Investor-State Dispute
Prevention Strategies
Selected Case Studies
June 2013
Investor-State Dispute
Prevention Strategies
Selected Case Studies
DISCLAIMER
This document is made possible by the support of the American people through the United States Agency for International
Development (USAID). Its contents are the sole responsibility of the author or authors and do not necessarily reflect the
views of USAID or the United States government.
Acknowledgements
This report was prepared for the Asia-Pacific Economic Cooperation (APEC) Investment
Experts’ Group as part of the APEC Technical Assistance and Training Facility (TATF)
program. The author of this report, Silvia Constain, would like to acknowledge the valuable
input provided by officials from Chile, Colombia, Costa Rica, Mexico and Peru, and
information made available by Canada and the United States.
APEC TATF is managed by USAID, with funding and strategic direction provided by the U.S.
State Department Bureau of East Asian and Pacific Affairs, Office of Economic Policy. For
further information, please contact Ms. Victoria Waite, Chief of Party, [email protected].
This publication was produced by Nathan Associates Inc. for review by the United States
Agency for International Development.
Contents
Abbreviations
Executive Summary
v
vii
1. Introduction
1
2. Context of International Investment Disputes
3
3. Case Studies
9
Chile
9
Colombia
13
Costa Rica
20
Mexico
23
Peru
31
4. Conclusion
35
References
39
IV
Illustrations
Figures
Figure 2-1. Foreign Direct Investment, Net
Figure 2-2. Foreign Direct Investment, Net Inflows (% of GDP)
Figure 2-3. IIAs Signed 1980–2011
Figure 2-4. Number of Renegotiated BITs, Annual and Cumulative (1998–2011)
Figure 2-5. Basis of Consent Invoked to Establish ICSID Jurisdiction in
Registered ICSID Cases
Figure 2-6. Known Investor-State Treaty-based Disputes, 1987-2011
Figure 2-7. Geographic and Sector Distribution of ICSID Cases
Figure 3-1. Foreign Investment in Chile by Sector and Total
Figure 3-2. IIAs Signed by Chile
Figure 3-3. Foreign Investment in Colombia
Figure 3-4. Investor-State Dispute Management System in Colombia
Figure 3-5. Foreign Direct Investment in Costa Rica
Figure 3-6. IIAs Signed by Costa Rica
Figure 3-7. Timeline of ICSID Cases in which Costa Rica is a Respondent
Figure 3-8. Foreign Investment in Mexico
Figure 3-9. IIAs Signed by Mexico
Figure 3-10. Timeline of ICSID Cases in which Mexico is a Respondent
Figure 3-11. Foreign Investment in Peru
Figure 3-12. Timeline of ICSID–UNCITRAL Cases in which Peru is a Respondent
Figure 3-13. Peru’s Investor-State Dispute Management System
3
4
5
6
6
7
8
10
11
13
16
20
20
21
23
24
28
31
32
33
Exhibits
Exhibit 3-1. New Language in Chile’s Agreements with Individual Investors
Exhibit 3-2. Outline of “Know Colombia’s Investment Commitments and
Obligations”
Exhibit 3-3. Outline of “Prevention and Management of Investor-State Disputes
under IIAs”
Exhibit 3-4. NAFTA Free Trade Commission Clarifications Related to
NAFTA Chapter 11, July 31, 2001
Exhibit 3-5. Outline: Mexico’s Guide to IIA Commitments
12
17
18
25
30
Abbreviations
AMPPI
APEC
ASEAN
BIT
FDI
FTA
HLGB
ICSID
IIA
IPA
IPPA
ISDS
MFN
NAFTA
OAS
RTA
UNCITRAL
UNCTAD
Agreement for the Mutual Promotion and Protection of Investments
Asia-Pacific Economic Cooperation
Association of Southeast Asian Nations
bilateral investment treaty
foreign direct investment
free trade agreement
High Level Government Body (Colombia)
International Centre for Settlement of Investment Disputes
International Investment Agreement
investment promotion agencies
Investment Promotion and Protection Agreement
investor-state dispute settlement
most-favored nation
North American Free Trade Agreement
Organization of American States
regional trading agreement
United Nations Commission on International Trade Law
United Nations Conference on Trade and Development
Executive Summary
Investment, both foreign and domestic, contributes to economic growth, prosperity, and
development. As part of their strategy to stimulate growth and employment following the global
economic downturn, governments continue to design and implement policies to promote new
investment. International investment agreements (IIAs) have been an instrument for investment
promotion since the first bilateral investment treaties (BITs) were signed in the late 1950s.
As transnational investment has increased, so too have the number of IIAs and the number of
disputes between investors and host states, and the use of international arbitration to resolve
them. As the number of treaties and the amount of international investment increases,
governments are more likely to face situations in which IIA investor-state dispute settlement
(ISDS) mechanisms are invoked.
