Analysis: Latin America’s new model bilateral investment treaties

By Damon Vis-Dunbar
17 July 2008

For the longest time, bilateral investment treaties were quintessential bureaucrats’ agreements. Terse and technical, these treaties were drafted by a handful of trade officials, with little consideration for their wider ramifications for public policy.

On the surface, therefore, many investment treaties look surprisingly similar. Although, they contain certain nuances and variations, the overall structure of such agreements has long been one-dimensional and focused largely on protecting foreign investors’ property interests.

However, the BIT landscape is gradually evolving. In large part, this is in reaction to the ways investment treaties have been in interpreted by tribunals in international arbitrations. These disputes between foreign investors and host states have led tribunals to carefully weigh the language in investment treaties. States have learned that a word, or an absence of one, can make the difference between an arbitration won or lost.

The first major innovators were the United States and Canada. The investment chapter of the 1994 North American Free Trade Agreement (NAFTA) was more ambitious than its predecessors, offering extensive protections and liberalizations to foreign investors operating in a host NAFTA state. All three NAFTA members (Canada, Mexico and the United States) have since found themselves targets of investor-state lawsuits; in the past, developing countries were the overwhelming target of investor-state lawsuits.

Even when they emerged victorious, defending these lawsuits drain government resources. They also plant a degree of uncertainty into policy making. Government regulation in areas such as environment, taxation and healthcare that exert a cost on a foreign investor could become the basis for a lawsuit.

Canada and the United States temporarily put their investment treaty-making activities on hold. When they emerged again, both countries brandished new model agreements. The treaties constructed on these templates send a clearer message to tribunals as to how the treaty should be interpreted, by, for example, including provisions that refer to a host government’s right to regulate in the public interest.

Now, greater precision in treaty making is spreading southward. More than any other region in the world, governments in Latin America have found themselves at the receiving end of lawsuits brought under investment treaties.  Argentina has lost several arbitration cases related to measures taken to stem an economic crisis in 2001, while Ecuador has also been hit with a series of suits as it re-negotiates long-term contracts in the extractive industries.

In response, governments in Latin America have gone to the drawing board to draft templates which will guide the negotiation, or renegotiation, of future investment treaties. Argentina, Bolivia, Colombia, Ecuador, and Venezuela are all at different stages in the exercise. Colombia, which began developing its model BIT in 2002, has led the pack.

“Our model reflects the fact that a developing economy is more likely to be a respondent in an arbitration,” said José Antonio Rivas-Campo, Director of Foreign Investment and Services for Colombia’s Ministry of Ministry of Trade, Industry and Tourism.

The model demands, for example, that at least a year pass between when an investor provides a notice of arbitration, and when it can register a claim. The norm has been six months. Colombia hopes that extra time will increase the odds that the disputing parties will agree on a settlement. It also provides a period for the government to mount its defense.

Should a dispute proceed to arbitration, the Colombian model is mindful of the government’s defense; it attempts to shield itself from frivolous claims, does not allow investors to sue in multiple venues (for example, domestic courts and arbitration), and draws a line between disputes related to a contract and those related to the treaty.

The result, according to Colombia, is a BIT that strikes a balance between “according protection standards to investors and provisions enabling the State to perform an appropriate defense if it is ever brought to an international arbitration.”

With the new template in hand, Colombia has embarked on an ambitious treaty making spree: negotiations are currently underway with Germany, the U.K, China and Sweden. Having a model does not guarantee that Colombia’s investment treaties will mirror the template, said Mr. Rivas-Campo. But it does ensure that Colombia enters negotiations better prepared and with an end-goal in mind.

Bolivia is also in the process of finalizing a new model BIT, which aims to bring its investment treaties in line with a revised constitution that was introduced at the end of 2007. Bolivia, like some other countries in Latin America, has been critical of the system of international arbitration used to settle investment disputes, and last year it became the first country to withdraw from the World Bank’s arbitration facility, the International Centre for the Settlement of Investment Disputes (ICSID). Bolivia’s new model will reflect this fact, said a Bolivian official, who declined to detail how the model would treat dispute settlement.

However, not all countries in Latin America are convinced of the benefits of bilateral investment treaties, even if based on progressive models. Brazil, for example, has never ratified a bilateral investment treaty, and remains skeptical of doing so. The government has indicated that it is unlikely that its congress would agree to an investment treaty, particularly if it allowed for disputes settlement through international arbitration.

Ecuador, meanwhile, has also adopted a more defensive posture. Its inter-ministerial process for developing a model BIT was recently put on hold, at the same that it announced plans to denounce at least nine of its existing investment treaties. Ecuador’s focus will now turn to updating its domestic laws on investment, rather than expanding its network of international investment agreements, said an official in that country.