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The emerging crisis of investment treaties
An epidemic of international legal suits taken by companies against governments for billions of dollars is causing public concern and leading to reviews of investment treaties.
A growing number of international law suits has highlighted an emerging global crisis: the nature and effects of investment treaties signed between governments but which are allowing private companies and investors to sue countries for millions or even billions of dollars.
The most recent cases involving investment include a US$1.8 billion judgment against Ecuador obtained by the U.S. oil company Occidental Petroleum, a US$2 billion suit filed against Indonesia by a UK mining company Churchill, cases taken against Uruguay and Australia for public health measures by tobacco companies, suits threatened against India by several multinational companies, and even the seizure of an Argentinian warship in a Ghana port on behalf of a U.S. investment firm.
The law suits, which have resulted in judgments totalling many billions of dollars against governments, were taken by companies and investors claiming that their investments including future profits had been affected by a range of government policies, including non-compliance with contracts or new health, environmental or economic measures.
Most of arbitration cases are taken up in the ICSID (International Centre for Settlement of Investment Disputes), based in the World Bank in Washington.
The tribunal system is widely criticised for its lack of professionalism and transparency, its conflicts of interest and the secrecy of its cases and outcomes.
The epidemic of cases and the high losses that governments have suffered or will potentially suffer is giving rise to grave concerns and calls by several governments as well as public interest groups and legal experts to review and amend the agreements that have led to the legal suits.
The agreements are of two main types – the bilateral investment treaties (BITS) signed between pairs of governments (of which there are now around 3,000) and the investment chapter contained in bilateral or regional free trade agreements (especially those involving the United States).
Many of these agreements have “investor-to-state” dispute systems, under which a private company or investor can directly sue governments in an international tribunal by claiming that their property or profits have been “expropriated” or adversely affected by a violation of contracts or by recent policy measures.
The following are some recent cases of legal suits taken by investors against countries:
• An ICSID tribunal in October awarded a judgment for US-based Occidental Petroleum (Oxy) against Ecuador of US $1.8 billion, its largest ever award, in a case taken under the U.S.-Ecuador BIT. In addition, Ecuador has to pay $589 million in backdated compound interest and half of the costs of the tribunal, making its total penalty around $2.4 billion. The government had annulled a contract with Oxy because it violated a clause that the company would not sell its rights to another firm without permission. The tribunal agreed the violation took place but judged that the annulment was not fair and equitable treatment to the company. (Ben Beachy, Public Citizen Global Trade Watch)
• The Indonesian government was sued in June for $2 billion by a London-based mining company Churchill, which claims its right to mine in Busang (East Kalimantan) was violated when the local government revoked the concession rights held by a local company in which it had invested. The government is countering the Churchill case, claiming that Churchill did not have the correct type of mining licenses. Law Minister Amir Syamsuddin said Churchill's acquisition of a local company broke the law as they did not report nor get approval from the regency government and Jakarta. Two Ministers and other senior officials will be representing Indonesia at the case in ICSID. (Straits Times, Singapore, 18 Sept 2012)
• The tobacco company Philip Morris sued Uruguay for alleged breaches to the Uruguay-Swiss BIT for requiring cigarette packs to display graphic health warnings and sued Australia under the Australia-Hong Kong BITS for requiring plain packaging for its cigarettes. The company claims that the packaging requirements in both countries violates its investment, including its trademark which as an intellectual property is an investment asset.
• The Indian government has planned to review its bilateral investment agreements after foreign telecommunication companies gave notice that they would take up BITS cases against India after the 2G licenses given to them were cancelled by the Supreme Court in April 2012.The company Sistema invoked the treaty between India and Russia, while Telenor invoked the agreement with Singapore through which the telecom firm routed its investment, according to an Indian Express report, which also quoted a government official:“We need to relook clauses in such treaties in order to ensure that such an eventuality does not happen in the future again.”
• There are two known pending cases taken in international tribunals against Vietnam. In 2010, U.S. businessman Michael L. Mackenzie, filed a case claiming that Vietnamese authorities failed to protect his investments in a resort development project in Vietnam. In 2011, the company Dialasie SAS sued Vietnam under the France-Vietnam BIT. Dialasie had a contract with Vietnam’s social security agency to operate a private dialysis clinic in Ho Chi Minh City but it was closed in 2006 amidst a series of disputes with local health-care authorities. (Source: Luke Eric Peterson, IA Reports).
