The friction between investor protection and human rights: lessons from Foresti v. South Africa.

• Author: Leibold, Annalisa M.
• Position: 2010 International Centre for Settlement of Investment Disputes arbitration decision

1. ABSTRACT II. INTRODUCTION III. CRITICISMS OF THE INTERNATIONAL LEGAL SYSTEM. A. Overview of Critiques B. A Conceptual Framework for Criticisms IV. THE LEGITIMACY CRISIS AND EFFICIENCY GAINS V. FORESTI V. SOUTH AFRICA: A CASE STUDY A. The Case Background B. The Controversy C. Transparency and the Participation of Non-Disputing Parties D. Costs and Fees VI. CONCLUSION II. INTRODUCTION

   The International investment law system is facing a legitimacy crisis. (1) Criticisms have largely arisen as a function of the increasing number of arbitration claims that have been brought under bilateral investment treaties (BITs) in recent years, (2) the vast sums in damages that have been claimed by investors against host states that may even exceed the Respondent state's entire budget, (3) and claims by investors against host states that implicate the state's regulatory power to address core human rights and/or environmental concerns. (4) Some critics call for a complete overhaul of the investment arbitration system, suggesting various alternatives, which would significantly alter both the substance and procedure of the status quo. Meanwhile, some states have responded by reigning in investor protection, thus threatening the stability of the very international investment dispute resolution system. (5)

   I argue that, consistent with some criticisms, there exists a space in which a state's obligations under the international investment system can conflict with its abilities to regulate in areas of human rights and/or environmental protection. Yet, because many criticisms of the investment system remain under-developed both theoretically and empirically, this conflict between investment protection and a state's regulatory power is often mischaracterized and poorly understood. The first part of this paper is dedicated to outlining the many criticisms of the international investment arbitration system and clarifying their theoretical and empirical underpinnings and limitations. My hope is that this will help create a coherent and neutral picture of the claims against the investment arbitration system.

   Based on the conclusions that I reach in Part I, I argue that in so far as there is real or perceived conflict between a state's regulatory authority and its investment obligations, there are many areas where legitimacy enhancements will function as efficiency gains. I construct a very simple model with three participants (states, multinational corporations (MNCs), and third parties) in which an investment treaty obligation is at odds with a state's desire to regulate in critical areas such as human rights and/or the environment. The tension introduced by this clash generates criticism and may ultimately threaten the legitimacy of the investment system. Within this context there are institutional changes that can be made, without overhauling the entire system, to make some participants better off without necessarily making others worse off. The result of these changes is an equilibrium result that is either Pareto or Kaldor-Hicks efficient. (6)

   The controversial investment dispute Foresti v. Republic of South Africa provides a live example of legitimacy enhancements as efficiency gains. (7) The dispute concerned a challenge to South Africa's Black Economic Empowerment (BEE) Policies, affirmative action measures designed to remedy the lingering effects of the apartheid era. (8) There were two particularly notable developments in the Foresti case. First, the Tribunal granted an unprecedented level of participation to non-disputing parties (NDPs). (9) I argue that this represents a type of Pareto improvement, arising in part due to the tension from an investment dispute, which directly implicates a state's regulatory authority in a public rights case. When the investment system is threatened because of this tension, the cost/benefit calculus determining the desirability of introducing transparency-enhancing measures shifts.

   The second notable development concerned the Tribunal's decision to shift costs. Claimants ultimately sought discontinuance, (10) and the Tribunal issued a default award on fees and costs requiring the claimants (the corporation) to cover a portion of the respondent's (South Africa) costs. (11) Tribunal cost shifting authority represents another example of a legitimacy enhancing efficiency gain, as illustrated in this case, because it can alleviate the burden on states to defend against unsuccessful and/or non-meritorious claims. [12] Although, as a result of such decisions, individual MNCs face an immediate increase in costs, these costs may be offset by the benefits that arise from maintaining the legitimacy of the system in a climate in which some states are re-considering the level of investment protection offered as a result of the alleged unfairness of the system. I allege that this represents a type of Kaldor-Hicks efficiency gain.

