claim from the company for nearly $1 billion.
The Australian government's current position is to say NO to investor-state dispute settlement in trade policy in relation to the Trans-Pacific Partnership Agreement (TPPA), she said.
Melinda St. Louis from Public Citizen spoke on investor-state disputes brought under the US FTAs and BITs and highlighted several cases. St. Louis said that BITs have existed since the 1950s but it has been in the last 10 years that most investor-state disputes have occurred. She said that in 1999, only 69 cases were launched in the International Centre for Settlement of Investment Disputes (ICSID) but today, there are 370-plus cases - a 436% increase in the total stock of investor-state cases just in this body alone.
(ICSID is an international arbitration institution which facilitates arbitration and conciliation of legal disputes between international investors and is a member of the World Bank Group).
In the USFTA investment chapter model on investor-state dispute resolution, individual foreign firms who are investors obtain equal status with sovereign national signatories to privately enforce a public treaty, St. Louis explained. She said that there are expansive substantive investor rights which extend beyond domestic property rights defined by US laws and courts. An "investment" is defined to cover permits, government approvals, IP, contracts etc.
St. Louis said that private investor-state dispute enforcement skirts the normal court system where foreign corporations get special privileges and greater rights. Investors can demand compensation for "loss of expected future profits related to non-discriminatory environmental, health, safety, land-use, and zoning policies". The concept of ‘sovereign immunity' is waived, she elaborated further.
St. Louis said that cases are decided by private tribunals (under the World Bank or United Nations) where three corporate lawyers rotate between suing government on behalf of corporations and being "judges". Clearly, there is a conflict of interest and the pay structure incentivises lengthy proceedings and governments share the costs of the case even if the case is dismissed, she added.
The tribunal has discretion to set damages, compound interest and allocate costs and there is no outside appeal, and annulment can be sought for limited errors, she said further.
St. Louis said that under the North American Free Trade Agreement (NAFTA), $365 million have already been paid out to corporations with $13 billion in pending claims under US NAFTA-style deals alone relating to land-use, timber, water rights, public health, environment, mining, energy and transportation.
She highlighted several cases of investor-state disputes under USFTAs or US BITs. In the case of Exxon-Mobil/Murphy Oil vs. Canada, a non-discriminatory requirement for a fee to be paid for research and development in two of Canada's provinces that applied to all firms, both domestic and foreign, was the subject of dispute where the investor claimed that this was a performance requirement and therefore not allowed under NAFTA. Exxon claimed $60 million.
In Metalclad vs. Mexico, the California-based company successfully challenged the denial of a construction permit by a Mexican municipality for the building of a toxic waste facility. The government move was viewed as an "indirect expropriation" and Mexico was asked to pay $15.6 million.
St. Louis also gave examples of cases where the investor-state dispute resolution is used as threats and coercion against governments to obtain a result.
One example was the case of a metal smelter in Peru "where an investor-state case was brought against Peru under the US-Peru FTA by Renco Group, a company owned by one of the richest men in the US. The dispute relates to Renco's investment in a metal smelter in Peru which has been designated as in the top 10 most polluted sites in the world. Peru's Health Ministry found that about 99 percent of the children at this site had lead poisoning and 20 percent of these needed urgent medical attention. Renco's Peruvian affiliate promised to install sulphur plants to help remediate the environment by 2007 as part of an environmental remediation program. Although it is out of compliance with this contractual obligation, the company sought (and Peru granted) two extensions to complete the project. In 2010, Renco sent Peru a Notice of Intent that it was launching investor-state proceedings, alleging (among other claims) that Peru's failure to grant a third extension of the environmental remediation obligations constitutes a violation of the firm's FTA rights as a foreign investor. The company is demanding $800 million in compensation from Peruvian taxpayers for alleged FTA breaches."
In the case of Chevron vs. Ecuador, after having lost on the merits in Ecuador and US courts, Chevron has turned to use an arbitration tribunal for investor-state dispute resolution under a BIT to help the company avoid paying to clean up horrific contamination in the Amazonian rainforest, said St. Louis. Chevron is trying to get the tribunal to suspend enforcement of or alter an $18 billion judgment against Chevron rendered by a sovereign country's court system, she added.
Roberto Bissio from Social Watch highlighted the case of Philip Morris, the transnational tobacco company which has brought an investor-state claim against the Uruguayan government for imposing restrictions on cigarette packaging. The government wanted 80% of the cigarette package to have anti-tobacco messages and that there can only be the use of one brand with no variations. According to Bissio, the company considers this a violation of its IP.
Dr. James Zhan of UNCTAD said that the investment treaties have not been functioning for sustainable development and no government has been happy with this. The issue was how to ensure the move away from agreements for freedom for investors to enabling investment for development and there was need for policy makers to have policy tool-kits and know-how, he added.
Zhan said the challenge was how to ensure investment rules serve economic growth and jobs and also mainstreams environmental, social and governance issues.
He said there were systemic challenges with the proliferation of investment treaties in the era of liberalisation, while now was the era of regulation and sustainable development. Zhan said there is incoherence at three levels: between treaties signed with countries at different times and at different levels of development; national and international incoherence; and investment polices vis-a-vis other policies including trade, competition, and industrial policy.
He said that there was need for new policy frameworks with a new generation of investment policies with guiding principles; national investment guidelines; and international policy guidance. On investment treaties, the option for governments was whether to have them or not, he said.
Zhan said that there was "no one size fits all" option but there are a range of options for countries to pick and choose from. There is need to analyse the development implications and a set of indicators for assessing effectiveness.
On what is the right approach, he said there is need for a balanced approach with investment for sustainable development with policy coherence, the right to regulate and to balance the rights and obligations of corporate governance.