Introduction
International Investment Agreements (IIAs) have been traditionally asymmetrical as they mainly entail obligations for host States to protect foreign investments and dispute settlement mechanisms for the investor. However, this asymmetrical nature has been subject to much controversy in the past decade due to the absence of accountability and corporate responsibility provisions in such instruments. Hence, there has been a major push for incorporating obligations for investors in IIAs, with states incorporating them in their model BITs and multilateral organisations suggesting changes to balance the current asymmetry. This raises questions regarding the scope and nature of these obligations, and whether they will be sufficient to create the sought balance.
In this article, I seek to engage with these questions. First, I explain the various types of investor obligations sought to be included in IIAs. Next, I analyse whether implied investor obligations as interpreted by arbitral tribunals in certain cases are sufficient to displace the need for express obligations. I argue in the negative, claiming that these implied obligations cannot be used in place of express clauses as they are insufficient to establish investor liability and are unenforceable without procedural changes in IIAs. Last, I conclude by discussing the way forward.
The Shift Towards Express Investor Obligations
The most prominent investor obligations sought to be included in IIAs are obligations to conform to international standards for environmental practices, human rights, labour rights and anti-corruption provisions. There are some efforts for their inclusion in IIAs, of which, the Morocco-Nigeria BIT stands as a trendsetter. It binds investors to undergo environmental assessment screening processes and maintain internationally recognized environmental standards even post-establishment. Further, investors have to operate the investment in a manner that does not circumvent international human rights obligations to which either or both the states are parties.
However, there is no other IIA which puts binding obligations on investors. Rather, recent IIAs fall just short of that. For example, the India-Belarus BIT obligates investors to “endeavour to comply” with internationally recognized standards, which may address issues such as the environment. The Brazil-Ethiopia BIT goes a step further, by saying that investors shall strive to achieve the highest possible level of contribution to the host state’s environmental progress and sustainable development.
This is true for human rights obligations too. Most BITs, rather than putting obligations on investors, flip the burden on the contracting states to encourage investors to observe internationally recognized standards. Even Model BITs merely encourage investors to adopt international standards of human rights. This is done to ensure that states fulfill their international human rights obligations and, at the same time, do not impose harsh requirements for investors. For example, the Model BITs of India, Brazil, and Netherlands, known to be “strict” due to the conditions they impose on investors, have, in fact, no obligations on investors with respect to international standards of human rights. Even Morocco and Nigeria have not followed their BIT’s investor obligations provisions in later BITs concluded with third states. Thus, though there is an outcry for incorporating investor obligations in IIAs, state practice shows that the movement is still in a very nascent stage.
Implied Investor Obligations: A Viable Alternative?
Though express obligations are absent in BITs, states still argue for implied obligations on investors before arbitral tribunals. This is done mainly to establish the jurisdiction of the tribunal to hear counterclaims by States. For example, Argentina filed a counterclaim in Urbaser v Argentina (para 1156–1166), claiming that the investor’s failure to operate the concession constituted a violation of the investor’s obligations under the applicable BIT. The Tribunal, while affirming its jurisdiction, held it can no longer be accepted that corporate entities are not subjects of international law. Rather, the standards of corporate social responsibility are a part of international law. Further, the rights that every person has under the UDHR, ICESCR, etc. are complemented by obligations on others, not just states, but also on corporate entities, to not engage in activities which may destroy those rights. Thus, it held that corporate entities are also subjects of international law, and thus, have obligations under international human rights law to uphold human rights. This ruling becomes significant as it adopts a novel approach by considering corporate entities as subjects of international law, which was otherwise limited to states, and puts binding obligations on them, even though the applicable BIT has no mention of it.
However, it has been subject to much criticism, as the Tribunal has erroneously included investors as subjects of international law, and therefore, has erred in putting obligations under international law on them. The tribunal in Aven v Costa Rica took another route to establish implied investor obligations. Here, the claimant’s project was terminated due to environmental concerns. Costa Rica pursued a counterclaim and argued that environmental concerns subordinate the protections given to the investors as under Article 10 of the Dominican Republic-Central America-FTA, and that the investor had obligations under the FTA to respect the environment which they failed to comply with. The Tribunal held that, as per the FTA, it will have jurisdiction only when the investor’s conduct amounts to a breach of an obligation under the FTA. To establish such an obligation, the tribunal relied on Article 10.11 of the agreement which provided the State the right to regulate to ensure that an investment is sensitive to environmental concerns. It held that this provision made the State’s measures compulsory for everyone in its territory. Thus, it presented an implied obligation for investors to comply not just with domestic laws and policies, but also with measures taken under this Article, and any violation of the same was a breach of international law.
