United States companies investing abroad stand to gain additional legal protections in the near future from two international treaties currently under negotiation intended to safeguard investments of United States investors in China and throughout much of the Asia-Pacific. These treaties would of course also extend greater legal protections to investors of other signatory countries in the United States. Public interest groups fear a threat to United States regulatory freedom by extending those same protections to foreign investors, despite the United States having never been found to have breached any of these international legal instruments. These concerns are felt in other countries also, because the rights and obligations these regimes create are reciprocal.
The Trans-Pacific Partnership (TPP) is a multilateral free trade agreement (FTA) currently under negotiation between the United States and 11 other countries throughout the Asia-Pacific region (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam). These 12 states account for around 40 percent of the world’s GDP and close to one third of global exports. While discussions are on-going with respect to the precise scope and application of the TPP, according to an announcement on October 25, 2014 by the Australian trade minister, Andrew Robb, there is a push to conclude the treaty by the year’s end. Such is its significance to U.S. investors that the Office of the U.S. Trade Representative has described the TPP as “the cornerstone of the Obama Administration’s economic policy in the Asia Pacific.” It remains to be seen, however, whether ultimately the U.S. is willing to bind itself to multilateral legal arrangements that in any way limit its legislative and regulatory discretion, in particular, by opening itself to potential legal claims brought by foreign investors in investor-state arbitration and agreeing to be bound by the resulting arbitral awards.
The TPP is intended to govern numerous aspects of international trade relations between member states and to supplement WTO rules largely unchanged since 1994. The investment chapter of the TPP will provide substantive legal protections for investors of each TPP state and in respect of their investments made in the territory of other TPP states. It is set to secure standards of treatment already widely found in bilateral investment treaties (BITs) or FTAs – including non-discrimination, minimum standards of treatment, rules on compensation for expropriation, and prohibitions on specified performance requirements that could distort trade and investments. Crucially for investors, at present it is likely to include provisions for binding investor-state dispute settlement.
China does not currently stand to be party to the TPP. It has labelled the TPP negotiations as part of a U.S. strategy to “contain” China by gathering together Pacific nations against China’s interests. Suspicion may be easing, with Vice Minister of Finance Zhu Guangyao contemplating a TPP with China in it, recently stating that any trade bloc not including China would be “incomplete”. But the challenge of securing legal protections at the international level for U.S. investments in China is not a new one. The U.S. and China, the world’s two largest economies, have for some years been in negotiations about a potential U.S.-China BIT. The U.S. Department of the Treasury has said that such a treaty would be “an important step in opening China’s economy to U.S. investment by eliminating market barriers, and levelling the playing field for American workers and businesses”.
The advantages for investors that stem from the presence of bilateral and multilateral free trade and investment protection agreements cannot be doubted. Such treaties often provide the only means of legal recourse for investors abroad who fall victim to sovereign interference with the enjoyment of their investments. The recent high-profile Yukos arbitration, brought under the Energy Charter Treaty (ECT), a sector-specific multilateral trade and investment protection treaty, demonstrates the potential for private actors to use the international legal system of investment treaty protection to hold to account a superpower. The award in that case, against the Russian Federation, is by far the largest in history (USD 67 billion and counting). As noted by Quinn Emanuel partner (and former lead counsel to Yukos) Philippe Pinsolle, such an outcome would have been inconceivable before the era of bilateral and multilateral investment protection treaties.
In recent years, however, the system of investor-state arbitration has come under fire from some quarters. Among several criticisms, there is frequently perceived to be imbalance in a system that puts private commercial interests ahead of broader considerations of public policy, sovereign regulatory authority, and democratic legitimacy, at least in countries where the government has been democratically elected.
Concerns as to undue interference with a state’s sovereign right to legislate have rarely been more apparent than in the on-going case of Phillip Morris v. Commonwealth of Australia. In that case, a Hong Kong-based subsidiary of Philip Morris brought a claim under the Australia-Hong Kong BIT in respect of tobacco plain packaging legislation introduced by the Australian government. Phillip Morris argues that the Australian legislation constitutes a prohibited “unreasonable and discriminatory” measure, an expropriation of its valuable intellectual property and goodwill, and a failure to provide for its investments “full protection and security” and “fair and equitable treatment” as guaranteed by the treaty.
Phillip Morris’ claim has been met with criticism. The public health interest in anti-tobacco legislation hardly needs repeating. The notion that an unelected arbitral tribunal (in this confidential UNCITRAL proceeding, operating largely behind closed doors) should have the power to sanction a sovereign state for introducing legislation of this nature is considered unpalatable by many.
