What’s the value of investment treaties?

by Dr. Dominic Beckers-Schwarz, Lawyer, Paris

 

On 7 March 2017, one day after the OECD Global Forum on International Investment, over one hundred stakeholders from businesses, trade unions, academics and OECD member states gathered for the one-day “3rd OECD Annual Conference on Investment Treaties”. The conference addressed issues concerning “evaluating and enhancing outcomes of investment treaties”.

How to measure the societal costs and benefits of investment treaties?

Following the previous day’s call for a new globalization narrative, the OECD opened the first conference panel by addressing the need to measure the societal costs and benefits of investment treaties.

Academics first explained the challenges of measuring the effects of investment treaties. While it may be easy to measure the economic exchange between two states, such a quantification is limited to bilateral interactions and does not necessarily address the global cross-fertilization of today’s investment treaties. The panel expressed doubt regarding the possibility of measuring in figures the societal costs and benefits of, for example, investor-state dispute settlements (ISDS) and the political benefits of depoliticizing international investment disputes.

The panel turned to the, sometimes unwritten, fundamental goal of international investment treaties—depoliticizing investment disputes and enhancing international investment flows through clear, stable and enforceable investor rights—a sort of rule of law codification.

But international investments occur frequently, even where no international investment treaties exist. International investment agreements often are not part of national investment promotion programs. However, smaller states especially see the need to conclude investment treaties to enhance cross-border investment.

When an NGO representative asked whether ISDS could cause populist resistance, due to misuse of the system, panelists denied the possibility of potential abuse of ISDS through cherry-picking. Costs of investment arbitration procedures and anti-treaty-shopping clauses in international investment treaties would prevent misuse of the system.

In sum, academics and government officials from OECD and non-OECD countries agreed that the connection between international investment treaties and economic dynamics needs continuing assessment. Further work includes defining more standardized approaches to measuring the effects of investment treaties. The OECD could be an optimal organization to conduct a cost-benefit analysis.

In my view, that governments are seeking out careful analysis of the costs and benefits of the investment treaty approach together is a positive sign to continue and enhance global cooperation in responsible investment policy.

Joint government interpretation of investment treaties—achievements and obstacles

The second panel addressed the topic of governments jointly interpreting international investment treaties in situations where no treaty clause permits the governments to do so (unlike NAFTA).

In general, the panel viewed earlier interpretations as better and more authoritative, since the later an interpretation, the more it may look like a hidden amendment.

Some state representatives explained that joint interpretations are a good way to avoid costly, lasting and complicated renegotiations. Participants mentioned fair and equitable treatment (FET) as a good joint interpretation example. Joint interpretations within the boundaries of the Vienna Convention of the Law of the Treaties might, for example, clarify or adjust an international investment treaty’s broad standards. Evolving views on what international investment treaties should address and how they should function lead to the need for such interpretations.

Another approach to enhancing the certainty and predictability of international investment treaties is a joint interpretation of certain investment treaty standards at the time of the treaty’s conclusion. For example, several provisions of CETA are subject to a joint interpretative instrument in CETA’s annex, which the parties agreed on at the time of signature. Such an expression of the parties’ intent might ensure greater clarity. However, conference participants cautioned that such joint interpretations must be clearly worded, because bad drafting could inspire further confusion rather than clarifying treaty standards.

Discussion participants further agreed that the non-disputing party of a treaty should always be informed about interpretations made by the disputing parties. Some provisions, namely Art. 5 of the UNCITRAL Rules on Transparency in Treaty-based Investor State Arbitration, even enable the non-disputing party to intervene in interpretations, such as by attending the hearings.

Panel members also expressed their interest in working on a plurilateral basis when interpreting standard investment treaty clauses. They saw this as the only way to maintain a common understanding of what an investment treaty covers.

Two participant questions especially showed the need for further work on the topic: (1) How far can a joint interpretation go, and when does it turn into an amendment? (2) As of when is a joint interpretation valid: the moment of the conclusion of the treaty or the moment of the formation of the joint interpretation?

In my view, joint interpretation can be a useful method of clarifying the contracting parties’ intent. However, retrospective joint interpretations might lead to back-door amendments, exceeding the reasonable bounds of the treaty. Further work in this area might seek to establish a clearer understanding of the barrier between legitimate interpretation and unwanted amendment and the impact of such a delineation in the field of international investment law.

Enhancing investment treaty outcomes and addressing globalization concerns

Though shorter in time, the closing panel drew on the Global Forum’s emphasis on “better” globalization from the day before and linked it to the discussions of this conference. Among international organizations—represented in this panel by UNCTAD and OECD—government representatives and NGOs, there is broad consensus on the necessity of further international cooperation and the global exchange of goods and investments. But ideas of whether the system is sufficiently inclusive, or how to make it more inclusive, still differ. The question, how to access the exact societal costs and benefits of these treaties showed the need for further work.

