2015: The Year of Reorienting International Investment Law

Barnali Choudhury
February 05, 2016

In the Chinese calendar, 2015 was the year of the sheep: a follower rather than a leader. Yet for international investment law, 2015 was a year of transformation, signaling a possible reorientation along a new path. This Insight reflects on some of the key moments reflecting such a transformation or reorientation in treaty law and practice: the draft model bilateral investment treaties of India and Norway, the public release of the agreed text of the Trans-Pacific Partnership (TPP), and the European Commission’s proposal for a new investment court.

March: India Model BIT

The year began with the introduction in March of India’s draft model bilateral investment treaty (Model BIT), which was then released in final form in December.[1] The Model BIT represents an effort to promote development considerations alongside investor protection. Thus, it introduces references to sustainable development in the preamble as well as a redefinition of the term “investment,” which must have “a significance for the development of the Party in whose territory the investment is made.”[2]

To reinforce its goal of promoting development objectives, the March version of the Model BIT introduced a series of positive obligations for investors, including promoting sustainable development and contributing to the host state’s development objectives.[3] However, the final version of the text replaces these specific obligations with more general requirements for investors to comply with a state’s laws and regulations concerning investments[4] and to “endeavour to voluntarily incorporate internationally recognized standards of corporate social responsibility in their practices and internal policies.”[5] The Model BIT also eliminates draft provisions that enabled states to bring counterclaims against investors and required home states to prosecute investors for damage or injuries in the host state.[6]

Nevertheless, the final version of India’s Model BIT circumscribes numerous treaty issues. For instance, all of the defined elements of fair and equitable treatment now require a violation of customary international law, full protection and security clauses are limited to physical security, and damages for investment treaty breaches may be mitigated, under delineated circumstances, including public interest considerations.[7]

May: Norway Model BIT

A few months after the introduction of India’s Model BIT, in May 2015, Norway also introduced its new draft Model BIT.[8] The 2015 Model BIT builds on Norway’s previous Model BIT, introduced in 2007 and infamous for having been shelved by Norway in its entirety due to public outcry. As in the case of India, Norway’s new Model BIT reflects a redirection away from a sole focus on investment protection. However, the Norwegian model BIT contains mainly subtle tweaks, rather than significant changes, to the standards generally found in traditional BITs.

The main changes introduced in Norway’s Model BIT relate to the state’s ability to regulate for the protection of health, human rights, safety, and environmental issues, and, to a lesser extent, labor rights.  The treaty explicitly preserves the states’ right to regulate in these fields and precludes states from waiving or derogating from such measures in order to encourage investment.[9]

The importance of these social issues is emphasised in the preamble, and they provide the basis for carve-outs from other substantive obligations found in the treaty. Thus, for example, the Model BIT clarifies that governmental measures that are designed to protect these interests and have a differential effect on foreign investors or investments are not inconsistent with national treatment or most-favored-nation standards of protection where they “bear[] a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investment”;[10] nor will a measure to protect these interests generally constitute an expropriation or a performance requirement.[11]

To ensure state ability to protect health, public morals, national treasures, and the environment, the Model BIT includes general exceptions akin to those in Article XX of the World Trade Organization’s General Agreement on Tariffs and Trade 1994 (GATT).[12] Additionally, it preserves the right of states to take measures for prudential reasons including ensuring stability of the financial system,[13] and excludes from the treaty measures designed to promote certain cultural activities.[14]

November: TPP

Changes in international investment law continued with the official release of the investment chapter of the TPP in November 2015.[15] As in the Norwegian Model BIT, the agreed TPP text introduces a number of safeguards to better protect states’ regulatory powers. The state’s right to regulate and to protect legitimate public welfare objectives is delineated in the preamble to the treaty, and the right to regulate is also delineated as a separate article in the investment chapter.[16] Furthermore, nondiscriminatory regulations to protect “legitimate public welfare objectives” do not constitute indirect expropriation (“except in rare circumstances”),[17] and certain performance requirements do not apply to such measures.[18] As in Norway’s Model BIT, the TPP also clarifies that national treatment considerations will take into account whether the treatment afforded distinguishes investors or investments based on legitimate public welfare objectives.[19] In addition, the scope of investment authorizations has been limited to exclude actions taken by a state to enforce environmental or health laws.[20] However, the investment chapter lacks a general exceptions provision corresponding to GATT Article XX.

