IIAs and Investor (Mis) Conduct

The issue of investor responsibilities in investment law is – and should be — gaining prominence. Questions regarding whether and how investor responsibilities are, could, and should, be incorporated into or otherwise interact with international investment law and international investment agreements (IIAs) are a crucial part of the conversation regarding international investment law and policy, and reform thereof.

We can break the issue of IIAs and investor responsibilities down into three main, related areas:

• first is whether and to what extent IIAs should provide legal or procedural mechanisms to hold corporations accountable for violating laws or contributing to harms;
• second involves a consideration of the signals that investment law sends investors; and
• third is how companies, third-party funders, and even law firms are using investment law.

The first issue is the one that is most discussed: whether and to what extent IIAs can and should provide legal grounds and procedural mechanisms to challenge corporations when they violate laws and/or cause harms, or to limit the benefits they would otherwise get from the treaty. For example, if a locally established, foreign-owned firm violates domestic environmental regulations, internationally recognized human rights, or domestic and international rules against corruption, can we and should we treat those breaches as relevant to or actionable under international investment law? If the answer is yes, there are several ways IIAs could treat these breaches of law or otherwise respond to harm-causing conduct. Certain breaches could result in the loss of IIA coverage or, more narrowly, access to ISDS. Additionally, IIAs could empower tribunals to order the firm to pay damages or comply with other sanctions. Claims against companies could be made as counterclaims or direct claims by states, or, potentially, by other non-state actors allowed to join the proceedings.

As a general matter, under current treaties and tribunal approaches, investor misconduct can result in loss of IIA protection and/or access to ISDS in the narrow cases in which the investor has clearly engaged in fraud or corruption in the making of the investment.[1] In some cases, investor misconduct can also result in the tribunal reducing the damages awarded to an investor if and when the tribunal deems that the misconduct has contributed to the investor’s losses.[2] In IIA-based ISDS cases, tribunals have permitted counterclaims based on contract, domestic and international law in only a handful of disputes.[3] And these are counterclaims, not independent claims, meaning that they are brought as a response to the investor’s suit as opposed to as an original cause of action. One consequence is that the parties to the case – generally the investor (not the locally invested firm) and the respondent state (not the particular individuals or entities harmed) – may not be the right parties. The shareholder claimants may not owe legal duties to those harmed in the host country;[4] and the state party may not adequately represent those harmed, or rightly recover remedies for the harms suffered by its citizens.[5]  In short, IIAs and ISDS are currently not well-structured to be, nor are being interpreted and used as, tools for affirmatively enforcing corporate obligations and securing recourse for harms suffered by investment-affected rights-holders.

The second issue area related to investment law and investor responsibilities involves the signals that investment law sends investors. In other spheres of law and policy, we have recently seen important shifts in how corporate responsibilities are being conceived and articulated. Key contributions at the international level include the development of the protect, respect and remedy framework, adoption of the United Nations (UN) Guiding Principles on Business and Human Rights, development and continued refinement and application of the OECD Guidelines on Multinational Enterprises, and adoption of the UN Sustainable Development Goals (SDGs). These instruments, particularly in concert, recognize the private sector as a key actor with shared responsibilities to advance articulated rights and goals. At the domestic level, we have seen important new laws that, for instance, expressly require human rights due diligence.[6]

Investment law is falling behind these parallel trends and initiatives and is even sending contrary signals. For instance, as a general matter, domestic and international laws, norms, and guidance are well advanced in terms of articulating corporate responsibilities to ensure respect for human rights, including the right to free, prior and informed consent (FPIC). But tribunals, in failing to adequately address, grapple with, and incorporate those laws, norms and guidance in investment disputes, have effectively told investors that their failure to comply with responsibilities in these areas and their complicity in human rights violations are legally irrelevant when, for instance, determining whether the investment was legal,[7] whether the investor had legitimate expectations to develop the project,[8] whether the state breached the treaty by taking action to protect those human rights,[9] and whether general exceptions or policy powers protections apply.[10]

