Thoughts About Investment Agreements

By | July 19, 2014

There is growing debate about foreign investment protection agreements – what Canada calls “FIPAs”, the Americans call bilateral investment treaties or “BITs” and what others refer to simply as international investment agreements or “IIAs”. Acronyms abound.

According to the UN Conference on Trade and Development, there are 3,200 of these around the world, proliferating in the last decade or so. Canada’s FIPAs have been around for about 25 years, the first concluded with Poland in 1990.

Foreign investor protection regimes have been embedded in Canada’s bilateral trade agreements like the NAFTA and in the recently concluded Canada-EU trade negotiations. Canada has stand-alone FIPAs as well, such as the one with Poland. And there are many others, some in force, some signed but not yet ratified, like Canada’s FIPA with China.

They are generally considered to be a positive force in promoting international stability and in aiding foreign direct investment (FDI) from wealthier economies to the developing world. They have many positive attributes, assuring stability, non-discrimination, due process and “fair and equitable treatment” of investors by foreign governments. They prohibit expropriation without prompt and adequate compensation.

One of their central features is that they give private investors the right to bring legally-binding arbitration actions against host governments that fail to abide by these obligations. This is referred to as investor-State dispute settlement or ISDS.

ISDS is often criticised, mostly by left-leaning organizations who claim that these agreements respond to a mercantilist agenda and – because they give investors binding arbitration rights – allow corporate interests to thwart legitimate public policy measures by host governments.

Investor claims have been proliferating, as UNCTAD reports, with 58 new cases in 2012 alone, the highest number in a single year, confirming foreign investors’ growing inclination to litigate against host governments and their agencies.

So there are controversies surrounding these IIAs and some are coming to roost in various free trade initiatives now underway, like the Trans-Pacific Partnership (TPP) negotiations.

One of the challenges in these efforts has been to refine the standards of investment protection, mostly the meaning of the “fair and equitable treatment” obligation of host states. In the Canada-EU trade agreement, for example, the two sides have narrowed the meaning to avoid wide-ranging and dubious claims by private investors.

US businesses have criticised that approach. In the current US-EU trade and investment negotiations, they argue that it will circumscribe the recourse available to investors when their economic interests have been trampled on by governments. This runs right up against the concerns of civil society who want to protect the freedom of governments to legislate for the common good, even if foreign investors are impacted.

There are related issues taking on traction. One is that these investor-State arbitrations are ad hoc in nature and inherently impermanent, with panels often made up of experts from distant places who are appointed to hear a single case but may not know much about the parties or the government involved.

Unlike judges on domestic courts who are part of the local community and essentially known quantities, ISDS arbitrators, deciding public issues of great importance, are strangers from afar who then fade back to their own countries and their own callings.

This boils down to matters of legitimacy, as UNCTAD puts it, whether three individuals, appointed on an ad hoc basis, can be intrusted with assessing often critical public policy measures undertaken by governments.

Another weakness is the absence of an appeal process. In the quest to make ISDS efficient, governments developed a dispute settlement model that was final and binding. But what if arbitrators err on a key legal or factual issue?

Interestingly, the International Centre for the Settlement of Investment Disputes (ICSID), the dispute settlement arm of the World Bank – and now headed by a Canadian – has been looking at these concerns, considering how to improve transparency and consistency ISDS but also the possibility adding an appellate mechanism to its structure.

The solutions to all this are not out of reach. They will require some creative ingenuity and international consensus-building, but there are answers. At the very least, we should be actively discussing these issues and testing, even at this late stage and even with 3,200 of these investment agreements in force, whether the old paradigm, including Canada’s current model, fully serves the broader public interest.