Investment terror

Since the 1990s developing nations have been on a treaty spree, signing a vast number of bilateral and regional investment treaties to attract funds for development. But as the figure of investment treaties has shot up so have the claims for damages from investor companies, which are seeking billions of dollars in compensation on account of regulatory laws. Poor countries are finding that footloose investments are cutting access to water, damaging public health and the environment, and endangering ethnic communities. As transnational firms challenge regulatory laws, countries are forced to retract, and pay damages. Rich states have become equally vulnerable.

Latha Jishnu  sifts through case studies and speaks to international lawyers, academics, researchers and development experts to uncover the hidden dangers of investment treaties. The most chilling feature is the role of a cabal of claims attorneys who are making colossal profit at the cost of nations, and sustainable life

By Latha Jishnu
Last Updated: Friday 05 August 2016
Germany has been sued by investors for phasing out its nuclear plants and for insisting on strict environmental rules for coal-fired projects (Source: Janericloebe)
Germany has been sued by investors for phasing out its nuclear plants and for insisting on strict environmental rules for coal-fired projects (Source: Janericloebe) Germany has been sued by investors for phasing out its nuclear plants and for insisting on strict environmental rules for coal-fired projects (Source: Janericloebe)

Investment terror

The New Year may not have started cheerily for the claims brigade. An international arbitration panel awarded US oil giant Exxon Mobil Corp just $908 million in compensation for Venezuela’s nationalisation of its assets in 2007, less than 10 per cent of what the behemoth had reportedly sought. It was presumed that Venezuela’s feisty president Hugo Chavez, known for his America-baiting, would be celebrating.

Not really. The compensation awarded to Exxon by the Paris-based International Chamber of Commerce (ICC) is against a claim on PDVSA, the national oil company of Venezuela. In other words, a company-to-company arbitration that is routine in the course of business. What is probably worrying Chavez is another suit filed by Exxon against the Bolivarian Republic of Venezuela at the World Bank-affiliated International Centre for Settlement of Investment Disputes (ICSID) on the same issue of expropriation. The damages sought, according to reports in the Venezuelan press, are close to $40 billion. This claim has been filed under a bilateral investment treaty (BIT) signed between the Netherlands and Venezuela. Exxon is taking advantage of this treaty because the oil giant has a subsidiary in the Netherlands which gives it locus standi to invoke this particular BIT. There is no treaty with the US. For Venezuela, this could prove costly since the compensation awarded by the ICSID will be determined by the terms of the treaty. Invariably, violations under such BITs are larger in scope and could include additional compensation. Monetary damages, however, are not the biggest cost imposed on host nations, although in the case of poor countries these could be crippling. The more severe consequences are on the environment and other sectors of public policy dealing with health.

 (Source: Steffen Papenbroock)

Look at what happened to Germany not too long ago. In 2007, protests against Swedish company Vattenfall’s proposal to build a massive thermal power project at Moorburg in the Greater Hamburg area reached a crescendo. The popular view was that Hamburg did not need such a large plant (2 x 820 MW units) fuelled by hard coal since it would further endanger the environment. The protest was also about keeping the River Elbe clean. When Hamburg gave Vattenfall final approval in September 2008, it imposed strict restrictions to minimise the project’s impact on the Elbe. It is these stipulations that prompted Vattenfall in 2009 to claim compensation from Germany at the ICSID under the terms of the Energy Charter Treaty (ECT). The treaty is a pact signed by 51 nations and the European Union and it provides the same protection for investors that BITs do.

Source: Based on data from United Nations Conference on Trade and Development (UNCTAD)

The Vattenfall claim, like the majority of the arbitration suits filed under BITs and regional trade agreements (RTAs) such as North America Free Trade Agreement (NAFTA) and Central America Free Trade Agreement (CAFTA), are never made public. Nor are the terms of the settlement revealed by either party. However, a report in Spiegel Online of July 15, 2009, describes Vattenfall’s request for arbitration as “an explosive document” and says it shows “just how helplessly and hesitantly city officials can react in their implementation of environmental restrictions.”

In March 2011, Vattenfall was awarded around €1.4 billion (US $1.8 billion as per current rate) it had sought as damages from the German government, claiming that environmental restrictions would make the project uneconomical. Shockingly, the ICSID settlement freed the Swedish energy giant from the earlier environmental conditions, including the requirement to build and operate a discharge cooler.

Nathalie Bernasconi-Osterwalder Canada and the US have well established model treaties which they pretty much impose on others. They negotiate them under pressure from their industries and big law firms
Nathalie Bernasconi-Osterwalder
Lawyer at the International Institute for Sustainable Development

Nathalie Bernasconi-Osterwalder, senior international lawyer who heads the investment programme at the International Institute for Sustainable Development (IISD), points out, “The conditions stipulated in the water permit are necessary under European Law, and are consistent with the rules imposed on industry along the Elbe River.” What is troubling is that Hamburg had told the arbitration panel that it was striving to meet the EU’s Water Framework Directive, which requires all member-states to ensure specified water quality in rivers, lakes, estuaries, coastal waters and groundwater by 2015. Clearly, that did not cut any ice with the panel.