Additionally, the OECD Guidelines for Multinational Enterprises and the OECD Guiding Principles for Durable Extractives Contracts caution against investors’ attempts to secure stabilization provisions and/or otherwise secure contractual deviations from or exceptions to the law.[11] In investment law, however, such stabilization provisions and deviations are strongly protected. Indeed, in the recent case of Tethyan v. Pakistan, the tribunal effectively granted the investor rights to stabilization provisions and deviations from the law it had never actually contractually secured and was not entitled to, and ordered billions of dollars of compensation, allowing the investor to benefit from that special, privileged, unsound, and effectively made-up legal regime.[12]

These decisions undermine signals being sent to investors in other contexts about the conduct we expect of global corporate citizens, and are out of step with modern policies on corporate responsibilities and sustainable development.

Third and finally, the ways in which investor claimants, third-party funders, and even law firms are using investment law are inconsistent with corporate responsibilities. Corporate responsibilities to respect human rights include corporations’ positions and practices in litigation and arbitration, and how they use those processes to influence the content and application of the law.[13] Much of the concern about investors vis-à-vis IIAs and ISDS relates not to the fact that investors who are using the system have breached discrete obligations under domestic or other law, but the fact that investment law provides corporate actors and asset holders disproportionate power to shape the law and outcomes, including in ways that are inconsistent with or undermine sustainable development and human rights. Investment law allows them extraordinary power to challenge, for instance:

• pricing of domestic tariffs for essential public services,[14]
• court decisions regarding the appropriate scope and nature of intellectual property rights,[15]
• efforts to combat aggressive tax avoidance,[16]
• efforts to scale back grants of wasteful and unwise incentives,[17]
• policy approaches aiming to help ensure host countries and communities receive some of the potential benefits of FDI,[18]
• environmental permitting decisions,[19] and
• measures to tackle climate change.[20]

ISDS cases are rarely about unremedied corruption or discrimination at the domestic level. More commonly, they are corporate efforts to use international law to shape how public and private rights and interests are balanced, and how economies and societies are regulated, and to do so in a forum where the participation, power and voices of other stakeholders are marginalized or non-existent. The focus on investor obligations is thus broader than issues of discrete investor wrongdoing. It is about attempting to address abusive and extortionary uses of investment treaties, and the failure, to date, of actors within the ISDS system to rein in such practices. While some recent treaty innovations are noteworthy, existing efforts do not adequately prevent treaties from being used as tools for rent extraction, or as instruments for international asset holders, law firms, and claim funders to distort the law in their favor. Meaningful articulation of the precise problems treaties are meant to address (bias, discrimination and lack of due process), and the grievances they are not, would be of tremendous value, as would sanctions for the filing of abusive claims.

Each of these three areas of intersection between investor obligations and IIAs are areas that merit further attention, and that reform processes could and should be used to address.

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For more information on aligning investment frameworks with human rights obligations and sustainable development objectives, see:

• Our submissions to UNCITRAL’s Working Group III on ISDS Reform.
• Our webinar and working paper on the interaction between international human rights and investment law.
• Our research on the implications of the investment regime for access to justice for investment-affected rights holders.

[1] E.g. Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3, Award (Oct. 4, 2013) (jurisdiction denied on grounds of corruption, para 422).

[2] E.g. Copper Mesa Mining Corporation v. Republic of Ecuador, PCA Case No. 2012-2 Award (15 March 2016). The tribunal found a breach of full protection and security for Ecuador’s failure to provide security to an investor in the face of social unrest and opposition to a mining investment. Para. 6.83. The tribunal, noting the investor’s contributory conduct in firing live ammunition on protestors, rather than dismissing the claim, simply reduced damages against Ecuador (to US$ 19.4 million) to reflect the fact that the investor’s “negligence” in engaging with local communities contributed to the collapse of its project. Para. 10.9.

[3] E.g. Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5 Decision on Ecuador’s Counterclaims (Feb. 7, 2017); Urbaser S.A. v. Argentina, ICSID Case No. ARB/07/26 Award (Dec. 8, 2016).