3. CRITICISMS OF THE INTERNATIONAL LEGAL SYSTEM

   1. Overview of Critiques

      Attacks against the international investment system have been severe and varied. Accompanying such criticism is a growing body of literature that seeks to empirically establish the claims. In Part II.A, I will present an overview of the existing criticisms of the international investment legal system and note any concrete empirical evidence supporting or refuting such critiques. Next, in Part II.B, I will attempt to organize the criticisms of the international investment legal system along a conceptual framework in order to inform an understanding of the nature of the criticisms, their merit, and where potential solutions might lie. (13)

      1. Human Rights and Environment Provisions within BITs

         Critics argue that investment treaties do not adequately account for the consideration of a state's human rights obligations. (14) In fact, very few BITs expressly reference a state's human rights obligations. (15) This implicates the extent to which a state's human rights obligations may inform an interpretation of its obligations under its investment treaties in the event of a dispute. For example, tribunals have disagreed over whether a state's purpose in enacting regulations that qualify as expropriation should be considered in the determination of whether or not the state has breached its treaty obligations and/or whether restitution is owed. (16) It is possible that a state, in enacting expropriation type measures, was actually acting with the express purpose of fulfilling its obligations under international human rights law. A clearer expression of a state's human rights obligation in its investment treaties could clarify this standard and ensure that states have a greater freedom to regulate in matters concerning human rights.

         Human rights obligations may also be considered by a Tribunal where an explicit provision in the BIT specifies that the Tribunal should decide the case in accordance with principles of international law. (17) Absent such an explicit provision, public international law may be read into a treaty: (1) to interpret the meaning of a BIT, (2) to avoid conflicting with a principle of international law, in particular, a jus cogens norm, or (3) through Article 313(c) of the Vienna Convention allowing international law to inform an interpretation of a treaty. (18)

         Although such methods allow for some consistency in interpreting and applying the bulwark of public international law, some commentators have argued that such methods are insufficient at protecting human rights in the context of investment disputes. (19) For one, critics argue that specific reference to a state's human rights obligation in the BIT would help prevent some of the "regulatory chill" effects, discussed infra. (20) Additionally, without a specific contractual mandate to look to human rights obligations, the BIT, as a lex specialis instrument could be allowed to trump non-fundamental human rights norms-though such a reading is doubtful. (21)

      2. BIT-Contractual Procedural Unconscionability

         Critics also allege that negotiations of BITs and other investment treaties are procedurally unfair. (22) In theory, BITs are agreements based on the free will of two sovereign governments. (23) Critics point out that this premise is undermined by the significant resource differentials that systematically disadvantage developing countries. (24) The United States, for example,

         has bargained with dozens of countries. It is familiar with provisions that may have large effects, either in terms of benefits or costs. The United States has a large staff that can write, review, and analyze such agreements clause by clause. As if these advantages were not sufficient, the United States is assisted by well-paid corporate lobbyists and lawyers, who are even more sensitive to the consequences of each provision. (25) Developing countries, on the other hand, lack the legal capacity to negotiate investment treaties to their strategic advantage. (26) Moreover, because of international power differentials, even if developing countries identify an area of strategic concern, they often lack the ability in negotiations with powerful Western countries to change model BITs. (27) And "[e]ven if renegotiations and other later corrections are not impossible, such initial misalignment is likely to produce unfavourable results." (28)

         Andrew Guzman presents a related thesis, positing that the system of BIT negotiations for developing countries constitutes a prisoners' dilemma. (29) According to Guzman's argument, developing countries negotiate investment protection in an effort to attract Foreign Direct Investment ("FDI"), to foster economic growth. (30) In Guzman's theory, all developing countries would be better off by mutually agreeing to offer lower levels of investment protection--which would better preserve their own sovereign authority and lower the cost of certain state regulatory actions--however, in the natural equilibrium each individual country has an...