Bilateral investment treaties: a friend or foe to human rights?

• Author: Sheffer, Megan Wells
• Position: Sustainable Development, Corporate Governance, and International Law

1. INTRODUCTION

   The worst cases of corporate-related human rights harm have occurred, predictably, in the places that need economic development the most: "in countries that often had just emerged from or still were in conflict; and in countries where the rule of law was weak and levels of corruption high." (1) Notably, corporations "increasingly play a significant role in the civil wars of developing countries from Sierra Leone, Angola, and the DRC [Democratic Republic of the Congo] to Azerbaijan and Myanmar." (2) For example, a United Nations Panel regarding the ongoing DRC conflict found that corporations trading minerals in the DRC were not only involved in the conflict but were "the engine of the conflict." (3) Sustainable economic development requires both foreign direct investment (FDI) by multinational corporations (MNCs) and the protection of human rights. FDI is a "category of international investment that reflects the objective of a resident entity in one economy to obtain a lasting interest in an enterprise resident in another economy." (4) Human rights law, as described by the Universal Declaration of Human Rights--and the subsequent International Covenant on Civil and Political Rights (ICCPR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR)--provides duties for States and affect a multitude of human rights-related policy areas, such as labor law and environmental regulation. Undoubtedly, FDI and MNCs "constitute powerful forces capable of generating economic growth, reducing poverty, and increasing demand for the rule of law." (5) Nevertheless, MNCs can also hinder economic development by violating, and inhibiting the protection of, human rights.

   In addition to actively perpetrating and enabling human rights violations, MNCs can hinder a State's regulatory power to provide human rights protections. The increasing power of MNCs is strengthened, at least in part, by Bilateral Investment Treaties (BITs). A BIT is a treaty between two States that ensures that investors of a State-Party receive certain standards of treatment when investing in the territory of the other State-Party. (6) The purpose of the BIT is to encourage FDI between the two State-Parties, which hopefully leads to economic growth for both State-Parties. However, BITs grant MNCs rights against States, and allow MNCs to directly initiate arbitration against a State when the State has not fulfilled its obligations under a BIT. The threat of a multi-million dollar adverse arbitration decision pressures States to placate MNCs, and this limits a State's ability to regulate, even in important human rights-related policy areas. For example, MNCs have claimed millions of dollars in damages under BITs for State regulations addressing an emergency financial crisis, refusing to grant a license for a toxic waste facility, and enacting affirmative action legislation. (7)

   The field of corporate social responsibility is vast and deep, and has produced a great deal of discussion and proposed solutions. However, this paper explores the narrow subject of BITs. Currently, BITs empower MNCs and encumber a State's regulatory power to promote and protect human rights. However, BITs can be reformed to remove, or at least limit, these encumbrances. Moreover, BITs could be restructured, not to remove the rights BITs grant to MNCs, but to create reciprocal obligations for MNCs to act responsibly and not violate human rights. Section I provides a brief history of the international investment law system and the development of BITs. Section II defines the basic components of a BIT. Next, Section III explains why the current patchwork BIT regime is insufficient. Finally, Sections IV and V discuss proposed solutions to the inadequacies of the present BIT regime.

2. BRIEF HISTORY OF INTERNATIONAL INVESTMENT LAW

   The regulation of international investment has deep roots in the development of law regarding the treatment and legal status of foreigners over the past several centuries. (8) Formal treaties governing international commerce, known as Treaties of Friendship, Commerce and Navigation, flourished in the post-WWII era, and the investment protection function of these treaties came to dominate and evolved into BITs. (9) During this period, there were a series of initiatives to establish a multilateral legal framework for investment, including an International Trade Organization (ITO), which failed, in part, due to existing preferences for BITs. Consequently, the General Agreement on Trade and Tariffs, negotiated in 1947, did not include an investment framework. (10)

