Global crisis of investment deals

The ease with which investors are able to win cases against govt is due to the nature of the agreements.

A growing number of international lawsuits has highlighted an emerging global crisis: the nature and effects of investment treaties signed between governments, which are allowing private companies and investors to sue countries for millions or even billions of dollars.

The most recent cases involving investment treaties include a 1.8-billion-dollar judgment against Ecuador obtained by a US oil company, a two-billion-dollar suit filed against Indonesia by British mining company Churchill, cases taken against Uruguay and Australia’s public health measures by tobacco companies, suits threatened against India by several multinational companies, and even the seizure of an Argentine warship in a Ghanaian port on behalf of a US investment firm.

The lawsuits were taken by companies and investors claiming that their investments, including potential profits, had been affected by a range of government policies, including non-compliance with contracts or new health, environmental or economic regulations. Most of these arbitration cases are taken up in the International Centre for Settlement of Investment Disputes (ICSID), at the Washington-based World Bank headquarters.

Tribunal system

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 treaties 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 US).

Many of these agreements have investor-to-state dispute systems, under which a private company or investor can directly sue governments in an international tribunal by claiming that their property or profits have been expropriated or adversely affected by a violation of contracts or by recent policy measures.

For instance, an ICSID tribunal in October awarded a judgment in favour of US-based Occidental Petroleum against Ecuador for 1.8 billion dollars. In addition, Ecuador has to pay 589 million dollars in backdated compound interest and half of the costs of the tribunal, making its total penalty closer to 2.4 billion dollars.

The government had annulled a contract with the company because the latter violated a clause that it would not sell its rights to another firm without permission. The tribunal agreed the violation took place but judged that the annulment did not constitute fair and equitable treatment to the company.

The ease with which investors are able to bring and win cases against governments for 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, franchises, licences, contracts, intellectual property and other assets. Investors can bring up cases claiming that their rights to any of these have been violated.

Second, the treaties grant national treatment, fair and equitable treatment and 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 restrict or disallow governments from imposing performance requirements on foreign companies.

Fourth, some of the treaties allow for investors to directly sue governments in international tribunals, including the ICSID. Fifth, the arbitration system is riddled with major weaknesses that are not found in normal courts. According to international expert on trade and investment issues, Chakravarthi 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 (the) ICSID system and these quite arbitrary 'arbitration' panels are exposed."

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, in April 2011, announced it would not agree to including investor-state dispute settlement provisions in its BITs and free trade agreements.

A year later, in April 2012, India announced it was 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 telecommunication companies. 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.