Introduction
One of the most important pillars of investment
protection under international law is the understanding that a foreign investor
investing in a host state should be treated ‘fairly and equitably.’ The
importance of this notion is supported by the inclusion of the fair and
equitable treatment (FET) standard in most of the International Investment
Agreements (IIAs), as well as its invocation in the vast majority of investment
disputes. However, the concern has been expressed frequently that a broad
interpretation of this usually openly formulated provision has an adverse
impact on the host state’s ‘right to regulate’ in the public interest. These
concerns have been voiced particularly as a result of FET claims in which
investors have challenged a variety of state decisions in publicly sensitive
areas, e.g. renewable energy, waste management, public health issues, and
access to water. In this regard, tribunals have often been criticised for
attaching insufficient weight in their assessment of the FET standard to a host
state’s right to regulate and its duty to fulfil its obligations under other
international treaties, such as human rights and environmental treaties.
In the
last five years the balance has gradually shifted from an approach of a broad interpretation
of investor protection under the FET standard to an approach in which the
state’s right to regulate is also recognised, and in particular when this right
is exercised to benefit the public interest and/or to fulfil obligations in the
field of human rights, health, and environmental protection, derived from
international treaties.[1]
However, there are still gaps in
clarifying the scope of the FET standard in the IIAs, including the new
generation of treaties. The following
proposals made in the context of the 2018 UN
Forum on Business and Human
Rights are aimed at harmonising
treaty practice – both treaty drafting and treaty interpretation practice. In the
proposals, a host state is allowed to maintain adequate policy space to
exercise its right to regulate in the public interest and, on the other hand, is
obliged to observe its obligations under FET standards in IIAs:
- Exhaustive list of the state’s obligations complemented by a
provision on the state’s right to regulate
For
example, in the IIAs concluded between the EU and Canada
(CETA), the EU and Vietnam, and the EU and Singapore the obligation to provide fair
and equitable treatment has been clarified through an exhaustive, but
expandable, list of the state’s obligations in relation to foreign investors.
Furthermore, these agreements
include provisions on the state’s right to regulate in the public interest. What is important in reforming the FET standard in future
treaties is to continue to include such a list. The exhaustive list
of obligations provides some certainty and predictability to host states and
investors about those types of state conduct that might lead to a breach of the
FET standard.
Also important is the explicit codification of the host state’s
right to regulate in some recent IIAs. See examples hereof in CETA, the EU-Singapore
FTA and the Dutch
Model BIT. Explicating the
right to regulate in the body of an IIA constitutes a strong sign that, in the
opinion of the contracting states, the role of tribunals is to balance the
state’s public interests and the interests of the investor when interpreting
and applying the FET standard.
- Direct
obligations towards investors
Further, retaining adequate domestic policy space, while
providing the FET standard to investors, can be attained by including a
provision on Corporate Social Responsibility (CSR) in the IIA (see our article). Such a provision should be addressed directly to foreign investors
rather than to the contracting states. Examples hereof are
the 2016
Morocco-Nigeria Bilateral Investment Agreement
(BIT), the
2016 Argentina-Qatar BIT, the 2016
Pan-African Investment Code, and the
2012
South African Development Community (SADC) Model Bilateral Investment Treaty
Template.
Also, it is essential to specify in
the CSR provisions to which CSR norms an investor
should adhere while operating in a host state. It is not sufficient to merely refer to the ‘internationally
recognized standards of corporate social responsibility’ that often can be
traced in CSR provisions. In the absence of a definition of CSR norms,
tribunals may face difficulty in interpreting these norms, as it will remain
unclear as to what investor obligations flow from such CSR provisions. A concrete specification of the CSR norms that foreign
investors are expected to comply with when investing in the host state provides
more concrete guidance to such investors, as well as to arbitrators. For example, the Dutch Model BIT refers to the OECD Guidelines for Multinational Enterprises, the United
Nations Guiding Principles on Business and Human Rights, and the
Recommendation
CM/REC(2016) of the Committee of Ministers to Member States on human rights and
business.
The Morocco-Nigeria BIT refers to the ILO
Tripartite Declaration.
- The investor’s
due diligence efforts
The
inclusion of the investor’s duty to conduct due diligence, is another aspect that
can help to create a better balance between the rights and obligations of
states and investors under the FET standard. For example, in Article 7 of Dutch
Model BIT, the contracting parties are encouraged to reaffirm the importance of
due diligence conducted by investors ‘to identify, prevent, mitigate and account for
the environmental and social risks and impacts of its investment.’
The
due diligence conducted by foreign investors in assessing the socio-political
risks in a host state has been growing in importance in tribunals’ assessments
of the FET standard. Some
FET tribunals (see, for example: Charanne v. Spain, Isolux Netherlands, BV v. Kingdom of Spain, Mamidoil v. Albania) have underlined that an investor bears the
responsibility of appraising the reality and the context of the state, in which
the investment is/will be made, by performing a due diligence investigation and
conducting risk assessments. The investor has to be aware and to take into
account the relevant regulations, policies and decisions concerning its
investment in order to anticipate the possible risks. This aspect played a role
in cases in which the investor’s claim was based on a claim to protect his ‘legitimate
expectations’ in the context of regulatory changes applied to a general
regulatory framework. The extent of an investor’s due diligence investigation
can operate as a yardstick in judging whether an investor could have predicted
the contested changes. As was pointed out in Isolux Netherlands, BV v. Kingdom of Spain, if the changes were not foreseeable by a prudent investor, despite visible
efforts to collect the information about the future of the regulatory
framework, the legitimate expectations of the investor may be protected under
the applicable IIA.
Therefore, it would be advisable to specify in a IIA that
an investor has the duty to conduct adequate due diligence comprising an
investigation of the environmental, human rights, and social risks, and that
this constitutes a condition for receiving fair and equitable treatment. An
explicit reference in
IIAs to an investor’s duty to conduct due diligence also strengthens the importance of investors’
responsibilities under international investment law.
General Conclusion
In
this contribution, several proposals have been made in the context of the 2018 UN
Forum on Business and Human
Rights to further clarify the right of investors to receive the FET
standard under an applicable IIA and to assure the adequate policy space for
host states to regulate in the public interest. We have suggested to include
(or to continue to include) an exhaustive list of the state’s obligations under
the FET standard into the text of IIAs with the aim to provide a certain degree
of predictability to foreign investors as well as host states regarding the types
of state conduct that might lead to a violation of the FET standard. Also, the provision on the right to regulate should continue to be
included in the operative part of IIAs. The
function of the aforementioned provision is not to exempt the state from
liability under the FET standard. Rather, it requires tribunals to balance the
state’s public interests and the interests of the investor, while interpreting
and applying the FET standard. Finally the proposal further argues that by incorporating
the direct CSR obligations imposed on foreign investors, as well as the
inclusion of the investor’s due diligence duty into the text of IIAs will
further assure the balance of the rights of the investor under the
FET standard and the state’s right to regulate.