BIT Off More Than They Can Chew: How Developing Countries Navigate Investor-State Dispute Resolution
In 2012, the Pakistani province of Balochistan denied a mining lease. To the naked eye, this seemed like a simple action taken by a domestic government. However, the denial of the mining lease ultimately cost Pakistan US$ 5.9 billion (approximately GBP 4.3 billion) and seven years of legal fees. The application for the mine was filed by a joint venture, of which Australian-registered Tethyan Copper Company is a majority stakeholder. Tethyan Copper Company claimed that in denying the mine lease application, Balochistan violated the Australia-Pakistan Bilateral Investment Treaty (BIT).
The Current ISDS Regime
Established through a tangle of bilateral investment treaties, the current Investor-State Dispute Settlement (ISDS) regime affords foreign companies the right to take a sovereign state to court if they feel the state’s actions have led to expropriation of their investment. Each year, private firms bring dozens of cases against states in front of the International Centre for Settlement of Investment Disputes (ICSID). Tethyan Copper’s US$ 5.9 billion settlement was not a one-off; in 2019, oil investors were awarded US$ 8.3 billion (almost GBP 6 billion) in their case against Venezuela.
Many reading this article will be unfamiliar with the ISDS regime, and puzzled why these massive settlements are barely discussed in the mainstream news. This is because ISDS is shrouded in a veil of secrecy: everything is conducted in private, with no published precedent and only selective details released to the public. When a company desires to bring a claim in front of the ICSID, presiding arbitrators are appointed, the world’s best law firms are hired, and the might of a massive multinational corporation faces down against whatever defense the accused country can afford. This is all done behind closed doors.
The fight is rarely fair - developing countries are plagued with capacity issues and legal costs on top of the nearly inevitable settlement payout, all of which are crippling. In a battle of budgets, the investor nearly always wins. ICSID paints a shocking portrait of what many fear: corporations lording over states' decision-making, using their mass of resources as leverage.
As developing states, Pakistan and Venezuela cannot afford to pay out billions to investors whenever their domestic policy jeopardises a profit. Yet, through entering into controversial bilateral investment treaties, states sign away a chunk of their sovereignty to supranational bodies. Compliance with ICSID rulings is the norm as states face political pressure and desire to look amenable to foreign investors.
Yet, states have not been magically stripped of their agency. States willingly signed and continue to enter into BITs that grant a slew of rights to investors while offering little protection for their own government. The fallacy of these agreements has led many developing states into dangerous waters. Believing that BITs would attract foreign investment and much-need economic infusion, governments are willing to concede sovereignty as a way of signaling that their country is a hospitable destination for foreign investors.
Looking Towards Reform
Unfortunately, investors admit that they rarely take BITs into consideration when choosing an investment location. If investors are not using BITs as signaling devices to differentiate between stable and risky investment locales, then all they function as is a noose for developing countries. BITs are largely ignored until the state takes an action that, while otherwise within their authority, infringes upon an investment’s profitability and the BIT provides an agreeable way for the corporation to recoup their losses.
Though there is little in the way of published case law from investor-state dispute settlements, there is one clear precedent: regulatory chill. Witnessing what happens to states that violate their BITs, many states operate a constrained policy space to avoid damaging relations with investors. This is an injustice to the citizens whose lives are governed not by a motivation for public good, but a motivation to preserve profits. Luckily, there is hope for reform in the investor-state dispute settlement space.
St Andrews’ own Dr. Taylor St John, a lecturer in the School of International Relations, has a front row seat to the United Nations Commission on International Trade Law (UNCITRAL) Working Group III negotiations. In Vienna, representatives from states and corporations alike are working towards creating more routes through international arbitration in hopes of creating a more equitable relationship between states and those who invest in them. Given the nature of the current investor-state dispute settlement system, Bilateral Investment Treaties likely cause more harm than good for developing states. There are other pathways to attracting foreign investment, just as investor-state disputes can be resolved in a more equitable and transparent manner. With billions of dollars, the world’s strongest corporations, and the UN all at play, it will be interesting to see where efforts to reform ISDS take the global investment community.