Claims brought against Germany by Swedish state-owned power company Vattenfall under the ECT have caused similar consternation. In 2009, Vattenfall challenged environmental restrictions imposed in respect of a multi-billion euro coal-fired power plant to be constructed along the banks of the Elbe River. Vattenfall argued that the City of Hamburg’s environmental regulations targeted its investment and rendered the project economically unviable, in breach of Germany’s investment protection obligations under the Energy Charter Treaty. In 2012 Vattenfall brought a second arbitration against Germany, also under the ECT, before ICSID. The second Vattenfall arbitration has been yet more controversial than the first. It concerns claims by the energy company for over EUR 3.7 billion in respect of the closure of two of its nuclear power plants. Germany argues that the closures are in furtherance of its post-Fukushima policy of phasing out nuclear energy by 2022.
The U.S. itself has also been subject to investment claims engaging similarly controversial questions of public policy. A well known example is the claim initiated in 1999 by Methanex, a Canadian chemicals manufacturer, based on alleged violations of Chapter 11 of the North American Free Trade Agreement (NAFTA), a FTA between the U.S., Canada and Mexico. The claim concerned environmental regulations enacted by the State of California banning the sale and use of the gasoline additive known as MTBE. Methanex was at the time the world’s largest producer of methanol, a feedstock for MTBE. In a public award, the arbitral tribunal rejected Methanex’s claims, siding with the U.S. government in stating that non-discriminatory regulations in the public interest should almost never be considered a compensable expropriation. That the U.S. won did little, however, to lessen the antipathy to these treaties, with many opposed to the idea that the bona fides of public regulation might ever be scrutinized by a privately-selected tribunal.
As well as giving rise to objections on the principle that legitimate environmental and public health measures enacted by sovereign governments ought not be second-guessed by international investment tribunals, these cases highlight concerns that foreign nationals might enjoy greater legal rights than nationals of the host state by virtue of their ability to bring treaty claims. Commentators have argued that in Vattenfall the rights provided to foreign investors in investment treaties surpassed those provided by the German Basic Law (Grundgesetz), and the careful balance achieved between private property rights and public welfare objectives. Further, it has been said that the investment protection system focuses exclusively on investors’ rights or interests, with little regard to investors’ responsibilities and obligations.
The debate is not taking place only in the U.S. Indeed, in recent years the European Commission has sought to bring about the termination of all BITs concluded between EU member states on the basis of their alleged incompatibility with an emerging harmonized body of European trade law. As recently as October 2014, Jean-Claude Juncker, president-elect of the European Commission, expressed hostility to the inclusion of investor-state resolution provisions in the Transatlantic Trade and Investment Partnership (TTIP), a FTA currently under negotiation between the EU and U.S. Juncker has stated that the Commission “will not accept that the jurisdiction of courts in the EU member states be limited by special regimes for investor-to-state disputes ... [there will be nothing in the TTIP] that will allow secret courts to have the final say in disputes between investors and states”. Perhaps jaded by its experience in the Vattenfall cases, Germany has been particularly vociferous in its opposition to investor-state arbitration, despite the first ever BIT being one Germany negotiated with Pakistan in 1959.
The system of international investment treaty arbitration has many critics but its flaws should not detract from the invaluable role it serves in protecting investments abroad exposed to regimes with lesser standards of governance, or victim to the abusive exercise of sovereign power. The proper parameters of the substantive protections commonly available under investment treaties are subject to debate and continuous refinement as an increasingly coherent body of consistent jurisprudence emerges. What cannot be doubted, however, is that the system currently plays a significant role in establishing checks and balances on the otherwise unfettered exercise of sovereign power, especially in economies where the local courts do not offer a level playing field or tolerably familiar standards of justice.
Taking the Yukos case as an example, the arbitral tribunal held unanimously that the Russian Federation had breached its international obligations under the ECT by destroying the Yukos Oil Company and expropriating its assets. The arbitral tribunal found that “Yukos was the object of a series of politically-motivated attacks by the Russian authorities that eventually led to its destruction”, the Russian Federation’s aim being “to bankrupt Yukos, assign its assets to a State-controlled company, and incarcerate [Mikhail Khodorkovsky] who gave signs of becoming a political competitor”. Yukos had previously been the largest oil company in Russia in terms of daily crude oil production. The arbitral tribunal found that state officials had arrested, imprisoned, and harassed Yukos employees, manufactured a false pretext for confiscation of Yukos’s assets, and later transferred all of Yukos’s assets to certain state-owned companies. For the claimants in the Yukos case, investment treaty arbitration provided a unique form of effective legal redress.
