PHM-Exch> The emerging crisis of investment treaties

[Claudio Schuftan]

From: David Legge <D.Legge at latrobe.edu.au>
*From:* South Centre [mailto:south=southcentre.org at mail360.us2.mcsv.net] **




         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.*

*By Martin Khor*

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.

*Author: Martin Khor is the Executive Director of the South Centre. *

*This article was published in the South Bulletin (21 November 2012).*****
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