TWN Info Service on UN Sustainable Development (Jun18/11)
19 June 2018
Third World Network
        
Investment treaty-making marks a turning point
Published in SUNS #8702 dated 18 June 2018

Geneva, 14 Jun (Kanaga Raja) - Investment treaty-making has reached a turning point, as for the first time, the number of effective treaty terminations outpaced the number of new IIA (international investment agreement) conclusions, according to the UN Conference on Trade and Development (UNCTAD).

In a chapter in its recently-released World Investment Report 2018 (WIR-201 8) highlighting recent developments in the international investment regime, UNCTAD also said that the year 2017 concluded with the lowest number of new IIAs since 1983, signalling a period of reflection on, and review of, international investment policies.

In 2017, at least 65 new treaty-based ISDS (investor-State dispute settlement) cases were initiated, bringing the total number of known cases to 855.

According to the WIR-2018, in 2017, 18 new IIAs were concluded, bringing the total to 3,322 treaties by year- end.

It said the year marks the lowest number of IIAs concluded since 1983, and for the first time, effective treaty terminations exceeded the number of new treaty conclusions.

In 2017, countries concluded 18 new IIAs: 9 bilateral investment treaties (BITs) and 9 treaties with investment provisions (TIPs).

This brought the size of the IIA universe to 3,322 agreements (2,946 BITs a nd 376 TIPs), of which 2,638 were in force at year-end.

The most active economy was Turkey, concluding four treaties, followed by Hong Kong-China with two. Forty-five economies were parties to one new treaty each.

Of the 18 new IIAs, three were regional agreements (the ASEAN-Hong Kong, China Investment Agreement, the Intra-MERCOSUR Investment Facilitation Protocol and the Pacific Agreement on Closer Economic Relations (PACER) Plus Agreement between Australia, New Zealand and 12 Pacific island States).

In addition, 15 IIAs entered into force. Between January and March 2018, three additional IIAs were signed.

At the same time, said UNCTAD, at least 22 terminations entered into effect ("effective termination").

Particularly active in terminating treaties was India with 17, while Ecuador sent 16 notices of termination in 2017.

Among intra-European Union (EU) BITs, at least two terminations took effect in 2017.

For the first time, the number of effectively terminated IIAs (22) exceeded the number of newly concluded treaties (18) and the number of new treaties entering into force (15).

However, the low number of IIAs concluded in 2017 does not necessarily translate into fewer treaty relationships among countries, said UNCTAD.

Unlike BITs, a single regional IIA creates many treaty relationships, depending on the number of contracting parties.

Moreover, effective treaty termination must also be seen in light of survival clauses, according to which treaty application is extended for a further period after termination (some for 5 years, but most commonly for 10, 15 or even 20 years).

And the stock of IIAs remains very large, comprising more than 3,300 treaties, most of them belonging to the "first generation" IIAs that are in need of reform.

According to UNCTAD, the nine TIPs concluded in 2017 can be grouped into four categories:

(a) Four agreements with obligations commonly found in BITs, including substantive standards of investment protection: Argentina-Chile Free Trade Agreement (FTA); ASEAN-Hong Kong, China Investment Agreement; China-Hong Kong, China Investment Agreement; Pacific Agreement on Closer Economic Relations (PACER) Plus.

(b) One agreement with investment provisions emphasizing investment promotion and facilitation as well as a number of investment protection provisions - although no investor-State dispute settlement (ISDS) clause: Intra-MERCOSUR Investment Facilitation Protocol (2017).

(c) One agreement with limited investment provisions (e.g. national treatment (NT) and most favoured nation (MFN) treatment with regard to the right of establishment of companies) or provisions on free movement of capital relating to direct investments: Armenia-EU Comprehensive and Enhanced Partnership Agreement.

(d) Three agreements that establish a process for negotiation or an institutional framework to promote and cooperate on investment but do not contain substantive investment protection provisions: Paraguay-United States Trade and Investment Framework Agreement (TIFA); Chile-Indonesia Comprehensive Economic Partnership Agreement; China-Georgia Free Trade Agreement (FTA).

