Investment treaties come under fire
Online Publication Date: 19 November 2012
Investment treaties come under fire*
By MARTIN KHOR
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$1.8bil (RM5.4bil)
judgment against Ecuador obtained by a US oil company, a US$2bil (RM6bil) suit
filed against Indonesia by a British mining company, 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 US 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 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 or potential
losses to governments is causing grave concerns and has 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 United States).
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, licences, contracts, intellectual property, etc. Investors
can bring up cases in claiming that their rights to any of these have been
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 not only
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,
Chakravarth 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
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
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
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 and international levels.
* This article that was published in The Star (Malaysia), 19
November 2012. Martin Khor is Executive Director of South Centre, an intergovernmental organization of developing countries based in
Geneva. He was formerly Director of the Third World Network (TWN).