My experience tells me some lawyers are unfamiliar with the modern right of foreign private parties to make enforceable claims against sovereign states. State expropriation without compensation and the lack of fair and equitable treatment of foreign investors had no remedy before the 1960s. Given the criticism of Canada’s recent ratification of the International Centre for Settlement of Investment Disputes Convention, it is a good time to take a deeper look at the issue.
International investment agreements are either part of a free-trade agreement or are a free-standing effort. They protect foreign investors by giving them rights and methods to claim damages for breaches. They now number more than 3,000 worldwide.
The emergence of so many agreements in such a short period of time is due to a desire to encourage foreign investment as well as the driving forces from the U.S. State Department and the leading international development institution, the World Bank.
Countries sign these deals to encourage foreign investment by promising investors fair and equitable treatment, no discrimination because they are foreign, and no expropriation without due process and payment of fair market-value compensation.
These three features are the keys to all international investment agreements. Many agreements include other commitments, such as detailed lists of obligations the state will not require from the investor. They also carve out from their protections the right of states to enact measures on health, safety, military matters, the environment, and certain other state activities, although these are complex, allegedly too weak, and often difficult to interpret and apply.
The principal method of including these provisions is to list statutes not subject to the agreement. The Investment Canada Act is a prime and sometimes-controversial example in the North American Free Trade Agreement. Another is to list specific areas of any state’s normal jurisdiction as exempt, such as human, animal, and plant life; health; protection of the environment; the stability of national financial institutions and payment systems; and culture.
An interesting Canadian note is what happened under NAFTA. A standard approach in international treaties for federations is that only the federal government signs them and is bound. In 1989, under the Canada-U.S. free-trade agreement, Canada assumed an obligation to cause the provinces to be bound. Some provinces strenuously objected and threatened a constitutional challenge. NAFTA, three years later, gave the provinces and U.S. states two years to list all measures contrary to NAFTA they could refuse to change. The provinces, at the last moment, delivered to Ottawa one-page letters saying, in effect, they reserved everything. This was non-compliant with NAFTA as they had to specify all measures.
The provinces told Canada it must do that. The final result was a thick binder listing scores of provincial statutes and regulations reserved. Although it briefly appeared on the federal NAFTA web site, it has since remained secret. Indeed, an Ontario directive told its employees they were not to disclose Ontario’s reservations and said the government must rigorously maintain them because the liberalizing ratchet goes down permanently.
Under the 2013 comprehensive economic and trade agreement with the European Union, meanwhile, the provinces have agreed to be bound by it.
As is the standard, the international investment agreement system provides for the settlement of investment disputes by final and binding awards of international panels of independent expert arbitrators. There is no world court to hear any private party’s claim against a state. Settling those claims under the laws and in the courts of one party is unacceptable and countries are almost always the respondent.
In my experience, there is no way any reasonable investor client would agree that its only remedy is to claim against the state in that country’s courts. Indeed, there are many states whose courts are suspect as corruptible. So knowledgeable practitioners would agree that binding arbitration should be the standard.
In 1966, the World Bank established a facility, ICSID, to manage private investment disputes under international investment agreements through a convention now ratified by a 150 countries. The ICSID convention requires the loser to pay monetary damages. Specific performance is only on consent. Also, all convention signatories must assist to enforce the awards in their courts, which is a very powerful enforcement and collection device.
International investment agreements and ICSID have many critics. Chief among the criticisms are the surrender of sovereignty, intrusion on vital areas of national concern, so-called mafias (one academic actually used that term) of allegedly investor-biased arbitrators, and loss of domestic court intervention. Recently, Law Times published a critique by two University of Ottawa academics (see “Tricks of Trade,” Nov. 25) that focused on the fourth criticism. It misconceived the whole system by arguing that Canadian domestic courts should have some power to review arbitral awards.
Although it’s not so surprising to those concerned with Canada’s constitutional division of powers, Canada only agreed to join ICSID in late 2013. Two provinces that held out for decades were Alberta and Quebec. The ICSID convention does contain a weak federal state clause that allows federal governments to leave out specified territories, but leading international law scholars have opined that it applies only to true territories. Britain, for example, exempted the Falkland Islands. Few people would seriously argue that the provinces of Canada are territories.
Now that Canada has joined ICSID, international investment agreements between Canada and other countries will provide protections previously unavailable to Canadian companies investing abroad. Why such companies were unable to convince their provincial governments to co-operate with Ottawa enough to enjoy that protection is almost incomprehensible.
Only Canada is responsible and must pay if it loses or settles a claim arising from a provincial measure. The 2010 claim against Canada, based on the Newfoundland and Labrador government’s expropriation by a special statute of the assets of a U.S.-owned timber and water rights company, is an example.
Canada settled the claim made under our applicable agreement (Chapter 11 of NAFTA) for $130 million of federal money. The province declined to contribute. The federal government promptly stated it would not permit a repetition of that situation but has yet to show how it would do that short of a constitutional amendment. We now eagerly await the text of the chapter in the agreement with the European Union on investment protection to learn if the government has resolved the issue, at least in the case of the 28 EU member states.
It is not mandatory for investors to go through ICSID. The 1956 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) provides for enforcement of awards given in international arbitrations. These can be ad hoc or through another arbitration institute or facility usually using the Model Law on International Commercial Arbitration that many countries and all Canadian provinces have adopted.
Until Argentina first refused to pay ICSID awards against it (there have been 43 claims at ICSID against Argentina following its most recent financial collapse and delinking of the peso to the U.S. dollar in 2002), no award had gone unpaid. Argentina is the leader in taking a wholly unsupportable legal position that its execution of the ICSID convention containing the very clear obligation to honour all awards requires also that they be “homologated” (reviewed and registered in the state to ensure they comply with its domestic law).
Some countries, meanwhile, have recently withdrawn from ICSID after losing arbitrations and refusing to pay the awards. Some are also seeking to denounce international investment agreements.
Bolivia, Venezuela, and Ecuador, for example, have now denounced ICSID and some of their international investment agreements. Unfortunately for them, although a country can make a denunciation on only six months’ notice, it is not retroactive.
Venezuela still faces dozens of what look to be valid claims by investors from around the world. Ecuador and Bolivia also face claims prior to denunciation. Ecuador is a particularly interesting case because it is at the same time seeking to enforce domestic judgements against U.S. oil giant Chevron for billions in damages for pollution in that country. Those efforts are continuing in a number of countries, including Canada.
The law for international investment agreements and ICSID is customary international law and not of any country. Thus, arbitration panels include many international law professors whose teaching jobs are part time. Some of them tend to apply their pet theories on customary international law. They do not fear appeals, even on errors of law, because the grounds for appeal under arbitration laws are very narrow.
At the end of the day, foreign investment, particularly in developing counties, has grown significantly under the system for international investment agreements as foreign investors became more trusting of effective protection.
The system, however, is not perfect and would clearly benefit from a thorough review with clarification on the health, safety, and environmental exemptions. The appointment of arbitrators, for example, is problematic and needs reform, particularly at ICSID. We need experienced retired jurists and fewer academics. Although panels are now considering more prior awards, the absence of stare decisis also remains an issue.
But overall, scrapping the system would significantly harm many countries, particularly developing ones, by reducing foreign investment. Critics of the international legal order on this issue and its forum, ICSID, may, therefore, want to press for reforms and updates rather than seeking to rid of something useful that has delivered positive results.
Michael Robinson is counsel to Fasken Martineau DuMoulin LLP. His practice focuses on international business law.
