Luke Eric Peterson
Chapter 1: Introduction
1 In recent years, there has been growing speculation that the two regimes may come into occasional friction—or even collision—in certain instances.2 Governments might pursue policies or measures in furtherance of human rights obligations, only to encounter allegations that such initiatives run afoul of parallel international obligations to protect foreign investors and their activities.
A recent series of human rights impact assessments of foreign investment projects initiated by Rights & Democracy highlighted considerable gaps in knowledge within the human rights community as to the international legal framework governing and protecting foreign investment, and the human rights impacts of that legal framework. The following paper was commissioned in an effort to capture and describe the rapidly-expanding international treaty regime which governs and protects foreign direct investment, and to highlight to what extent human rights issues are indeed arising in the context of legal disputes between foreign investors and their host governments.
As will be seen below, international treaties providing legal protection for foreign investment provide investors with the ability to sue governments in international arbitration in the event that the treaty protections are alleged to have been breached. In a small but growing number of these investor-state arbitrations, human rights law arguments have arisen. Typically, however, human rights law has been referenced by international arbitrators in contexts where human rights related to property or due process provide some insight or assistance into how investment treaty obligations might be construed. In other words, it is those human rights which sometimes protect business or economic actors that have been cross-referenced as interpretative aides in the investment treaty context.
At least to date, arbitrators have not grappled to the same extent with a very different use for human rights law: to highlight a host state’s legal obligations to non-parties to the arbitration (e.g. those living within a given host state) and to use those obligations as a lens for interpreting and determining the boundaries of any parallel obligations owed to foreign investors. Nonetheless, arbitrators are starting to encounter scenarios where the human rights of non-parties to arbitrations are being raised by governments or outside interest groups. As later sections of this paper make clear, in some pending international arbitrations between foreign investors and their host countries, investors are accusing their host governments of violating legal protections owed to them, at the same time as governments are countering with references to broader human rights obligations owed to citizens and others living under the government’s jurisdiction.
In one arbitration case highlighted in detail below, a review of the legal pleadings of the arbitrating parties—a group of international water companies and the Republic of Argentina—demonstrates that governments are raising detailed and sophisticated human rights law arguments in the context of investment treaty disputes. In lay terms, states are beginning to demand that arbitrators not interpret international economic treaties in a vacuum—and that human rights law obligations are not ignored or marginalized.
While such developments may discomfort those who distrust the capacity of “commercial” adjudicative processes to interpret or review human rights norms, the reality, as made clear in the subsequent pages, is that arbitrators are today confronted with cases that have human rights impacts and externalities. Arbitrators will either ignore or engage with these human rights norms, but there is little prospect that the genie can be stuffed back into the bottle. This may help to explain why some governments and nongovernmental organizations have recognized the stakes involved in these investor-state arbitrations and have pushed to ensure that economic treaties are read in light of human rights obligations.
Some of the disputes highlighted in the subsequent pages may provide an important testing-ground for the degree to which international legal protections owed by states to foreign investors will be read by adjudicators in light of, and in harmony with, a government’s parallel human rights obligations to its own citizens. Accordingly, human rights actors and advocates should monitor the evolving foreign investment protection regime, so as to understand how tribunals are responding when confronted with human rights arguments arising in the context of legal disputes between foreign investors and their host governments.
“…foreign investment is governed by an unwieldy and highly-decentralized patchwork of bilateral investment treaties (BITs).”
Background to the international investment protection regime
The protection of foreigners, or aliens, is a long-standing preoccupation of international law. Long before the advent of modern international investment treaties, some minimum standards of protection have been owed by all states as a matter of customary international law—even if the extent of these obligations has been a matter of much controversy and debate. Notably, the international law governing the treatment of aliens encompasses not only business actors, but also ordinary citizens. Thus, many claims lodged against foreign states in the nineteenth century and the early part of the twentieth century for mistreatment of aliens, involved situations where foreign states were accused of having mistreated or abused what might be characterized as the civil rights of foreigners.3 Examples include cases of unlawful arrest or detention; police brutality; prisoners being held incommunicado; or foreign citizens victimized by mob violence.4 What’s more, treaties negotiated to confirm or supplement these slender customary obligations, sometimes provided not only for economic and property protections, but also civil rights and religious liberties.5 Indeed, a major negotiating objective of several governments, including the United States (US) and the United Kingdom (UK), with other countries, was to secure religious liberty guarantees—or at least freedom of conscience guarantees—for the protection of aliens.6
In the second half of the twentieth century, international claims arising out of the personal injury or death of aliens have tended to be pursued by individual victims via human rights channels as these became available, while claims brought by one government against another government for the mistreatment of aliens have tended to arise out of economic injuries to foreigners.7 In a similar vein, the negotiation of wide-ranging treaties protecting the broad range of rights owed to aliens—civil and economic—appears to have fallen out of fashion. Rather, there has been a steady growth over the last half-century in narrowly-tailored agreements for the protection of one category of aliens: foreign investors, and their investments. These binding international treaties protect both corporations and individuals, but in the context of their owning foreign investments— not in a more generalized sense of protecting the health and well-being of such actors from all forms of interference.8 It is these investment treaties, and their application and uses, that are the primary focus of this study.