Preventing investor-state disputes from arising, or from escalating to the point of formal dispute
settlement proceedings, is in the interest of both investors and the states that host them. An
investor’s primary occupation is to conduct its business, and a government’s is to encourage and
support growth- and job-creating investment; neither party has an interest in engaging in
disputes. Where such disputes lead to formal proceedings, they can be costly, lengthy, and their
outcomes unpredictable. Reputational risk can be suffered by the state and investor both, and
disputes can unnecessarily sever otherwise mutually beneficial relationships.
In light of these facts, several governments have designed and implemented policies and
practices to prevent and better manage such disputes. These policies may be formal laws or
regulations, or more ad hoc measures, including early detection systems, training for
government officials, design of institutional frameworks for optimal dispute prevention and
management, and monitoring systems.
The case studies in this handbook provide a broad overview of different policies and programs
implemented by governments as transnational investment, the number of IIAs, and the volume
of ISDS cases all increase. Some governments have created an institutional framework that can
better detect potential investment controversies, including by creating central investment contact
points and lead agencies or commissions to prevent and manage investment disputes. In some
states, the institution negotiating IIAs is also in charge of preventing and managing disputes and
in others the agencies are separate.
Several governments have clarified the roles of other agencies and government officials in
preventing international investment disputes. While the need to communicate international
commitments has traditionally been a concern for governments, the increase in investor-state
disputes, and ISDS cases in particular, suggests there may be benefit to IIA-specific training and
communication strategies at all levels and branches of government.
VIII
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
Agencies in charge of ISDS prevention publicize commitments among government officials
through seminars or workshops, or through web-based materials on obligations taken on by a
government in IIAs. Several governments have published pamphlets, handbooks, or
presentations on IIA commitments and their relevance to public policy and decision-making, as
well as promoted articles in specialized outlets (i.e., Mexico).
To spot difficulties that could lead to investment disputes and allow for timely correction,
governments are mapping and monitoring possible obstacles. They are also promoting an
improved environment for IIAs in general by including more precise language and more
specific exceptions in agreements to better reflect policy. The impact of such measures is
difficult to assess, but greater awareness and knowledge of IIA commitments at all levels of
government contributes to a better understanding by officials of IIA obligations as they adopt
measures and policies that may affect investors.
International investment agreements provide investors with increased security as they undertake
new ventures, which can encourage investment and thereby contribute to host state economic
activity and development, and promote predictable investment environments in host states. The
IIA web will continue to expand with new bilateral investment agreements and free trade
agreements with investment protection provisions, and states are likely to adopt new measures
to prevent and better manage controversies and disputes with investors, and to avoid ISDS
where possible. Having a strong and predictable ISDS management framework strengthens a
government’s capacity to provide a more effective response to investment disputes, and may
even serve as a deterrent to claims as investors assess the option of international investment
arbitration.
1. Introduction
As investment disputes and international investment agreements (IIAs) proliferate, it is
increasingly important that governments communicate the obligations contained in these
agreements, better manage relationships with investors, and establish mechanisms to identify
and resolve disputes at an early stage.
Facilitating trade and investment is a cornerstone of APEC’s work. This handbook supports the
recommendation in the Investment Facilitation Action Plan that economies put in place
measures “to ensure effective compliance with commitments under international investment
agreements.” It is intended to serve as a reference tool for policymakers on options to prevent
investor-state disputes based on a review of efforts undertaken and policies implemented by the
governments of Chile, Colombia, Costa Rica, Mexico, and Peru. It identifies formal as well as
ad hoc policies and practices that contribute to a better understanding of IIA commitments
within governments, and to the unnecessary escalation of investment disputes. Some measures
or actions implemented for purposes other than or in addition to preventing international
investment arbitration also contribute to reducing the likelihood of disputes.
Section 2 describes the context of international investment disputes in which these polices arise
and are implemented. Section 3 presents case studies of the experiences of five economies, and
the Section 4 concludes with a summary of measures and lessons learned.
2. Context of International
Investment Disputes
Foreign investment brings with it value added, jobs, technology, managerial know-how,
integration into global supply chains, taxes, exports and investment in capital formation, among
others. Because of the perceived and demonstrable benefits of foreign direct investment (FDI),
and the contribution of investment in general to development and growth, most governments
adopt policies to promote investment, both foreign and domestic, in their economies. Global
FDI flows slowed with the financial crisis, although they seem to be slowly recovering since
2009 (Figure 2-1).
Figure 2-1
Foreign Direct Investment, Net (US$ at current prices and current exchange rates in millions)
Source: UNCTAD, UNCTADSTAT (http://unctadstat.unctad.org/TableViewer/tableView.aspx?Reportid=88)
The five economies studied in this report have all taken big steps to promote foreign investment,
and the percentage of FDI to GDP in those economies has increased significantly since the early
1990s (see Figure 2-2).