UNCTAD also said that the year 2017 maintained momentum in negotiations for mega-regional agreements, particularly in Africa and Asia.

In addition, a number of country groups are developing non-binding guiding principles for investment policy making.

TRENDS IN ISDS

The WIR-2018 also found that the number of new investor-State dispute settlement (ISDS) claims remains high.

More than half of the arbitral decisions on jurisdictional issues that were rendered in 2017 were decided in favour of the State, whereas those on the merits we re mostly decided in favour of the investor.

In 2017, investors initiated at least 65 ISDS cases pursuant to IIAs. As of 1 January 2018, the total number of publicly known ISDS claims had reached 855.

(On the basis of newly revealed information, the number of known cases for 2016 was adjusted to 75, and for 2015 to 80.)

As some arbitrations can be kept fully confidential, the actual number of disputes filed in 2017 and previous years is likely to be higher, said UNCTAD.

The new ISDS cases in 2017 were initiated against 48 countries. Croatia was the most frequent respondent with four cases, followed by India and Spain with three cases each.

Four economies - Bahrain, Benin, Iraq and Kuwait - faced their first (known) ISDS claims.

As in previous years, said UNCTAD, the majority of new cases were brought against developing countries and transition economies.

So far, 113 countries have been respondents to one or more known ISDS claims.

Developed-country investors brought most of the 65 known cases in 2017. Investors from the Netherlands and the United States initiated the most cases with eight cases each, followed by investors from the United Kingdom with six.

Investors from Turkey were the most active claimants from developing countr ies, with four cases filed in 2017.

Intra-EU disputes accounted for about one-fifth of all investment arbitrations initiated in 2017, down from one-quarter in the preceding year.

The overall number of arbitrations initiated by an investor from one EU mem ber State against another totalled 168 by the end of 2017, i.e. 20 per cent of the total number of cases globally.

UNCTAD noted that a recent judgment of the EU Court of Justice found that the arbitration clause contained in the Netherlands-Slovakia BIT (1991) was incompatible with EU law.

This decision may have important implications for intra-EU BITs and future intra-EU disputes, said UNCTAD.

About 80 per cent of investment arbitrations in 2017 were brought under BITs. The remaining arbitrations were based on TIPs, or on BITs and TIPs in combination. The majority of the IIAs invoked in 2017 date back to the 1980s and 1990s.

The IIAs most frequently invoked in 2017 were the Energy Charter Treaty (wi th six cases), the Austria-Croatia BIT (three cases) and NAFTA (two cases).

Looking at the overall trend, about 20 per cent of all known cases have invoked the Energy Charter Treaty (113 cases) or NAFTA (61 cases).

In respect of the economic sectors involved, about 70 per cent of the cases filed in 2017 related to activities in the services sector, including: financial and insurance services (11 cases); construction (9 cases); supply of electricity, gas, steam and air (7 cases); information and communication (6 cases); transportation and storage (4 cases).

Primary industries and manufacturing each accounted for 15 per cent of new cases. This is broadly in line with the overall distribution of the 855 known ISDS cases filed to date, said UNCTAD.

Investors in 2017 most frequently challenged the following types of State conduct:

* Domestic legal proceedings and decisions (at least 7 cases);

* Termination of contracts or concessions, and revocation or non-renewal of licenses (at least 7 cases);

* Placement under administration and other actions allegedly resulting in bankruptcy or liquidation (at least 6 cases);

* Alleged takeover, seizure or nationalization of investments (at least 5 cases);

* Legislation prescribing changes in the currency of loans and mortgages (at least 4 cases);

* Tax-related measures such as allegedly unlawful tax assessments or the denial of tax exemptions (at least 4 cases);

* Legislative reforms in the renewable energy sector (at least 2 cases).

Other conduct that was challenged included alleged harassment by State authorities, unfair or discriminatory treatment, fraudulent misrepresentation and anti-money laundering regulations.

Where information regarding the amounts sought by investors has been disclosed (in about one-quarter of the new cases), the amounts claimed range from $15 million (Arin Capital and Khudyan v. Armenia) to $1.5 billion (MAKAE v. Saudi Arabia).

