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 | 09:18:52 AM
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.

Source: www.iiapp.org

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.

Cabal of claim chasers

Case of the Dominican Republic and the cost of untenable claims made by multinationals

Bolivian demonstrators protest water privatisation ordered by the World Bank.
Bechtel, which won the water project later, sued Bolivia for $50 million (Photo: Reuters)

When Sri Lanka was struggling with a bloody rebellion in the 1987, AAPL, a Hong Kong corporation whose minority-owned Serendib shrimp farm was destroyed in counter- insurgency operations, sued the small island nation for damages of $8 million. The case filed under the Sri Lanka-UK BIT was brought before an ICSID tribunal.

AAPL was awarded $460,000 plus 10 per cent interest from the time it filed the claim to settlement date (three years), a generous settlement for a company that had just begun operations. In addition, the tribunal ruled that Sri Lanka had to bear its own legal costs and a third of AAPL’s apart from 60 per cent of the costs of the tribunal.

The big winners always are the arbitral lawyers. No surprise, therefore, that top flight of arbitration lawyers are spurring claims even in the midst of appalling human crises. A flagrant instance is the Libyan invasion when corporate lawyers were prodding clients to file claims. On March 10, 2011, when Libya was in throes of a violent uprising, prominent international law firm Freshfields Bruckhaus Deringer was also preparing for battle. Its brief paper was advising multinational corporations (MNCs) how to defend their threatened profits. It suggested that MNCs use bilateral investment treaties (BITs) to sue the Libyan state for its failure to comply with “promises to investors regarding physical security and safety of installations, personnel etc”.

imageTwo months later, when NATO planes were pounding Libya, another international law firm King and Spalding told MNCs they could still sue Libya under BITs by arguing that Gaddafi had created an “untenable, unstable and unpredictable investment environment.” The law firm even suggested it would be possible to make claims against a post-Gaddafi government although it admitted arbitrators “might be reluctant to impose substantial damages against Libya at a time when it is recovering from a major political, social and economic crisis”.

In case MNCs are reluctant to pursue cases because they do not have upfront capital, there are any number of funds set up by legal firms that finance arbitration in return for a share of the claims it is awarded. Because of the rich pickings there is no dearth of money. Some law firms specialise in raising third party funding for international arbitration.

These chilling revelations have been made by two research institutes, the Amsterdam-based Transnational Institute and Corporate Europe Observatory of Brussels. Their report, Legalised Profiteering, is an insight into the secretive and lucrative world of international investment arbitration. It exposes conflict of interest as arbitrators are chosen on a case-by-case basis, mainly from the same firms that provide counsels. Prominent figures in the industry often sit as arbitrators while advising and representing claimants or respondents, and, worse, while promoting arbitration clauses in investment contracts, treaties or arbitration rules.

It is not surprising that developing countries dragged to arbitration find the costs too heavy and a marked corporate bias in the proceedings. Since arbitration costs result in diversion of resources, quite a few developing countries settle claims rather than pursue cases however untenable these might be. A glaring instance is the experience of the Dominican Republic (DR). Following a bank crisis in 2003, the US firm AES Corporation sold its 50 per cent stake in Ede Este, an electricity utility, to a Cayman Islands holding company for $2.

This company was owned by other Cayman and US firms in an eight-layer holding, with ownership ultimately resting with TCW. The Nevada-registered firm was, in turn, controlled by French multinational Société Générale (SG). The companies did not invest a cent more. Yet, they sought damages of $600 million claiming expropriation of Ede Este—300 million times their purchase price! And although the claims related to decisions made prior to SG’s indirect acquisition of the investment, and prior to CAFTA and the France-DR BIT entering into force, they were sued under these treaties. DR settled both arbitrations for $26.5 million, saying it was cheaper than continuing arbitration.

Going up in smoke in Uruguay, Australia

Tobacco giant seeks revocation of government policies aimed at protecting health

Photo: Kym Smith

Transnational corporations, it is said, can almost always find a treaty somewhere in the world when they want to claim damages from a country. If there’s more than one, they pick the best.

So when American tobacco giant Philip Morris, now known as Altria Group, sought to claim compensation from the state of Uruguay for its cigarette packaging regulations, it picked a 1991 Bilateral Investment Treaty (BIT) signed between Uruguay and Switzerland—where its subsidiary Philip Morris International (PMI) is based —rather than the Uruguay-US BIT of 2005.