With the dramatic growth in flows of foreign direct investment (FDI) worldwide, this framework of international investment treaties has quietly grown to govern the billions of dollars devoted to cross-border investment activity. In contrast with the system used to govern world trade—whose locus has long been at the World Trade Organization (WTO), and before that the General Agreement on Tariffs and Trade (GATT). Foreign investment is governed by an unwieldy and highly-decentralized patchwork of bilateral investment treaties (BITs). Indeed, efforts to develop a single multilateral agreement on investment have failed consistently, often in the face of concerted opposition from civil society groups suspicious of the motives underlying such initiatives. Human rights non-governmental organizations (NGOs) were in the vanguard of opposition to the proposed Multilateral Agreement on Investment (MAI) being negotiated by the Organization for Economic Cooperation and Development (OECD), as well as a later initiative by WTO member-governments. At the regional level, human rights NGOs also led opposition to a proposed Free Trade Area of the Americas (FTAA), which might have included an investment chapter modeled after bilateral investment treaties.
At the root of the opposition from human rights NGOs has been a concern that a MAI or a FTAA would extend powerful legal protections to property and assets, perhaps chilling the ability of governments to regulate economic activity for broader objectives such as the promotion and protection of human rights—or obliging states to compensate foreign investors when human rights policies impact negatively upon them.9
Notwithstanding such concerns about the multi-lateralization of investment protection rules, governments have negotiated countless bilateral (and some regional) treaties on the model of the MAI or FTAA, typically with a fraction of the publicity devoted to the latter. Indeed, the number of such agreements quintupled: from 385 to 1,857 during the 1990s. As of mid-2008, there were more than 2600 bilateral investment treaties with similar BIT-like provisions also written into a growing number of broader free-trade agreements (FTA).10 The upshot of this trend has been that many of the objectives sought by proponents of a multilateral or regional agreement—including high levels of property protection—have been obtained through other means. While the current patchwork of BITs (and FTAs) is not universal in its coverage, it has proven highly-serviceable – with international law firms advising foreign investors to structure any FDI projects or transactions so that they fall under the protective umbrella of one of these agreements.11 For example, a US investor might incorporate a Dutch vehicle so that any onward investments are covered by a Dutch treaty with the intended host country.
“As of mid-2008, there were more than 2600 bilateral investment treaties with similar BIT-like provisions also written into a growing number of broader free-trade agreements (FTA).”
Broadly speaking, the foreign investors who draw upon this legal framework may be corporate enterprises (private or public), as well as individual businesspeople making investments in another country. However, given the loose drafting of many investment treaties, there is broad scope under many of these agreements for companies or individuals to wield such treaty protections against their own government simply by structuring their business activities so that they are owned by foreign entities eligible for protection under an international treaty.12
Thus, given that cross-border investment flows increasingly travel under the protective passport of one or another of these international agreements, it is important to understand the protections offered by such instruments and, later, to examine the impact of such agreements upon human rights.
Provisions of bilateral investment treaties
Bilateral investment treaties trace their origins to the late 1950s, and were developed in an effort to supplement the slender protections afforded by customary international law to aliens. While there were some minimal protections guaranteed to foreign investors who might find themselves suffering abuse at the hands of a host country, there was also continuing disagreement as to more specific forms of treatment that should be extended by host governments. For example, at the United Nations, governments from developed and developing countries clashed sharply over whether governments could nationalize foreign investment in the natural resources sector without paying full compensation to foreign investors.13
Against such a backdrop, bilateral investment treaties were hoped to provide (in theory) greater certainty and clarity as to the legal rules which would apply, at least with respect to the investments flowing between a given set of countries. However, the terms of the treaties still require interpretation and adjudication to determine their concrete application, with most of these treaties permitting investors to file arbitration lawsuits in case of alleged breach by a host government. Germany concluded the first modern bilateral investment treaty in 1959 with Pakistan, and other European capital-exporting governments would inaugurate their own BIT programs in subsequent years. (Apart from the treaties which are the focus of this paper, an investor or its local representative may also sign contracts, concessions or host-country agreements with the local authorities.)14
It must be stressed that the vast majority of BITs do not force countries to open their economies to foreign investors. Although some countries demand market access as part of their investment treaties, most existing BITs do not oblige governments to privatize sensitive economic sectors (for example: airlines; banking; insurance) or to open those sectors to foreign ownership. Rather, the treaties extend protection to those foreign investments which are made in conformity with existing rules on foreign ownership in the local economy. Thus, if a state permits a foreigner to acquire a local business or establish a new green-field investment, those investments might be covered by an international treaty which obliges governments to live up to higher standards of protection than are available under local law.15
These investment treaties are generally single-purpose instruments protecting foreign investors and their assets, rather than imposing duties or legal responsibilities on foreign investors. While BITs will differ from case to case, over time, they typically provide for the repatriation of profits and other investment-related funds; protection from being treated less favourably than local investors and/or investors from third-countries (national treatment and most-favored nation treatment respectively); certain absolute standards of protection (eg. “fair and equitable treatment” or “full protection and security”); as well as a promise of compensation in case of nationalization or expropriation. Table 1 sets out some of the key protections.
