The evils of bilateral investment treaties – Analysis
December 5, 2012
By Julio Godoy
Between 1995 and 1998, the Organisation for Economic Cooperation and Development (OECD) prepared behind closed doors a so-called multilateral agreement on investments (MAI). The harmless sounding name concealed a Machiavelli-like treaty allegedly addressed at – as an OECD paper put it at the time – setting “clear, consistent, and transparent rules on liberalisation and investor protection, with dispute settlement, thereby underpinning the continued removal of barriers to market access and encouraging economic growth.”
In reality, the MAI was aimed at destroying every possibility of national legislation protecting local traditions, public health, or the environment.
Fortunately, thanks to a leak, and to the work of numerous activists across the world, from Canada to France to Malaysia, the MAI documents were exposed to a large public. The revelation led to mass protests, especially in Canada, France and the United States. As consequence of the protests, and following an internal report ordered by his government, the French Prime Minister Lionel Jospin was forced to withdraw support for the MAI.
As Jospin remarked at the time, his government’s report had identified a number of fundamental problems with the agreement, particularly relating to matters of national sovereignty. The French government also concluded that in view of so many reservations were being incorporated into the agreement, it would have rather a limited value for French investors.
So the MAI disappeared from the international trade and investment agenda. Instead, however, industrialised countries conceived bilateral trade agreements (BITs) with other countries, in particular developing nations, with the very same aims as the MAI. According to the United Nations Conference on Trade and Development (UNCTAD), the number of such BITs tripled since the mid-1990s to more than 3,000 bilateral trade treaties now.
Officially, such treaties provide foreign investors with powerful new rights to protect their investments against expropriation and other forms of discrimination and give them the ability to sue governments directly through a new form of dispute settlement known as investment treaty arbitration. But, according to a new report by the Corporate Europe Observatory (CEO) and the Transnational Institute (TI), the BITs are actually used by “powerful companies to sue governments if policy changes – even ones to protect public health or the environment – are deemed to affect their profits.”
Surge in legal claims
As it was to be expected, the extraordinary growth of the BITs has led to a similar surge in legal claims at international arbitration tribunals, in which powerful international corporations sue national governments for exercising their national sovereignty and laying down regulations aimed, among others, at protecting environment and public health.
As the CEO-TNI report says, “the costs of these legal actions weigh on governments in the form of large legal bills, weakening of social and environmental regulation and increased tax burdens for people, often in countries with critical social and economic needs.”
Some of the more emblematic cases of international investment arbitration taking place in the framework of the BITs include the processes before the International Court for Settlement of Investment Disputes (ICSID) launched by the tobacco giant Philip Morris against Australia and Uruguay, on the charges that the governments’ actions to warn against the scientific proven risks provoked by smoking harm the company’s profits.
The ICSID is a part of the World Bank group charged with arbitrating the investment and trade disputes.
Other cases include the complaint of a U.S. mining company against the moratorium on fracking, the highly controversial method of exploitation of shale gas, decided by the Quebec government in Canada. In order to liquefy the gas, wells are dug and then injected with millions of litres of water, sand and chemicals under high pressure, in an attempt to ‘fracture’ the geological masses containing the shale gas.
The method is considered highly dangerous for water sources, and has been temporarily forbidden in most countries of Western Europe, although it continues to be widely applied in the United States, despite claims by environmental activists that it is causing numerous polluting phenomena, dubbed now “fraccidents.”
Yet another case is the billion judgement a U.S. oil company obtained against the South American country of Ecuador.
The CEO-TNI report reveals the concentration of litigations in the hands of a small circle of international law firms, which are pocketing enormous amounts of money thanks to the BITs conflicts. As Pia Eberhardt, of CEO, says, “The boom in arbitration has created bonanza profits for investment lawyers paid for by taxpayers. Elite law firms charge as much as 1,000 U.S. dollar per hour and per lawyer, with whole teams handling cases.”
While multinational corporations such as Philip Morris dispose of the financial means to pay for elite law advice, developing countries don’t. Ergo, the arbitration is asphyxiating developing countries and blocking their sovereign right to protect the national public health, as in the case of Uruguay, or the environment, as in the case of Quebec and Ecuador.
Uruguay vs. Philip Morris
In the case Uruguay vs. Philip Morris, the South American country is being represented by the U.S.-based law firm Foley Hoag, which avails of the services of 250 experts, led by international law specialists Paul Reichler and Ronald Goodman.
“Sovereign states are normally given wide discretion in enacting legislation or promulgating regulations to protect and promote public health,” Reichler said in a statement. “Indeed, that is one of the fundamental aspects of sovereignty. The case Uruguay vs. Philip Morris is not one of economic regulation, but of government action strictly in the name of public health.”
Reichler added that “Uruguay’s regulations are aimed at tobacco products which … kill people or cause grave illnesses to those who smoke and to those around them.”
“Philip Morris and its associated companies are challenging the right and discretion of Uruguay to make its own determination on how to protect public health, which in our view is a sovereign right that no private company can overrule,” Reichler said.
But not many countries can afford to pay a firm such as Foley Hoag.
For, as law expert Eric Gottwald puts it, “Investment treaty arbitration is a complex form of litigation that demands much in the way of resources and legal expertise. Due to financial and administrative barriers, many developing nations do not have the legal expertise within their government service to defend investment treaty claims.”
As a consequence, most developing nations are forced to hire one of a handful of international law firms who charge the same premium market rates that wealthy individual investors and corporations pay for their services. Meanwhile, developing nations which cannot hire outside counsel are left to contend with scattered and incomplete legal authority resources with no organized legal assistance from the international community.
That’s why Gottwald suggested already in 2007 to create an international legal assistance centre for developing countries, in order to support them in the disproportionate imbalanced fight against multinationals.
While the Gottwald proposal remains dead letter, some countries, such as Argentina, have created their own investment legal departments. Others, such as Venezuela, have walked away from the ICSID. Still others never signed the ICSID Convention formulated by the Executive Directors of the World Bank.