This ruling becomes significant because it interprets the FTA keeping in mind environmental concerns, and establishes implied obligations for the investors from the state’s right to regulate. Thus, even if IIAs are silent on investors obligations, the state’s right to exercise police powers puts obligations on investors to comply with the same, and any such violations may have a bearing not just on merits but may also lead to a counterclaim.
Another interesting approach to establish implied investor obligations was done by Phillip Sands’ partial dissent in Bear Creek v Peru. Here, Bear Creek’s investment was met with strong opposition from the locals. Consequently, the Peruvian government shut down the mining project. Here, while the claimant was successful in establishing indirect expropriation by Peru, arbitrator Phillipe Sands dissented regarding the method of calculating damages. According to him, the claimant’s contribution to the unrest, which compelled Peru to revoke the concessions, is a relevant factor while calculating damages. Relying on the ILO Convention 169 (Indigenous and Tribal Peoples Convention), he held that even though it does not put direct obligations on investors, it does not mean that the convention is without legal effects or significance to them. Thus, relying on the fact that the claimant had majorly failed to engage in effective consultation with the affected communities, arbitrator Phillipe Sands awarded only USD 9.1 million as opposed to the Majority’s award of USD 18.2 million. Thus, Phillipe Sands’ approach demonstrates that even if direct obligations are absent, investors are still bound to “endeavour” to comply and observe some standards of conduct which may have a bearing on their rights.
Do these cases obviate the need for having express investor obligations, as there are already various implied obligations on investors? While these decisions are hailed by some for construing implied obligations, they do not displace the need for express obligations.
Firstly, tribunals are generally wary of assuming jurisdiction over counterclaims because the jurisdiction clauses in most BITs allow only the investor to submit a claim for arbitration. In Aven vs Costa Rica, the only reason why a counterclaim was allowed was because Article 10.16 of the FTA used neutral terms such as “claimant” and “respondent. Further, counterclaims also require a connection not just with the investment, but with the underlying dispute in question. This entails a stricter standard for jurisdiction and unreasonably restricts the scope of the investor’s liability only to instances connected to its claim but not to others. In the absence of any reform in such procedural matters, such implied obligations become unenforceable and have the same value as non-binding voluntary principles.
Secondly, if the jurisdiction for counterclaims cannot be established, the respondent-State can only raise the investor’s violation of its obligations as a defence for its actions. However, it is unclear whether this would be treated as a merits issue or a jurisdictional issue. In fact, even in cases of post-establishment violations of host-State law by investors, the general tribunal practice, as highlighted in Hamseter v Ghana (para. 126) , has been to treat them only as a merits issue. This would mean that the investor’s wrongful conduct would be relevant only for determining the State’s liability, not the investor’s. For example, in Al Warraq vs Indonesia, even though the investor had breached the local laws, his liability was still not made out; only his claims were rendered inadmissible.
Further, the investor’s wrongful conduct might be used just to reduce the award he is entitled to, as seen in Phillipe Sands’ opinion in Bear Creek. With more IIAs incorporating such provisions, such as Article 26.3 of the India-Belarus BIT and Article 21.2 of the Iran-Slovakia BIT, tribunals might treat violations of conduct as factors which are relevant only for the calculation of damages but not for establishing the investor’s liability.
Thus, though the approaches undertaken by arbitral tribunals to establish implicit investor obligations are a positive development, they are still insufficient to replace altogether the need for express obligations on investors to uphold certain standards of conduct. This is because investor liability, which is central to the idea of investor obligations, is still absent in these approaches.
Way forward
It is evident that states are wary of putting investor obligations in BITs to ensure foreign investors do not detract. This explains the slow and unsatisfactory development of the framework for investor obligations. However, with frequent instances of wrongful conduct by investors, either by harming the environment, or indigenous population’s cultural integrity, such obligations are necessary to keep investors accountable.
With the implied obligations being insufficient, it would seem that the only way is to incorporate express provisions within IIAs. A pivot to that end is, thus, required. States may refer to the UNCTAD’s Policy Framework for Sustainable Development which contains elaborate policy options for IIAs including a robust framework for investor obligations. Further, the International Institute for Sustainable Development has also proposed the inclusion of investor and corporate accountability provisions, which include draft languages for provisions on human rights, environment, anti-corruption, impact assessments etc. However, this is just the first step. More substantive and procedural changes will also be required to actually balance international investment law, as they will ensure that investor obligations are actually enforced.
Rishabh Shivani is a second-year law student at NLSIU, Bengaluru.
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