A few months down the line when the company, known for its Marlboro brand, instituted a similar suit against Australia, it plumped for an Australia-Hong Kong BIT ratified in 1993 instead of the 2005 Australia-US Free Trade Agreement. Why did it do so? International lawyer Nathalie Bernasconi-Osterwalder has an explanation for this puzzle. “Philip Morris chose to bring claims under old-style, vaguely worded treaties rather than the more clearly formulated Uruguay-US BIT, which was the first to be based on the 2004 US model text.” The model treaty clarifies some provisions and better protects the government’s regulatory space, especially with respect to expropriation and fair and equitable treatment. The Uruguay-US BIT does not use the word “reasonable” in its language either, a term that allows for any kind of interpretation.

image According to other analysts, the Australia-US FTA may be a dud from the cigarette company’s perspective since it is the only one of the many FTAs signed by the US that doesn’t empower foreign investors to sue national governments in foreign tribunals. While the arbitration would proceed under the different arbitration rules of ICSID and UNCITRAL, the notices of claim are believed to be similar in both cases. They speak of “significant financial loss, potentially amounting to billions of dollars” and also include a request that Australia and Uruguay be asked to discontinue their plain packaging legislation. These pieces of regulation, it argues, are an expropriation of its intellectual property (trademarks and logos).

Uruguay has the toughest anti-smoking regulations of all countries and its cigarette packaging rules, approved in 2009, mandate that health warnings cover 80 per cent of cigarette packages. The warnings are in the form of grisly images of corpses, cancer patients, diseased lungs and rotting teeth and gums. It also limits each brand to one package design, so that alternate designs do not mislead smokers into believing the products inside are less harmful. In other words, companies cannot advertise variations such as “light” or “mild”.

Plain packaging is one of the measures recommended by the World Health Organization’s (WHO’s) Framework Convention on Tobacco Control and even the US Food and Drug Administration has announced that it proposes to introduce similar warning labels to cover 50 per cent of the cigarette packets in 2012. Canada, which introduced such regulations in 2000, says its smoking rate has declined from about 26 per cent of the population to about 20 per cent.

Why then are some countries being targeted? Douglas Bettcher, head of WHO’s Tobacco Free Initiative, believes big tobacco is using litigation to threaten low and middle-income countries. In fact, when PMI threatened to take Uruguay to international arbitration, the small Latin American country was seen to be on the verge of pulling back legislation.

imageFortunately for it, New York Mayor Michael Bloomberg stepped into the fray. He announced that the Bloomberg Family Foundation, active in fighting smoking, would pick up the defence tab for Uruguay.

This balances the David-Goliath contest between a country with gross domestic product of $40.27 billion and a company with market capitalisation of over $137 billion. With Australia, too, passing similar laws, the fight appears to be joined more fairly. The Australian Plain Packing Act, passed last month, prohibits the display of all tobacco company logos, symbols, and other images that promote their products. The Act requires packets to be in a particular shade of drab dark brown and imposes restrictions on the dimensions and make-up of cigarette packets. Brand names and variant names though are allowed to appear in standard colour, position and size.

Nicola Roxon, the fiery champion of the packaging rules, says smoking costs the country some $30 billion a year in healthcare and lost productivity and that 15,000 Australians die each year from tobacco-related diseases. Roxon, health minister till last month, has taken over as the country’s Attorney-General and vows to continue the fight against tobacco companies. In response to Philip Morris Asia’s notice of arbitration, the government has accused the company of engaging in corporate restructuring—Philip Morris Asia acquired its shares in Philip Morris Australia on February 23, 2011—a year after Australia’s packaging laws were announced.

But all the same, Australia is up against a tough legal strategy. Philip Morris is claiming violations of the expropriation clause, claiming its investments and intellectual property has been expropriated without compensation apart from violations of the fair and equitable treatment clause and other standard charges levelled by investor-companies. Curiously though, it has also listed violation of Australia’s obligations under the WTO Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) and the WTO Agreement on Technical Barriers to Trade (TBT). Curious because a claimant using BITs is alleging violations of WTO treaties that cover state-to-state litigation.

Bernasconi-Osterwalder says it is a nightmare come true since investment lawyers like her have warned that the umbrella clause in certain BITs could be used to import WTO issues into investment disputes even while many issues raised here remain unresolved in the WTO’s panels and Appellate Body. “Will unaccountable arbitrators now pre-empt the decisions of the Appellate Body and decide what the WTO treaties mean based on allegations and arguments by private entities?” she worries.

There seems to be no end to the terror that BITs throws up.

Poison on the lawn

IN the many cases filed by investors against states, few stand out like the Ethyl Corp v Canada, for successfully challenging important environmental and health regulations. In this instance, Canada banned import and inter-province sale of MMT, a gasoline additive, on health concerns—the manganese-based product was widely suspected to be a neurotoxin—and environmental grounds.

