Over the last few years, there has been increasing public awareness and concern over the ability of private investors to sue democratically elected governments before privately constituted tribunals which operate “in secret” outside the sphere of domestic courts.
It is against this background that governments have started to adopt a new generation of investment treaties. These new treaties seek to address some of the concerns and bolsters the legitimacy of international investment protections and the system of investor-state dispute settlement (ISDS) as a whole. Many of the changes focus on providing much more detail with respect to the scope and limitations of the investment protections. In the earlier generation of treaties, these matters had been set out in sparse detail, leaving their interpretation and application to the discretion of the relevant arbitral tribunal.
In this context, in May 2018, the Netherlands published a new draft investment treaty, which substantially restricts the application of the treaty to a much narrower class of investors and investments. The draft similarly seeks to circumscribe the scope of the treaty’s substantive protections. Among other things, the draft:
- Contains a much more granular definition of the fair and equitable treatment (FET) obligation.
- Seeks to buffer regulations that pursue “legitimate policy objectives”.
- Allows regulatory space to address anti-competitive behaviour.
- Provides a separate protocol for measures relating to the restructuring of public debt.
At the same time, the draft limits the treaty’s most-favoured nation (MFN) provision, so as to prevent investors from seeking to import more favourable protections from other treaties. The draft treaty also narrows the scope of claims that would be arbitrable under the treaty’s ISDS provisions and imposes a strict time limit for such claims. Finally, the draft treaty:
- Seeks to acknowledge and promote responsible and sustainable investment by reference to a number of international standards and principles.
- Seeks to bolster the legitimacy of arbitral tribunals by prohibiting double-hatting with respect to arbitrators who also serve as counsel.
- Provides for much greater transparency by reference to the UNCITRAL Transparency Rules.
In September 2020, Australia announced a review into the treaties to which it is a party. This review focusses on a range of safeguards that could be included in a new generation of treaties, including provisions that:
- Ensure the state’s right to regulate.
- Exclude investment claims against public health measures.
- Limit the ability of investors to forum shop or use shell companies to gain investment protections.
- Set out detailed rules and ethical guidelines for arbitrators.
Shortly thereafter, in November 2020, 15 countries from the Asia-Pacific region set out to create the world’s largest free trade area by entering into the Regional Comprehensive Economic Partnership (RCEP). In line with the new generation of investment agreements, RCEP’s investment chapter limits the scope of substantive protections by, among other things:
- Limiting FET protection to the minimum standard of treatment.
- Protecting the state’s right to adopt non-discriminatory regulatory measures designed to achieve legitimate public welfare objectives.
- Limiting the scope of the treaty’s MFN provision.
Around the same time, reports surfaced about ongoing negotiations aimed at updating the Energy Charter Treaty (ECT), focussing on the same range of issues. Among other things, it was reported that the parties were considering:
- Circumscribing certain objective characteristics of protected investments.
- Introducing a requirement of substantial business activities for corporate claimants (that is, preventing claims by mere post-box companies).
- Limiting the scope of the treaty’s FET, expropriation and MFN provisions.
- Protecting the state’s right to regulate. The ECT review is also reported to include setting out separate provisions relating to the restructuring of public debt.
In line with the other treaty reviews, the parties were also reported to be negotiating provisions regarding sustainable development and enhanced transparency.
This trend has continued into 2021, with Canada publishing its new model BIT, also known as the Foreign Investment Promotion Agreement (FIPA), in May 2021. FIPA, which runs to 83 pages, very much continues the above evolution of the new generation of investment treaties. FIPA narrows the scope of protected investments and investors, by introducing additional criteria for protected investments and the requirement for substantial business activities for corporate claimants. As regards to substantive protections, FIPA does not contain a reference to FET, but merely requires treatment in accordance with the international minimum standard, which itself is limited to specific measures listed in FIPA. Similarly, FIPA reaffirms the state’s right to regulate in order to achieve legitimate policy objectives. It contains special rules for measures relating to financial services. It also protects the state’s right to adopt good faith, non-discriminatory measures to protect legitimate public welfare objectives. Furthermore, in line with the other new generation BITs, FIPA limits the scope of the treaty’s MFN provision, which does not apply to dispute settlement or to substantive obligations in other treaties. Likewise, FIPA also contains enhanced transparency provisions, seeks to promote responsible business conduct, and prescribes an arbitrator code of conduct that, among other things, prohibits double-hatting.
FIPA thus solidifies a consistent trend that has seen states adopt a much more stringent, considered and detailed generation of investment treaties substantially re-adjusting the balance between investor protections and the state’s right to regulate.
No doubt, the various measures taken by governments around the world in response to the COVID-19 pandemic will bring even greater scrutiny to the existing system of investment protection and ISDS, and may well lead to yet more adjustments in the future generation of treaties. However, it will likely take years before the current generation of BITs is replaced with a new generation of treaties based on the above model agreements. It thus remains to be seen whether the proposed reforms, possibly coupled with the EU’s aspirations for the establishment of a multilateral investment court, will change public opinion and growing concern about international investment protections and the legitimacy of the ISDS system as a whole.