Lakshmi Kumaran & Sridharan AttorneysAn ISO 9001 / 27001 certified law firm

Investment protection - Investing in confidence

By R. Subhashree

The divergence between a nation’s domestic laws and the provisions in international treaties is not something new. It is noticed that the general practice at the time of entering into investment promotion agreements, the priority is to accord favourable treatment to the foreign investor following standard texts/mechanisms like ISDS. However, when a State does not adopt proper consultative process with all stakeholders, including sections of populations likely to be affected, it runs the risk of making the investment climate less favourable with delays and disputes. A broad-based approach is likely to yield better results under BITs, FIPAs, etc.

Hupacasath approaches the national courts

Hupacasath First Nation (HFN) a 300 member strong community in Vancouver Island, Canada is challenging the Canadian government over the Canada-China FIPA, particularly the investor protection clauses like Investor State Dispute Settlement Mechanism (ISDS) which will enable foreign investors to proceed against the Canadian government for failure to protect / loss in value of investments. HFN argued that it was entitled to protect its aboriginal and treaty rights guaranteed under the Canadian Constitution and, in finalizing the treaty without consulting it, Canada had failed in its duty. The Canada-China FIPA was finalised over a year ago but has not yet been ratified. HFN lost the case in the lower court and will seek to convince the Federal Court of Appeals that the FIPA is likely to affect its rights and had triggered the ‘duty to consult’.

Treaty versus domestic law, people’s rights

While the case of HFN relates to aboriginal rights which are unique to it, the same argument of a treaty affecting rights guaranteed under the Constitution can arise in other jurisdictions. Would such a challenge be possible in India? There are no precedents but the fact that treaties do alter the rights to his disadvantage may spur a citizen or group of them to seek remedy through national courts.

In Golan v. Holder,  No. 10–545, US Supreme court, 18-1-2012, the appellants challenged the constitutionality of the amendments to IP laws which created copyright protection for materials which were in public domain in the US though the copyright term had not expired in foreign jurisdictions. The amendments were brought about to ensure compliance with Berne Convention. In his dissenting opinion, Judge Breyer observed that the ‘convention cannot provide the statute with a constitutionally sufficient justification that is otherwise lacking’.

The Indian Constitution guarantees equality to all persons – even to non citizens. However, if we take the case of two investors – an Indian national and foreign investor, both of whom are awarded contracts for hydro power projects which are later stopped due to environmental concerns. ISDS in a treaty gives the foreign investor a right to sue the government of the day for expropriation, loss in value of investment, failure to provide fair and equitable treatment and not meeting legitimate expectations of the investor.  But, the Indian investor cannot seek any quick remedy like arbitration or bypass the domestic courts. Experience has shown that the mere threat of ISDS would suffice to dissuade governments from taking such steps. In any case, even if the government were to take the same, it would still be liable to pay compensation along with costs.

Test of non-speculative, appreciable threat

In the HFN decision, the lower court applied the test of whether there was an appreciable and non-speculative threat to HFN’s rights and concluded that there was no threat. The court based its decision on changes made to the NAFTA agreement which restricted protection to investors, on which the FIPA is modeled and statistics which stated that USA with larger investments in Canada than China had brought very few claims and that currently there was no Chinese investment in HFN.  However, the issue is not whether HFN is already harmed or is likely to be harmed in near future. The point HFN tried to make was that Canada by binding itself to protect investments would be reluctant to support HFN in any measure which would be seen as not investor friendly. The experience of developed countries like Germany and less developed countries like Argentina and Ecuador has been that even grounds like recession, internal strife or environment concerns are not good reasons to avoid compensating investors for legitimate expectations not being met.

As per the Vienna Convention on the Law of Treaties (VCLT), a party cannot invoke provisions of its internal law as a justification to not perform its obligations under a treaty. Judged from this angle, the potential threat envisaged by HFN that Canada may be reluctant to protect rights of HFN in case of a conflict between it and an investor is not speculative.

Duty to consult

Duty to consult flows from common law and from judicial interpretation by the Supreme Court of Canada that the Crown must act honorably in relation to rights guaranteed to aboriginal peoples. The words in the constitution only ‘recognize and affirm’ the rights of the First Nations. The duty of the state to consult and accommodate as far as possible the views/claims of the people likely to be affected by some action has been reiterated in a number of cases by Canadian courts.  Notable among them is, Haida Nation v. British Columbia (Minister of Forests), 2004 SCC 73 on allowing a corporation to harvest timber from lands belonging to Haida. The Court held that there was a duty to consult the people whose rights might be adversely affected. The threshold for triggering a duty to consult is low and it is enough if there is an act or a measure that is contemplated by the Crown which might affect existing or potential rights of the indigenous peoples.

Giving an opportunity to be informed and consent

The argument of common law duty to consult is a very attractive one. It is emphasized, particularly in international agreements. For instance, as per the recently accepted Trade Facilitation Agreement (TFA) at WTO session in Bali, members are required to provide an opportunity to traders (not confined to nationals) and ‘other interested parties’ to comment on proposed amendment or introduction of laws.

Peru in 2011 enacted legislation mandating prior consultation of indigenous peoples before development projects are finalized. It is significant that this legislation came in the aftermath of protests and killing of indigenous tribes who were protesting against certain decrees which had been issued to conform to the Peru–USA FTA. Like HFN, the tribes inhabiting the Amazon forest asserted their rights under the Peruvian constitution and claimed that awarding projects to (foreign) corporations to develop the region violated their rights.

As per Article 18 of the VCLT, a state cannot act so as to defeat the purpose of the treaty prior to its coming into force. Hence once finalized, there is little room for a re-assessment. Ratification is generally a formality. In certain cases, a treaty may come into force solely under Executive Authority bypassing the parliament - like Anti-counterfeiting Trade Agreement (ACTA) in the USA. There was no discussion or debate in the Congress, much less public consultation, before it was signed.

It is impracticable to expect a unanimous voice from all stakeholders before a treaty is finalized but it is important that there is dialogue and exchange of information with stakeholders before the treaty is finalized. This may guarantee that the time and efforts invested in such investment protection treaties bear the desired results.

[The author is a Manager, Knowledge Management Team, Lakshmikumaran & Sridharan, New Delhi]  
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