The panel showed, that OECD and UNCTAD both do substantive work on the topic and continue to do so by especially by reviews, reports, analysis and statistics. Governments endorse that work, since it is an important basis for their politics. NGOs use it to point out what may be improved in their view. This OECD conference gave governments as well as NGOs an opportunity to exchange their views on what the problems are and how to tackle them.

In my view, the OECD’s work—especially on topics like inclusive growth and responsible investment—can help promoting a form of broadly beneficial globalization in the investment context and in general. Let’s not ask whether globalization is crumbling away; let’s work on a globalization which fits everyone’s needs.

In search of a “better” globalization

by Nikos Lavranos, Secretary-General of EFILA

The backlash against globalization

At the OECD, Global Forum on International Investment (6 March) more than hundred stakeholders from businesses, trade unions, academics and OECD member states gathered together for a one-day meeting considering ways towards a “better” globalization, which is more “inclusive”, i.e., which benefits all.

The OECD set the scene by describing the current backlash against globalization, trade, investment and investor-state dispute settlement (ISDS) as an urgent matter that must be addressed now to reverse the trend of protectionism and populism, which is increasingly visible in the US and Europe.

While it was stressed from the outset that foreign direct investments (FDI) have created many jobs and hugely benefitted many countries around the world over the past decades, it was also concluded that this was not an “inclusive” development. In other words, the benefits of globalization were distributed unevenly and there have been many more losers – not only low-skilled workers but also domestic businesses – than has generally been acknowledged so far.

At the backdrop of this, it was argued that nowadays FDI must not only be perceived to be more inclusive but that they must be more inclusive by making a positive, lasting and substantial contribution to the economy and benefit all citizens of the host state.

The responsibility of multinationals

In this context, many speakers from emerging economies and representatives of trade unions put the responsibility to achieve this on multinationals.

In the first place, many speakers stressed the need that the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct must be systematically adhered to by all investors. Moreover, it was argued that multinationals must take the lead towards a low carbon economy and “green investments”.

In the second place, it was stressed that multinationals must pay their fair share of taxes. The current tax system which allows multinationals to avoid paying the full amount of taxes was criticized. The OECD’s efforts against Base Erosion and Profit Shifting (BEPS), the increasing transparency regarding international tax rules and the implementation of country-to-country reporting were considered essential in countering the backlash against globalization.

In the third place, multinationals were called upon to invest in the “social infrastructure” of societies by supporting the losers of globalization in building a new future.

Towards “quality” investments?

The discussion then turned towards a new econometric study which aims at analyzing how “good” or “quality” investments, which are “inclusive”, could be fostered.

To achieve that it is first all necessary to decide the factors which should be taken into account in order to determine whether, and if so, to what extent an investment is “inclusive”.

The researchers of the study made a distinction between (i) FDI policy and framework composition, (ii) different FDI types, and (iii) FDI outcomes.

The first results show that all of these factors have an important impact on the outcome, which means that a much more nuanced view of FDI must be developed for this new narrative. It also was admitted by the researchers that there is still a lack of sufficient data regarding the various FDI types and FDI outcomes. Obviously, the vast differences in the economies of various is another complicated factor, which makes it difficult to provide easy answers.

As a one of the speakers pointedly concluded:

“it is not the same if an investor invests in producing microchips or potato chips”.

Preliminary results were also shown which indicate that foreign investors compared to their domestic counterparts generally pay higher wages, tend to have a higher productivity, create more and better jobs, and employ more female workers. In other words, foreign investors are in many cases already now providing relatively more inclusive investments than domestic investors.

A new positive globalization narrative

While this study has just been started and much more work needs to be done, the discussion raised several additional issues.

The first issue is the seemingly complete absence of required state action. Instead, many participants expect that multinationals will take on this responsibility, while states do not need to act. However, one may question whether this is not a too easy solution for the states. After all, the domestic Rule of law and governance situation in each state can significantly impact the level of “inclusiveness” of an investment. For example, if a state is run by practically one family clan, any FDI will naturally benefit mainly or exclusively that family clan and thus can never be considered “inclusive”. However, does this fact make every investment – even in for example renewable energy – automatically a “bad” investment? And is the investor solely responsible for the fact that the country is run by a family clan?