The US company challenged this ban under chapter 11 of NAFTA at the UN Commission on International Trade Law, or Uncitral, where it sought $250 million in damages. For Sanya Reid Smith of Third World Network, this ranks as the most egregious of the investment cases. “The government settled when it began losing the case,” she says. “It not only reversed the ban on MMT, but also issued a statement for Ethyl’s use in advertising, declaring that ‘current scientific information’ did not demonstrate MMT’s toxicity!”
image
In an out-of-court settlement, Canada paid $13 million in damages and legal fees to Ethyl, an amount that one researcher says exceeded the total 1998 Environment Canada budget for enforcement and compliance programmes.

Canadian law professor Gus Van Harten of York University’s Osgoode Hall Law School agrees with Reid Smith that it is one of the more egregious cases. “The ban on MMT was introduced due to reported public health concerns (possible nervous disorders in children) and environmental concerns (interference with catalytic converters). One trade lawyer in Toronto put it to me as: ‘We knew less about the health effects of lead when lead was banned in gasoline than we did about MMT’.”

Another case relating to toxic substances involved the 2006 ban by the Canadian province of Quebec on several chemical pesticides, including 2, 4-D manufactured by Dow Agro Sciences.

In 2009, Dow alleged the ban was without scientific basis and imposed without providing a meaningful opportunity for the company to demonstrate that its product was safe. Dow sought $2 million in compensation on the grounds that the ban was “tantamount to expropriation”. In May 2011, however, there was a surprising outcome. The two sides reached an agreement without recourse to arbitration: the ban would stay in force—possibly because other provinces have also banned it—and Dow would get no damages.

Filthy underbelly of gold in El Salvador

ICSID tribunal orders State to pay cost of arbitration, while company pollutes waterways

The San Sebastian gold mine has polluted nearby waterways with heavy metal,
jeopardising the health of residents (Courtesy: stopthesuits.net)

One of the more troubling aspects of investor-state arbitration is the minuscule number of lawyers who specialise in defending governments. The top international lawyers work in law firms where most of their clientele are corporate entities and many of them are engaged in advising them how to sue governments. As such, the current investment arbitration regime suffers from a marked bias in favour of multinationals and other corporate entities.

The other concern is the fact that governments are unable to use the same mechanisms to sue companies. In Commerce Group Corporation versus El Salvador, under which the US company claimed compensation of $100 million, it was clearly El Salvador that should have sued the investor for the environmental damage it had caused. A 2006 study of the local waterways surrounding the San Sebastian mine of Commerce Group showed high levels of cyanide and heavy metals. Just the aluminium level in the waterways, vital for the local community, was 1,800 times higher than the World Health Organization’s recommended limit. Documents filed in the Salvadoran court show Commerce Group’s environmental permit was revoked in 2006 after it failed to comply with its requirements. The environmental ministry had said, “We cannot grant permits for mining projects if the company’s environmental impact assessment doesn’t show they’re going to protect the earth, aquifers, surface, air and health of the people that live in the communities.”

image El Salvador, therefore, revoked the mining permits of the Wisconsin-based company. The company then sued Salvador under the Central American Free Trade Agreement (CAFTA) under the World Bank-affiliated International Centre for Settlement of Investment Disputes (ICISD). The suit was tossed out on a technicality because Commerce Group had not halted ongoing court proceedings in El Salvador. ICISD, however, maintained the claim was not “frivolous” and ordered the parties to split all associated court costs. This means a tab of $800,000 for the Salvadoran government and is a reflection of the injustice at the heart of the international arbitration regime.

There is an interesting background to Commerce Group’s claim. It worked the San Sebastian mine between 1987 and 1999 but ceased operations when the international price of gold dropped. Five years later, Commerce Group was granted environmental permits to reopen the mine. But in 2006 Salvadoran government authorities revoked these because the company had failed the environment audit. Communities living along the waterways had long accused the mining firm of polluting nearby waterways.

CAFTA is a 2005 trade agreement that groups Costa Rica, the Dominican Republic, Guatemala, Honduras Nicaragua and El Salvador with the US.

Reacting to the ICSID verdict, Al Gedicks, professor of sociology at University of Wisconsin LaCrosse had this to say: “It’s pretty outrageous that the government of El Salvador has been attacked for protecting the health and safety of its people. It is Commerce Group who should be paying for the toxic legacy they have left behind.”

