Investment Negotiations at the WTO and the IIA Regime: Anticipating unintended interactions

The Joint Statement Initiative (JSI), launched by a group of WTO Members to develop a multilateral framework on investment facilitation (MFIF), could substantially alter the field of international investment governance, exacerbating existing fragmentation in this area of law and policy. The initiative, launched nearly three years ago on the sidelines of the WTO’s Eleventh Ministerial Conference, will transition into negotiating mode in September 2020. Its stated primary objective is to facilitate cross-border investment by increasing the transparency and predictability in the capital-importing host state. The preparation of an MFIF Streamlined Text[1] in January 2020, an Informal Consolidated Text in April 2020, and a revised Informal Consolidated Text[2] in July 2020, provide an idea of what this proposed framework could look like.

From the outset, JSI signatories acknowledged that the relationship and interaction between the MFIF and IIAs needed to be clarified and wished to prevent new disciplines in the MFIF from being subject to ISDS under IIAs. The concern stems from the fact that ISDS provides a mechanism for foreign investors to obtain compensation if states fail to live up to their treaty commitments. In contrast, the MFIF does not envisage the possibility of investors bringing claims against states alleging non-compliance with MFIF disciplines, or the award of compensation for breach of these disciplines. The fact that ISDS tribunals have a history of interpreting obligations broadly raises further concerns that these tribunals might interpret the substantive obligations in the MFIF in ways that state parties had not intended.

Signatories expressly stated that discussions toward an MFIF “shall not address market access, investment protection, and Investor–State Dispute Settlement.”[3] They have tried to reflect this intention in the draft text by including a provision stating that the framework “shall not cover: a. investment protection rules; and, b. investor–state dispute settlement.” Since the effectiveness of this provision and its precise meaning are not clear, some JSI signatories have recently submitted proposals, described below, with the objective of insulating the framework from the broader IIA regime. These proposals seek to preclude investor claims for breach of MFIF disciplines in ISDS.

This article highlights three key areas where WTO Members need to be wary about unintended interactions between the proposed MFIF and IIAs. It also comments on the effectiveness of proposed attempts to separate the MFIF developed by the trade community from the broader IIA regime, the reform of which is being coordinated and led within the United Nations through UNCTAD and UNCITRAL.

Scope

While the existing WTO agreements have some overlap with IIAs, the proposed MFIF could greatly expand the degree of overlap. The draft MFIF text applies to measures affecting investors or investments across the life cycle of an investment, including in the pre-establishment and operations phases. IIAs also apply to measures affecting investment, although they typically focus on the operations phase only. As such, the primary area of overlap between the MFIF and IIAs is that they both seek to govern investment-related measures in the operations phase of the investment life cycle.

Overview of MFIF content

The current version of the proposed MFIF sets out seven overarching sections. Section I covers scope and general principles, including key definitions and a clause on MFN treatment. Section II focuses on the transparency of investment measures, including provisions on notifying measures to the WTO, setting up enquiry points, and the process around adopting and publishing new measures and conducting consultations. Section III covers administrative reforms, under the heading of “Streamlining and Speeding Up Administrative Procedures and Requirements,” while Section IV focuses on setting up contact or focal points, ombudspersons and other coordination systems, internally and with foreign partners.

The final three sections cover special and differential treatment for developing and least developed country members, “cross-cutting issues” such as corporate social responsibility and anti-corruption, and institutional provisions such as dispute settlement. It is also worth noting that there are two additional, newly proposed sections between Sections III and IV, which deal with “temporary entry for investment persons/facilitation of movement of business persons for investment purposes” (Section III bis) and free transfer of capital and subrogation (Section III ter). Most draft provisions, except those on CSR and corruption, use mandatory language (“shall”).

Many of the details of each section are still up for discussion and debate, including important definitional questions that could have major implications for the MFIF’s scope. What is clear, however, is that the current proposal would require states to engage in significant reform of processes and institutions of investment governance within their own economies. The institutional reform required to comply with the proposed MFIF would be especially demanding for developing countries.[4]

The potential interaction between the MFIF and IIAs[5]

The concern of JSI signatories about unintended consequences stemming from the interaction between two regimes governing the same subject area is well founded. New MFIF disciplines could indeed affect the outcome of disputes initiated by investors under an IIA against host states that are also party to the MFIF. This risk arises from the possibility that an arbitral tribunal deciding a dispute under an IIA incorporates obligations arising under the MFIF into the IIA through the interpretation or application of vaguely worded provisions of the IIA. The most relevant provisions in IIAs in this respect are umbrella clauses and provisions on FET, as well as MFN treatment.

