DO INVESTOR- STATE DISPUTE SETTLEMENT (ISDS) CASES REPRESENT A THREAT TO A COUNTRY’S CLIMATE CHANGE POLICIES AND ACTIONS?
Introduction
Investor-state dispute settlement
in the simplest of terms refers to a system that allows foreign investors to sue host
countries for certain actions that derogate international investment
agreements, treaties or charters entered by both parties that affect foreign
direct investments (FDI) or in simpler terms, the interests of these
foreign investors. Key examples of these international investment agreements
are the North American Free Trade Agreement (NAFTA) and closer to our
jurisdiction, the African Continental Free Trade Area (AFCTA) Agreement.
This practice is considered to be a
form of public international law as it provides a unique structure aimed at
protecting foreign investors from incurring unwarranted and unjustifiable
losses by actions of host countries. This primary aim it achieves through the
help of the International Centre for Settlement of Investment Disputes (ICSID)
and other tribunals such as the London Court of internal Arbitration (LCIA),
the International Chamber of Commerce (ICC), Singapore International
Arbitration Centre (SIAC) and so on.
Now with the existence of this
system, foreign investors are offered substantive legal protection and security
as they are the only ones who are able to bring a claim under this system with
the state being held liable to pay damages for breach of the treaty. More
interestingly, however, host states are only left with the option of instituting
actions at their domestic courts.
According to Tietje and Baetens, the
historical preludes of the ISDS system can be divided into four categories[1] namely;
1. The era of merchant concessions
beginning in the 10th century:
It is fair to say that the earliest
forms of investment protection emerged from trade concessions. This could be
seen when Venetian merchants were granted concessions to enter Byzantine ports
without paying duties. This sort of concession was eventually adopted by
English Kings in the 12th century as well. Thus, the earliest
investment protection instruments were concessions granted by a sovereign state
to foreign traders.
2. Development of treaties of
friendship, commerce, and navigation (FCNs) from the 18th to the
mid-20th century:
This era brought to light the
drafting of written and formal bilateral agreements in Europe that offered
protections for foreign-owned property in a state. Unlike concession agreements, these treaties
provided a better balance of power between the two signatory states and till
today, are considered the true precursor to modern Bilateral investment
treaties we have today.
3. Post-1959 Bilateral Investment
Treaties (BITs) and the development of investor-state arbitration:
Early treaties enacted prior to the
establishment of ICSID utilized the international court of justice (ICJ) in the
process of settling disputes. However, where parties were unable to settle
these disputes at the ICJ, the treaties provided that they resolved them by
arbitration. Over time, the BITs provided rights giving investors to directly
enforce substantive rights, and thus, instead of relying on unpredictable
political or diplomatic processes, investment treaties began to provide a more
reliable mechanism for investors to enforce specific protections articulated in
the treaty. Thus, the ISDS came into existence to solve two primary issues, the
first, is unreliable and disjointed reliance on diplomatic protection, and the
second is biased and ineffective domestic remedies.
4. The current ISDS Landscape:
Currently, both states and investors
are familiar with the system as it has become a common tool for investors to
use in order to enforce their rights against host states.
Overall, 274 ISDS claims have been
concluded. 43% of cases historically have been decided in favor of the state,
while 31% have been decided in favor of the investor and another 26% were
settled.
ISDS
Successes and challenges
With the full establishment of ISDS,
there have been a number of notable benefits it has had on the global
business/investment space such as;
1. ISDS provides vital protection
for foreign investors against unfair, discriminatory and arbitrary measures
adopted by foreign governments:
With this system in place, lots of
investors have been able to protect their investments and continue to
contribute to the growth of economies across the world. For instance, under NAFTA, investors from the US have
brought more than 40 claims against Canada and Mexico in the past 22 years
which turned out to be successful[2]. In
the case of Clayton/Bilcon V. Government
of Canada, United States-based investors’ project was denied by the
Canadian government based on findings that it would undermine “core community
values” of the neighboring town, however, and more interestingly, no Canadian-based entity was held to be subject to this standard, the US investors
challenged this as being unfair and discriminatory and in violation of various
provision of NAFTA. The Canadian government was subsequently found liable for
breaching its obligation under NAFTA articles 1105(minimum standard of
treatment) and 1102(national treatment).