In 2017, ISDS tribunals rendered at least 62 substantive decisions, 34 of which are in the public domain (at the time of writing), said UNCTAD.

Of these public decisions, more than half of the decisions on jurisdictional issues were decided in favour of the State, whereas those on the merits were mostly decided in favour of the investor.

More specifically:

* Thirteen decisions (including rulings on preliminary objections) principally addressed jurisdictional issues, with five upholding the tribunal's jurisdiction and eight denying jurisdiction.

* Eighteen decisions on the merits were rendered in 2017, with 12 accepting at least some investor claims and 6 dismissing all of the claims. In the decisions holding the State liable, tribunals most frequently found breaches of the expropriation and the fair and equitable treatment (FET) provisions. In one decision, the tribunal found that the State had breached the IIA but decided that no compensation was due.

* Three publicly known decisions were rendered in ICSID (International Centre for Settlement of Investment Disputes) annulment proceedings. ICSID ad hoc committees rejected two applications for annulment and partially annulled one award.

According to the WIR-2018, by the end of 2017, some 548 ISDS proceedings had been concluded.

About one-third of all concluded cases were decided in favour of the State (claims were dismissed either on jurisdictional grounds or on the merits), and about one-quarter were decided in favour of the investor, with monetary compensation awarded.

A quarter of cases were settled; in most cases, the specific terms of settlements remain confidential.

In the remaining proceedings, cases were either discontinued or the tribunal found a treaty breach but did not award monetary compensation.

Of the cases that were resolved in favour of the State, about half were dismissed for lack of jurisdiction.

Looking at the totality of decisions on the merits (i.e. where a tribunal determined whether the challenged measure breached any of the IIA's substantive obligations), about 60 per cent were decided in favour of the investor and 40 per cent in favour of the State.

On average, said UNCTAD, successful claimants were awarded about 40 per cent of the amounts they claimed.

In cases decided in favour of the investor, the average amount claimed was $1.3 billion and the median $118 million. The average amount awarded was $504 million and the median $20 million.

These amounts do not include interest or legal costs, and some of the award ed sums may have been subject to set-aside or annulment proceedings.

The combined $114 billion claimed and $50 billion awarded in three cases related to the Yukos company (brought by Hulley Enterprises, Veteran Petroleum and Yukos Universal against the Russian Federation) were the highest in the history of investment treaty arbitration.

These arbitration awards have been set aside by The Hague District Court; its judgment was appealed and the appeal is currently pending.

Excluding these values from the calculations above, the average amount claimed falls to $454 million and the amount awarded to $125 million, i.e. about 28 per cent of the amount claimed, said UNCTAD.

The WIR-2018 also found that about 500 people have been appointed as arbitrators in known ISDS cases (original proceedings).

About half have served on more than one known case. A small number of people (13) have been appointed to more than 30 cases each, with three having rece ived the most appointments. All but one are citizens of European or North American countries.

IIA REFORM

UNCTAD also said that IIA reform is well under way across all regions. Most of today's new IIAs include sustainable development-oriented reform elements.

Highlights of modern treaty making include a sustainable development orientation, preservation of regulatory space and improvements to or omissions of ISDS.

For example, in contrast to the IIAs signed in 2000, the 2017 IIAs include a larger number of provisions explicitly referring to sustainable development issues (including by preserving the right to regulate for sustainable development-oriented policy objectives).

Of the 13 agreements concluded in 2017, 12 have general exceptions - for example, for the protection of human, animal or plant life or health, or the conservation of exhaustible natural resources.

All but one also explicitly recognize that the parties should not relax health, safety or environmental standards to attract investment; and 11 refer to the protection of health and safety, labour rights, the environment or sustainable development in their preambles.

UNCTAD also noted that some of the IIAs concluded in 2017 contain innovative features that have rarely been encountered in earlier IIAs.

These include conditioning treaty coverage on investors' contribution to sustainable development; reducing the role of investor expectations in fair and equitable treatment (FET); fostering responsible investment; building capacity for investment facilitation; and facilitating counterclaims by the respondent party against the claimant investor.