El Salvador faces yet another case that involves a claim of $77 million. This has been Pacific Rim Mining, a Canadian mining company that owns a gold mine called El Dorado in Cabañas. To come under CAFTA, the Canadian company filed its ICISD suit via a fully-owned subsidiary it reincorporated as a company belonging to a Nevada corporation, Pac Rim Cayman. It claims El Salvador has breached both Salvadoran international law by allowing the firm to spend five years prospecting for gold and refusing it extraction rights. The case, which has hit international headlines, is worrying for the tiny nation because Pacific Rim is seeking to establish a massive gold mine using water- intensive cyanide ore-processing in the basin of Rio Lempa, El Salvador’s largest river. El Salvador is a densely populated country with limited water resources.

Worryingly for El Salvador, Pacific Rim has cited as a precedent the 2000 Metalclad case against Mexico. Here, the government was sued under NAFTA and forced to pay the Californian firm $15.6 million because local authorities had thwarted its efforts to build a hazardous waste treatment plant after promising to give the needed permits.

India wiser or just lucky?

Not enough flexibility in India’s investment treaty to safeguard its regulatory powers

Erstwhile promoters of the
Dabhol power project sued India
and won a reported $1 billion (Photo: Reuters)

Has India learned to negotiate its investment treaties more judiciously? That’s the question cropping in several fora as India negotiates its biggest trade agreement to date: the Free Trade Agreement with the EU. Commerce ministry officials say progress is slow. One concern, of course, is intellectual property rights and India, it appears, is treading cautiously because of the implications of granting more than required under the World Trade Organization’s TRIPS agreement.

But few in the ministry appear to be aware of the ramifications of the 80 bilateral investment treaties (BITs) that it has signed (UNCTAD list), despite India’s bruising encounter with GE and Bechtel, the erstwhile equipment suppliers and equity partners of Enron which set up the Dabhol Power Company. India is reported to have shelled out $1 billion in claims to the two US corporations reportedly filed under the BIT with Mauritius.

Another suit for damages (undisclosed) has been filed against India under the India-Australia BIT by Australian mining company White Industries Australia. The case being adjudicated under UNCITRAL rules comes in the wake of complaints by the company that the Indian courts have failed to enforce a foreign arbitration award it secured against its joint-venture partner, Coal India Ltd., a public sector enterprise. In fact, leading international legal firms are advising clients how to avoid the Indian courts having jurisdiction to review and set aside awards in foreign arbitration.

While these are the only known cases, international investment lawyers tracking arbitration claims say many could have slipped under the radar. However, India appears to have made an effort to tighten its investment treaties, but it is far from adequate. A study done by Prabhash Ranjan who teaches at the National University of Juridical Sciences, Kolkata, finds India is taking care to include Non-Precluded Measures (NPMs) in such treaties. NPM—these start with words like ‘‘nothing in this agreement precludes’’—provide the vital regulatory latitude to host countries to deal with threats to important national interests. Such provisions also give countries the flexibility to give preference to policy goals over investment protection in certain circumstances, without incurring any liability under international law. NPMs are legal, notwithstanding their inconsistency with other investment agreements.

Prabhash Ranjan Adjudication of a wide range of sovereign regulatory measures by tribunals, sometimes in unexpected and undesired ways, is coupled with inconsistent legal conclusions and poor reasoning
Prabhash Ranjan
Faculty, National University of Juridical Sciences, Kolkata


However, such provisions are inadequate in India’s treaties, he warns. In the first such study, Ranjan critically analyses NPM in 57 investment treaties, bilateral, regional and multilateral, and argues that these are not enough to allow the exercise of regulatory power by India for all its policy needs. Especially in view of the adjudication of such a wide range of sovereign regulatory measures (discussed in the preceding pages), the academic says NPM should be reformulated to balance investment protection with India’s regulatory power to pursue policy objectives.

This is particularly important since adjudication of a wide range of sovereign regulatory measures from privatisation to environment protection by international tribunals sometimes results “in unexpected and undesired ways”. These, “coupled with other factors like inconsistent legal conclusions and poor reasoning of arbitral tribunals,” leads to the award of substantive damages to foreign investors.

He also underscores another dilemma India faces. It receives capital not just from developed countries but also from developing countries. Even if India is a net capital exporting country vis-a-vis some of these developing countries, there is nothing to stop a Sri Lankan or a Kenyan investor from bringing a case against India challenging a regulatory act allegedly violating a treaty, he warns. “The need is to avoid extreme viewpoints and to take a balanced position on investment protection and regulation in the interest of the international investment law regime.”

Not everyone would agree. A number of countries want a thorough overhaul of the current investment law regime which they find skewed. Ecuador and Bolivia, for example, have quit the ICSID Convention; Brazil, a major capital importer and exporter, has not ratified a single treaty. South Africa is reviewing all its treaties and Australia says it will no longer subscribe to investor-state provisions. It will be interesting to see what India does.
 

 

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