About the Author: Kartik Sharma and Aditya Singh are BA.LL.B. (Hons) students at the National Law School of India University, Bengaluru, India. Kartik is an editor at the Indian Journal of International Economic Laws. Aditya is a line editor at the National Law School Business Law Review(NLSBLR).
Photo by Yukiko Matsuoka, available here.
The EU landscape of dispute resolution, involving the member states and private entities, has undergone major transformations at various points in time. The most recent changes include Portugal’s withdrawal from the Energy Charter Treaty and a European Commission proposal on a coordinated withdrawal, following similar decisions of other member states. Such withdrawals signalled the states’ refusal to enforce EU laws regarding arbitral awards, which affect most investor-state arbitrations. EU member states like Sweden and Germany have been using rulings in Achmea and Komstroy as a defense across forums within and outside EU with the most recent seen in Sweden and Germany.
The common concern regarding these withdrawals is the EU’s protectionist attitude towards upholding the autonomy of their domestic legal order and the space for welfarist and developmental measures, which are perceived to be under the threat of the “investor friendly” arbitration regime. While literature has emerged on the legal fallacies and disproportionality of such measures, the impact on the Global South is yet to be highlighted. Here, we attempt to unravel the glaring irony of the EU members' withdrawal from the Treaty after putting the Global South in an undesirable trap, wherein their redistributionist and welfarist capacity is constrained.
GENESIS OF GLOBAL GOOD GOVERNANCE BY THE FIRST WORLD
After the collapse of the direct colonial order, a multiparty treaty institution, International Centre for Settlement of Investment Disputes (“ICSID”) Convention was established, and separate Bilateral Investment Treaties (“BIT”) were signed between individual countries. These efforts aimed to institute a legal framework that could ensure the protection of investor interests against the interests of sovereign states. While critics of such systems often describe them as neo-colonial, accusing them of imposing the Western concepts of rule of law on the Global South, the supporters praised these measures as a tool to promote uniform global standards of good governance. While having different stances, both perspectives indicate the formation of a regime akin to global administrative law. This system, often viewed as neo-colonial, creates a separation between the domestic legal-political realm and an international order primarily focused on investors protection. Scholars such as Schneiderman and Van Harten described this transformation as the ‘constitutionalization’ of nature, which places legal limits on the government’s power to undertake redistributionist and welfarist measures while affording investor interests ‘the highest possible protection.’ From the perspective of developing countries, they are curtailed from taking the most basic of measures, for example, the regulation of an industry to further the right to life and improve people’s welfare.
THE REAL NEED FOR GOVERNANCE AUTONOMY
If we are to contextualise the current paradigm, it is clear that those mostly in need of deference towards their developmental policies are Global South countries for two broad reasons. Firstly, statistics show that 70% of the International Investment Arbitration claims active in 2020 were initiated by investors and corporations of developed countries against developing countries. Of the remaining 30%, 15% of the International Investment Arbitration claims are intra-EU and hence cannot be enforced any longer. The rationale for not granting arbitral tribunals the ability to interpret EU law, which is included in the constitutional structure and supersedes the laws of member states, is not only attributable to the EU’s legal framework. The constitutions of many developing countries, which are the sacrosanct and supreme laws of these jurisdictions, can also only be interpreted by designated constitutional courts, and they tend to have a more direct bearing on the developmental policies of the country. This is to say that welfarist ideals and directions are often codified into the countries’ constitutions in form of directive principles, the preamble, or fundamental rights. Actions impinging upon them are issues of constitutional interpretation such that the constitution is used to curtail executive actions ranging from allotment of telecommunication/ satellite spectrums, allotment of infrastructural projects in geologically and socially sensitive locations, etc.
Bilchitz and Landau studied the constitutions of such nations and highlighted the transformative capacity that the constitutional texts are imbued with. The lawmakers intentionally empowered the government and its constituent branches with authority to create policies that further socio-economic rights. This scheme of governance necessitates a larger leeway in policy making that the governmental apparatus needs to possess. However, these aspirations are sometimes against the interests of investors, who tend to prioritize their own benefits at the cost of the welfare of the public. The UN Guiding Principles on Business and Human Rights (UNGP) recognize the effect of BITs on domestic policies, such as restrictions on a state’s ability to implement a new human rights legislation. It is particularly challenging for developing countries to find a way out of these opposing obligations and achieve a state of balance. These states often have to address their complex historical contexts, necessitating egalitarian, transformative actions by their governments.
