As India prepares itself for a possible arbitration tribunal, courtesy Vodafone, under the India-Netherlands Bilateral Investment Treaty (BIT), it is worth revisiting these controversial agreements which, some argue, give multinational corporations an inordinate influence over the domestic policy of countries they invest in.
When Australia introduced legislation pretty much banning all branding on cigarette packets, effective from December 2012, the global tobacco industry threw a fit, but Marlboro-maker Philip Morris decided to go a step further.
It filed for arbitration last November, accusing Australia of breaching its BIT with Hong Kong. It cited a host of reasons, including “unlawful expropriation” of investments and failure to provide fair and equitable treatment.
Philip Morris is no stranger to such arbitration: in Uruguay it is using the Swiss-Uruguayan BIT to combat restrictions on cigarette branding.
‘Evolving' BITs
For campaigners such as Mr Mark Halle, director of trade and investment at the International Institute of Sustainable Development (IISD), such cases are a powerful reminder of how BITs have metamorphosed into a means by which multinational corporations can get their way on domestic policies.
“They are being used to hammer countries into doing what companies want them to do,” he says.
BITs between countries are for the “reciprocal encouragement, promotion and protection of investments in each other's territories,” explains the web site of the UN Conference on Trade and Development. They were first introduced in 1959 as a basic means of investment protection, particularly against nationalisation initiatives. “They were moderate arrangements and didn't go too far,” says Mr Sol Picciotto, emeritus professor of law at Lancaster University. No longer.
Over the years, not only have the number of BITs soared (there are just under 3,000 known ones globally), but the obligations ensconced in them have grown, too, as countries have come to see them as a necessary, if non-ideal, tool for attracting foreign investment. The consequence? Vastly imbalanced agreements, argue campaigners.
“What it does is allow MNCs to sue the host country they invest in but doesn't create any obligations the other way round,” says Ms Isolda Agazzi, a BIT specialist at Switzerland-based Alliance Sud. “What it does in many cases is give foreign investors better treatment than anyone domestically based can get,” says Mr Picciotto.
And with their rather vague terms (they aren't long documents), BITs have enabled the types of disputes to evolve, too, — from cases of plain vanilla expropriation (nationalisation of assets, for example) to more insidious challenges to sovereignty.
A country you are invested in toughens up its environmental policies? Or plans to bring in new labour laws limiting the hours your workers can toil? Invoke a BIT!
Last month, a group of investors holding Greek government bonds announced plans to challenge the beleaguered nation's debt restructuring programme under the German-Greek BIT.
In 2006, foreign mining companies challenged South Africa's Black Economic Empowerment legislation “designed to rectify the abuses of Apartheid” under treaties with Italy and Luxembourg.
Armoury for MNCs
Direct and indirect taxes are also increasingly being held to be matters of expropriation. “There is an increasingly broad definition of interpretation of ‘expropriation' or ‘takings' under the rapidly developing jurisprudence of BIT disputes related to expropriations,” says Mr Saionton Basu, partner and co-head of the India practice at Penningtons Solicitors.
Often, it's hard to keep track of cases. While the findings of tribunals administered through the International Centre for Settlement of Investment Disputes are made public, BITs have provisions for beneath-the-radar arbitration through other routes, such as the UN Commission on International Trade Law and the International Chamber of Commerce.
As the Australian case demonstrates, BITs enable MNCs to take on powerful developed nations; the US and Canada have also been subject to their fair share of challenges. However, more often than not, it is poorer states that fall prey to such action. South America has been a particular focus, with Argentina holding the record for the most number of disputes following its 2002 devaluation of the peso.
Given the proliferation of BITs, it is not difficult for an MNC to find one through which to pursue its claims, even if this can involve a bit of shopping around for a suitable BIT: one between two countries, both of which you happen to have business in but neither necessarily where you are headquartered (the Philip Morris action against Australia is a case in point).
US firm Bechtel was criticised by campaigners for re-structuring parts of its business to enable it to use the Netherlands-Bolivia BIT in its action against the Bolivian government over a water contract. A clever bit of asset tweaking can mean you can even sue the country where your company is headquartered, invoking your assets elsewhere.
Mailbox companies
The Netherlands, the conduit through which Vodafone has chosen to pursue its claim against India, has so often been invoked in such arbitration proceedings that it has gained the reputation of being a BIT arbitration sweet spot.
There is also a certain irony in Vodafone invoking the Netherlands-India treaty, given its insistence that the Hutchison acquisition involved Dutch and Cayman Island companies.
SOMO, a Dutch campaign group, estimates that nearly 10 per cent of all BIT arbitration cases globally are pursued through the Netherlands, as Dutch investment protection policy is increasingly used for “treaty shopping.”
“The majority of companies enjoying generous investment protections offered by Dutch BITs are so-called ‘mailbox companies,' companies with no employees on their payroll and no real economic activity in the Netherlands,” SOMO wrote in a report published last November. Over the past few years, several countries, including the US, Australia and South Africa, have attempted to re-jig BITs so as to better balance an investor's need for protection with a nation's responsibility towards its own people. BITs are also the subject of discussion at the UN Conference on Trade and Development XIII, currently under way in Doha.
A civil society declaration calls on UNCTAD to promote alternatives to the conventional BITs, ensuring that they allow for countries to enact progressive legislation without the fear of reprisal.
An alert for India
These are warnings that India, which has over 70 BITs but has been reasonably immune to arbitration proceedings until recently, should heed.
Last November, White Industries, an Australian firm, won a verdict against India over a Coal India investment under the India-Australia BIT, while The Children's Investment Fund has raised the possibility of BIT action over its investment in the same Public Sector Undertaking.
Russian telecom giant Sistema and Norway's Telenor are also warning of action under various BITs over the telecom licence cancellations.
While India has been cautious in the design of its free trade agreements, it has been less careful in its BITs, warns Ms Nathalie Bernasconi, senior lawyer at IISD. “India is very vulnerable,” she says.
From a governmental perspective, the assumption has always been that BITs help attract overseas investors. Whether this is actually the case is thrown into doubt by the experiences of countries such as Brazil and China.
Brazil's failure to ratify BITs hasn't dissuaded foreign firms from pouring money into its economy. Nor have the restrictive terms of China's agreements with investors. Perhaps this is the moment for India to take a fresh look at the complex, far-reaching and shadowy BITs phenomenon.