Global Trends by Martin Khor

Monday 19 November 2012

Investment treaties come under fire

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 allow private companies and investors to sue countries for millions or even billions of dollars.

The most recent cases include a US$1.8 billion judgment against Ecuador obtained by the U.S. oil company, a US$2 billion suit filed against Indonesia by a UK mining company, Churchill, cases taken against Uruguay and Australia by a tobacco giant for making regulations on cigarette packaging to control smoking, suits threatened against India by several multinational companies, and 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 billions of dollars against governments, were taken by companies and investors claiming that their investments or future profits had been affected by a range of government policies, including not honouring contracts or introducing new health, environmental or economic measures.

Most of the arbitration cases are taken up in 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 or potential losses to governments is causing grave concerns and led to moves in several countries to review and amend the treaties.

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 U.S.).

Recent cases of the legal suits include:

  • 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 addition, Ecuador has to pay $589 million in backdated compound interest. The government had annulled a contract with Oxy because it violated a clause that it 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. 
  • The Indonesian government was sued in June for $2 billion by a London-based mining company Churchill, after the local government revoked the mining concession rights of a local company in which Churchill had invested.  According to the government, the company did not have the correct type of mining licenses and had broken the law.
  • The tobacco company Philip Morris sued Uruguay for requiring cigarette packs to display graphic health warnings and sued Australia for requiring plain packaging for its cigarettes.  The company claims that the packaging requirements violate its investment, including its trademark which as an intellectual property is an investment asset.
  • In November, US energy company Lone Pine Resources sued Canada 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.
  • In October, an Argentinian military ship was detained in a Ghana port at the behest of a US-based investment firm NML that claimed that the Argentinian government owes it full debt repayment of US$300 million.  In a debt restructuring settlement, most creditors agreed to receiving 30% of the original value of their loans, but NML chose to hold out, claiming 100% of the value as a tactic to obtain profits.  It pursued Argentina through the courts, and most recently got Ghana to enforce its claim through the seizure of the ship. Argentina has filed a case in the UN’s International Sea Tribunal to declare Ghana’s action illegal.
  • The Indian government 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.   Said 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.”

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, licenses, contracts, intellectual property, etc.  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 disallow governments from imposing performance requirements (such as technology transfer) 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. 

Fifth, some of the treaties allow for investors to directly sue governments in international tribunals, causing the diversion of scarce time and resources to defend the cases.

Sixth, the arbitration system is riddled with major weaknesses not found in normal courts. In many cases, the tribunal members are lawyers who have also acted for investors in 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 ICISD 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.

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 is no longer agreeing to investor-state dispute provisions in its BITS and free trade agreements, because such provisions would constrain the ability of government to make laws on social, environmental and economic matters.

India 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 announced they are quitting ICSID.

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 an international levels.