Table 1: Key protections contained in BITs
Fair & Equitable Treatment
Arbitrators must interpret what constitutes “unfair” or “inequitable” treatment in light of the facts of a dispute. Tribunals have differed as to what this entails in practice. Examples of “unfair” or “inequitable” treatment in the eyes of certain arbitrators have included the denial of justice by local courts, or where administrative authorities have acted in bad faith or subjected investors to harassment or discrimination. Often, arbitrators interpret this obligation to protect an investor’s “legitimate expectations” although there is no consensus as to what this concept encompasses.
Full Protection & Security
Host governments must ensure basic police protection of foreign-owned property.
National treatment ensures that foreign investors and their investments are treated comparably to the local investors (or investments) of the host state.
Most Favored Nation (MFN) Treatment
MFN treatment ensures that foreign investors and their investments are treated comparably to foreign investors (or investments) from third states.
Restrictions on Expropriation and Indirect Expropriation
Treaties generally protect against direct or indirect expropriation, by obliging the host state to pay full compensation for any investment subjected to such treatment.
Free Transfer of Funds
Foreign investors are guaranteed the right to repatriate investment-related funds (profits, interest, fees, and other earnings).
– Fair and equitable treatment
Perhaps the most important protection provided in investment treaties is that which offers “fair and equitable treatment.” The meaning of this obligation continues to evolve, and there are disagreements as to whether the standard is uniform across countries regardless of their level of development.16 At a minimum the stan dard is designed to protect against “denials of justice,” however states may also run afoul of its terms where they treat foreign investors in bad faith, or with an absence of due process. In some cases, arbitrators have taken the view that the protection safeguards the “legitimate expectations” of investors—for example, where certain promises or representations were made by government officials or agencies and then subsequently reneged upon. For example, a state might fail to issue permits which were promised to a foreign investor or neglect to follow through with the sale of (previously offered) shares in a state-owned company. However, there is no consensus as to what, exactly, investors should expect from their host countries—whether it be a stable business environment, transparency in dealings with state officials, or certain standards of administrative efficiency and due process.
In one arbitration ruling, which has proven particularly contentious, a tribunal took the sweeping view that “fair and equitable treatment” includes an obligation “for the host state to act in a consistent manner, free from ambiguity, and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investments and comply with such regulations.”17
“While investment treaties impose certain limits on how governments may treat foreign investors or foreign-owned businesses, they place few countervailing limits or obligations on investors.”
Some observers have noted that such a daunting set of duties would bedevil even the government apparatus of the most advanced economies, much less poorer less-developed nations. Lawyers for the Government of Chile famously characterized the above-interpretation, which was quoted approvinglyinsomesubsequent cases, as an “extreme” program of good governance imposed upon governments.18 Failure to meet this heightened reading of the fair and equitable treatment standard might trigger an obligation to pay compensation to investors denied such protection.
Another key investment treaty provision is that relating to expropriation. A concern which has emerged in relation to the North American Free Trade Agreement (NAFTA)—which contains provisions similar to those contained in investment treaties—is how to define the concept of “indirect” expropriation. Uncertainty has long swirled in relation to drawing a clear line between those regulatory measures which have some impact upon the profitability of an investment, and those which amount to an “indirect” expropriation of an investment (i.e. a taking or deprivation carried out through indirect or regulatory means.) Continuing uncertainty has prompted some governments to introduce new language into its future investment treaties so as to provide greater clarity that legitimate public interest regulatory measures will rarely be characterized as indirect expropriation under an investment treaty. In the Canadian context, the 2004 model investment treaty declares that:
Except in rare circumstances, such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation.19
Most treaties do not contain such language however, thereby leaving greater discretion to arbitrators to draw the line between legitimate regulations (which will not constitute an expropriation) and those actions or measures which amount to an expropriation of an investment.
