bilateral investment treaties, arbitration and environmental consequences

by holly harwood, 2nd year politics and international relations at LSE

Salta province, Argentina. Courtesy of Holly Harwood

Salta province, Argentina. Courtesy of Holly Harwood

Investment protection treaties often privilege profit-seeking multinational corporations (MNCs) over national governments instigating environmental protection regulations. However, national governments can also use arbitration to defend international law and domestic environmental regulation from corporate interference.

Bilateral investment protection treaties (BITs) are unique in the jurisdiction they grant MNCs to sue national governments for the implementation of regulations which can damage their business’s financial interests. The process of arbitration can be a curse, but potentially also a blessing to states that want to pursue counterclaims against the contested foreign investors.

What is a bilateral investment treaty? International investors want to shelter their companies and financial operations, based mostly in the Global South, from the possibility of the host state implementing policies that could damage their profits. Such policies include nationalization of resource-based industries; workers rights and employment protections; and environmental regulations which would constrain the parameters of industry, or protect the health of citizens over the extractive capacity of firms. In essence, corporations seek to protect their investments over and above the populations and ecospheres of their host states.

During the 20th century, attempts were repeatedly made to create an international top-down system of investment protection, first in the 1920s under the League of Nations, and again in 1997 through the Multilateral Agreement on Investment, drafted by the OECD. Both attempts failed, and in the latter case, the proposed treaty was met by international outcry from governments in the global south, and NGOs from within the OECD due to the unconditional rights it would grant to MNCs over those of citizens. We can breathe a sigh of relief that the OECD’s Multinational Investment Treaty was halted. But the practice of MNCs suing national governments for enacting regulation that inhibits their profits continues in BITs.

These treaties often have similar conditions and structure to the proposed multilateral investment treaty of 1997, except they are negotiated between two states. If a state breaches the conditions of the treaty, the MNC has the right to sue the state in an international tribunal of arbitration, in which three investment lawyers will rule on whether the state or MNC is guilty. The MNC is not obligated to use the host state’s court system. If found guilty of treaty violations, the state must compensate the corporation. But it is also possible for states to make counter-claims challenging a firm that filed a case against them.

States in the global south have been signing BITs since the 1960s, more recently encouraged by the IMF and UNCTAD. When struggling with economic downturn, the promise of increasing competitively and attracting investors draw many ‘developing’ states to sign BITs.

So how does this system of international investment protection and arbitration affect the environment? The contradiction between profit-maximization and environmental protection has resulted in a high level of investment protection cases; since 2012, more than 60 disputes have been filed including an environmental element. In this respect there are varied possibilities: either the investor sues the state for its restrictive environmental regulations, or the state files a counter-claim against the investor for failing to abide by the national environmental regulations, or increasingly recently, the state may file a counter-claim arguing that the investor is failing to uphold international law regarding human rights and the environment. It is also possible, though rare, that the investor may sue the state for failure to uphold its own environmental regulations.

The structure and conditionality of many BITs is such that the treaties do not make exceptions for environmental regulation, or public interest for that matter – this is the case for Ghana and Canada’s BITs for example. This means that state actions such as refusal of environmental permits, contracts, or the punishment of MNCs responsible for breaches of domestic environmental law, could result in investors challenging that state in international arbitration courts.

Three arbitration cases will be examined closely to demonstrate the role of investment arbitration processes in allowing environmental damage, but also their potential for enabling environmental protection, when states make counter-claims against MNCs challenging them.

A case made against Argentina by the French company Vivendi was an instance in which a privatized water company was compensated despite low-standard water quality supply. After a period of neoliberal reform, the water services in the Northern Province of Tucumán were privatized in 1995 with the French company Vivendi’s subsidiary firm winning the contract. Economic shock followed for the public, as water bills increased by an average of 104% and water quality decreased – resulting from surface water pollution. The residents of Tucumán mobilized in response, to create the Association for the Defense of Users and Consumers in Tucumán (ADEUCOT). The association rallied the local government and encouraged citizens to boycott Vivendi by not paying water bills. The provincial government eventually terminated Vivendi’s contract as a result. When the case went to international arbitration in 2007, Vivendi won on the basis that the government had conducted an unjust campaign against the company, and that the accusation of water-related health risks disputed the investor’s evidence. Argentina was ordered to pay $105million to Vivendi, and the sovereign right of the Argentinean state to restore water quality by re-nationalizing its water system was subverted by the MNCs ‘right’ to economic profit from its investment.

Many arbitration cases do see state success. Kenya made a successful counter-claim against the British Cortec Mining Company. Mrima Hill, sacred indigenous land and forest, was protected from mining in Kenyan law since 1997.  However, Cortec mining company acquired a license for prospecting in the area in 2013 from a mining Commissioner - later found to be involved in “improper conduct”. When the commissioner was dismissed the Kenyan government revoked the mining license for the protection of the Mrima Hill site. Cortec then challenged the Kenyan state for alleged expropriation and breach of the Kenya-UK BIT. The arbitration ruled in Kenya’s favour, observing that Cortec had failed to conduct a mandatory environmental impact assessment, alongside an already void license. There are therefore instances in which arbitration is able to defend the state against MNCs in their environmental protection efforts.

Recent cases concerning the enforcement of international environmental law provide optimism for increasing the accountability of MNCs. Anagha Sundararajan argues that investor-state arbitration can actually function as a mechanism for the enforcement of international environmental norms against private investors. The asymmetry between MNCs right to international arbitration and protection through BITs, and their lack of accountability or responsibility when it comes to respecting human rights and environmental norms was recently challenged in a case between Costa Rica and David Arven. Costa Rican authorities halted Arven’s tourism construction project, Las Olas, when previously undisclosed wetlands and forests were discovered in the area. Historically in investment arbitration tribunals, international law is seen not to apply to MNCs, since only the state is required to enforce these norms in their domestic laws. But in the case of Arven v Costa Rica, the tribunal made it clear that not only did the state have a right to terminate the real estate project on domestic environmental protection grounds, but also the foreign investor was liable for breaches of international environmental law. The ruling was made in favour of the state of Costa Rica, and a legal trend of holding MNCs to account for international as well as domestic law was established – to the benefit of environmental protection.

Investment arbitration and enforcement of BITs are emerging as pivotal legal battlegrounds between states and MNCs, with important consequences for the environment. Despite the investment-privileging origins of BITs and the arbitration process, it is crucial to understand the ways in which the state can make counter-claims to hold foreign investors to account using the arbitration tribunals, enforcing implementation of international human rights and environmental standards.