Umbrella clauses

According to UNCTAD figures, approximately 43% of IIAs include umbrella clauses.[6] These clauses bring obligations or commitments that the host state entered into in connection with a foreign investment under the “umbrella” of the IIA. An umbrella clause can elevate a host state’s other commitments to the level of the treaty, extending the treaty’s reach beyond the rights and obligations that it explicitly provides. The wording used in umbrella clauses can vary and has evolved over time, with modern treaties increasingly avoiding them altogether. However, many of the older treaties have short, broad umbrella clauses, setting out a commitment for the host government to abide by “any obligations with respect to investment.”

Investor–state tribunals have interpreted broadly phrased umbrella clauses as extending to contractual, legislative, and other commitments that the host state has generally made with respect to investments. No tribunal has yet weighed in with sufficient clarity on the question of whether breaches of international treaties, such as the WTO agreements, could amount to breaches of umbrella clauses. However, given the proposed approaches to the definition and scope of “investment” and “investor” in the MFIF, it is probable that commitments made in a potential MFIF would qualify as a commitment “with respect to investments” under broad umbrella clauses. This would be especially the case where the MFIF commitments are mandatory, as is the case with most commitments in the proposed MFIF draft.

Fair and equitable treatment

According to UNCTAD, 95% of IIAs contain a FET requirement. It is the most litigated standard in ISDS, accounting for 83% of such claims.[7]

“Unqualified” FET clauses are common in most older IIAs. States have struggled to actively prevent disputes under treaties with this clause, as the treaty language usually gives no guidance and is interpreted by tribunals in a range of ways, including by determining the investor’s “legitimate expectations” which induced them to make the investment. Written commitments by governments to act in particular ways can influence a tribunal’s assessment of a foreign investor’s legitimate expectations under this clause.

When considering how potential new disciplines under the proposed MFIF might interact with the FET standard, an investor–state tribunal would likely, in line with the VCLT, look at the other international commitments a host state has undertaken. It would also consider whether MFIF commitments can create “legitimate expectations” of the investor, given that past tribunals have found that legitimate expectations can be based on the state’s legal order—potentially including its international treaty commitments. The crucial question for tribunals would then be whether the state has made a specific enough representation or commitment under the MFIF to generate legitimate expectations of the investor, inducing them to make the investment. If tribunals find this is the case, then a breach of an MFIF discipline would also breach that legitimate expectation and thus the FET obligation in an IIA.

MFN provisions

According to UNCTAD, over 98% of IIAs have at least some form of MFN clause.[8] These provisions require contracting parties to treat investments by investors of the other party no less favourably than investments by investors of a third state. Investor–state tribunals have repeatedly allowed investors to invoke the MFN clause to import rights and obligations under other BITs which the investor perceived as more favourable than those in the underlying BIT. Given the substantive overlap between IIAs and the MFIF, it would be possible for tribunals to allow for the importation of rights and obligations from the MFIF. An investor could then rely on the MFN clause in the IIA to import MFIF rights and obligations if the host state is part of the MFIF, but the investor’s home state is not, arguing that the host state treats investors from MFIF participants more favourably.

The attempt to insulate the MFIF from IIAs and ISDS

Governments have not yet analyzed in detail the potential for MFIF disciplines being subject to ISDS under IIAs based on the three provisions described above. Nevertheless, they have understood the risks, in general terms, of MFIF disciplines being used as a basis for claims for monetary compensation under IIAs and so have attempted to address it in the scope article which provides that the MFIF “shall not cover: a. investment protection rules; and, b. investor–state dispute settlement.” One proposal clarifies “for greater certainty” that “this framework does not create new or modify existing commitments relating to the liberalization of investment, nor does it create new or modify existing rules on the protection of investment or investor–state dispute settlement” [emphasis added]. In other words, it tries to insulate existing IIA rules and ISDS from MFIF disciplines by stating that the MFIF does not “create or modify” investment protection rules in IIAs. It is nevertheless impossible to predict how effective this provision would be in case of a dispute under an IIA. For instance, open questions for interpretation include: what qualifies as an “investment protection rule,” and what does “creating or modifying new or existing rules” mean? These questions of interpretation would be answered by future investor–state arbitral tribunals deciding disputes that arise under IIAs, not by the state parties to the MFIF or the dispute settlement system thereunder. Such investor–state tribunals have a track record of broad and unanticipated interpretations of states’ obligations to foreign investors.