Subsequently in Mobil Investments Inc and Murphy Oil Corporation V. Government of
Canada, Newfoundland Offshore Petroleum Board unilaterally imposed a new
condition on oil companies to pay fees in exchange for the authorization for
Hibernia and Terra Nova offshore oil projects. The claimants relied on ISDS to
challenge this action arguing the new condition has caused and would further
cause in the future approximately $66 million in damages. The tribunal ruled in
favor of the claimants ordering Canada to pay approximately $17 million in
total.
2. ISDS provides investors with
leverage to successfully resolve problems with foreign governments:
ISDS has been an effective
enforcement tool that can be critical in gaining leverage to induce reasonable
actions and favorable settlements from foreign states. This was quite evident
in the case of AbitibiBowater Inc V. Government of Canada.
However, like every system, ISDS
also has its flaws which are listed below:
1. Inconsistency of rulings and
decisions[3]:
It is fair to say that international
investment law consists of thousands of different international trade and
investment agreements with differing positions. This has thus built up a level
of legal uncertainty for investors, which leads to inconsistent arbitral awards
and complicates the development of uniform principles in the area of
international investment law. one of the most fundamental values of a system
based on rule of law is predictability. If investment tribunals render
conflicting judgments on similar or the same issues, then there will be poor
predictability in the ISDS system.
2. Exorbitant costs of proceedings
[4]:
A 2017 study found that average
party costs were $6,019,000 for the claimant and $4,855,000 for the respondent,
while average tribunal costs were $933,000. Investment arbitration is a remedy
that involves costs and many times are borne by governments with taxpayers’
money and often times compelled to pay ridiculous damages.
3. Unfair and unequal strength of
parties:
While on the face of things, it may
seem like countries are in a better position but in reality, that is far from
the case seeing some foreign corporations are even valued more than countries.
4. Threat to Climate and environmental
policies (Public policy):
Currently, in the US, a number of
persons have insisted that ISDS is currently being used as an abusive tool to
protect their private interests and undermine government policies geared
towards public well-being.
ISDS in Nigeria
and Africa
While a lot of African countries are
parties to BITs which allows investors to bring their investor dispute claims to
international arbitral tribunals such as ICSID, ICC, and LCIA, there have been
dissenting opinions about the entire ISDS system in the continent[5].
Countries in the continent have shown concern about the lack of transparency in
the system, the exorbitant cost of arbitration proceedings, and most notably, the
attempt of the system to undermine policies geared towards the welfare and
sustenance of their climate and environment.
With these issues at hand, some
countries have rejected ISDS and in its stead, make provisions for investors to
use local remedies.
This would also have been a key
issue that ought to have been addressed by AFCTA, African Continental Free
Trade Area, which is an agreement among African Union member states and cannot
create any rights or obligations for foreign (non-African) investors. This however has not been well accepted by foreign investors as they see it as worrisome and insist that most African national
courts lack impartiality and independence from governments and lastly lack the
expertise in investment-related arbitration.
The vital question now is what then
becomes the faith of African states where they cannot provide adequate
protection to foreign investors due to the inconsistency in systems and
policies?
ISDS as a
threat to a state’s climate change policies and actions?
Environmental issues and ecosystem
protection such as the treatment of waste and chemicals, hazardous substances,
pollution, the protection of the atmosphere, and reduction of greenhouse gas
emissions have become a major concern in recent years and have become intertwined
with the concept of sustainable development[6]. As a
result, environment-related disputes have surged as countries have engaged in
energy transition and this has been reacted to by foreign investors through the
use of investor-state dispute settlement. Tons of scholars have also opined
that ISDS claims have an effect on climate-related domestic regulations. Take
for instance states who seek to switch to cleaner sources of energy but are
unwilling to do so due to the fact that it may lead to an ISDS claim worth
hundreds of millions of dollars and with this in mind, are discouraged from
taking any action.
Precisely on 6th of
April, 2022, the intergovernmental panel on climate change (IPCC) warned that
climate action is being jeopardized by trade agreements that give global
corporations the right to sue governments through clauses known as “investor-state dispute settlement” mechanisms[7].
