Although it doesn’t get as much ink as the World Trade Organization, there is a vast network of international treaties that protect foreign investments from discrimination, expropriations, and other forms of mistreatment. Lately, state compliance with these treaties has given rise to numerous multi-million dollar lawsuits between investors and their host countries. A backlash against these treaties in South America, a new administration in Washington, DC, and the current financial crisis are a few of the factors that may have an impact upon the FDI legal system.

 

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Will the Obama administration shake up international investment agreements?

For eight years under the Bush administration, the US government pushed aggressively to negotiate bilateral investment treaties, as well as broader free-trade agreements that covered investment issues. The administration had the wind at its back, thanks to fast-track negotiating authority granted by the US Congress. Congress agreed to refrain from line-by-line scrutiny and revision of new international economic agreements – provided that certain environmental and other concerns were addressed in new agreements.

However, concerns have been raised as to the vagueness of certain legal protections owed by states to foreign investors – with arbitrators given too much discretion to decide what is ‘unfair’ or ‘arbitrary’ treatment of a foreign investor. Some critics still worry about the potential for important public policies to be quashed thanks to foreign investor lawsuits against governments. Indeed, in South America, a backlash against Bush-style investment protection agreements has long been brewing.

On the presidential campaign trail, Barack Obama sent out mixed signals with respect to his plans for the North American Free Trade Agreement. When speaking in blue-collar communities where job losses were great, he focused on the need to alter the terms of trade deals, so as to provide stronger labour protections.

Given the present financial crisis, it seems unlikely that the Obama administration will push for ambitious new trade and investment negotiations with additional countries. However, it remains to be seen whether the White House will push to revise earlier deals. One group of academics at Columbia University has proposed that the Obama administration take a wider view and consider reforms to the overall system of international investment protection. Rather than push for piecemeal changes in bilateral negotiations with US trading partners, the Columbia plan wants a multilateral appeals body, which would review the judgements issued in major crossborder investment lawsuits.

 

Will Europe dismantle treaties between western and eastern European governments?

Foreign investments from western Europe into eastern Europe have long been protected by bilateral investment treaties, but new EU member states would like to tear up these unfavourable arrangements and rely on the internal legal framework that bind all EU members.

Countries such as the Czech Republic would prefer to see disputes resolved in local courts – and before the European Court of Justice as a last resort – rather than before international arbitration tribunals that may over-reach in order to appease foreign investors.

Billions of dollars are at issue because eastern and central Europe is a hotbed of FDI lawsuits – many of them involving western European investors complaining that new EU members have yet to shake off Soviet-era bureaucratic mindsets.

In several disputes, the Czech government has tried to short-circuit international arbitration claims filed by western European investors. The Czechs argue that their bilateral investment treaties with Germany and the Netherlands were rendered null and void once the Czech Republic joined the EU family. However, arbitrators convened to hear these FDI disputes have rejected this argument and insisted that the treaties remain in force.

The EU’s executive branch, the European Commission, has tended to side with new EU members. It has complained that these bilateral investment treaties create an uneven playing field, giving some foreign investors greater legal right and offering a favoured few private access to international arbitration.

In recent years, the commission has pushed for member states to dismantle investment treaties with one another and to fall back on the protections of EU law. It would like to

co-ordinate FDI policies for the whole of Europe. For now, individual governments can negotiate foreign investment protection pacts with other countries on a bilateral basis.

In fact, last autumn, the 27 EU member governments pointedly announced that a majority of them see no reason to roll up long-standing bilateral agreements between pairs of EU member states.

This may not be the end of the issue: the European Court of Justice could offer its own view as to the legality of these intra-EU bilateral investment treaties.

 

Will Argentina make good on arbitration awards?

For years now, several South American governments have snarled menacingly at the growing international network of investment protection treaties. Venezuela, Bolivia and Ecuador have all grumbled about the potential for such treaties to handcuff the ability of governments to change policies or introduce new taxes or levies on foreign investors. In 2007, Bolivia went so far as to withdraw from one of the main forums used to resolve investor-state disputes: the World Bank’s International Centre for Settlement of Investment Disputes.

Foreign investors are more concerned about a government that has largely shunned the political rhetoric of its South American neighbours. Many arbitration watchers are keen to know whether Argentina plans to comply with the rulings issued against Buenos Aires.

In the earlier part of this decade, the Argentine government was buffeted by lawsuits from foreign multinationals who lost tens or hundreds of millions during the 2002-03 financial crisis. Foreign firms blame the government for ignoring contractual undertakings and failing to live up to regulatory stability promises made during more stable times.

Upwards of six foreign firms have obtained arbitration awards against the government – ranging from a few million to well over 100 million dollars. But, thus far, the Argentine government has not written any cheques. Instead, it has engaged in a stand-off with foreign investors: insisting that victorious claimants should bring their arbitration verdicts to the Argentine courts and demand payment there. However, foreign investors have no desire to be mired in years of litigation in the Argentine courts.

After failing to collect a $130m-plus arbitration award, US-based CMS Energy sold that award to a Bank of America subsidiary which will now try to collect on the award – likely by ferreting out Argentine government assets in other countries.

 

Will financial crisis spawn a wave of new FDI lawsuits against states?

 

The question is whether the current financial crisis will lead to a flurry of foreign investor lawsuits against governments. Some past crises have spawned complaints by foreign investors that they were not treated fairly by their hosts.

In the aftermath of a Czech banking crisis in the 1990s, a Dutch subsidiary of the Japanese bank Nomura sued the Czech Republic over its handling of the situation.

While arbitrators were prepared to give the Czech government some leeway, they ruled that the authorities had failed to treat foreign investors on an even footing with local companies which had received state hand-outs unavailable to foreign-owned financial institutions.

When arbitrators found that these discriminatory actions breached the Netherlands-Czech Republic bilateral investment treaty, the Czech Republic found itself paying out more than $180m in compensation to Nomura.

Policymakers may find themselves looking over their shoulders to see if lawyered-up foreign investors try to recoup their losses via lawsuits against the state. Some of the most developed economies could be on the receiving end of the types of lawsuits which hit Argentina, the Czech Republic and other emerging economies in previous crises.

Belgium has already been threatened with a lawsuit by a Chinese financial institution with a minority stake in the troubled Fortis bank.

With the shoe on the other foot, it remains to be seen whether Western governments will insist on strict adherence to treaty terms made during better economic times.

 

Luke Peterson writes the In Dispute column for fDi Magazine.