The changing landscape of international investment agreements

In brief

A recent United Nations Conference on Trade and Development report identifies recent trends in international investment agreements and investor-state dispute settlement – among them, a rise in the integration of sustainable development objectives, including via more careful regulation by states of investor-state dispute settlement mechanisms. Partner Peter O'Donahoo, Managing Associate Hilary Birks and Associate Anna McMahon report.

Background

On 19 February 2015, the United Nations Conference on Trade and Development (UNCTAD) published Issues Note (No 1, 2015) on 'Recent Trends in IIAs and ISDS' (the IIA issues note). The IIA issues note comments on a number of developments relating to international investment agreements (IIAs) and investor state dispute settlement (ISDS), and reports on some interesting statistics drawn from data sourced, including information about the content of IIAs entered into in 2014.

The publication of the IIA issues note follows a number of recent UNCTAD initiatives focusing on trends and reform in IIAs and ISDS.¹ Most recently, UNCTAD convened a meeting of intergovernmental experts to identify concrete strategies and measures that would contribute to the creation of a new generation of IIAs.²

According to the IIA issues note, countries continue to use IIAs as a tool for international investment policymaking, with 2014 seeing the conclusion of 27 IIAs, bringing the total number of agreements to 3268. The IIA landscape is also evolving with regard to substantive provisions. In particular, the IIA issues note indicates that sustainable-development-oriented provisions are on the rise.

In terms of investment dispute settlement, the IIA issues note confirms that investors are continuing to make use of ISDS mechanisms, with claimants initiating 42 known treaty-based ISDS cases in 2014. On the other hand, recently negotiated IIAs demonstrate that states are more carefully regulating ISDS: eg by limiting the scope of claims that an investor may make under ISDS mechanisms.

The IIA issues note recognises that there is a growing consensus regarding the need for reform of IIAs, and ISDS in particular. Debate continues about the optimal way for IIAs to align with sustainable development goals. There has also been extensive consideration of the areas and extent of reform required to address issues such as transparency, efficiency and the ISDS process itself.³ We consider these issues in further detail below.

IIAs and sustainable development policies

One of the key trends that the IIA issues note identifies is the integration of sustainable development objectives into IIAs. Governmental focus on managing sustainable development objectives, including environmental, social and poverty alleviation concerns, as well as investor responsibility in these areas, is not new. However, to date, solutions and options developed to address sustainable development concerns have not been a part of mainstream investment policymaking. Most existing IIAs have followed the 'traditional' approach of stimulating foreign investment by focusing on investment promotion and protection, without provisions designed to ensure that investment leads to, and does not hamper, sustainable development. This has led to criticism of IIAs on the basis that they impose unreasonable constraints on the ability of host country governments to adopt the policies needed to promote sustainable development.

In response to this, there is a growing consensus on the need for a more coherent and well designed IIA regime that reflects sustainable development objectives, balances investors' rights and obligations, and corresponds with modern economic realities (such as the proliferation of the global value chain). This is illustrated by the increasing number of countries that are reviewing their model IIAs to bring them into line with recent developments in international investment law, including the sustainable development imperative. At least 45 countries (including Brazil and India) and four regional integration unions are currently revising, or have recently revised, their model IIAs.

The increased focus on sustainable development in the IIA content is reflected in the results outlined in the IIA issues note, with a review of the 13 IIAs concluded in 2014 (for which texts are available) demonstrating that most of the treaties include sustainable-development-oriented features. From an Australian perspective, this includes the Korea-Australia Free Trade Agreement (KAFTA), the Japan-Australia Economic Partnership Agreement (JAEPA) and the China-Australia Free Trade Agreement (ChAFTA).⁴ Of the 13 IIAs concluded in 2014, 11 include mechanisms to ensure that the host state has the capacity to regulate and enforce compliance with public policies that it has implemented by including general exceptions: eg for the protection of human, animal or plant life or health, or the conservation of exhaustible natural resources. Another 11 treaties include provisions that explicitly recognise that parties should not relax health, safety or environmental standards in order to attract investment. Of those 11, nine treaties refer to the protection of health and safety, labour rights, the environment or sustainable development in the preamble.

ISDS

Another trend the IIA issues note identifies is the continued use of ISDS mechanisms, with the total number of known ISDS cases reaching 608 by the end of 2014.⁵ In light of the increasing number of ISDS cases, the debate about the usefulness and legitimacy of ISDS has gained momentum, especially in those countries and regions where ISDS is on the agenda of high-profile IIA negotiations; in particular, the proposed Trans Pacific Partnership Agreement.⁶

One of the original purposes of the ISDS mechanism was to ensure a neutral forum for the resolution of disputes between foreign investors and host states that would offer investors a fair hearing before an independent and qualified tribunal. ISDS was also intended to provide disputing parties with considerable control over the process: eg by allowing them to select arbitrators. However, the actual functioning of ISDS mechanisms has highlighted some systematic deficiencies. These have been well documented in the literature on the subject and are summarised in UNCTAD's 2014 World Investment Report.⁷ They include issues around legitimacy, transparency, 'nationality planning', consistency of arbitral decisions, the absence of an appeals mechanism, the independence and impartiality of arbitrators, and the financial cost for the parties to the dispute. UNCTAD has outlined a number of areas of potential reform to address these deficiencies,⁸ and to ensure that the ISDS mechanism does not unnecessarily hinder sustainable development and governments' pursuit of legitimate public policy objectives.

Focusing on the sustainable development issue as a way of addressing some of the concerns about the impact of ISDS mechanisms, many of the IIAs entered into during 2014 limit access to ISDS in order to protect sustainable development objectives: eg by limiting treaty provisions subject to ISDS, excluding policy areas from ISDS, limiting time periods to submit claims, or simply excluding an ISDS mechanism altogether. The KAFTA and the ChAFTA both contain limitations and carve outs from the ISDS mechanism that are aimed at protecting sustainable development objectives. The JAEPA does not include an ISDS mechanism at all, although this is likely to be subject to review in light of the inclusion of an ISDS mechanism in the ChAFTA.⁹ The Australian Coalition Government's current policy is to consider the inclusion of ISDS in investment treaties (or equivalent agreements, such as bilateral investment treaties, regional trade agreements or free trade agreements) on a case-by-case basis.¹⁰ It is not yet clear how this impacts on current treaty negotiations with which Australia is involved, but this is an issue we will continue to monitor closely.¹¹

Comment

Companies investing in foreign jurisdictions should be aware of the growing tendency of states to craft IIAs (or equivalent agreements) that complement their sustainable development objectives. Recent developments indicate a trend in finalised IIAs to limit or exclude ISDS. If this trend continues, it could significantly affect the process of ISDS claims, as well as the availability of ISDS as a dispute resolution option at all.