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Trends in investment treaty arbitration: a perspective on Brazil

Brazil’s experience with investment agreements stands in sharp contrast to that of other countries. At a time when most states were promoting them, Brazil declined to do so. For this reason, the government’s recent promotion of cooperation and facilitation investment agreements (CFIAs) is of some interest. This blog post discusses the context in which CFIAs in Brazil have emerged; considers their main features (in particular, the dispute resolution mechanism); and reflects on their advantages and disadvantages relative to traditional bilateral investment treaties (BITs).

Preliminarily, BITs have not always been off Brazil’s agenda. In the 1990s – a period when the number of BITs worldwide grew exponentially – Brazil signed 14 of them (including with the United Kingdom, France, and Italy), though these were subsequently never ratified. The agreements were later withdrawn in 2002, apparently on the basis that treaty provisions providing for international investor-state dispute settlement were unconstitutional. For (presumably) the same reason, Brazil did not sign the International Centre for Settlement of Investment Disputes (ICSID) Convention either.

Notwithstanding the lack of BIT protections on offer to foreign investors, Brazil has seen no shortage of foreign direct investment (FDI). Indeed, according to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2017, Brazil ranks as one of the top economies in the world for FDI; in 2016 alone, it attracted almost US $60 billion’s worth. All without having signed one single BIT. One can compare Brazil’s position with that of Ecuador’s – which terminated all its BITs earlier this year. In a recent U-turn, however, the Ecuadorian government announced that it may renegotiate and renew these BITs (and even readopt the ICSID Convention) because it believes the absence of foreign investor protections could deter potential new FDI.

Brazil’s record of attracting FDI despite the absence of any BIT protections would seem to suggest that the existence of BITs does not have a direct impact on inbound FDI. Historically, that may have been the case. However, FDI into Brazil has decreased dramatically of late. In 2016, there was a reduction of almost 9%. This, of course, is unsurprising given the country’s recent political instability and economic uncertainty, which may suggest that the historic willingness to invest was driven by the promise of huge returns from one of the BRIC economies (Brazil, Russia, India and China) and despite the non-existence of BITs.

Brazil’s Model CFIA

Despite no shortage of FDI without BITs, Brazil changed tack in 2013, when the drafting of a model Brazilian investment agreement began, culminating in its Model CFIA in 2015. According to the Brazilian government, the Model CFIA is an alternative to the “traditional” BIT.

Brazil has now signed CFIAs with seven Latin American and African countries: Angola, Chile, Columbia, Malawi, Mexico, Mozambique, and Peru. CFIAs with Mexico and Peru have been approved by the Brazilian senate, becoming the first investment agreements to obtain congressional approval. Brazil has also concluded negotiations with India and Jordan.

What is not immediately apparent is why Brazil opted for a change of course. Perhaps the designing of the Model CFIA represents a tacit recognition that the availability of investment agreement protection is, indeed, important as far as FDI is concerned (a conclusion Ecuador has also recently reached). Indeed, the hypothesis seems to be supported by empirical evidence: a recent study in 2015 by the Netherlands Bureau for Economic Policy Analysis found that FDI flows increased by 35% after a state’s ratification of a BIT. Either way, it is fair to say that Brazil’s alternative investment protection model has triggered significant interest.

The Model CFIA’s main features

The Model CFIA’s principal aim (like traditional BITs) is to promote investment; but without sacrificing regulatory autonomy (which has, in recent times, increasingly been a concern of states party to investment treaties). The drafting of the Model CFIA can be seen to adopt a long-term perspective; recognising that the state parties thereto need to cooperate and maintain a consistent and structured dialogue. This is partly achieved through the establishment of a common agenda between the parties, where topics of mutual interest are discussed, including business visa facilitation and exchange of legislation.

As far as foreign investor protections are concerned, these include articles on transparency, non-discrimination, and protection against direct expropriation (indirect expropriation, however, is not included in the Model CFIA). A most favoured nation provision is also provided for, establishing that investors must be treated no less favourably than investors from third parties. Generally, these protections are formulated to leave considerable policy space for government regulation compared with traditional BITs.