Limited investor responsibilities
While investment treaties impose certain limits on how governments may treat foreign investors or foreign-owned businesses, they place few countervailing limits or obligations on investors. A 2001 UN review of investment treaties found few examples of obligations imposed on investors or their home countries.20 In the intervening period, there have been comparatively few moves to draft treaties with greater investor obligations. Nevertheless, analysts have argued that certain baseline investor responsibilities are implicit in standard investment protection treaties. Professor Peter Muchlinski has argued that the “fair and equitable treatment” protection offered by host governments to foreign investors can be read so as to impose certain duties on those same investors, including the duty to refrain from unconscionable conduct.21 In other words, an investor could not claim to have suffered unfair or inequitable treatment at the hands of a host-government if they themselves had engaged in “unconscionable” activities—for example misrepresenting to government officials their own activities or business experience.22 This argument has been borne out in several subsequent arbitration rulings, where tribunals convened to hear investment treaty disputes have ruled that fraudulent misrepresentations and certain other forms of investor malfeasance may undermine any investor claims against host governments.23
Although most BITs do not contain explicit investor responsibilities, there have been various proposals which would introduce such obligations into treaty texts, including the conditioning of legal protections for investors upon various duties including to comply with International Labour Organization (ILO) and the OECD instruments on corporate responsibility and to operate investments so that they do not circumvent international labour and human rights conventions.24 A draft model investment treaty released for discussion in 2008 by the Government of Norway, makes some efforts to introduce modest investor responsibilities.25 In particular, the preamble to the Norwegian agreement—which will be relevant whenever arbitrators are called upon by investors to interpret the treaty provisions—makes reference to several objectives including corporate social responsibility, anti-corruption, and the principles of “transparency, accountability and legitimacy” for all participants in the foreign investment process. Furthermore, the draft agreement “encourages” investor compliance with the OECD Guidelines for Multinational Enterprises and the UN Global Compact; however, it does not go so far as to mandate concrete investor obligations. Apart from this, there have been academic proposals which would introduce clauses into investment treaties so as to give citizens the right to bring “counter-claims” against foreign investors for certain human rights violations.26 However, such proposals have not moved from the drawing board into actual treaties. Indeed, in his 2008 report to the UN Human Rights Council, the UN Special Representative on Business and Human Rights, John Ruggie, lamented that the legal rights of transnational corporations have expanded greatly— including through bilateral investment treaties—while the legal framework regulating those same corporations has not expanded in a similar fashion.27
“In other words, where an investor believes itself to have been denied “fair and equitable treatment” or some other treaty protection, the investor can sue the host government before an international arbitration tribunal in an effort to collect financial compensation for such treaty breaches.”
In the absence of a single more-balanced global agreement on investment, there are limits to incremental and piecemeal reforms to bilateral investment treaties. For example, if the Norwegian Government negotiates more balanced bilateral treaties with foreign partners, it remains to be seen whether Norwegian investors will elect to make use of such agreements or whether they will instead structure their foreign direct investment (FDI) activities so as to make use of agreements concluded by other governments with the intended host-country. Indeed, many bilateral investment treaties define “investor” loosely so as to encompass any corporate entities incorporated pursuant to the putative home country’s laws. Thus, for example, investors from a range of countries may—and do—elect to incorporate in the Netherlands, so as to take advantage of that country’s BITs with a broad range of developing countries. Indeed, given the patchwork of protection available and the gaps in coverage in the current system, it is perfectly rational for investors to “shop” for treaty protection if their own home country does not have a treaty with a desired host-country. This phenomenon of treaty-shopping could detract from sporadic government efforts to reform or re-balance investment treaties.
Dispute settlement provisions of bilateral investment treaties
The investor protections found in BITs are typically made effective by a powerful international dispute settlement mechanism which permits investors to initiate arbitration claims against their host state in cases of alleged breach of the treaty protections. Typically, the investor will nominate an arbitrator, the state will do likewise, and a third member of the tribunal will be selected by consensus or by some supervising body. Investors may take issue with the full range of government measures, including new taxes, administrative decisions, laws, or other forms of state action. Perhaps most important, investors can claim cash damages arising out of treaty breaches.
Although BITs are state-to-state treaties, they pave the way for investor-to-state claims. Thanks to the arbitration mechanism contained in BITs, investors can enforce the treaty terms without relying on their home governments to espouse their claims for them (as is required in the WTO system or under the traditional forms of diplomatic protection used to protect aliens and overseas assets). In other words, where an investor believes itself to have been denied “fair and equitable treatment” or some other treaty protection, the investor can sue the host government before an international arbitration tribunal in an effort to collect financial compensation for such treaty breaches.
There is no single international court or body which hears such claims; rather they are handled on a case-by-case basis according to a handful of different procedural rules. Most investment treaties make available more than one set of arbitration rules, meaning that the investor can actively choose the arbitration rules. This decision can have important consequences as the procedural rules differ, including in relation to the level of confidentiality surrounding the process. Several of the most common arbitration options are described in Table 2 (below).
Table 2: Various arbitration options available in BITs
International Centre for Settlement of Investment Disputes (ICSID)
The World Bank’s ICSID is the only purpose-built facility created for settling FDI disputes between investors and governments. For decades, the Centre handled only a trickle of contract disputes. However, in the 1990s, ICSID’s caseload exploded as investors began to invoke the arbitrationoffers contained in BITs. Of the various arbitration options available for resolving BITs disputes, the ICSID is unique in that it publishes a full list of arbitrations taking place under the Centre’s auspices. However, hearings are in-camera unless both parties wish otherwise.