The report went on to state that “A
large number of bilateral and multilateral agreements, including the 1994 Energy
Charter Treaty, include provisions for using a system of investor-state dispute
settlement (ISDS) designed to protect the interests of investors in energy
projects from national policies that could lead their assets to be stranded”.
As at the second quarter of 2022,
Spain was only second to Argentina and Venezuela as the most frequent
respondent state with 53 total investor-state dispute settlement (ISDS) cases
out of which 48 have a bearing on renewable energy projects. Similar claims
have also been brought against Italy, Canada, Bulgaria, the Czech Republic,
Romania, and Germany[8]. With
this in mind, what becomes the fate of states who are caught at a dilemma to
either please these investors or save their environment. It becomes a debate
between economic gains against environmental gains, which should be
prioritized. Moreover, the sheer fact that states are faced with this sort of
challenge goes on to undermine their sovereignty.
In Africa today where countries even
struggle to attract foreign direct investments, and for those fortunate to have
these investments are largely from energy multinationals. While Africa produces
no more than 3.8% of global greenhouse gas emissions, many have opined that the
continent can significantly achieve overall emission reduction targets. With
the oil powerhouses in Africa being Nigeria, Angola, Algeria, Libya and Gabon,
it is imperative to state that have vital roles to play for this to be achieved[9].
With the overwhelming dangers of fossil fuels being evident, the most crucial
question is whether these countries are willing to face the wrath of these
investors in order to make the environment better? With most parts of North
Africa shifting to alternatives with low carbon emissions, this may be
plausible.
Nigeria is Africa’s largest
producer of crude oil and gas with over 183 trillion cubic feet (TCF) of proven
gas reserves and more so with revenues from this sector at a staggering 9% of
the country’s gross domestic product (GDP), but it is fair to say that the country
has become over-dependent on this sector and a shift from fossil fuel may lead
to a huge economic downturn for one of Africa’s largest economies. However, all
of these have not discouraged the country from making a move to save the
environment through the help of laws like the Petroleum industry Act (PIA) and
other policies from the Federal Ministry of Environment through its National
policy on climate change. But how far can these changes go and how effective
can they be seeing that the major source of income for the economy is fueled by
the oil industry.
Now, with Nigeria already at the
receiving end of a number of ISDS claims from top energy corporations such as
Shell, it only gives us a glimpse of other suits that may quickly come after
where Nigeria decides to make new laws unfavorable to these corporations or
even amend existing ones. This indeed reinforces the opinion of many scholars
of the adverse control investors exercise over countries due to the existence
of several BITs/IIAs.
Conclusion
What then becomes the way out of
this dilemma for countries who have found themselves caught up in this?
A very necessary step Nigeria and
other countries who find themselves in this fix can take is to seek better
negotiation of terms of BITs they get into with foreign investors and eliminate
clauses that can tie them up. While the whole bargaining strength may seem to
be tilting to these investors, this may be the only option left.
Get in touch
For further information, please contact:
Managing Partner, FRED OGUNDU & CO, LP - Nigeria
Tel +234 813 873 0840
fredogunduco@gmail.com
[1] Prof. Dr. Christian Tietje & Associate Prof. Dr. Freya
Baetens; The Impact of Investor-State Dispute (ISDS) in the Transatlantic Trade
and Investment Partnership.
[2] American Petroleum Institute (API); US Benefits of Investor-State
Dispute Settlement (ISDS)
[3] Council on International Law and Policy Indianapolis; Investment
Arbitration and National Interest (edited by Csongor Istvan Nagy)
[4] Gabriel Bottini; Excessive Costs and Insufficient Recoverability
of Costs Awards.
[5] Talkmore Chidede; Investor-State Dispute Settlement in Africa and
the AfCTA Investment Protocol
[6] Ms. Magali Garlin Respaut; Environmental Issues in ISDS
[7] Intergovernmental Panel on Climate Change (IPCC) sixth report on
climate change
[8] Ms. Magali Garlin Respaut; Environmental Issues in ISDS
[9] African Development Bank Group; Africa in search of a just energy
transition
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