[4] E.g., Piedra v. Copper Mesa Mining Corporation, 2011 ONCA 191 < http://www.ontariocourts.ca/decisions/2011/2011ONCA0191.pdf>.

[5] Chevron v Ecuador (n 19), Second Partial Award on Track II (30 August 2018), Part VII, 11-12 (holding that the state did not have standing to raise arguments regarding claims of individual harms to Ecuadorians).

[6] E.g. French Law on Vigilance, Loi n 2017-399 du 17 Mars 2017 relative au devoir de vigilance des sociétiés mères et des enterprises donneuses d’ordre < https://www.legifrance.gouv.fr/eli/loi/2017/3/27/2017-399/jo/texte>. Other recent developments in European countries are outlined by the Business & Human Rights Resource Center (BHRRC) here: <https://www.business-humanrights.org/en/national-movements-for-mandatory-human-rights-due-diligence-in-european-countries>.

[7] E.g. Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/21, Award (Nov. 30, 2017) paras 282-285.

[8] E.g., Border Timbers Ltd, et al. v. Republic of Zimbabwe, ICSID Case No. ARB/10/25; Bernhard von Pezold and others v. Republic of Zimbabwe, ICSID Case No. ARB/10/15.

[9] E.g. Copper Mesa Mining Corporation v. Republic of Ecuador, PCA Case No. 2012-2 Award (15 March 2016).

[10] E.g. Bear Creek Mining Corporation v. Republic of Peru, ICSID Case No. ARB/14/21, Award (Nov. 30, 2017) paras 471-478.

[11] OECD. OECD Guidelines for Multinational Enterprises. 2011. p. 18 (Commentary on General Policies no. 6: “The Guidelines recommend that, in general, enterprises avoid making efforts to secure exemptions not contemplated in the statutory or regulatory framework related to human rights, environmental, health, safety, labor, taxation and financial incentives among other issues, without infringing on an enterprise’s right to seek changes in the statutory or regulatory framework”); OECD. Guiding Principles for Durable Extractive Contracts. 2019. Principle VII and Commentary on Guiding Principle VII, para 35 (“Durable extractive contracts recognize that regulatory regimes evolve over time, and sod o the expectations and requirements that extractive projects must meet for the protection of public health, safety, the environment and communities. In line with the OECD Guidelines for Multinational Enterprises, investors “should refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to human rights, environmental, health, safety, labor, taxation, fiscal incentives, or other issues.””)

[12] Tethyan Copper Company Pty Limited v. Islamic Republic of Pakistan, ICSID Case No. ARB/12/1 (Award July 12, 2019).

[13] John Ruggie, Kiobel and Corporate Social Responsibility, Harvard Kennedy School of Government (September 4, 2012).

[14] E.g. Urbaser S.A. v. Argentina, ICSID Case No. ARB/07/26 Award (Dec. 8, 2016).

[15] E.g. Eli Lilly and Company v. The Government of Canada, UNCITRAL, ICSID Case No. UNCT/14/2 (Final Award (in favor of State) March 16, 2017).

[16] E.g. Vodafone International Holdings v. The Government of India, PCA Case No. 2016-35 (India-Netherlands BIT); Vodafone Group Plc v. The Government of India, UNCITRAL (India-UK BIT).

[17] E.g. Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20; Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1 (Award (in favor of Investor), May 16, 2018).

[18]  E.g. UP and CD Holding v. Hungary, ICSID Case No. ARB/13/35, Award, October 9, 2018, para. 414.

[19] E.g. Bilcon of Delaware et al v. Government of Canada, PCA Case No. 2009-04 (Award on Jurisdiction and Liability (in favor of investor), March 17, 2015); Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12 (Award (in favor of State), Oct. 14, 2016).

[20] TransCanada Corporation and TransCanada PipeLines Limited v. The United States of America, ICSID Case No. ARB/16/21 (settled, 2017).