United Nations Commission on International Trade Law (UNCITRAL)
Unlike the ICSID, the UNCITRAL does not administer or supervise arbitrations; rather the UNCITRAL has drafted procedural rules which can be used by parties wishing to arbitrate their disputes in an “ad-hoc” fashion. Because UNCITRAL arbitrations do not take place under a single roof it is extremely difficult to know the number of such arbitrations actually underway. Nevertheless, the rules are widely offered in BITs, and surveys suggest that a substantial number of investment treaty arbitrations take place under this less visible channel.
Stockholm Chamber of Commerce (SCC)
While less commonly offered in investment treaties, the SCC rules are found in a minority of BITs, particularly where one or both parties hails from Eastern Europe or the former USSR, as well as the Energy Charter Treaty a powerful multilateral agreement governing trade and investment in the energy sector. The SCC handles a modest number of investment treaty arbitrations – up to several in a given year – as revealed through statistics it publishes. Little information is available about arbitrations taking place under SCC rules unless the disputants desire otherwise.
International Chamber of Commerce (ICC)
The Paris-based ICC’s International Court of Arbitration is a popular venue for resolving private commercial disputes. The ICC also handles a tiny number of investment treaty cases, about which very little is known. The major bottleneck which limits the number of treaty cases arbitrated at the ICC is the fact that most BITs do not offer ICC arbitration as an option.
Several features of the BIT arbitration process are important to note. First, the process lags significantly in terms of transparency. There are no uniform requirements for arbitration claims to be publicly disclosed. While arbitrations at the World Bank’s ICSID are all disclosed on a public register, those taking place under other procedural rules are not subject to the same level of openness.28 Furthermore, when it comes to the actual unfolding of the arbitration process, some procedural rules impose formidable barriers even if an individual party (either the investor or the government) would like to disclose information about the proceeding. For example, under the often-used UNCITRAL rules, the default for arbitration proceedings is clearly one of confidentiality. The legal pleadings and the oral hearings are typically not a matter of public record.
Oddly, there is no way to know how many claims are filed worldwide against governments, much less the details of such claims and their legal, policy and financial implications. In a few cases discussed here, this information has come to light as a result of research and investigation conducted for this paper. Sometimes parties pro-actively disclose information about their cases; at other times journalists or non-government organizations investigate lawsuits and bring new information to light.29
Another notable feature of the arbitration process is the extent to which the parties may choose who will hear the dispute. There is no permanent standing court which hears such cases. Rather they are submitted to purpose-built arbitration tribunals. The ability of individuals to serve as advocates and argue on behalf of investors and governments, as well as arbitrators who will sit in other cases and interpret the meaning of treaties, has generated considerable scrutiny and debate.30 There have been calls for a permanent court whose members would be full-time and independent judges hearing investment treaty disputes.31 However, such proposals have yet to lead to any significant alteration in the current case-by-case arbitration model.
“There has been a groundswell of these BIT arbitrations in recent years, with dozens known to be filed in a given year. A further unknown number of cases are thought to be initiated without any disclosure.”
It should be stressed that investment treaties have spawned a large volume of international law disputes. Investors can often avoid taking disputes to the national courts of the host state. Rather, they may initiate an international claim after observing the (typically minimal) waiting periods prescribed in the given investment treaty. Clearly, this stands in contrast with the international human rights system, where access to UN human rights bodies and regional human rights courts requires the exhaustion of domestic remedies as a means of respecting state sovereignty and the principle of subsidiarity (i.e. that conflicts should be resolved at a local level to the extent possible).
As will be profiled in the remainder of this paper, there is clear evidence of human rights issues being raised before investment treaty tribunals. This trend leads to obvious questions as to the capacity of adjudicators to engage satisfactorily with the human rights dimensions of such disputes. Nevertheless, the reality is that human rights are—and will continue to be—raised in investment treaty arbitrations. As such, it is important to understand how these processes operate, including in comparison to human rights adjudication mechanisms. Table 3 (following page) offers a comparison of several of the major features of investment protection and human rights resolution processes, specifically two of the most commonly-used regional human rights courts.
The next section profiles the use of investment treaties by foreign investors to arbitrate against their host governments over alleged treaty breaches. Subsequent sections explore how issues of human rights law are arising in these investor-state arbitrations—and how arbitrators are engaging with the human rights obligations of states.
