You may remember, a few years back, a big international row about something called the Multilateral Agreement on Investment, or MAI. It would have applied to the 29 wealthiest OECD nations and, in effect, it would have allowed foreign investors to leapfrog domestic legal systems and sue governments whenever health, environmental or other types of regulation put a dent in a company’s bottom line. The agreement was aborted after a public outcry.
So that was the end of it? Alas, not quite. The multilateral (29 countries) agreement went down the pan, but there are some 2,000 bilateral (two countries) agreements on very similar lines. The UK alone has signed no fewer than 95 bilateral investment treaties, second only to Germany, which pioneered them.
These agreements were originally designed to protect nervous investors who feared arbitrary treatment or outright confiscation of their investments in developing nations with unreliable legal systems. They were a defence against expropriation. The treaties allowed investors to submit disputes to binding international arbitration before a panel of three trade lawyers, one of whom would be chosen by each side, and the third by mutual consent. The proceedings were held in strict privacy, and the final judgements, with sensitive commercial information edited out, published only where both parties consented.
Such treaties go back to the 1950s, and worked reasonably well for resolving purely commercial disputes. It was the US-based Ethyl Corporation, in a dispute with the Canadian government, that alerted investors (and entrepreneurial lawyers) to another use for the treaties.
In 1998, Canada imposed a trade ban on Ethyl’s controversial petrol additive MMT. Ethyl invoked Chapter 11 of the North American Free Trade Agreement (Nafta), which contains protections for investors similar to those in the bilateral treaties. The Canadians rescinded the ban and offered the corporation $13m (£9.3m) compensation for “expropriated” profits.
The same chapter was later invoked against Mexico (the third signatory to Nafta) by the US-based Metalclad Corporation. It had wanted to build a waste treatment plant in Mexico, but was thwarted by local opposition. The dispute was finally settled last month with the Mexican government paying more than $15m (£10.7m) to Metalclad.
These examples persuaded the lawyers to dust off Nafta’s obscure cousins, the bilateral investment treaties. At a conference of international arbitrators, William D Rogers, a former US assistant secretary of state, and a senior partner with a Washington law firm, predicted “a flood of litigation”. The treaties, he said, are “an open invitation to unhappy investors, tempted to complain that a financial and business failure was due to improper regulation, misguided macroeconomic policy or discriminatory treatment by the host government”. The Washington-based International Center for the Settlement of Investment Disputes, an arm of the World Bank, used to see one new case of an investor-state dispute each year. Now it sees more than one a month.
For example, a Spanish firm, Tecnicas Medioambientales SA, which operates waste treatment facilities worldwide, is pursuing a case against the Mexican government’s environmental laws. Last year, a subsidiary of the French Vivendi group sued the government of Argentina after disputes over charges for a newly privatised water and sewage system. The company argued that the government regulator was imposing “politically motivated” constraints, and that statements by public officials had encouraged people not to pay their water bills. The company lost its case only because it had foolishly signed a contract stating that disputes should first go to the local courts.
Another dispute, also over water privatisation, has begun in Cochabamba, Bolivia. International Water Ltd (IWL) raised water rates by more than a third in order to finance future improvements. Critics claimed that poorer customers were being forced to choose between food or water. There were several days of rioting, forcing the imposition of martial law. The government bowed to public pressure and sent IWL packing.
The uprising has been widely reported as a triumph of people power over corporate might. What has gone unreported, however, is that the company is now attempting to extract compensation from the Bolivian government. A high-level official with the firm’s London office told me that, if negotiations fail to reach a settlement, International Water will explore other legal options – including recourse to litigation under a bilateral investment treaty.
Faced with such threats, many governments are likely to decide, as Barry Appleton, the New York trade lawyer who pioneered investor-state litigation, put it, that “[they] would rather switch their policy than pay the bill”. This was aptly illustrated several years ago, when the Canadian government flirted with legislation that would have forced cigarette manufacturers to use plain, generic packaging. Almost immediately, several US-based tobacco companies fired a legal shot across the Canadian government’s bows. Armed with a high-powered legal opinion, and backed up by the views of a former Nafta negotiator, the companies argued that such a move would constitute an “expropriation” of their intellectual property under the terms of Nafta’s investment provisions, requiring hundreds of millions of dollars in compensation. Canada promptly abandoned its plans.
So far, the UK has not been targeted by this kind of investor-state litigation. But one expert, Professor Thomas Walde, of Dundee University, says that, when the Blair government imposed its windfall tax on the privatised utilities, he was contacted by US corporations looking for a legal foothold to challenge it. The firms were chagrined to discover that the US and the UK have never concluded a treaty allowing investors of one country to sue the government of the other for “expropriation”.
The UK has signed such treaties with dozens of other nations, however, and experts suggest that it is only a matter of time before investors begin to use these agreements against the UK.
Yet officials at the Foreign Office and other relevant government departments seemed relatively unaware of the threat when I spoke to them. Which is why, when an aggrieved investor finally does fix the UK government in its sights, Walde expects that the shocked reaction will be similar to that in Canada and Mexico: “Who signed this agreement?”
Somebody might also ask: “Why is the UK continuing to sign these agreements?” One government official told me that the latest bilateral agreement, signed this year, was “very, very close” to the long-standing model used by the UK. And this long-standing model is very, very close to the wording of Chapter 11 of Nafta and to what you thought was safely dead and buried: the Multilateral Agreement on Investment.
The author is an associate of the International Institute for Sustainable Development, a Canadian think-tank