   Since then, the international trade and investment law regimes have developed separately. The Uruguay Round of negotiations, which established the World Trade Organization (WTO) in 1994, provided for centralized regulation of international trade, but again excluded discussion of an investment framework. While two WTO agreements touch on trade-related investment they do not constitute comprehensive multilateral investment regulations: the Agreement on Trade-Related Investment Measures reaffirms that investment laws must be consistent with WTO trade obligations, and the General Agreement on Trade in Services creates rights for foreign investors to invest in certain service sectors. (11)

   Presently, international investment law exists through a fragmented patchwork of BITs created to entice FDI. The frenetic rate of globalization has increased the number of MNCs, and consequently, the frequency of FDI and the use of BITs. During the 1970s there were more than 1,000 instances of States nationalizing private investments, which made the compelling need to protect foreign investors from unfair and arbitrary treatment by host governments more apparent and led to a proliferation of BITs. (12) Over the last two decades developing nations have entered the intemational investment environment, providing fertile new ground for investment opportunities and an exponential multiplication of BITs. (13) The rapid spread of BITs was likely the result of the increasing enthusiasm for foreign investment in the developing world. BITs appeared to address a need on the part of the developing countries "to add credibility to commitments these countries made to investors." (14) Today, there are nearly 3,000 separate BITs (15) among more than 170 countries. (16)

   Recent attempts to restructure the patchwork BIT regime and create a multilateral investment framework have been largely unsuccessful. Following the failure of the Uruguay Round to obtain investment protection, the United States promoted negotiations of a Multilateral Agreement on Investment (MAI) within the Organization for Economic Cooperation and Development (OECD). (17)

   Activists argued against the agreement, concerned that it would constitute a corporate bill of rights with no corresponding obligations. In February 1998, more than 600 organizations from 67 countries released a joint statement calling for the suspension of MAI negotiations. (18) This heightened public scrutiny further discouraged interest by international businesses, which was already lacking. For these reasons, in addition to disagreement between States on a broad range of issues, MAI negotiations ended in April 1998 and have not resumed. (19)

   However, the failure of the MAI renewed enthusiasm for bringing investment into the WTO regime. The 2001 Doha Declaration expressly recognized the need for a multilateral investment framework. (20) In 2003, at the Fifth Session of the Ministerial Conference in Cancun, Mexico, investment was at the center of the debate between developed and developing countries, and was one of the proximate causes for the breakdown of negotiations. (21) Developing nations wanted an investment framework to include special considerations for developing countries, including allowances for development policies and governments' rights to regulate in the public interest. (22) Due to the divisive nature of this debate, the WTO General Council has decided to exclude further discussion of multilateral regulation of investment from the Doha Round of negotiations. (23)

   Most recently, the European Union (EU), whose members are parties to over 1,200 BITs, has taken steps to solidify its members' investment policies. (24) When the Lisbon Treaty entered into force on December 1, 2009, the EU received exclusive competence over FDI. This includes a transition of power to enter into BITs; the power EU members previously had to negotiate BITs with non-EU States has shifted to the Union. (25)

   On July 7, 2010 the European Commission released a draft Regulation and a Communication. The draft Regulation, which proposes a transitional arrangement for existing BITs, has to be approved by both the Council and the Parliament. (26) It would give members temporary authority to maintain their existing BITs with nonEU countries, and to even negotiate new BITs. However, the Commission would be able to withdraw that authority if it concluded that a member's BIT compromised the EU's investment policy. (27) The Communication is not very detailed but it does mention broader policy objectives. It explicitly refers to the objectives of the overall European foreign policy, including the promotion of the rule of law, human rights, and sustainable development, and also to the OECD Guidelines for Multinationals. (28) The Communication does not add any nuance or a more balanced construction of typical BIT provisions, which are described in the next section. Nevertheless, this is a unique opportunity for an assessment of the existing BITs and for an open and broad discussion on the future European international investment policy. (29)

3. DESCRIPTION OF BILATERAL INVESTMENT TREATIES

   A BIT is a treaty between two States. The BIT ensures that investors of a State-Party receive certain standards of treatment when investing in the territory of the other State-Party. (30) When there is...