Bringing BITs back from the brink: incorporating progressive treatment provisions in international investment agreements to maintain policy space for state regulation of human rights.

Author:Goldstein, Jeremy S.
Position:Bilateral investment treaties
 
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  1. INTRODUCTION

    In 2011, the United Nations (UN), and as proposed by John Ruggie, Special Representative of the Secretary General, published the Guiding Principles on Business and Human Rights (UNGP's), with the objective of "enhancing standards and practices with regard to business and human rights." (1) The UNGP's offer "guidance and recommendations to states and companies" (2) in implementing the Special Representative of the Secretary General's (SRSG) 2008 Report, the UN 'Protect, Respect, and Remedy' Framework for Business and Human Rights. (3) UNGP Article 9 recommends that states "maintain adequate domestic policy space to meet their human rights obligations when pursuing business-related policy objectives with other states or business enterprises, for instance through investment treaties[.]" (4) Article 9 recognizes the impact that investment treaties, primarily international investment agreements (IIAs) and bilateral investment treaties (BITs), have on human rights in the modern global economy. (5) It also posits that IIAs need not be inherently detrimental to the furtherance of human rights protections when drafting is guided by policy aimed at maintaining adequate domestic policy space. (6)

    IIAs are agreements between and among states, which "are designed to protect foreign investments] from one country from interference by the government of the country in which the investment is located." (7) IIAs are typically embodied as cither a BIT between two states or a multilateral investment agreement among more than two states, and are designed to increase foreign direct investment (FDI) inflows. (8) Each BIT is a unique instrument, but all investment agreements contain fundamental provisions protecting distinct categories of investor interests. (9) These categories include the treatment of investment, nationalization/expropriation, general exceptions, and dispute resolution. (10) When an unexpected harm occurs to an investment as a result of an action by a host state, dispute settlement clauses allow a foreign investor, operating under the protection of a BIT, to file an 'investor-state arbitration' against the host state. (11)

    Most pertinent to the cause of their conflict with state-imposed human rights protections, BITs create only rights for investors without obligations, and only obligations for host states seemingly unaccompanied by any substantive rights. (12) Of principle concern are traditional treatment provisions. (13) These provisions create substantial rights for investors to file claims restricting host states (14) domestic policy space to legislate to meet its international human rights obligations.

    This article analyzes methodology for drafting treatment provisions which reserve states domestic policy space to regulate human rights in-line with UNGP Article 9. This article examines: state practice in the form of existing treaties, model IIAs, draft IIAs, and policy statements; recommendations from civil society, international organizations, and intergovernmental organizations, including various Model IIA's and Model BIT's; and the work of popular academics and jurists.

    Following this introduction. Section II provides background and context on the issue. Section III briefly presents the history and purpose of IIAs, and considers their efficacy. Section IV introduces the core principles of traditional BITs and explains how treatment provisions enshrined therein restrict government policy space regarding human rights regulation. Section V discusses conflicts between IIAs and international law. Section VI examines UNGP Article 9 and analyzes its recommendations in the context of the greater IIA regime. Section VII presents and analyzes the methodology available for drafting treatment provisions in IIAs in a manner which heeds the recommendations of UNGP Article 9, by examining existing and model IIAs and BITs. Section VIII concludes and provides the author's opinion.

  2. BACKGROUND

    John Ruggie, UN Secretary-General Special Representative for Business and Human Rights, included Article 9 in the UNGP's out of concern for the unequal distribution of rights and obligations IIAs create, particularly in private investment contracts (15) and traditional BITs. (16) The concern is that this unequal distribution impacts states' domestic policy space relating to human rights and the environment. (17) When a state regulates in a manner which seeks to protect or promote a human rights interest, (18) foreign investors operating under a BIT are more likely to successfully challenge the measure than those operating without investment protections. (19) Damage awards in investor-state arbitrations can reach into the billions of U.S. dollars. (20) In Occidental v. Ecuador, the International Center for Settlement of Investment Disputes (ICSID) (21) decided that Ecuador had been in breach of a BIT provision for conduct which was "tantamount to expropriation." (22) While the fairness of the ultimate decision on the issues is not under intense scrutiny, the tribunal awarded Occidental US $1.7 billion, even though Ecuador justified their actions with proof that the company had intentionally committed other serious regulatory violations. (23) As a result, states have become fearful of advancing domestic policies, particularly those relating to human rights and the environment, which may encourage claims. (24)

