INTERNATIONAL INVESTMENT AGREEMENTS AND INVESTOR-STATE ARBITRATION LECTURE 3. IIAs and Sustainable Development

1. INTERNATIONAL INVESTMENT AGREEMENTS AND INVESTOR-STATE ARBITRATIONLECTURE 3. IIAs and Sustainable Development Sergey Ripinsky International Investment Agreements Section Division on Investment and Enterprise Geneva, 4 May 2012

2. Plan • Reactions to the perceived drawbacks of the IIA/ISDS system: • “Business as usual” • Exiting the system • Renegotiations of IIAs/modernizing treaty content • Sustainable development dimension of IIAs • UNCTAD’s IPFSD (2012) • Examples – making treaties SD-friendly

3. Exiting the system 1. Unilateral termination of BITs? Survival clauses: “Notwithstanding termination of this Agreement, it shall continue to be effective for a further period of 15 years from the date of its termination in respect of investments made or acquired before the date of termination of this Agreement.” • Few terminated BITs: • In 2008 Ecuador terminated nine BITs : with Cuba, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, Romania and Uruguay. • Venezuela terminated its BIT with the Netherlands.

4. Withdrawals from the ICSID Convention • Bolivia (2007), Ecuador (2009), Venezuela (2012) • Venezuela: • A wave of nationalizations under Chávez, disputes about amount of compensation • 20 cases pending at ICSID (10 of them initiated in 2011): no effect on them • 6-month period available for new claims • Out of 26 BITs in force for Venezuela, only two (Chile, Germany) name ICSID as the sole arbitral venue. What about UNCITRAL? • Chávez: the Republic “will not recognize any ICSID decisions”. • Is ICSID the one to blame?

5. Improving investment treaty law • Review of countries’ model BITs Review process concluded or under way: Austria, Argentina, Bolivia, Colombia, Ecuador, France, Germany, Mexico, Morocco, South Africa, Turkey, United Kingdom, United States, Venezuela. Main reasons for review: - establish clearer rules; - seek balance: investor & host country interests; - adjust model to new developments.

6. Improving investment treaty law 2. Renegotiations of existing IIAs • A significant part of new IIAs are renegotiations. • Sometimes BITs are replaced by broader economic agreements with a BIT-like chapter. • Renegotiation on regional level: ASEAN replaced its investment agreement in 2009. • “ASEAN plus” agreements: e.g., ASEAN-Aus-NZ, ASEAN-China, ASEAN-Korea. • TransPacific Partnership (TPP) - under negotiation. Negotiating countries – Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, United States and Vietnam (+Canada and Japan joined recently).

7. EU Developments • Lisbon treaty (2009) transferred competence over FDI • The number of extra-EU BITs is almost 1200 (plus intra-EU) • Ireland – no BITs, Germany leading with almost 120 • All new negotiations – Union level. In the long run, all existing BITs will be replaced • First partners-to-be: Canada, India, Singapore and Mercosur, China, Russia. • An opportunity to update and modernize old BITs.

8. Sustainable development impact of IIAs • Investment protection – not an aim in itself but a means for sustainable development • Ensure that States retain right to regulate for public policy objectives, even if this causes harm to businesses • Shield countries from exorbitant financial liabilities • Promote responsible investment: compliance with national laws, CSR standards • Increase degree of certainty and predictability of rules.

9. UNCTAD’s 2012 Investment Policy Framework for Sustainable Development (IPFSD) • Comprehensive set of policy guidelines • Builds on previous work by UNCTAD and others, experience in the field and successful examples in individual countries • Particular emphasis on balanced relationship between foreign investment and sustainable development • Core Principles for investment policy making • National policy guidelines • Policy options for IIAs (goes through all treaty clauses)

10. Treaty preamble • Plays a role in the interpretation of treaty provisions • Especially important when interpreting vague provisions such as FET. • Most IIAs emphasize the parties’ intention to create “a stable framework for investments” or “favourable conditions for investments”. • To counterbalance, the preamble may set out other objectives, e.g.: • sustainable development; • the right to regulate in public interest; • commitment to high human rights, labour and environmental standards; • corporate social responsibility.

11. Definition of investment • What investments should an IIA protect? • Positive list: those investment that contribute to the economic development of the host State (criteria?) • Negative list: all investments except those explicitly excluded, e.g.: • one-off commercial transactions • short-term loans • portfolio investments • assets acquired not for business purpose

12. General exceptions Inspired by WTO law (Article XX GATT) If a State shows that its measure falls within one of the exceptions, a violation will not be found. Examples of exceptions: to protect human, animal, plant life or health to protect public morals or public order to preserve cultural and/or linguistic diversity to preserve the integrity and stability of the financial system The measure must be genuine and not a disguised way of breaching the treaty protections. 12

13. Free Transfer – Balance-of-Payments exception • An investor should be able to make free use of invested capital and returns on investment. • A host country's should be able to deal with sudden and massive outflows or inflows of capital, balance-of-payments difficulties and other macroeconomic problems. • An exception increasingly found in recent IIAs allows States to impose restrictions on the free transfer of funds in specific circumstances: • serious balance-of-payments difficulties or threat thereof • serious difficulties in macroeconomic management, in particular, related to monetary and exchange rate policies. • Condition these exceptions to prevent their abuse (e.g. respecting conditions of temporality, equity, non-discrimination, good faith and proportionality)

14. Expropriation • The problem of regulatory expropriation. • Some recent IIAs introduce a regulatory carve-out such as this: “Non discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.”

15. Investor obligations • Most IIAs – only State obligations (investor rights). • An obligation for investors to comply with laws and regulations of the host State? Possible consequences: • Denying treaty protection to non-complying investors for serious violations • Giving States a right to bring counterclaims in ISDS proceedings. • Encourage to comply with relevant universal principles and applicable CSR standards, e.g.: • ILO MNE Declaration, • the UN Guiding Principles on Business and Human Rights, • ICC Guidelines for International Investment • ISO 26000 standard “Guidance on Social Responsibility”. • Instruct tribunals to take into account investors’ compliance with relevant principles and standards when deciding investors’ ISDS claims.