By Anthea Roberts,
Centre for International Governance & Justice, RegNet
My previous blog provided an introduction to investment treaty law and arbitration. In this blog, I consider some controversial aspects of an area of law that has only recently attracted widespread public attention.
Why are investment treaties controversial?
Investment treaties are controversial for many reasons, including because:
1. It is unclear that signing bilateral treaties increases investment
Do investment treaties promote increased investment? Or does increased investment lead to pressure to sign investment treaties? The quality of foreign direct investment (FDI) data is notoriously poor, with states measuring FDI in various, often incomparable and time-inconsistent ways. Many developing states have limited administrative capacity to accurately measure FDI, no matter the methodology adopted, and FDI data on a bilateral basis is surprisingly limited.
It is also very difficult to identify where foreign investment comes from because of complex corporate structures with multiple levels of ownership based in different states.
Some studies find a relationship between signing investment treaties and increased investment, some don’t, and some say that the relationship is unclear. Thus the jury is out on whether signing up to investment treaties has actually contributed to increased foreign investment and improved development for capital importing states.
2. There has been an explosion in the number of cases brought to arbitration under bilateral treaties, and the nature of some of these cases has changed
About 5-10 years after the explosion in new investment treaties, there was an explosion in investment treaty cases. In the 3 decades leading up to 1996, the International Centre for Settlement of Investment Disputes (the main forum for investment disputes) registered 35 claims. Between 1996 and 2005, it registered 166 claims. The rate of new claims being added is now about 50 per year. Commentators characterise these figures differently. While the number of new claims is significant by comparison with historical figures, they are relatively small by comparison with the total number of foreign investors and treaties.
In the early days of the investment treaty system, the main concern of developed states and foreign investors was direct expropriation. But since the early 1980s, acts of direct expropriation have been relatively rare. Instead, most modern investment treaty arbitrations are concerned with more subtle forms of government action, like decisions on whether to renew a mining license or regulate to protect the environment. In these cases, it is often unclear where to draw the line between reasonable regulation – which does not require compensation – and an indirect expropriation which should be compensated.
Let’s look at the case of Philip Morris v Australia. Australia announced it was going to require plain packaging for cigarettes: regardless of who manufactured the cigarettes, all would be sold in olive green boxes with large graphic health warnings. The brand name would appear only in small print in plain font. Philip Morris sued Australia for billions of dollars on the basis that this constituted an indirect expropriation of its intellectual property because it prevented the company from using its trademark. Australia responded by saying that it had a right to regulate in the interests of public health even if that meant lower profits for foreign tobacco companies.
Philip Morris ultimately lost the case at the jurisdictional stage because it is a Swiss company and had shifted its claim to Philip Morris Asia in order to take advantage of the Australia-Hong Kong investment treaty (there was no Australia-Switzerland investment treaty). Attitudes to the case vary. Critics of the system emphasise the fact that the fear of being taken to arbitration has made other governments wary of adopting plain packaging legislation. They also focus on the time and expense involved in defending Australia’s legislation. Proponents of the system say that the case shows that investment treaties do not always lead to successful outcomes for investors, so we should focus on how cases are decided rather than what claims are brought.
3. Arbitrations have led to large and inconsistent awards that cannot be appealed
In cases that are now notorious, the Czech Republic was sued by a corporation and the primary shareholder of that corporation under two separate investment treaties. The cases involved the same facts and virtually identical treaties. But at arbitral decisions issued within 10 days of each other, one case failed and the other succeeded. The size of the award in the case that succeeded was US$353 million, equal to the Czech Republic’s entire health care budget for the year. Adjusted for population size and gross national income, this was equivalent to an award of $19 billion against the UK or $131 billion against the US. The Czech Republic paid every single dollar. These sorts of arbitral awards are typically not subject to appeal, even in the face of direct inconsistency such as occurred in these two cases.
4. There is concern that public law issues are now being decided by private tribunals
Investor state arbitrations are not conducted in open court. Traditionally, non-parties had limited access to documents and were not entitled to intervene. As I have noted already, cases followed a commercial arbitration model, which deals with private parties and private rights, despite the fact that they are concerned with public parties and public rights. More recently, this has changed somewhat.
Many newer investment treaties are building in transparency provisions to permit more openness about cases and hearings. These changes reflect the hybrid nature of the field because they provide for case procedures that have both public and private characteristics.
Despite these changes, critics argue that ad hoc private tribunals should not be sitting in judgment of public law decisions. A number of cases involving Argentina have fueled this concern. In the 1990s, Argentina encouraged foreign investment and privatized many of its public services. It pegged the peso and the US dollar on a 1:1 ratio and signed many investment treaties. But in the late 1990s it ran into significant problems. In the economic crisis of 2001-2002 there was a run on the banks, and Argentina defaulted on its international public debt. Unemployment rose to over 20% and half of the country was living in poverty.
In response, the Argentine government froze bank withdrawals (subject to a small weekly limit) and prevented transfers of capital abroad. It pesofied all financial obligations so that dollar tariffs turned into pesos, and it delinked the peso and the US dollar. The peso dropped in value by 75-80%, so investments and incomes also dropped in value. If the government hadn’t taken these actions, poor people would have been paying 3 or 4 times as much for water and electricity, and the country could have collapsed completely.
The response by many foreign investors was to take the country to arbitration. Argentina’s government argued that it was entitled to act as it did because it was defending the country’s essential security interests – given that the economy was on the brink of collapse – and most investment treaties create exceptions for measures within a state’s essential security interests. But arbitral tribunals have split on whether Argentina violated its obligations to treat foreign investors fairly and equitably given that it went back on its commitment to peg the peso to the US dollar.
What is happening now?
The investment treaty field is evolving very quickly, and many changes are afoot. These include introducing transparency provisions in treaties; carving out the right of states to regulate in the interests of public health and the environment; and proposals for an international investment court. While investor-state disputes are likely to remain controversial, the fact that this area of treaty law is now being exposed to careful scrutiny should help in formulating improved treaties and dispute resolution mechanisms in the future.