Info Service on WTO and Trade Issues (Oct12/02)
8 October 2012
Third World Network
BITs, FTAs and damaging effects of their investment chapters
Published in SUNS #7449 dated 2 October 2012
Geneva, 1 Oct (Meena Raman) -- The damaging effects of Bilateral Investment
Treaties (BITs) and the investment chapters of North-South Free Trade
Agreements (FTAs) were highlighted at a World Trade Organisation (WTO)
Public Forum held last week.
The WTO Public Forum on "Investment provisions and agreements:
What is the right 21st century approach?" was organised by Our
World Is Not for Sale Network, the International Trade Union Confederation,
and Public Citizen and was held on Tuesday, 26 September.
Members of the panel were Ms. Sanya Reid Smith from the Third World
Network (TWN); Ms. Melinda St. Louis of Public Citizen's Global Trade
Watch from the US; South Africa's Deputy Director-General from the
Department of Trade and Industry, Mr. Xavier Carim; Mr. Roberto Bissio
from Social Watch in Uruguay; and Dr. James Zhan, Head of the Investment
Policies and Capacity Building Branch at the United Nations Conference
on Trade and Development (UNCTAD). The session was moderated by Ms
Kinda Mohamadieh, from the Arab NGO Network on Development based in
(For the report on the presentation by Mr. Xavier Carim, see SUNS
#7446 dated 27 September 2012).
Sanya Reid Smith from TWN highlighted the provisions that commonly
arise in the BITs and the investment chapters of North-South FTAs
that have been problematic. She said that the purpose of the BITs
is to protect the rights of foreign investors and traditionally have
no protection for the rights of government and do not contain obligations
of the foreign investors.
Smith explained that the BITs and the investment chapter of the FTAs,
especially those based on the US model, generally have a very broad
definition of investment which also includes stocks, shares, futures,
options, derivatives, expected or future profits, market share of
the investor, intellectual property (IP) etc. The provisions usually
define an investor loosely where even companies from other countries
(not just those countries involved in the BIT or FTA) can seek protection,
merely by buying shares in a company in one of the BIT/FTA signatory
countries or by opening a letter-box or setting up a subsidiary in
one of the signatories to the BIT/FTA, she added.
Another provision relates to "fair and equitable treatment"
(FET), which appears to sound good but actually has been interpreted
by some tribunals to mean that there is a standstill on regulations
and that the government is prevented from amending or passing new
laws so as to ensure a "constant regulatory environment",
said Smith. Even in cases where words were put into an agreement to
limit the scope of this provision, tribunals have decided otherwise.
Citing a recent study by Public Citizen of US FTAs and BITs, Smith
said that in instances where investors have raised a violation of
the FET provision in tribunals, 81% of the time they have won, which
indicates that the provision is very powerful to strike down government
As regards the clause on "expropriation", she said that
this is widely defined to cover any government action which reduces
the value of the investment. Where disputes arise between an investor
and a government under a BIT, arbitral tribunals are used to enforce
the BITs and some of these tribunals do not have sufficient conflict
of interest rules for judges, said Smith. This allows judges who have
an interest in the company bringing the dispute to hear the case,
she added, citing an example in one case where one of the judges in
a dispute was on the board of a parent company which brought the case
and the investor won.
In investor-state disputes, she said that the claims are often huge,
with one of the largest being for billions of dollars (in the case
of Philip Morris vs. Government of Australia).
[Philip Morris Asia, an enterprise registered in Hong Kong (with whom
Australia has a BIT), has launched the suit under the BIT. However,
according to a post at the IELP Blog, citing Andrew Mitchel at Lawyers
Weekly, and Don Anton, an international law academic at the Australian
National University, Philip Morris Asia acquired shares in Philip
Morris Australia on 23 February 2011 - 14 months after the Government
announced its intention to introduce plain packs. Hence, said Mr.
Anton, Philip Morris Asia "faces hurdles" trying to prove
that investors' legitimate expectations have been violated. - SUNS]
The largest known pay-out was almost $1 billion but in two-thirds
of the cases, the disputes are a secret, with no information on which
government was sued, for what violation and for how much and what
was paid out, Smith explained further.
On the type of cases that have arisen, Smith explained that investors
have successfully challenged health and environmental measures taken
by governments. There have also been cases by investors challenging
government measures related to government procurement, state-owned
enterprises, taxation, financial regulation, industrial policy, sovereign
borrowing, agriculture etc.
She gave examples of several cases where governments have been sued
by investors and governments have lost even if these measures were
legitimate and taken for environmental or health reasons. Many cases
involve the mining sector, and where an investor breaks a law in a
country it invests in, and the host government revokes the company's
mining permit (as it is permitted to do under its domestic law), the
investor sues under the treaty and the investor wins with the host
government having to pay monetary compensation to the wrongdoer.
Smith gave examples of developed country governments who have been
thus sued such as Germany, Canada and Australia. She said that in
the case of Germany, a Swedish energy company called Vattenfall sued
the German government twice when the government took measures to address
climate change in one case and the other in relation to the German
government's decision to phase out nuclear power, following the Fukushima
disaster. In the first case, the German government settled the case
for an undisclosed sum (Vattenfall had claimed Euros 1.4 billion plus
interest) while the second case is pending, with a claim from the
company for nearly $1 billion.
The Australian government's current position is to say NO to investor-state
dispute settlement in trade policy in relation to the Trans-Pacific
Partnership Agreement (TPPA), she said.
Melinda St. Louis from Public Citizen spoke on investor-state disputes
brought under the US FTAs and BITs and highlighted several cases.
