International trade agreements (and arguments) seem to be everywhere at present. Whether it is the US-China trade war, post-Brexit trade policies, a rekindling of a US-EU pact or a reworking of the Transatlantic Trade and Investment Partnership, the political posturing has been piqued by press coverage of negotiations, upping both the interest and the ante in new trade agreements.
As a consequence, questions regarding investor-state dispute settlement (ISDS) have reached a wider audience and, as the UK prepares to exit the EU and adopt an independent trade policy for the first time in some 40 years, ISDS and, in particular, its place in future UK international investment agreements, is now in the spotlight.
BITs and pieces
ISDS clauses in trade deals typically allow foreign investors to bring arbitration proceedings against national governments for a breach of obligations under the agreement, such as expropriation of the investor’s assets or discriminatory treatment (IS arbitration). Most IS arbitration provisions are not found in the trade agreements themselves, but in bilateral investment treaties (BITs) between states. IS arbitation clauses in BITs are nothing new; a recent OECD survey found that 93% of BITs contain IS arbitration provisions. Indeed, they were included in the UK’s very first BIT, made with Egypt in 1975. They have also, for many years, given investors confidence in the protections offered under the terms of BITs and thus supported the flow of foreign investment into projects around the world by providing a mechanism for a neutral forum (through arbitration instead of litigation, as many investors feared that the domestic courts of the host country may have an inherent bias in favour of the state) to hear disputes. However, with anti-IS arbitration sentiment and increased calls for reform, Brexit provides a prime opportunity for the UK to consider the possible alternatives for its future international trade relations.
In common with much of the post-Brexit landscape, the future of ISDS in UK trade and investment agreements is uncertain at present. Opponents say that IS arbitration provisions should have no place in any future UK trade deals, but the UK government is yet to confirm its position.
In parliamentary debate, the former UK Secretary of State for International Trade and President of the Board of Trade, Dr Liam Fox, was questioned about whether the UK will seek IS arbitration provisions in proposed post-Brexit trade agreements with Australia, New Zealand and the US. However, he declined to give a firm answer and none has yet been forthcoming from the Department for International Trade. The House of Commons International Trade Committee’s latest report (published on 30 July 2019) merely notes the controversy surrounding the issue and promises proper consideration and evaluation of alternative dispute resolution mechanisms for investors. The report also notes that the UK is a signatory of the Energy Charter Treaty (which contains an IS arbitration clause), but does not set out the UK’s objectives for upcoming negotiations on the modernisation of that treaty.
The turning tide
Criticism of IS arbitration appears to have emerged partly as a result of a number of high-profile and widely reported arbitral awards rendered against states and in favour of the investor. These have been perceived by some as attaching cost to the public purse of passing laws that are of public benefit and thus limit, or at the very least deter, governments from taking action that is in the public interest (so-called “regulatory chill”).
For example, Philip Morris brought claims against Australia and Uruguay relating to their introduction of strict tobacco packaging rules. Although ultimately unsuccessful, they resulted in considerable legal fees for the respective governments (and consequently their taxpayers) when the purpose of the change in legislation was to protect public health, rather than any kind of deliberate capriciousness. Indeed, Uruguay’s GDP is dwarfed by Philip Morris’s annual revenue. This case led to Bloomberg Philanthropies and The Bill and Melinda Gates Foundation together launching the Anti-Tobacco Trade Litigation Fund. The purpose was to help smaller nations fight legal battles with tobacco companies and thus prevent the industry from using IS arbitration clauses in BITs to dissuade countries from passing strong tobacco-control laws. Other concerns relate to the lack of transparency of IS arbitration proceedings (as tribunals are not required to publish their decisions), treaty shopping (whereby investors arrange their corporate structure in a way that will enable them to sue under a BIT with the most favourable terms), and the fact that domestic investors are disadvantaged if BIT protections exceed those enjoyed under national law.
As already stated, the vast majority of BITs currently in force contain IS arbitration clauses. However, the anti-IS arbitration movement has gained support in recent years. A few countries have taken the radical step of cancelling existing BITs containing IS arbitration provisions, and others have chosen to exclude such clauses from new ones. By way of example, India issued notices to terminate BITs with 58 countries in 2017 and, in 2018, New Zealand signed side letters with five countries in the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) to exclude compulsory IS arbitration.
If the UK were to decide to abandon IS arbitration in future trade and investment agreements negotiated post-Brexit, it is not clear what type of dispute resolution system should replace it.
One possible option that has been championed by the EU for some time is to replace the IS arbitration model with a multilateral investment court system (ICS). This ICS proposal has gained particular popularity since the March 2018 decision of the European Court of Justice in the Slovak Republic v Achmea BV, which held that the governing treaty of the EU precludes IS arbitration provisions in agreements between member states. Indeed, the EU included ICS-style provisions in its Comprehensive Economic and Trade Agreement with Canada (CETA). Under the terms of CETA, investor-state disputes will be dealt with by a permanent court comprising a Tribunal of First Instance and an Appeal Tribunal. Members from both sides (that is, the EU and Canada) will sit alongside members from neutral countries, all of whom will be paid a monthly retainer for the period of their appointment to ensure availability. They will also be required to conform to certain standards of independence. These CETA tribunals will make hearings open to the public, publish case documents, and allow interested parties (such as NGOs and trade unions) to intervene and make submissions.
Brazil has taken a different approach. Brazil is not signed up to any BITs which include IS arbitration provisions. It has instead adopted cooperation and facilitation investment agreements (CFIAs). CFIAs require the parties to exhaust various procedures designed to achieve an amicable settlement (such as taking the complaint to a committee or ombudsman, who will guide the parties through negotiations and provide a report on its recommendations for avoiding adversarial proceedings) and provide for state-to-state arbitration as a last resort.
There are also “hybrid” options which permit IS arbitration only where certain preconditions have been met. For example, under the terms of India’s model BIT, foreign investors can only launch arbitration proceedings against the government after they have pursued local remedies in Indian domestic courts for a period of at least five years. The CPTPP contains a tobacco carve-out; Article 29.5 of the CPTPP allows any party to the agreement to elect at any time to deny the benefits of the CPTPP’s IS arbitration section with respect to claims challenging a tobacco control measure. If a party elects to do so, then no claim against it can be submitted to arbitration (or if it has been submitted, it must be dismissed).
The best of the worst?
One of the new ICS or CFIA approaches may, as it is tried and tested over the next few years, emerge as the frontrunner to replace IS arbitration in BITs worldwide. However, in the meantime, whilst there are valid criticisms of IS arbitration, there is arguably no obvious better alternative.
Regarding the approach that the UK will take in its post-Brexit trade discussions, the UK may have no choice but to sign up to ICS as part of any trade and investment agreement with the EU because of the EU’s seeming keenness to embrace the ICS model. As for the rest, it seems likely that, at least initially, the UK will try to maintain the status quo after Brexit. The relevant provisions are likely to be copied over into any new BIT insofar as the existing BIT between a country and the EU (to which the UK has been a party as a consequence of its membership of the EU) currently contains an IS arbitration clause. However, with no clear indications being given by the UK government either way, it remains a key question yet to be answered.