The second issue concerns the almost exclusive focus on multinationals in this narrative, whereas it is well-known that SMEs play a very important role in most, if not all, economies of the world. It therefore would seem necessary and appropriate to consider how these additional obligations – if they were to be imposed on investors – would affect SMEs. More generally, it would seem important to make a clear distinction between the needs and obligations of multinationals and SMEs. In other words, the narrative must also be “inclusive” vis-à-vis all types of investors and investments.

The third and probably most complex and contentious issue relates to the question of how states could make a distinction between “bad” and “good” FDI without discriminating against certain foreign investors. Arguably, a state could always invent and apply certain criteria, which would enable it to decide one way or the other as it sees fit, while the investor would be rather helpless against this kind of potential arbitrariness.

This in turn raises the fundamental question of whether this new narrative of “quality” FDI and “inclusiveness” can actually be effectively applied in practice? For now, it is too early to give a definite answer.

Nonetheless, the efforts of the OECD and most of its member states to continue to push for a multilateral framework, which promotes and supports FDI as an essential and important element for an open economy must be applauded. This is a rarely heard sound in these days.

The development of a new, positive narrative in support of FDI is any case a welcome tool to help fight the backlash against globalization.

 

Multilateral Investment Court: A Realistic Approach to Achieve Coherence and Consistency in International Investment Law?

Shiva Ghahremani (Konrad & Partners)

Ivan Prandzhev (Konrad & Partners)

Against all odds, the idea of creating an investment court to replace arbitration tribunals hearing disputes between investors and states has so far made a remarkable career. It has been only 3 years since the idea of an international investment court surfaced in EU Trade Commissioner Malmström’s speech during the meeting of the International Trade Committee of the European Parliament, in which the idea was referred to as a “medium term objective”. Since then, it was transformed into what we know as the Investment Court System (ICS) and has made its way into EU’s agreement with Vietnam, as well as the negotiations on a Transatlantic Trade and Investment Partnership with United States. It has also attracted significant public attention by replacing the originally envisaged investment arbitration tribunals in the EU’s Comprehensive Economic Trade Agreement with Canada (CETA).

While CETA has not passed the tests of the 28 Member States’ parliaments yet, the European Commission is ready to move its investment court to the next level and is setting the stage for its multilateralization. The introduction of a Multilateral Investment Court (MIC) was the subject of an informal ministerial meeting hosted by the EU and Canada at the World Economic Forum in Davos earlier this year. The EU Commission has launched a public consultation to gather opinions from companies, scholars and civil society groups on this subject until the 15 March 2017.

The purpose of the MIC is to do away with the ad hoc nature of the current investor-state dispute settlement system, introducing a standing court with a permanent seat consisting of a first instance and an appellate body with highly qualified state-appointed arbitrators to serve at both tribunals.

The Commission does not lack ambition. A look into its “Inception Impact Paper” shows that its goal is to align the dispute settlement systems available under the existing EU Member States’ BITs and the ECT with the policy being negotiated in EU level trade and/or investment agreements. To put this into perspective, there are around 1400 EU Member States’ BITs and this represents a substantial portion of the overall 2329 BITs and 297 treaties with investment provisions currently in force according to the UNCTAD Investment Policy Hub data. If fully implemented, the Commission’s proposal may result in the most significant reform of investor-state dispute settlement since the ICSID Convention entered into force in 1966.

Even more remarkable is that this revolution is being announced at a time in which the original backlash against investment arbitration that has been there for a number of years is now turning into an outright rejection of multilateralism and globalization. Today’s political environment appears significantly more hostile than back in the period of 1995 to 1998, shortly after the coming into force of the Uruguay Round and the creation of the WTO when the last great attempt to reform investment protection failed with the end of the negotiations on the Multilateral Investment Agreement.

However, the domestic and international political problems are not the only challenges before the Commission’s MIC proposal. The Court of Justice of the European Union (CJEU) has yet to decide the faith of the European investment protection itself since it showed in its Opinion 2/13 of 18 October 2014 that it would not tolerate other courts and tribunals encroaching its exclusive jurisdiction to interpret and apply European Union law. While the law applied by arbitral tribunals is usually derived from investment treaties and trade agreements with investment provisions, domestic European Union law may sometimes be considered as part of the relevant “factual matrix” [Ioan Micula, Viorel Micula and others v. Romania (I), ICSID Case No. ARB/05/20] and require interpretation.

In addition to this, the ICS has not yet been put to the test of enforcement. Obviously, any treaty underlying the proposed MIC will have to ensure enforcement in all its signatories as CETA does for the EU and Canada. However, what will be the probable response of the enforcement authorities in third countries to the question whether the decisions rendered by a MIC, modeled on the ICS, are indeed arbitral awards enforceable under the New York Convention or the ICSID Convention? Even though recent publications [Reinisch, in J Int Economic Law (2016) 19(4): 761 et seq.] suggest parties will be able to rely on the New York Convention, the question will remain hanging as a sword of Damocles over the MIC initiative until coherent case law is established.