Uses of BITs in investor lawsuits with host-governments
BITs have become a major feature of the foreign investment regulatory landscape, with many governments facing lawsuits from foreign investors and needing to reconcile their conduct with these international treaty obligations. As was noted earlier, in cases where an investment treaty has not been concluded between a would-be investor’s home country and the intended host country, it is increasingly commonplace for investors to structure their investments so that they flow through at least one country which has a protective treaty with the intended host state. Thus, even where a treaty is not in place between an investor’s home country and its intended destination-country, a foreign investment transaction may still be protected by some treaty. With more than 2600 BITs in existence, it is not always easy to determine which international treaties pertain to a given FDI project. Table 4 (following page) provides some guidance for observers seeking to understand which investment treaties may apply to a given FDI project. However, only investors will know how they have structured their investments and with what treaty implications.
|Table 3: Comparing key features of regional human rights courts and investment treaty arbitration
Given that foreign investors increasingly structure their investments so as to be governed by one or more treaties, it may come as no surprise that lawsuits under these treaties are burgeoning. Typically, claims are brought against governments by corporations alleging that their investments have been treated contrary to treaty commitments. However, in a small number of cases, individual business-persons—rather than corporations—bring claims against governments. While these may involve strictly economic disputes, on occasion they may evoke the more traditional international claims for mistreatment of aliens involving allegations of false imprisonment, harassment, physical abuse, or even torture. For example, a Dutch businessperson, Mr. Trinh Vinh Binh brought a claim against the Vietnamese government pursuant to the Netherlands-Vietnam investment treaty in 2005. Apart from a standard allegation of confiscation of certain business assets, Mr. Trinh also alleged that he had been subjected to illegal pre-trial detention, torture and physical abuse at the hands of Vietnamese authorities.32 This type of claim, while clearly an outlier in the investment treaty context, looks similar to human rights claims in some respects even though asserted under an economic treaty.
Nevertheless, in the modern era, it is unusual for investment treaties to be wielded so as to protect what might be characterized as the civil rights or physical well-being of individual aliens. The overwhelming proportion of known investment treaty claims are brought by corporate actors, alleging that certain government measures (laws, regulations, administrative rulings), or other state actions (or omissions) have led to a breach of one or more treaty obligations owed to foreign investments. Often investors will claim that they have suffered a direct or indirect expropriation, for example where government actions are alleged to have seriously diminished or destroyed the value of an investment. At other times, investors may claim that governments have treated them unfairly, arbitrarily, or in a discriminatory fashion. Claims in this latter vein have included ones which allege foreign investors to have been subjected to less favourable regulatory or licensing treatment than other investments; to domestic administrative or judicial processes which lacked due process or transparency; or to have been harmed by a decision on the part of a new government to reverse earlier privatizations or introduce significant new taxes or royalties on existing investments.
Table 4: Understanding which treaties may apply to a particular investment project
1. The home country of the foreign investor may have a BIT with the host country. If there are multiple foreign investors involved in a given project, there may be multiple treaties which apply to a given project.
2. Investors can incorporate subsidiaries or holding companies off-shore, which may entitle them to protections contained in treaties that have been signed between such third countries and the host country. Most famously, the US construction conglomerate Bechtel launched an investment treaty arbitration against Bolivia—despite the absence of a US-Bolivia investment treaty—because Bechtel routed its investments into a Bolivian water services concession via the Netherlands. Thanks to this corporate structure, the investments qualified as “Dutch” under the Netherlands-Bolivia BIT. Accordingly, it is critical for host countries and other observers to determine what intermediary companies may have been used in FDI transactions, so as to understand what treaties might be applicable to a given investment.
3. Even when an investor’s home country has a BIT with a host country, an investor may elect to use the treaty of some other “home” country by structuring its investments in a creative fashion. For example, the Montreal-based Aeroport Development Corporation invoked the Cyprus-Hungary BIT in a dispute with Hungary over the construction and operation of a terminal at Budapest airport. Although Canada had a BIT with Hungary, the investors had invested via Cypriot subsidiaries thus entitling them to invoke the Cyprus-Hungary treaty if any of its provisions were deemed more generous than those of the Canada-Hungary treaty.
4. Investors may invoke the MFN clause in a given BIT in an effort to obtain more favorable rights or protections contained in other treaties. For example, a UK-incorporated investor (RosInvest Co UK Ltd) successfully invoked such a clause in a recent arbitration with Russia under the UK-Russia treaty, thus enabling the investor to benefit from more generous arbitration rights contained in the Denmark-Russia treaty. However, not all arbitration tribunals have endorsed such an investor-friendly interpretation of the MFN clause, leading to continuing uncertainty on this point. At a minimum, governments should be aware that investors may try to invoke the MFN provisions of a given BIT in an effort to “bring in” the provisions of other investment treaties.
The United Nations maintains lists of BITs entered into by each country, as well as copies of the texts of many such agreements.* However, with dozens of treaties under negotiation at any given moment, the international trade or foreign affairs ministries of specific governments should be able to provide the most up-to-date information about the recent treaties of a given country.
* See www.unctad.org/iia and consult the “IIA databases” for more details.
As of this writing, pending arbitrations between investors and states touch upon most economic sectors (energy, mining, telecommunications, water & sewage concessions, manufacturing, financial services, media and entertainment, agriculture and food processing), and raise fundamental questions as to the limits imposed by investment treaties on state sovereignty.33 While the merits of these different cases may vary sharply, they all raise potential liability for governments. The amounts claimed in damages by investors are not indicative of what will be awarded in the event that a state is held liable for a treaty breach; however, the financial damages awarded in successful BIT claims by foreign investors can run into the tens or hundreds of millions of dollars.