One example is Piero Foresti v South Africa, an arbitration dispute brought by investors based in Italy and Luxembourg, who were engaged in the mining business in South Africa. The Minerals and Petroleum Resources Development Act of 2002 contained provisions that allowed the South African government to redistribute privately held mineral rights among companies through a fair system of licensing. The same was carried out to address past racial inequities prejudicing the ownerships. As a result, the investors filed expropriation claims. Ultimately, the court discontinued proceedings as the settlement agreement provided the investors with an alternate mining site. There are numerous decisions that keep the legitimate expectation of investors at the forefront. Developing countries experience the greatest impact of the increasing range of expropriation cases, yet there is no definitive test to determine the occurrence of expropriation. In the words of Yves Fortier and Stephen Drymer, the standard to distinguish a valid regulation from expropriation is at best - “I know it when I see it”.
Even if we are to look at seemingly progressive decisions such as Biwater Gauff v United Republic of Tanzania - decisions that seek to deviate from tests that give primacy to legitimate expectations of investors - the destination is the same. In this case, Dar Es Salaam Water and Sewage Authority(DAWASA), the state-owned Tanzanian company, cancelled a contract for the operation of water facilities in Dar es Salaam that was awarded to Biwater Gauff. Biwater impugned this action and others including the withdrawal of VAT exemption as constitutive of expropriation. It was finally held that these cumulative series of actions, including the seizure of Biwater's assets, as amounting to an expropriation and violation of the ‘Fair and Equitable’ standard.
However, what constitutes the essence for the authors in not the conclusion but the reasoning therein. The amicus had framed the dispute through the lens of human rights obligations pertaining to water. The Republic of Tanzania argued that the State had the responsibility to effectuate adequate measures in guaranteeing the access to water, and termination of the contract was a step in pursuance of this. The tribunal remarked that these arguments were taken into account in the assessment of the FET standard. Yet, the precise way in which the amicus submissions impacted the award was not elaborated by the tribunal.
Further, the tribunal in a way withdrew its earlier deference to the host country’s policy. The tribunal stated that it could not give complete primacy to legitimate expectations of the investors, and limitations to legitimate expectations should be factored in “where an investor itself takes on risks in entering a particular investment environment”. It firstly relied on MTD v Chile, which stated that the sole source of host state’s obligation was the underlying BIT. Biwater Gauff’s tribunal in its own analysis also mentioned the need to rely on rights and obligations set out in the relevant investment agreement. The very issue here was to preserve the host state’s autonomy to circumvent these agreements in cases where its own constitutional obligation to protect its citizens rights is at risk. Secondly, the tribunal defined protection of legitimate interest as protection of ‘basic interest’ as long as they are ‘reasonable and legitimate.’ The standard is low, vague and circular. It takes us back to the point we departed from. What counts as ‘legitimate’ is, after all, based on the western standards of global governance. As Fortier and Drymer observed, while domestic laws of the respondent countries are referred to, American laws are frequently cited as thresholds due to their strong regard for property rights.
Friedman has rightly argued that cases such as Peiro will continue to come up and pose crucial questions for the future of the Global South in the international investment paradigm. While it is not tenable to create an exhaustive list of such cases, scholars as a matter of general observation have noted that incompatibility and bias owing to “institutional application of international law doctrines toward a conservative set of ideological preferences founded on a deep and enduringly intuitive loyalty to a public/private distinction” in case of the Global South was destined. Yet the creation of the ‘New International Economic Order’ was pushed unhindered until it backfired upon the global north. All such developments took place at a time when the the Global South had negligible say and bargaining power and had to adopt these measures to facilitate their inclusion in the global order.
Borrowing from the empirical study conducted by Thomas Schultz and Cédric Dupon using about 541 investment awards from 1972-2010, we can see that the Global North was largely unhampered and unaffected until the late 90s. Untill this period, it could largely be described as a sword in the hands of investors hailing from developed countries used to press claims against the developing countries. The trend started to change after the above-mentioned period as investors also started to bring claims against the developed countries. Measured changes such as an addition of mandatory environmental policy compliance clauses were taken. This, however, soon transcended into withdrawals from multilateral agreements such as the ECT and other mentioned developments occurring post-Achmea. What was earlier hailed as a tool to ensure rule of law and global good governance is now being repelled by its founders when it poses a threat to their autonomy of governance and attainment of developmental goals.