Web exclusive  
Nathalie Bernasconi-Osterwalder  
Nathalie Bernasconi-Osterwalder
Lawyer at the International Institute for Sustainable Development
Gus Van Harten  
Gus Van Harten
Associate professor, Osgoode Hall Law School of Toronto-based York University

Bernasconi-Osterwalder has written extensively on arbitration cases. She says it was only in the late 1990s that “foreign investors began to increasingly and aggressively sue host states under these treaties. Often, investors use investment treaties in ways that can catch the host state by surprise, as in the dispute initiated by Vattenfall against Germany.”  It is significant that a foreign investor could force even a developed country like Germany to toe its line. Gus Van Harten, associate professor, Osgoode Hall Law School of Toronto-based York University, underscores the fundamental threat that investment treaties pose to “democratic choice and responsive regulation in all countries”.

The academic, who has campaigned vigorously for alternatives to the current BITs, says: “It is true that developing countries have been by far the main targets. This reflects the structure of BITs, their origins as treaties designed to provide extremely generous protections for foreign investors, usually transnational corporations (TNCs), where the corporate nationals of one country (originally a former European colonial power and, from the 1980s, the US) owned far more assets in the other treaty signatory (the developing country). However, it is important to understand that the treaties are used by companies and the wealthy to discipline all countries and government.”

Gus Van Harten It is important to understand that treaties are used by companies and the wealthy to discipline governments. They are a threat to democratic choice and responsive regulation in all countries
Gus Van Harten
Associate professor, Osgoode Hall Law School of Toronto-based York University

India, despite the 80 BITs it has signed—14 are yet to be ratified—is sitting pretty. Its only recorded brush with such arbitration has been the infamous Dabhol Power Company case initiated by the partner firms of Enron, the original promoter, which used the India-Mauritius treaty to win a huge claim. None of the details of what is widely reported to have been a $1 billion settlement, have been made public. More recently, Australian mining company White Industries Australia filed a case against India under the BIT of the two countries, according to IAReporter.

          Lethal treaties
WHAT makes an investment treaty so risky for nations? Here are some factors
National treatment: Foreign investors (nationals of the signatory country) cannot be treated any less favourably than domestic investors

Most favoured nation: This is a guarantee to signatories that their investors will receive the same treatment as the investors of the country with which the host is on the most favourable terms

Fair and equitable treatment: This offers a minimum or specified level of protection under which, regardless of the treatment given to a state’s own investors, the treatment given to foreign investors cannot fall below the minimum set by the treaty. This includes full protection against damage caused by third parties. It is this phrase that has been interpreted very broadly by arbitration panels since a wide range of government regulation and policy can be viewed from this perspective

Indirect expropriation: This is a controversial interpretation made by investors that expropriation can also be the result of government action even if it leaves an investor’s ownership title intact. As claims filed in recent years show, even routine actions taken by the government, such as environmental or health protection measures that increase the costs for investors, indirectly or incidentally, are being treated as case for seeking compensation because they reduce profits

Ban on performance requirements: Treaties bar or limit government from imposing performance requirements, such as use of local content and labour

This follows complaints by the company that the Indian courts had not enforced a 2002 foreign arbitration award against its Indian joint-venture partner, Coal India Ltd. Officials claim they are unaware of the case but IAReporter says it is being heard under United Nations Commission on International Trade Law (UNCITRAL) rules.

Why are BITs so toxic? These are bilateral agreements intended to promote and protect investments in each other’s territories by companies based in either country. According to United Nations Conference on Trade And Development (UNCTAD), which promoted the concept, BITs are treaties that usually give foreign investors guarantees of fair and equitable treatment, and compensation in the event of expropriation or damage to the investment. But most are loosely worded treaties open to varying interpretations by arbitrators and creatively by investors. Unlike the multilateral trade and investment framework of the World Trade Organization, it permits investor-companies and their shareholders to sue sovereign states (see ‘Lethal treaties’).

These pacts allow foreign firms to attack the host country’s public interest laws and skirt their court systems as happened with India in the Dabhol case. But what is extraordinary is that tribunals, composed of three-member professional arbitrators, decide cases in camera, closed to public participation and input. Even acceptance of written submissions by public interest groups becomes a ponderous legal exercise. The tribunals can, and do, award unlimited compensation to corporations if they find policies or government decisions undermine not only their current profits but also anticipated future profits. Taxpayers seldom know how much the government has shelled out to settle claims.

Cases for compensation are becoming legion. According to UNCTAD, the number of known cases coming for arbitration has risen from 50 at the beginning of this century to over 350 now. UNCTAD makes it clear that this is the number of known arbitration suits since most litigants insist on secrecy.