• In November 2012, a US energy company Lone Pine Resources sued Canada under the investment chapter of the NAFTA (North American Free Trade Agreement) for $250 million because the Quebec provincial government declared a moratorium on fracking (a method of obtaining shale gas) and also banned drilling below the St. Lawrence River, which the company claims is a violation of its drilling permit. (Source: The Star, Ottawa; and Globe and Mail, 15 Nov. 2012).
The ease with which investors are able to bring and win cases against governments for such a wide range of issues is due to the nature of the investment agreements.
First, the definition of “investment” which is the subject of the treaties is usually very broad, covering direct investment, portfolio investment, loans, franchises, licenses, contracts, intellectual property and other assets. Investors can bring up cases in claiming that their rights to any of these have been violated.
Second, the treaties grant national treatment, “fair and equitable treatment” and investor protection to investors. The definitions of these are so flexible that investors are able to claim their rights are violated for a wide range of reasons.
Third, many of the treaties prevent governments from controlling or regulating inflows and outflows of capital, and some restrict or disallow governments from imposing performance requirements on foreign companies.
Fourth, the treaties prohibit expropriation of the investments. The definition of “expropriation” is very broad; it includes direct expropriation such as takeovers of property but also indirect expropriation including “regulatory takings”, or the implementation of new policy measures that affect the potential revenue and profits of the investors. Thus, investors have sued governments for changes to or cancellation of contracts, and for health and environmental policies and regulations.
Fifth, some of the treaties allow for investors to directly sue governments in international tribunals, including ICSID, the Washington-based and World Bank-linked tribunal mentioned in most investment treaties. These cases have caused many governments to divert scarce time and resources to defend several cases.
Sixth, the arbitration system is riddled with major weaknesses that are not found in normal courts. In many cases, the tribunal members are lawyers who have also acted for investors in other cases. For example, in the case taken by Dialasie against Vietnam, the chair of the tribunal is a European lawyer who has also worked extensively as counsel for investors in many other cases.
According to international trade and investment expert, Chakravarthi Raghavan: “The ICSID panels are constituted of lawyers who sometimes are on panel, and sometimes suing for firms against governments, and don't have any obligation to disclose conflicts of interest. It is time that BITs and ICSID system and these quite arbitrary, 'arbitration' panels are exposed.”
Seventh, the BITS arbitration cases are shrouded in secrecy. They are not held in the open, and the existence or results of cases are not officially made known.
Eighth, it is difficult for a country to exit from a BIT even if it has decided it is against its interests, as many BITs have a “survival clause”; the country is bound by its provisions 10-15 years after giving notice of exiting.
The growing number of cases could also be due to the setting up of law firms, especially in the US and Europe, that specialise in investment disputes, and which encourage investors to take up cases in order to profit or benefit.
The BITs as well as FTAs’ investment component have caused outrage among public interest groups which are concerned that these treaties prevent or punish the implementation of required health, safety, environmental and developmental measures.
Governments, especially in developing countries, are also increasingly concerned. Faced with a multitude of law suits, several governments have recently taken action to review or revise their investment treaties.
South Africa, after completing a review of its BITS, has decided not to sign any new BITS, will attempt to exit from or re-negotiate existing ones, and will formulate a new model BIT.
Australia, in April 2011, announced it would not agree to including investor-state dispute settlement provisions in its BITS and free trade agreements.
India in April 2012 announced it is reviewing its BITS, especially their dispute resolution component, after facing the threat of suits arising from a Supreme Court order nullifying the award of 2G contracts to several foreign telecommunication companies.
And some Latin American countries including Ecuador, Venezuela and Bolivia have expressed their serious concerns about BITs and announced their exit from ICSID.
The UN Conference on Trade and Development (UNCTAD), which has been a major promoter of BITS, is also changing its mind about the benefits of these treaties. It now distinguishes between the normal BITS which it calls “agreements for freedom of investors” and a new type of BITS which it terms “investment agreements for sustainable development”, and it is promoting the move from the first to the second type.
With so many problems arising and so many cases being taken against countries, the review and reform of investment treaties should be accelerated at both national and international levels.
- Martin Khor is the Executive Director of the South Centre.
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