Human rights obligations in investor-state disputes

Jasmine Cundiff, Bristol Uni law student, explores the hurdles to keeping investors accountable

Foreign Direct Investment (FDI) activity began when European nationals acquired assets in foreign countries from the 17^th to early 20^th centuries, which is now viewed as a form of colonialism. The investor’s right to profit from their property could be compromised by expropriation and nationalisation, where the host state assumed control of the property for public benefit.

In light of this, a body of dispute resolution principles emerged, which allowed foreign investors to advocate their business interests in an independent forum. The intention was to adequately compensate investors where they could show the host state had unjustifiably interfered with their assets. International investment law protects the human rights of investors to varying extents, an issue that this article sheds light on.

Introducing the international investment arbitration system

Arbitration is an ad hoc system where both parties consent to have their dispute settled by a specific tribunal of arbitrators that are appointed on a case-by-case basis. The arbitrators give an enforceable and binding decision, which can only be challenged on limited grounds. The majority of investment arbitrations are based on  dispute settlement clauses in Bilateral Investment Treaties (BIT), an International Investment Agreement (IIA), where the parties (the host state and the home state of the investor) consent to dispute settlement through arbitration. BITs delineate the rights and obligations of the investor and the host state. Whilst the non-state investor is not a party to the BIT, the BIT standards apply to all investors who are nationals of the signing state.

International investment arbitration has traditionally set out how the state should treat the foreign investor.

The discussion of an investor’s human rights obligations is important as it furthers interests in corporate social responsibility by recognising that business interests of the investor may infringe upon the human rights of nationals of the host state. For example, in Argentina v Urbaser, Argentina argued that Urbaser violated the locals’ human right to water, a claim that did not succeed. It is important to seriously consider situations where business operations may have detrimentally affected people and analyse the barriers that confront human rights claims against investors.

Human rights claims do not have standing as independent claims before investment tribunals. The alternative is to make a counterclaim. This may play out where an investor brings a claim alleging state interference with their investment, and the state may respond with a counterclaim citing the investment infringed human rights.

Since the dispute settlement clause in the IIA sets the jurisdictional boundaries on what can be arbitrated, the tribunal must have competence to hear human rights claims. Regarding the substantive law, there are no mandatory human rights obligations addressing private investors on the international level, as international law only binds state signatories to international treaties. In considering jurisdictional and substantive issues, this article argues that the drafting of explicit human rights obligations into BITs is essential to give arbitration tribunals the tools to impose human rights obligations upon the investor.

 The first hurdle: having jurisdiction to hear the matter

A tribunal may not have competence to hear a matter where reasonable interpretation of the dispute settlement clause indicates the issue falls outside of its scope. The tribunal’s interpretation of the dispute settlement clause is crucial. International arbitration experts Kabir Duggal and Nicholas Diamond point out that a broad dispute settlement clause could allow ‘any legal dispute’ related to the investment, which may give the tribunal jurisdiction to assess claims beyond the substance of the BIT. Conversely, a narrow clause may leave the tribunal with limited choice but to only admit claims that directly invoke obligations arising out of the relevant investment agreement.

The tribunal in Gavazzi v Romania undertook a narrow interpretation of the dispute settlement clause, where it dismissed the counterclaim due to the lack of legal connection between the counterclaim and the investor’s obligations under the BIT. In a human rights context, it is difficult for the counterclaim to survive a narrow interpretation that requires it is tied to the obligations under the investment treaty, if the investment treaty does not address the investor’s human rights obligations.

Conversely, the tribunal in Urbaser v Argentina followed a broad interpretation and was the first to declare jurisdiction to hear a human rights-based counterclaim. There was a factual connection as both the principal claim and the counterclaim centred around the same investment, which was sufficient to admit the case. The tribunal went further, arguing that the BIT should be interpreted to complement international law, including human rights treaties.

The Urbaser decision paves the way for human rights-based counterclaims against the investor to be heard, however the issue will ultimately develop on a case-by-case basis due to the ad hoc nature of investment arbitration. The wording of the dispute settlement clause determines how much discretion the tribunal has to decide if it can consider a human-rights based counterclaim.

The second hurdle: finding human rights obligations in the law

As Duggal and Diamond point out, the tribunal would only have permission to consider a human rights-based counterclaim if the dispute settlement clause is broad enough. The success of the counterclaim depends on if the applicable law contains specific human rights obligations. This is often decided by a choice of law clause in investment agreements and may be a combination of host-state law and international law.

Having jurisdiction to hear claims grounded in international law, the tribunal in Urbaser departed from the status quo that investors are not directly responsible for human rights in international law. Their reasoning was that international human rights obligations may bind private corporations, as they enjoy rights under the BITs and are therefore subjects of international law. As subjects, they assume obligations under international law.

However, the human rights-based counterclaim failed as the tribunal could not identify a specific obligation in international law that addressed the investor. Whilst Urbaser presents an innovative argument to impose human rights obligations upon investors, it reinforces the fact that tribunals are tied to the content of ratified international treaties and cannot impose an obligation where there is nothing in the law that supports it.

Human rights obligations in BITs

 Obligations addressing investors could be drafted into investment agreements to fill the regulatory gap. If this were the case, it is unlikely that jurisdiction would be a problem, as the tribunal would have competence to assess obligations in the investment agreement. The nature of the obligation in the investment agreement may direct a tribunal to find the human rights obligations in the applicable law that bind investors. Finding a binding obligation may provide the legal basis for states to raise successful counterclaims.

New-generation BITs have captured much attention. They depart from the traditional focus on the investor’s commercial interests, by introducing international human rights standards into the conversation.

The 2018 Ecuadorian model BIT defines an investment as one that fully respects human rights. This BIT cleverly uses jurisdiction as a tool to support human rights protection rather than hinder it. An investment that violates human rights may not qualify as an investment to be protected under the investment treaty, so the tribunal may not have competence to assess the investor’s claim.

Under article 19 of the BIT, the investor is to respect ‘internationally recognised’ human rights and ‘national legislation’. Though it remains somewhat vague as to which specific human rights are binding, the provision clearly counters the status quo that human rights obligations in international law do not address private investors. Therefore, it gives the green light for states and tribunals to identify specific human rights obligations as binding in the applicable law.

Furthermore, the state is entitled to reparations if the investor breaches this obligation. Here, the provision attaches a legal consequence to non-compliance by awarding the host state reparations for the investor’s breach. This highlights that respecting human rights is not just wishful thinking, rather it is mandatory. This is an essential step in enforcing human rights obligations on the investor.

Yet it seems other BIT proposals don’t go as far. Article 12 of the 2015 Indian Model BIT leaves more discretion. Here, investors are to ‘voluntarily incorporate’ international standards of corporate social responsibility. Corporate social responsibility appears to be an aspiration rather than a must have. As the regulations that advance corporate social responsibility seem to lack the tools to ensure compliance, states may have more discretion to dilute corporate responsibility standards when negotiating investment agreements. Therefore, the standards of human rights protection may vary.

Conclusion

As shown in Urbaser, liberal tribunals clearly want to impose corporate social responsibility obligations upon the investor. Explicit human rights obligations in new-generation BITs give tribunals the tools to hold investors accountable. Without a mandatory and uniform standard on the human rights obligations of investors in investment law, any change may be incremental, as corporate social responsibility becomes a pressing issue when negotiating investment treaties.

 Jasmine Cundiff is a final-year law student at the University of Bristol. She is an avid legal writer and a student advisor at the University of Bristol law clinic.