St. Louis said that BITs have existed since the 1950s but it has been
in the last 10 years that most investor-state disputes have occurred.
She said that in 1999, only 69 cases were launched in the International
Centre for Settlement of Investment Disputes (ICSID) but today, there
are 370-plus cases - a 436% increase in the total stock of investor-state
cases just in this body alone.
(ICSID is an international arbitration institution which facilitates
arbitration and conciliation of legal disputes between international
investors and is a member of the World Bank Group).
In the USFTA investment chapter model on investor-state dispute resolution,
individual foreign firms who are investors obtain equal status with
sovereign national signatories to privately enforce a public treaty,
St. Louis explained. She said that there are expansive substantive
investor rights which extend beyond domestic property rights defined
by US laws and courts. An "investment" is defined to cover
permits, government approvals, IP, contracts etc.
St. Louis said that private investor-state dispute enforcement skirts
the normal court system where foreign corporations get special privileges
and greater rights. Investors can demand compensation for "loss
of expected future profits related to non-discriminatory environmental,
health, safety, land-use, and zoning policies". The concept of
‘sovereign immunity' is waived, she elaborated further.
St. Louis said that cases are decided by private tribunals (under
the World Bank or United Nations) where three corporate lawyers rotate
between suing government on behalf of corporations and being "judges".
Clearly, there is a conflict of interest and the pay structure incentivises
lengthy proceedings and governments share the costs of the case even
if the case is dismissed, she added.
The tribunal has discretion to set damages, compound interest and
allocate costs and there is no outside appeal, and annulment can be
sought for limited errors, she said further.
St. Louis said that under the North American Free Trade Agreement
(NAFTA), $365 million have already been paid out to corporations with
$13 billion in pending claims under US NAFTA-style deals alone relating
to land-use, timber, water rights, public health, environment, mining,
energy and transportation.
She highlighted several cases of investor-state disputes under USFTAs
or US BITs. In the case of Exxon-Mobil/Murphy Oil vs. Canada, a non-discriminatory
requirement for a fee to be paid for research and development in two
of Canada's provinces that applied to all firms, both domestic and
foreign, was the subject of dispute where the investor claimed that
this was a performance requirement and therefore not allowed under
NAFTA. Exxon claimed $60 million.
In Metalclad vs. Mexico, the California-based company successfully
challenged the denial of a construction permit by a Mexican municipality
for the building of a toxic waste facility. The government move was
viewed as an "indirect expropriation" and Mexico was asked
to pay $15.6 million.
St. Louis also gave examples of cases where the investor-state dispute
resolution is used as threats and coercion against governments to
obtain a result.
One example was the case of a metal smelter in Peru "where an
investor-state case was brought against Peru under the US-Peru FTA
by Renco Group, a company owned by one of the richest men in the US.
The dispute relates to Renco's investment in a metal smelter in Peru
which has been designated as in the top 10 most polluted sites in
the world. Peru's Health Ministry found that about 99 percent of the
children at this site had lead poisoning and 20 percent of these needed
urgent medical attention. Renco's Peruvian affiliate promised to install
sulphur plants to help remediate the environment by 2007 as part of
an environmental remediation program. Although it is out of compliance
with this contractual obligation, the company sought (and Peru granted)
two extensions to complete the project. In 2010, Renco sent Peru a
Notice of Intent that it was launching investor-state proceedings,
alleging (among other claims) that Peru's failure to grant a third
extension of the environmental remediation obligations constitutes
a violation of the firm's FTA rights as a foreign investor. The company
is demanding $800 million in compensation from Peruvian taxpayers
for alleged FTA breaches."
In the case of Chevron vs. Ecuador, after having lost on the merits
in Ecuador and US courts, Chevron has turned to use an arbitration
tribunal for investor-state dispute resolution under a BIT to help
the company avoid paying to clean up horrific contamination in the
Amazonian rainforest, said St. Louis. Chevron is trying to get the
tribunal to suspend enforcement of or alter an $18 billion judgment
against Chevron rendered by a sovereign country's court system, she
Roberto Bissio from Social Watch highlighted the case of Philip Morris,
the transnational tobacco company which has brought an investor-state
claim against the Uruguayan government for imposing restrictions on
cigarette packaging. The government wanted 80% of the cigarette package
to have anti-tobacco messages and that there can only be the use of
one brand with no variations. According to Bissio, the company considers
this a violation of its IP.
Dr. James Zhan of UNCTAD said that the investment treaties have not
been functioning for sustainable development and no government has
been happy with this. The issue was how to ensure the move away from
agreements for freedom for investors to enabling investment for development
and there was need for policy makers to have policy tool-kits and
know-how, he added.
Zhan said the challenge was how to ensure investment rules serve economic
growth and jobs and also mainstreams environmental, social and governance
He said there were systemic challenges with the proliferation of investment
treaties in the era of liberalisation, while now was the era of regulation
and sustainable development. Zhan said there is incoherence at three
levels: between treaties signed with countries at different times
and at different levels of development; national and international
incoherence; and investment polices vis-a-vis other policies including
trade, competition, and industrial policy.
He said that there was need for new policy frameworks with a new generation
of investment policies with guiding principles; national investment
guidelines; and international policy guidance. On investment treaties,
the option for governments was whether to have them or not, he said.
Zhan said that there was "no one size fits all" option but
there are a range of options for countries to pick and choose from.
There is need to analyse the development implications and a set of
indicators for assessing effectiveness.
On what is the right approach, he said there is need for a balanced
approach with investment for sustainable development with policy coherence,
the right to regulate and to balance the rights and obligations of
corporate governance. +