With these rights for investors, also comes a responsibility. Again, moving away from the conventional BIT model, the CFIAs require foreign investors and investments to endeavour to contribute to the sustainable development of the host state. A detailed list of voluntary principles for responsible business conduct is set out in the Model CFIA, with which investors should strive to comply. These include environmental protection standards and respect for human rights. There are also clauses covering corruption.

Regarding dispute resolution, the Model CFIA outlines progressive steps for the settlement of an “issue of interest to an investor”. In short, according to the Model CFIA, claims by foreign investors are addressed in two ways:

  • Through a dispute prevention mechanism involving the state and the investor.
  • Through a dispute settlement phase. (Unlike traditional investment agreements, this second stage is limited to the state to state level – an investor has no direct access.)

To facilitate this, the Model CFIA contemplates the creation of two institutional bodies. First, an ombudsman is established within each government party to the CFIA, which essentially acts as a mediator to amicably settle disputes. (Brazil established its ombudsman in 2016, and it comprises part of the Chamber of Foreign Trade.) The ombudsman also engages in permanent discussions with the Joint Committees (as to which, see below).

Thus, where an investor is concerned about, say, the introduction of a new regulatory measure, it may submit a request for consultation to the ombudsman. Once the request is lodged, the ombudsman will analyse the questions issued and, coordinating with relevant government entities, will provide guidance to investors. The objective behind this is that, while the dispute is being resolved, investors will be able to maintain their investment, in turn contributing the establishment of a more productive business environment over the long-term.

Secondly, a “Joint Committee” is established, with representatives of both governments. Broadly speaking, any of the two governments may bring the dispute to the attention of the Joint Committee if amicable settlement fails. The parties to the dispute request a meeting in which their concerns will be presented and they may engage in negotiations. After 60 days of the request to establish the meeting, the Joint Committee will issue a report with its recommendation. If the parties are not satisfied with the report, they can move onto the dispute settlement phase – state to state arbitration. The principal objective of the arbitration is to identify whether the host state has violated any part of the CFIA and, where it has, recommend that the state adjust or remove the non-conforming measure.

As an aside, the dispute resolution provisions in the CFIAs signed thus far vary from the Model CFIA (and from each other). While the dispute prevention provisions are broadly the same, the settlement mechanisms are increasingly complex.

The positives and negatives

How, then, should Brazil’s CFIA approach be seen? Starting with the positives, perhaps the most obvious is that the Model CFIA attempts to first resolve disputes amicably. It fosters a cooperative approach between investors and states, rather than create an adversarial dynamic as is found in traditional BITs through the investor-state dispute mechanism.

Relatedly, Brazil’s Model CFIA seeks to focus both on the protection and promotion of investments. While that is also theoretically true of traditional investment agreements as well, they are drafted more with protection in mind. Furthermore, the CFIA Model can be viewed as working to filter out frivolous investors’ claims since they need to be sufficiently serious for the home state to take them forward. The system also endeavours to preserve Brazil’s “right to regulate” – limiting substantive protections and restricting dispute resolution access.

So far as the disadvantages to Brazil’s alternative approach are concerned, a state to state dispute resolution system (in contrast to the investor-state dynamic) may breed politicisation of investment disputes (precisely what BITs are designed to prevent). It also places the power of deciding which disputes are worth taking forward firmly within the state’s hands, and makes state interference with the conduct of the case more likely.

Moreover, some notable widespread traditional BIT protections are missing from the Model CFIA. For example, there is no provision relating to fair and equitable treatment, and none regarding indirect expropriation (however, this has been included in CFIAs subsequently negotiated).

To briefly conclude, the recent proliferation of CFIAs by Brazil is an innovative approach that may be seen to address a recent trend of criticism against investor protection and, in particular, investor-state arbitration. Despite some of the limitations mentioned, the Model CFIA is a potentially useful and important tool for both Brazilian companies investing abroad and foreign investors in Brazil, while also ensuring investors themselves contribute to the state’s sustainable development.

Of course, it is yet to be seen how successful Brazil’s CFIAs will be. For now, what can be said is that Brazil’s approach to investment arbitration appears to be changing; and for investors and legal practitioners alike, this remains a development to watch.

Allen & Overy Stephanie Grace Hawes

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