    This 'regulatory chill' can affect a plethora of policy decisions not protected under the traditional BIT regime. (25) This includes domestic measures that are advanced to achieve legitimate non-investment related policy objectives, such the strengthening of labor laws, and the introduction human rights or environmental protections. (26) States with traditional BIT regimes are most susceptible to policy space restrictions. The chilling effect weighs heaviest on developing nations because they have the greatest need to continue advancing their regulatory regimes as compared to states with developed regulatory environments. (27) Developing states also more frequently engage in traditional BITs relative to developed nations, making them significantly more susceptible to investor claims. (28)

    The regulatory chill largely escaped concern until recently because foreign investors only first began to invoke dispute settlement mechanisms in BITs in the mid-1980's. (29) With the long term consequences of engaging in IIA's now readily apparent, some states are rapidly moving to denounce their traditional BITs; (30) both Venezuela and Ecuador have terminated agreements. (31) Other nations have selected to renegotiate agreements; South Africa and Indonesia have begun this process. (32) However, only so much renegotiation is possible. Basic investor protections that establish discipline on host state measures, generally obliging them to provide compensation for expropriation, and to treat foreign investors fairly, equitably, and in a non-discriminatory manner, are intrinsically necessary in any IIA. (33) For capitol-importing nations, FDI is crucial to development and the advancement of social and economic rights. (34) Investor-protective provisions in agreements which provide the basis for investor-state claims cannot be entirely eliminated.

    Most states concerned about the consequences of engaging in IIAs are not abandoning their agreements in whole. Many recognize that IIA's need not be inherently detrimental to human rights when drafted in a manner which does not restrict domestic policy space. These states are now developing model agreements to guide future IIA drafting in line with UNGP recommendations. Guided by the UNGP, states, specifically developing nations, should be able to take full advantage of the positive benefits that IIAs have on advancing development without succumbing to a restriction on their ability to regulate human rights abuses. This is especially true when those abuses are prohibited by conventions comprising the International Bill of Human Rights, (35) and those enshrined in ILO conventions enumerating protections for children, minorities, and laborers. (36)

  3. WHAT ARE IIAS?

    1. The History of IIAs

      Over the past quarter-century, the number of BITs that comprise the patchwork of the international investment policy regime has skyrocketed; (37) UNCTAD reports less than 500 agreements before 1980, 1,322 in 1995, 2,495 in 2005, and over 3,000 today. (38) More than 450 investor-state arbitrations claiming provisions in BITs have been filed, (39) but formal investment treaties had their start with humble beginnings. The first formal BITs were intended to guarantee foreign investors protections easily justified as necessary to establish business; such as the right to freedom from unjustified appropriation by the state, (40) the right to pay only the market tax rate, (41) and the right to operate free of discrimination on the basis of nationality. Some scholars argue that BITs are a form of human rights protection in that they typically guarantee freedom from discrimination due to nationality. (42) Other scholars highlight the use of treatment provisions during colonial times as evidence of their sinister roots in catalyzing the exploitation of Africa, the Americas, and Asia. (43)

    2. Do IIAs Increase FDI?

      What impact, if any, do IIAs have on FDI? In the commentary to the UNGP, the SRSG expressly acknowledges that "[e]conomic agreements concluded by states ... such as [BITs] ... create economic opportunities for States[,]" (44) but does this opportunity correlate directly to increasing FDI? Numerous quantitative studies have measured changes in FDI inflows relative to IIA proliferation, and the findings are mixed. (45) The prevailing view amongst them is that the relationship between IIAs and FDI is either unclear, (46) or a stalemate. (47) Other studies have found a positive relationship between IIAs and FDI, but only when the study takes into account other specific factors. (48) Some argue that...

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