There has been a groundswell of these BIT arbitrations in recent years, with dozens known to be filed in a given year. A further unknown number of cases are thought to be initiated without any disclosure. Such disputes may arise out of truly egregious conduct on the part of the state or government officials including those resulting in destruction of investor property or assets. At other times, BIT lawsuits may arise in an effort to block or challenge efforts by governments to regulate foreign investors for seemingly important public purposes, including health, environmental or cultural policy reasons.
– Regulatory authority and state sovereignty
Investment treaties have attracted heavy public scrutiny, particularly in North America, when foreign investors have mounted arbitration lawsuits which touch upon sensitive questions of governments’ regulatory authority. The BIT-like provisions of the NAFTA earned notoriety in the late 1990s when a series of investor lawsuits targeted sensitive measures such as a California ban on a controversial gasoline additive and a Canadian trade ban on another gasoline additive.34 More than a decade later, the Government of Canada continues to face BIT-type NAFTA lawsuits which touch on controversial issues such as the environmental impact assessment process for an unpopular quarry site; an effort to phase out the hazardous agro-chemical Lindane; and the proposed use of a mine site for the disposal of non-toxic municipal waste.35
Many difficult and thorny questions remain to be resolved when it comes to interpreting and applying investment treaty obligations including: the dividing line where a regulation or state action tips over into a form of “expropriation” for which compensation must be paid to the affected foreign investors; what types of policy differentiation between different business actors will be permissible without breaching the duty to provide National Treatment to foreign investors and investments; and to what extent the absence of certain exception provisions in BITs can be read as an indication that such exceptions are not implicit in the treaty.
Because such a wide range of government actions or policy measures may come under scrutiny in investment treaty disputes, it is not surprising that human rights issues are also starting to arise in this context, as is explored more fully in the next chapter. Before turning to this discussion, the next chapter offers a brief recap of the status of human rights under international law.
1- Dinah Shelton has written of how the law of state responsibility for injury to aliens (foreigners) “can be viewed as a precursor to international human rights law.” Indeed, she notes that many of the nineteenth century cases dealing with injuries by states to aliens “concern what today would constitute violations of international human rights law.” See Dinah Shelton, Remedies in International Human Rights Law, Oxford University Press, Second Edition, 2005, par. 59-62; on the so-called fragmentation of international law more generally, see Martti Koskenniemi, “Fragmentation of International Law, Difficulties Arising from the Diversification and Expansion of International Law,” Report for the International Law Commission, April 4, 2006, available on-line at: untreaty.un.org/ilc/guide/1_9.htm.
2- In 2003, Rights & Democracy hosted a “think-tank” discussion which raised the potential for investment treaty disputes to touch upon human rights. Subsequent research has continued to focus on the potential for governments to be pulled between their treaty obligations to foreign investors and their human rights obligations. See for example, Luke Eric Peterson and Kevin R. Gray, “International Human Rights in Bilateral Investment Treaties and in Investment Treaty Arbitration,” International Institute for Sustainable Development, Briefing Paper 2003, www.iisd.org/pdf/2003/investment_int_human_rights_bits.pdf ; “Human Rights, Trade and Investment,” Report of the UN High Commissioner for Human Rights, 2003, E/CN.4/Sub.2/2003/9; Rémi Bachand and Stéphanie Rousseau, “International Investment and Human Rights: Political and Legal Issues,” Rights & Democracy, 2003, available at www.dd-rd.ca/site/_PDF/publications/global-ization/bachandRousseauEng.pdf; Lahra Liberti, “Investissements et droits de l’homme,” in Philippe Kahn and Thomas Walde, eds, New Aspects of International Investment Law (Hague: Hague Academy of International Law, 2007).
3- See discussion of civil rights-type protections in Edwin Borchard, The Diplomatic Protection of Citizens Abroad or the Law of International Claims (The Banks Law Publishing Co, 1916) pp. 69-77; for a flavor of claims between the US and Mexico involving civil rights, see A.H. Feller, The Mexican Claims Commission: A Study in the Law and Procedure of International Tribunals, 1923-1934, New York , Macmillan Company, 1935, pp. 132-146.
4- Borchard, pp. 98-99; and Feller, ibid.
5- Thus, for example, Art. XII of the 1851 US-Costa Rica treaty of friendship, commerce, and navigation, includes not only guarantees for “houses, persons and properties,” but also guarantees of religious liberty and tolerance.
6- See the extensive discussion of the UK-Mexico, US-Colombia, and US-Mexico negotiations conducted in the first decades of the nineteenth century in Wilkins B. Winn, “The Efforts of the United States to Secure Religious Liberty in a Commercial Treaty with Mexico, 1825-1831,” The Americas, vol. 28, no. 3, January 1972, 311-332.
7- Dinah Shelton, op.cit., pp. 56-57.
