Investment protection: A collapsing system

The Colombian health care system has many problems. Costly, patent-protected drugs are one, notorious corruption is another. Photo: At the Santa Cruz del Islote clinic, which the doctor from Cartagena visits only every few months.

27.10.2017

Article as analysis

Isolda Agazzi

States sign investment protection agreements among themselves, multinational corporations can sue if they are violated. This is becoming ever more frequent. But more and more States are reacting by terminating those agreements.

There is hardly a stone still standing in the legal structure governing investment protection: four developing countries have terminated their Investment Protection Agreements (IPAs) with Switzerland in the past three years. And for the first time last year, a court of arbitration upheld a counterclaim by a State (Argentina) against a (Spanish) investor. There is an ongoing discussion in international trade diplomacy about creating an international court of arbitration to replace the arbitral panels existing hitherto.

The Investor-State Dispute Settlement (ISDS) mechanism is creaking and on the verge of collapse. According to the United Nations Conference on Trade and Development (UNCTAD), between January 2016 and July 2017 no less than 104 new suits were filed by foreign investors against States, representing a spike in the overall number since 1987 to 817. Some 60 per cent of these disputes have been ruled in favour of the foreign investors. The amounts of compensation have ranged between USD 10 million and USD 16.5 billion, this latter amount being claimed from Colombia by the US Multi Cosigo Resources (goldmining) corporation.

Swiss companies too have not been holding back when it comes to filing suits, the most recent one to come to light being Glencore vs. Colombia; Novartis also recently threatened that same country with legal action.[1] Swiss companies rank 11th among the multinationals filing suits, but no action has ever been brought against the Swiss Confederation itself.

It is therefore hardly surprising that ever more developing countries are terminating their IPAs with a view to negotiating better conditions. India, South Africa, Indonesia and Ecuador, for example, have terminated their agreements with Switzerland. India has every reason to be concerned: until 2010 the subcontinent had never been ruled against an arbitration tribunal, but a growing number of suits have been filed since that time (22 altogether), the majority of which are still pending. South Africa has been even more careful: no sooner had the first action been filed – and since withdrawn – than it terminated all its IPAs. Indonesia has taken a similar approach, having been sued seven times, two of the cases being still pending.

Citizens' Commission in Ecuador

Ecuador is an emblematic case. The Andean country has been dragged before arbitration tribunals at least 23 times. Most of the suits – none from Switzerland – are still pending. The majority of them stem from expropriations in the energy sector ordered by former President Rafael Correa. Last year Quito had to pay USD 980 million to the US oil firm Occidental after withdrawing from a contract. Another arbitral panel ordered the payment of USD 380 million to US energy giant ConocoPhillips.

In Ecuador, the Citizens' Commission (CAITISA) produced a 668-page report in which it calls for the termination of the IPAs; it asserts that the agreements do more harm than good to Ecuador. Although Ecuador is one of the countries in the region that has signed the most IPAs, between 2001 and 2011, it received only 0.79 per cent of its direct investment under those agreements. The most substantial investments came first and foremost from countries with which it has no agreement, namely Brazil, Mexico and Panama. In Ecuador's 2017 budget, indemnity payments and accrued interest account for 52 per cent of government expenditure.

For the future, the Commission favours completely abandoning Investor-State Dispute Settlement, indirect expropriation, «fair and equitable treatment", as well as the umbrella clause. These are demands also being made by Alliance Sud in relation to Swiss IPAs – so far in vain; the State Secretariat for the Economy (SECO), which is responsible for such agreements, has limited itself to making just a few cosmetic changes to the new model agreement of March 2016.

Human rights and countersuits

Cecilia Olivet of the Transnational Institute, which supervised the CAITISA study, says: “Under our alternative model investment protection agreement, investors must also assume legal obligations, and not only acquire rights.”

Up to now, IPAs have protected only the rights of investors but not the human rights of peoples. A first step in that direction came in July 2016 with the ruling against Philip Morris and in favour of Uruguay; the cigarette manufacturer headquartered in Switzerland lost on all counts. A second glimmer of hope came at the end of 2016 when an arbitral tribunal rejected a suit filed by the Spanish company Urbaser, which had been providing water supply and sewerage services in Buenos Aires and filed for bankruptcy there following the Argentine crisis of 2001/2002. The principle of a counterclaim was accepted for the first time. Even though Argentina lost the case on the merit, since the panel did not recognize the violation of the right to water by Urbaser, it accepted the principle of the counterclaim because the IPA between Spain and Argentina expressly accords “both parties” the right to file a claim in the event of a dispute.

Precisely this is not present in the Swiss IPAs, where only the investor may be a plaintiff – but not the host country.[2] The ongoing review of Switzerland's IPAs might be an opportunity to change this. But the improvements will remain modest, as the right to bring the first action is still reserved for the investor. Victims whose rights to water, health and freedom of association are violated are still not allowed to initiate proceedings against multinational corporations on their own initiative.

International court of arbitration: a wrong right idea?

After the EU-Canada Comprehensive Economic and Trade Agreement (CETA) was almost scuppered by criticism of the ISDS mechanism, the EU Commission proposed that a Multilateral Investment Court should be established. Such a court with permanent judges and allowing for appeals against rulings would indeed represent progress in relation to the present situation. However, Alliance Sud and other NGOs are sceptical of this idea because the principle of private justice at the service of foreign multinationals would remain unaffected. Cecilia Olivet takes a similar view: “We categorically reject the current Investor-State Dispute Settlement (ISDS) mechanism. We could nonetheless warm to the idea of a multilateral investment court as proposed by Professor Gus Van Harten only if there were sufficient guarantees of independence and impartiality. But the European Commission's proposal fails to provide this."

Which TNCs headquartered in which countries have sued?