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Courting balance between investor and host state in ISDS

By R Subhashree

The  India’s model BIT (Bilateral Investment Treaty) was criticised as moving away from investor protection and being unreal. Foreign investor protection and the Investor State Dispute Settlement (ISDS) mechanism have received lot of attention, of late and has triggered law suits in the national courts ([Hupacasath First Nation v. Canada], public consultation by European Commission besides host of representations and campaigns cautioning against compromising the right of sovereign governments to legislate/ regulate and making the foreign investor more than equal as compared to a domestic investor though the treaty language calls for ‘National Treatment’.

Showing the way (EU) or doing away with ‘foreign’ investor claims(South Africa)

Two solutions are being debated currently and are interesting for the difference in approach. The European Commission (EC) has proposed an international investment court modelled on the WTO dispute settlement mechanism while South Africa seeks to revoke all its existing BITs and adopt national legislation as a means to assure protection for investments. While South Africa seeks to bring the entire issue within the folds of domestic law guaranteeing equality as per its constitution, the EC seeks to remedy the issue by improving the procedure of how an investor is compensated. It is interesting that the arbitration model which was advanced as an effective and quick remedy for expropriation is being brought within the more traditional judicial process to improve its efficacy and acceptance.

The EC identified four areas for improvement based on its consultations - protection of the right to regulate; establishment and functioning of arbitral tribunals; review of ISDS decisions through an appellate mechanism and the relationship between domestic judicial systems and ISDS.

Drafting and appeal

The EC envisages an operational provision in the treaty specifically worded to protect right to regulate in public interest, establishing a roster list of arbitrators which are agreed to by the parties (States) in advance, conferring right to third parties with direct interest in the dispute, to intervene and an appeal mechanism. It calls for setting up an appellate body with 7 permanent members whose qualifications could be broadly similar to those of the WTO Appellate Body and/or the International Court of Justice. The EC proposal seeks to avoid multiplicity of proceedings by asking parties to choose between national law and arbitration and barring arbitral tribunal s from reviewing decisions of national courts. The EC proposes that EU should pursue the creation of one permanent court which would later become multilateralised as a self standing international body or by embedding it into an existing multilateral organization. The EC proposal also seeks to improve the drafting of the treaty so that wide interpretation is rendered impossible. It seeks to address the problems of bias of arbitrators, restricting frivolous claims by arguing against ‘loser pays’ principle. The first response from the US, with whom EC is negotiating the Transatlantic Trade and Investment Partnership (TTIP), has been negative.

Making the foreign investor  ‘ Equal ’

South Africa’s ‘Promotion And Protection Of Investment Bill 2013’ (PPIB) and the ‘Expropriation Bill’ clarifies its stand on the issue of investor protection against expropriation. For the first time, the domestic investor will have a right / be eligible to be compensated and rather than resorting to a treaty obligation which means that (foreign) investor protection will have the backing of domestic laws. The Expropriation Bill sets out a procedure for appropriation with due notice etc, calculation compensation due and determination of the by the court in certain cases. Expropriation may be for public purpose or in public interest. The PPIB provides for national treatment, reiterates sovereign right to regulate in public interest to correct historical inequalities and provides for dispute resolution by arbitration or mediation without specifically mentioning international arbitration or bodies like ICSID or UNCITRAL. The Bill also states that compulsory licensing, measures having adverse effect without permanent ownership being transferred to the State shall not be expropriation and compensation need not be provided to the investor.

Weighing the approaches

As can be expected, each country’s proposal is a response to the issues faced by it. For instance, wording pertaining to addressing historic inequalities is a fallout of the challenge to grant of mining rights which were held by a foreign investor, to historically disadvantaged South Africans to promote better sharing and access to South Africa’s  resources.[ Piero Foresti, Laura de Carli and others v The Republic of South Africa, ICSID Case no ARB(AF)/07/01]. Among the member countries of EU, almost 1400 BITs are in existence and seen as encouraging bilateral investment and hence it does not want to and may find it impossible to scrap them altogether.

The EC proposal appeals since it envisages a WTO like body which can be successful but if there is to be an appeal mechanism, funding of a permanent court etc, time and cost involved will still make it unattractive to the investor and host state respectively.  Some critics of the EC proposal also argue that without a well-drafted treaty, no amount of fair interpretation will come to the aid of the host state. Without a treaty obligation as per the South African model, investors will be hesitant since there is little guarantee that the State will not change its laws at a later date.

Earlier this year UNCTAD organised a meeting to discuss how the investment dispute settlement process can be reformed. The differing views which emerged essentially question the balance between efficacious remedy for a foreign investor who can have a say in the arbitration process and the remedy through an investment court which raises question of who will fund the same, whether it will have jurisdiction over investment contracts etc. The public discussion draft released by OECD on BEPS suggests mandatory arbitration as a means to effective dispute resolution so that Mutual Agreement Procedure (MAP) for cooperation between the tax authorities of different countries can provide quick remedy. However, not many member countries are in favour of the same.

Refining the treaty text

We still do not have an answer on the best method to ensure investor protection without compromising on certain sovereign rights of a state. The question still remains – how much protection should a foreign investor get, what would amount to expropriation, how much compensation should be paid to an investor and who should decide. May be the answer lies in drafting the treaty without vague terms and clauses like the MFN which is used to import more favourable terms from other treaties. After all, the basis for claims and the framework for dispute settlement arise from treaties. For instance, though it is not used often, the non-violate clause in WTO agreements seeks to protect impairment of benefits caused by ‘existence of any other situation’ - even when the action does not conflict with any provisions of the agreement. The use of such terms is open to broad interpretations. Any dispute settlement forum will look to the treaty for interpretation and hence the better option is to concentrate on the drafting of the terms.

[The author is Principal Associate, Lakshmikumaran & Sridharan, New Delhi]
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