The TPP further recognizes the right of states to engage in financial regulation and restricts the right of investors to bring actions for defaults on public debt, in a nod to the myriad of investment claims that arose out of the Argentine financial crisis.[21] Similarly, the text acknowledges the Phillip Morris claims against Uruguay (ongoing) and Australia (dismissed in December 2015) by enabling host states to deny the benefits of investor-state dispute settlement (ISDS) in respect of claims against tobacco control measures.[22]

Curiously, while the TPP provides for states to make certain counterclaims against investors challenging investment authorisations or investment agreements,[23] it makes only limited reforms to the traditional ISDS process. For example, it provides for enhanced transparency, including disclosure of pleadings and transcripts and open hearings.[24] It also states that if an appellate mechanism is developed in the future in another forum, the parties will consider whether awards rendered under the TPP should be subject to that mechanism.[25]

November: International Investment Court Proposal

One week after the official release of the text of the TPP, the European Union (EU) issued a finalized proposal for a new International Investment Court (IIC).[26] The IIC is designed to replace ISDS in the Transatlantic Trade and Investment Partnership (TTIP), currently being negotiated by the EU and the U.S., while also serving as the new standard for dispute resolution in investment and trade agreements.

The IIC is designed as a two-tiered standing court with a Tribunal of First Instance and an Appeal Tribunal. It will be staffed by a permanent roster of fifteen judges at the Tribunal of First Instance and six judges at the Appeal Tribunal.[27] Judicial terms will be either for a term of six years, renewable once, or for a term of nine years.[28] Furthermore, to ensure their availability, judges will be paid a monthly retainer fee, currently proposed as €2,000 per month for judges at the Tribunal of First Instance and €7,000 per month for judges at the appellate level.[29]

To ensure a high degree of ethical practices at the Court, IIC’s judges will be required to boast unquestionable independence. Furthermore, they will be prohibited from being affiliated with a government or acting as counsel or as party-appointed expert or witness in any existing or new investment dispute in any forum.[30]

The proposal also introduces baseline standards for judicial appointments. Judges will be expected to possess qualifications for appointment to judicial office of their own countries or be jurists of “recognised competence.” They must further possess demonstrated expertise in public international law and, preferably, have experience in international trade or investment law including dispute resolution experience in these areas.[31]

The EU’s proposal additionally ensures the applicability of the UNCITRAL Transparency Rules, meaning that many of the documents of the court’s process will be publicly available.[32] Furthermore, third-party funding of a dispute must be disclosed to the Tribunal and to the other disputing party.[33]

In addition, the IIC will contain time constraints for rendering decisions. Tribunals are thus expected to issue a provisional award within eighteen months of the date of submission of the claim, or account for the delay, while the Appeal Tribunal is expected to render its decision within six months of the date of appeal.[34] Parties are also given a strict ninety-day time limit to appeal their award.[35]

However, the most revolutionary change in the proposal is likely the introduction of the appellate mechanism. Designed to ensure the legal correctness of decisions, the Appeal Tribunal’s mandate is to consider whether the Tribunal has erred in the interpretation or application of the applicable law or whether it has manifestly erred in the appreciation of the facts, including the appreciation of relevant domestic law.

Revolutionizing International Investment Law?

The past year’s developments indicate a growing trend in international investment law of continual change. The provisions in the TPP and in the Indian and Norwegian Model BITs enlarging the regulatory space of states represent a global move augmenting the role of the state in BITs and other international investment agreements.

In many ways, however, the new provisions in the TPP and the Model BITs are reactive rather than proactive. For instance, the right of states to take measures for financial prudential reasons under the Norway Model BIT and the TPP are a response to the Argentine financial crisis cases, while the TPP provisions on tobacco regulation respond to recent tobacco claims. In this sense, these provisions are less likely to revolutionize international investment law.