Hardly any country with resources worth exploiting has escaped the trauma of being taken to international arbitration in a system that favours rich nations and a small group of claim-chasing attorneys (see ‘Cabal of claim chasers’ ). All of this has weakened the capacity of sovereign states to regulate their environment, public health and address livelihood concerns. In the case of developing countries in particular, it has weakened the ability to introduce policies that promote food security, poverty reduction, equity and human rights.

The ability of nations to protect the last named objective was severely tested when a group of shareholders of a company challenged, at ICSID, South Africa’s Black Economic Empowerment legislation because of its impact on their mining assets. These individuals used the South AfricaA-Italy BIT to seek a rollback of the law that required mining companies to divest a portion of their assets to increase indigenous ownership to 26 per cent.

This legislation is aimed at redressing the past racial discrimination arising from apartheid which has left Black people or the “historically disadvantaged South Africans” at the bottom of the economic heap. It was also intended to address the exploitative labour practices, forced land deprivations and discriminatory ownership policies that had previously characterised the country’s mining sector.

imageAlthough this policy was accepted by other investors, the litigants, including a Luxembourg-based company that had sued under South Africa-Belgium-Luxembourg BITs, argued it amounted to expropriation. And they had their way. The shareholders withdrew their claims after South Africa granted them additional mineral rights.

“What is even more worrying,” says Sanya Reid Smith, a lawyer who analyses Free Trade Agreements (FTAs) for Third World Network, “is that some governments have been stopped from regulating by the mere threat of a case being filed. For instance, through a letter from the investor.” TWN is an independent global network of organisations and individuals involved in issues relating to development.

Sanya Reid Smith Brazil has signed several BITs but its parliament refuses to pass any because of concerns about restrictions these would place on its ability to regulate. Brazil still gets plenty of FDI
Sanya Reid Smith
Analyst of Free Trade Agreements with Third World Network

An analysis by the Washington-based non-profit Public Citizen finds all US FTAs, except the one with Australia, empower foreign investors to sue national governments in foreign tribunals. “The ‘investor-state’ enforcement mechanism elevates private firms and investors to the same status as sovereign governments, effectively privatising the right to enforce public treaties’ expansive new investor rights. There is no such private enforcement for labour rights or environmental standards,” it emphasises.

Public Citizen, which describes itself “as leading the charge against undemocratic trade agreements that advance the interests of mega-corporations at the expense of citizens worldwide”, calculates that over $350 million has already been paid out in compensation to corporations under such cases. These include attacks on natural resource policies, environmental protection and health and safety measures. In fact, of the $9.1 billion in pending claims, all relate to environmental, public health and transportation policy—not traditional trade issues. For the more egregious of these cases, see ‘Going up in smoke in Uruguay, Australia’ and ‘Filthy underbelly of gold in El Salvador’ in the following pages.

There is a twist in the Vattenfall-Germany case. Months after it won the coal case, the Swedish TNC launched another case on nuclear power, this time for the government’s decision to phase out old nuclear power plants in the wake of the Fukushima disaster. The decision was approved by the Bundestag after a countrywide clamour by the people, but that is not stopping Vattenfall from claiming massive compensation, reportedly in billions of euros. Domestic companies that are also hit by this decision cannot do so. They only have limited constitutional remedies.

The irony is that Germany has been most active in promoting BITs, the majority with the poorest of nations. Its tally of treaties is an extraordinary 136, of which just six have to be ratified. Is it a case of the biter bit?

No more, say some nations

OF the 400 known investment disputes filed so far, most (33 per cent) are against Latin American nations. Argentina, having been sued 51 times, is the favourite target of foreign investors. Most cases are due to the reforms programme it was forced to implement after its 2001 financial crisis. Awards against it have already crossed $912 million.

At the other extreme is Brazil, with not a single case against it for the simple reason that predatory investors cannot use any bilateral investment treaty (BIT) to sue it. Thanks to the precautionary approach of its parliament, none of the 14 BITs signed by different governments have been ratified. Says Gus Van Harten, investment law expert and academic: “These were signed by the executive in the 1990s, but the legislature refused to ratify them. This was all the more insightful of Brazil given that the decision was taken before the flood of corporate lawsuits against developing countries started in the 2000s.”

Agrees Sanya Reid Smith of Third World Network who points out that Brazilian lawmakers showed rare judgement because of concerns about their ability to regulate. “Brazil still gets plenty of investment since FDI is determined by other factors such as market size and natural resources.” Other nations, hit unexpectedly by investor claims, are becoming wiser. One is South Africa. In 2009, it undertook a thorough review in the wake of arbitral proceedings against the country. “Prior to 1994, South Africa had no history of negotiating BITs and the risks posed by such treaties were not fully appreciated at that time,” says an official paper that has drawn up new guidelines.

Another is Australia. In April 2011, the Julia Gillard government said BITs or regional pacts should not include matters that would raise costs or affect established social policies without a comprehensive review of the implications. Change appears to be on the way.

Subscribe to Weekly Newsletter :

Comments are moderated and will be published only after the site moderator’s approval. Please use a genuine email ID and provide your name. Selected comments may also be used in the ‘Letters’ section of the Down To Earth print edition.