Another proposal by a JSI signatory, also attempting to insulate the MFIF from IIAs, provides that the MFIF “shall not be understood or interpreted to affect in any manner international investment agreements that Members have concluded or will conclude for protection and treatment of foreign investors and investment” and that MFIF members “confirm their understanding that contracting parties and covered investors of international investment agreements shall not refer to or rely on this Agreement for any purpose.” This proposed language targets, first, the interpretation of the MFIF text. It states that the MFIF may not be understood or interpreted to “affect [IIAs] in any manner.” It is unclear how an investor–state tribunal, whose primary role is to interpret IIA provisions, would implement this clarification on the interpretation of MFIF provisions. It is also unclear whether a purported instruction to investors from the state parties to the MFIF parties that investors not “refer to or rely on [the MFIF] for any purpose” carries any legal weight. Investors are not parties to the MFIF and bring their claim under the IIA, not the MFIF. Finally, situations in which not all state parties to an IIA are also MFIF parties would add to the complexity in cases of an investor–state dispute.

Variations of these proposals have also been put forward elsewhere.[9] The common difficulty facing all these proposals is that they seek to address problems that might arise from interaction between a future MFIF and the IIA regime through language included in the MFIF. However, the nature of these interactions will ultimately depend on how tribunals deciding disputes under IIAs interpret such language in light of the obligations contained within IIAs themselves. In other words, the crucial role of interpreting and applying such language is not something that the state parties to the MFIF or the WTO institutions will have direct control over. The risk of unpleasant surprises in the way that arbitral tribunals might interpret and apply the MFIF needs be taken seriously, given the unpredictable nature of ISDS, past instances where investment obligations have been interpreted more broadly than states intended, and the lack of any process of appeal or institutional mechanism to ensure consistency between decisions in ISDS proceedings and the intentions of the state parties to the MFIF. None of the proposals to date address this underlying institutional problem, which would require IIA parties to amend or clarify the applicable IIA clauses.

Concluding remarks

The proposed MFIF raises important issues of international investment governance, particularly how the framework relates to IIAs. As they enter negotiating mode, WTO Members involved in the MFIF discussions need to understand the potential interaction between the proposed text and the IIA regime to avoid unintended legal consequences. The language of the MFN, FET, and umbrella clause provisions in investment treaties, especially older ones, significantly influences the likelihood of these unintended legal consequences. While the WTO Members involved in the MFIF discussions have made clear that they wish to insulate the MFIF from IIAs and ISDS, the current proposals submitted by JSI signatories or other proposals could clarify the intention of MFIF participants to some extent. However, these are unlikely to achieve the desired certainty because ISDS outcomes remain highly unpredictable due to the characteristics inherent to ISDS. As long as IIAs are not themselves reformed or clarified, MFIF members must expect that tribunals will scrutinize investment measures through the lens of the broadly formulated investment protection clauses taking into account the overall legal framework and obligations entered into by the host state, including under the MFIF. This analysis also highlights the challenges governments are facing in light of the increasingly fragmented system of international investment governance. The MFIF would add another layer of binding international commitments, which require many states to engage in a complex process of legislative and administrative reform in order to comply.

Authors

Nathalie Berrnasconi-Osterwalder is executive director of IISD Europe and Senior Director, Economic Law and Policy, IISD. Jonathan Bonnitcha is an Associate in with IISD’s Economic Law and Policy Program who is based in Sydney, Australia. He is also a Lecturer at the Law Faculty of the University of New South Wales.

Notes

[1] INF/IFD/RD/45

[2] INF/IFD/RD/50

[3] WT/MIN(17)/59. Joint Ministerial Statement on Investment Facilitation for Development.

[4] Berger, A. (2019). Investment facilitation for sustainable development: Index maps adoption at domestic level. German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE). https://blogs.die-gdi.de/longform/investment-facilitation-for-sustainable-development/

[5] For a more detailed review on the relationship between the MFIF and IIAs, including references to arbitral decisions, see Bernasconi, N., Leal Campos, S., & van der Ven, C. (2020, September). The proposed multilateral framework on investment facilitation: An analysis of its relationship to international trade and investment agreements. IISD and CUTS International. https://www.iisd.org/publications/proposed-multilateral-framework-investment-facilitation

[6] UNCTAD. (n.d.). Mapping of IIA clauses. Investment Policy Hub. https://investmentpolicy.unctad.org/pages/1031/mapping-of-iia-clauses

[7] UNCTAD. (2020). Investment dispute settlement navigator. Investment Policy Hub. https://investmentpolicy.unctad.org/investment-dispute-settlement

[8] UNCTAD, supra note 7.

[9] For example, Bermann, G.A., Jansen Calamita, N., Chi, M., & Sauvant, K.P. (2020, September 7). Insulating a WTO investment facilitation framework from ISDS. Columbia FDI Perspectives, 286. http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/