Conversely, the codification of counterclaims in the TPP may signal a new direction for international investment law. Currently, BITs afford foreign investors rights without imposing any obligations upon them, yet this may not continue to be the practice going forward.

Still, the year’s most significant change is the EU’s proposed investment court. In proposing a standing court structure and introducing an appellate mechanism—a vehicle that has been called for by many and alluded to in the TPP—the IIC completely overhauls the current system of investor-state dispute settlement. Replacing arbitrators with a standing pool of judges and allowing for the review of egregious decisions transforms the current system of ad-hoc practice—plagued by inconsistent decisions and the appearance of bias—to an institution bearing the hallmarks of legitimacy that is poised to restore public trust in the resolution of investment disputes. More importantly, since the EU-Vietnam Free Trade Agreement has recently accepted the IIC as its method for dispute resolution of investment disputes,[36] the IIC now stands on the brink of establishing itself as the new standard for dispute resolution for all investment disputes. Indeed, the IIC, alone, could be the reason to declare 2015 the year of reorienting international investment law.

About the Author: Barnali Choudhury, an ASIL member, is an Associate Professor at University College London.

[1] Draft Model Text for the Indian Bilateral Investment Treaty, Mar. 2015, http://www.jurisafrica.org/html/pdf_indian-bilateral-investment-treaty.pdf [hereinafter Mar. Indian Model BIT]. The final text was released in December 2015. Model Text for the Indian Bilateral Investment Treaty, Dec. 2015, http://finmin.nic.in/the_ministry/dept_eco_affairs/investment_division/ModelBIT_Annex.pdf [hereinafter Dec. Indian Model BIT].

[2] Dec. Indian Model BIT, supra note 1, art. 1.4.

[3] Mar. Indian Model BIT, supra note 1, art. 8 to 12.

[4] Dec. Indian Model BIT, supra note 1, art. 11(i).

[5] Id. art. 12.

[6] Mar. Indian Model BIT, supra note 1, arts. 14, 11, 13.

[7] Dec. Indian Model BIT, supra note 1, arts. 3.1, 3.2, 26.3 n.4.

[8] Draft Agreement between the Kingdom of Norway and . . . for the Promotion and Protection of Investments, May 2015, https://www.regjeringen.no/contentassets/e47326b61f424d4c9c3d470896492623/draft-model-agreement-english.pdf.

[9] Id. arts. 12, 11.

[10] Id. art. 1 n.1.

[11] Id. arts. 6.8, 8.2.

[12] Id. art. 24.

[13] Id. art. 25.

[14] Id. art. 27.

[16] Id. art. 9.15.

[17] Id. Annex 9-B, s. 3(b).

[18] Id. art. 9.9.3(d), (h).

[19] Id. art. 9.4, n.14.

[20] Id. art. 9.1 n.10.

[21] Id. art. 29.3, Annex 9-G.

[22] Id. art. 29.5.

[23] Id. art. 9.18 (2).

[24] Id. art. 9.23.

[25] Id. art. 9.22(11).

[26] Draft Transatlantic Trade and Investment Partnership, ch. II, § 3, Nov. 12, 2015, http://trade.ec.europa.eu/doclib/docs/2015/november/tradoc_153955.pdf.

[27] Id. arts. 9(2), 10(2).

[28] Id. arts. 9(5), 10(5).

[29] Id. arts. 9(12), 10(12).

[30] Id. arts 11. See also id. Annex II, Code of Conduct.

[31] Id. arts. 9(4), 10(7).

[32] Id. art. 18.

[33] Id. art. 8.

[34] Id. arts. 26(6), 29(3).

[35] Id. art. 29(1).

[36] Press Release, European Commission, The EU and Vietnam Finalise Landmark Trade Deal (Dec. 2, 2015), http://trade.ec.europa.eu/doclib/press/index.cfm?id=1409.