The purpose of the CJEU’s exclusive jurisdiction is to guarantee the coherent application of the EU law. Coherency also appears to be one of the central objectives which the European Commission is seeking to achieve with its MIC initiative. In its Inception Impact Assessment, the European Commission points at inconsistencies in interpretation – sometimes of the very same provisions in the same BITs – which naturally results in unpredictability. In addition to all the reasons why certainty is a highly desirable feature for any legal system, the lack of certainty in the field of investment arbitration needs to be seen in the light of criticism often voiced with respect to the substantive standards of investment protection as being vague. Vagueness has the potential to increase the regulatory chill on governments beyond what was originally envisaged in the treaty. The European Commission, therefore, is seeking to allow coherent case law to emerge under the guidance of MIC’s Appellate Tribunal.

The focus on the debate on the word “court” makes us forget that, in the past, different and more effective solutions had been proposed to address the issue of incoherence. Such is the mechanism of “preliminary ruling” which would allow arbitral tribunals to avoid divergent interpretations ex-ante rather than engaging in a complex and cumbersome appellate procedure. Once faced with a fundamental issue of investment treaty law, the competent arbitral tribunal would be required to suspend the proceedings and request a ruling by a central and permanent body set up for this purpose. After such preliminary ruling on the interpretation of investment law has been provided, the tribunal would apply it to the merits of the case pending before it. This solution is mainly modeled on the system of preliminary rulings which safeguard the uniform application of the European Union law and has been proposed for the domain of investment protection by Christoph Schreuer [Schreuer, Preliminary Rulings in Investment Arbitration, in: Appeals Mechanism in International Investment Disputes (K. Sauvant ed.) 207 (2008)].

None of the alternative policy approaches discussed in the Commission’s Inception Impact Assessment seems to include this option. Apart from the founding of the MIC, the paper addresses alternative approaches such as renegotiating the currently applicable BITs one by one, the creation of a permanent multilateral appeal instance and the introduction of an appeal mechanism into the ICSID Convention, which would require renegotiating it. Article 53(1) of the ICSID Convention expressly provides that “[t]he award shall be binding on the parties and shall not be subject to any appeal or to any other remedy except those provided for in this Convention”. The introduction of a mechanism providing for preliminary rulings, however, would be fully compatible with this provision and would leave the principle of finality of arbitral awards untouched. While suspending the arbitral proceedings until a preliminary ruling is provided would add to the time and costs of investment arbitration, this solution guarantees higher procedural efficiency than an appellate review of the award.

While the ambition of the European Commission deserves admiration even from those who may disagree with its proposed solutions and oppose the MIC initiative, a more moderate approach may prove more realistic and may come from a different place. The ICSID is accepting suggestions from members of the public as to how to amend its Rules. A decade ago, the process of updating the ICSID Rules took about two years and introduced third-party briefs and early dismissal of claims which are “manifestly without legal merit”. The introduction of a system of preliminary rulings may fit the size of a comparable reform, help investment arbitration achieve a long-desired coherence, ensure enforceability awards and address at least one of the European Commission’s concerns with respect to its Member States’ BITs.

Norton Rose Fulbright and EFILA: Investor-state disputes, what will change post Brexit?

Norton Rose Fulbright and EFILA invite you to attend a panel discussion on trade, foreign investment and investor-state dispute settlement post-Brexit.

Panel discussion and drinks reception

We are pleased to host an distinguished panel of experts from industry, trade policy and investment treaty arbitration.

Topics our panel will cover include:

  • The UK’s post-Brexit relationship with the EU and non-EU countries
  • The fate of intra-EU bilateral investment treaties (BITs)
  • Trade and foreign investment protections (inward and outward bound investment)
  • Investor-state dispute settlement procedures
  • The EU’s proposed International Court System (ICS)

Speakers include:

  • Deborah Ruff, Partner, Norton Rose Fulbright
  • Chris Southworth, Secretary General, ICC UK
  • Ali Malek QC, 3 Verulam Buildings
  • Norah Gallagher, Academic Director, Energy and Natural Resources Law Institute, EFILA Advisory Board

Places for this session are limited and will be allocated on a first come first served basis. If you would like to attend please RSVP here.

Date:

Wednesday, 29 March 2017

Time:

Registration: 6:00pm

Event start: 6:30pm

Drinks & canapes: 7:30pm

Where:

3 More London Riverside

London, SE1 2AQ

United Kingdom