In 2007, Dutch investor ConocoPhillips initiated an arbitration against Venezuela before the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID). The claimants had invested in major oil projects in Venezuela that were subsequently nationalized by the government of the late president Hugo Chavez. The expropriation took place without any offer of adequate compensation,whilst the investors were also subjected to discriminatory taxation measures. Amongst other things, the arbitral tribunal held that a sovereign state’s taxation policy can under certain circumstances be subject to scrutiny under international investment law, despite this traditionally being seen in some quarters as a sovereign power beyond the reach of investment treaty tribunals.
The 2012 award in the Occidental v. Ecuador arbitration, brought by an American investor under the Ecuador-U.S. BIT, occasioned the then largest ever award by an ICSID tribunal at over USD 1.7 billion, plus interest. The dispute concerned the unlawful termination by Ecuador of a contract entered into with the claimants for the exploration, and development of an oilfield in the Ecuadorian Amazon. ExxonMobil enjoyed a similar success just this year in a case against Venezuela.
Yukos, ConocoPhillips, Occidental and ExxonMobil all highlight the potentially far-reaching impact and effectiveness of claims under investment protection treaties. Both the TPP and China-U.S. BIT stand to make foreign investment in the participating states a more enticing prospect. Put differently, it may reduce the costs of investing in those countries, both for investors who might otherwise seek greater levels of return to compensate for the lack of recourse in the event of sovereign misconduct, and for States, who need not offer as attractive terms to foreigners in order to attract their capital and know-how. The willingness of arbitral tribunals to deliver awards worth billions of dollars in circumstances where sovereign states might otherwise presume to act with impunity significantly levels the playing field between private investors and foreign governmental power. To this end, the draft investment chapter of the TPP aims to strike a balance between safeguarding investors’ rights and protecting the rights of TPP countries to legislate in the public interest.
Nonetheless, it remains to be seen exactly what form the TPP’s protections ultimately will take. It is still in doubt, for example, whether Australia will consent to the TPP’s proposed investor-state dispute settlement procedures, given the announcement of recent governments that it no longer supports such procedures in its trade agreements.
Further, certain U.S. state legislators have expressed concerns in an open letter to the negotiators of the TPP, urging them to oppose the inclusion of investor-state arbitration provisions in the TPP. The open letter expresses a “particular concern about the impact on state regulatory, legal and judicial authority”. It was concerns such as these that, in the 1990s, led to the U.S. ultimately not signing up to the ECT despite having been instrumental in its formation.
The U.S.-China Business Council (USCBC) has expressed strong support for the proposed U.S.-China BIT. In October 2014, 51 CEOs and members of the USCBC wrote to President Obama, urging his administration to “make the prioritization of a high-standard BIT between the United States and China a visible part of your visit to China in November and bilateral meeting with President Xi”. Among other matters, the USCBC has urged the U.S. government to ensure that any treaty includes only a very limited list of so-called “excluded sectors”, these being areas of the economy that the parties reportedly might agree to place beyond the scope of the treaty’s coverage. The eventual conclusion of a U.S.-China BIT could have significant implications for trade and investment flows between the two countries.
Bilateral investment treaties concluded between economically powerful states and economically weak states can be seen as having asymmetrical effects. The more numerous and active investors of the more powerful state, often large multinational corporations, receive greater benefit than the numerically fewer and less well-resourced investors of the economically weak state. The quid pro quo for the economically weak state is the attraction of foreign investment and know-how, while the flow of investment from the weak state to the powerful state is often comparatively negligible. This cannot be said of the relationship between the U.S. and China, the world’s two most economically powerful states. The terms of any eventual treaty will be carefully negotiated, with each wary of offering any net advantage to the other. Finalisation of the text and a signing ceremony would not be the end of the story, since most treaties only acquire force of law upon ratification. A BIT was negotiated between the U.S. and Russia and signed in 1991, for instance, but it was never ratified and brought into force.
Should either the TPP or the proposed U.S.-China BIT come to fruition, not de-clawed but fully equipped with investor-state arbitration, they will afford clients and the counsel who support them an additional layer of legal rights for their investments abroad and a forum in which to seek redress where otherwise there might be none.