8- Notwithstanding the narrow remit of these investment treaties, there is an argument that certain categories of non-profit activity (for example certain developmental or charity activities which promote economic development in a host country) might enjoy protection under these treaties. See Luke Eric Peterson and Nick Gallus, “International Investment Treaty Protection of Not-for-Profit Organizations,” International Center of Not-for-Profit Law Working Paper, May 2008, available on-line at www.icnl.org/knowledge/pubs/BITNPOProtection2.pdf.
9- See for example, Rick Rowden and Vicki Gass, “Investor Rights or Human Rights? The Impacts of the FTAA,” Action Aid USA Briefing Paper, Nov. 2003, on file with author.
10- UNCTAD, Recent Developments in International Investment Agreements 2007- June 2008, IIA Monitor, no. 2, 2008, available on-line at www.unctad.org/en/docs/webdiaeia20081_en.pdf.
11- See Table 4 below.
12- See the majority and dissenting opinions in Tokios Tokeles v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction and Dissenting Opinion of April 29, 2004.
13- M. Sornarajah, The International Law on Foreign Investment (Cambridge University Press), 2004, pp. 22-23.
14- These agreements may set forth specific rights and responsibilities of the two parties, and provide for some mode of dispute settlement (for e.g. the local courts or some form of arbitration). While these contracts or agreements may provide an additional layer of legal protection for FDI projects, such instruments will differ widely from project to project and are beyond the scope of this paper. Recently, one aspect of such contractual arrangements has been examined in a study prepared for Prof. John Ruggie, the UN Special Representative on Business and Human Rights. (Andrea Shemberg, “Stabilization clauses and human rights,” March 11, 2008). This study examined a series of investor-state contracts, and found that a number of stabilization clauses used for investments outside of the OECD contained stringent wording which might allow a foreign investor to “avoid compliance with, or seek compensation for compliance with, laws designed to promote environmental, social, or human rights goals.” (par. 146).
15- Recent treaties pursued by the US, Canada, Japan, Singapore and several other countries do encompass so-called pre-establishment commitments, which may place foreigners on the same footing as locals when it comes to being able to establish new investments or acquire existing ones.
16- Nick Gallus, “The influence of the host state’s level of development on international investment treaty standards of protection,” 6(5) Journal of World Investment and Trade 711 (October, 2005).
17- Técnicas Medioambientales Tecmed, S.A. v. United Mexican States (Case no. ARB(AF)/00/2), Award of May 29, 2003.
18- MTD Equity Sdn Bhd and MTD Chile SA v. Republic of Chile, ICSID Case no. ARB/01/7, Decision on Annulment, February 16, 2007, par. 66.
19- See the draft treaty text at www.international.gc.ca.
20- “Social Responsibility,” UNCTAD Series on Issues in International Investment Agreements, 2001, p. 17.
21- Peter Muchlinski, “Caveat Investor’? The Relevance of the Conduct of the Investor Under the Fair and Equitable Treatment Standard,” 55 International and Comparative Law Quarterly, July 2006, pp. 567-598.
22- See discussion of Azinian v. Mexico case in Muchlinski, pp. 576-77.
23- Inceysa Vallissoletana v. El Salvador, Award of August 2, 2006; and Plama Consortium Limited v. Republic of Bulgaria, Award of August 27, 2008.
24- For more on IISD’s Draft Model Investment Agreement, which was co-drafted by the author of the present briefing paper see www.iisd.org/investment/model_agreement.asp.
25- For more information see www.regjeringen.no/en/dep/nhd/documents/Consultations/Horingsdokumenter.
26- See for example, Todd Weiler, “Balancing Human Rights and Investor Protection: A New Approach for a Different Legal Order,” 27 Boston College International and Comparative Law Review 429, (2004).
27- Report of the SRSG on the issue of human rights and transnational corporations and other business enterprises, April 7, 2008, at par. 12.
29- One tool for following developments in the field is the Investment Arbitration Reporter, an electronic reporting service published by the author of this briefing paper. (www.iareporter.com).
30- Michael Goldhaber, “Are Two Hats Too Many?,” The American Lawyer Magazine, vol. 27, no. 6, Focus Europe edition, Summer 2005.
31- Gus Van Harten, Investment Treaty Arbitration and Public Law, Oxford University Press, 2007.
32- The Binh case proceeded under the UNCITRAL procedural rules, and few details emerged about the case. The arbitration was settled before the arbitrators had an opportunity to rule in the case. Details presented here is based on confidential information obtained by Rights & Democracy.
33- For an indication of the arbitrations (largely treaty-based, but some contract-based) handled by the International Centre for Settlement of Investment Disputes, visit their website at www.worldbank.org/icsid.
34- Howard Mann and Konrad Von Moltke, “NAFTA’s Chapter 11 and the Environment,” International Institute for Sustainable Development, Working Paper, 1999.
35- Luke Eric Peterson, “Drowning in Chapter 11 Lawsuits,” Embassy: Canada’s Foreign Policy Newsweekly, April 16, 2008, available on-line at www.embassymag.ca/page/view/.2008.april.16.peterson.