Figure 2-2
Foreign Direct Investment, Net Inflows (% of GDP)
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
SOURCE: World Bank. Available at http://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS/countries?display=default
Costa Rica
Mexico
Peru
2011
Colombia
2010
Chile
2009
LAC (all income levels)
2008
-2.0%
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
0.0%
CONTEXT OF INTERNATIONAL INVESTMENT DISPUTES
International investment agreements (IIAs) promote FDI in many states. They include bilateral
investment treaties (BITs), regional agreements, free trade agreements (FTAs), economic
cooperation agreements, and other international agreements with investment chapters. While
some IIAs provide protection for investments once they are established in the host state, others
provide access and protection commitments. Most IIAs include consent to investor-state
arbitration in the event of disputes.
BITs make up the bulk of IIAs (2,833) although non-BIT IIAs (331) (UNCTAD 2012b) have
increased over the past two decades. Non-BIT agreements are increasingly popular because they
go beyond investment and are not limited to two-state relationships.
The evolution in international investment treaty making has resulted in an ever-growing
labyrinth of investment treaties, with BITs negotiated in different decades, ever-changing
models and negotiating outcomes, and new-generation more comprehensive agreements with
investment provisions (Figure 2-3). Therefore, governments are faced with an array of IIAs with
varying provisions and coverage.
Figure 2-3
IIAs Signed 1980–2011
SOURCE: UNCTAD.
The web of IIAs is dynamic and continues to grow. Governments negotiate new agreements—
BITs and other IIAs—and renegotiate existing agreements to reflect new negotiating positions
and objectives (see Figure 2-4). This at times may create parallel agreements with obligations
that are different depending on type, partner, and time of negotiation (e.g., when parties decide
that old agreements are not terminated with the development of new ones or negotiate a regional
agreement while keeping in force a BIT previously signed with that partner). This situation
requires host economies to make a special effort to ensure coherence between domestic
legislation and measures and the commitments made in IIAs.
5
6
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
Figure 2-4
Number of Renegotiated BITs, Annual and Cumulative (1998–2011)
SOURCE: UNCTAD.
The increase in investment flows and in investment agreements is the backdrop to an upsurge in
investors’ use of international arbitration provisions imbedded in IIAs and, in some cases, in
individual agreements signed by some states with individual investors or in their domestic
legislation. The International Centre for Settlement of Investment Disputes (ICSID) reports that
consent to establish ICSID jurisdiction in cases under the ICSID Convention and Additional
Facility (AF) Rules has a basis in three forms: an investment contract between an investor and
the host-state (20 percent of cases), the investment law of the host-state (6 percent), or an
international investment agreement (74 percent) (ICSID 2013, 10) (see Figure 2-5).
Figure 2-5
Basis of Consent Invoked to Establish ICSID Jurisdiction in Registered ICSID Cases
The first case registered before ICSID was in 1974. For the next 20 years, investor-state dispute
settlement (ISDS) was rare. This changed in the mid-1990s. Between 1987 and 1999 the
average number of known ISDS cases per year was five, between 2000 and 2011 the yearly
CONTEXT OF INTERNATIONAL INVESTMENT DISPUTES
average was 34. The total number of cases is likely to be even higher because not all arbitration
institutions publish the ISDS cases in which they are involved.
Most of the 279 ISDS treaty-based cases are registered under the ICSID Convention and AF
Rules, while 126 follow UNCITRAL rules, which are sometimes administered by ICSID
(UNCTAD 2012a). While ICSID administers the bulk of all known cases, other arbitration
institutions or venues have also been used. These include the Stockholm Chamber of
Commerce, the International Chamber of Commerce, the Cairo Regional Centre for
International Commercial Arbitration, or the London Court of International Arbitration.
Figure 2-6
Known Investor-State Treaty-based Disputes, 1987-2011
SOURCE: UNCTAD.
At least 89 economies have been respondents in investor-state arbitration, most of them
developing economies (55), although claims have also been filed against developed economies
(18) and economies in transition (19) (UNCTAD 2012a). A review of geographic and sector
distribution of past ISDS cases suggests that there are certain regions and sectors where
investor-state arbitration is more prevalent (Figure 2-7).
7
8
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
Figure 2-7
Geographic and Sector Distribution of ICSID Cases
The rise in ISDS cases has generated interest in some governments to identify and implement
policies and practices that can diminish the incidence of investor-state disputes generally, and
exposure to ISDS in particular. The following section explores what five economies have done
in this regard.
3. Case Studies
This section describes the experience of Chile, Colombia, Costa Rica, Mexico, and Peru with
ISDS prevention. Each economy presents different situations: Colombia has never had an ISDS
case; Costa Rica, Mexico, and Peru are all facing investor claims at different stages; and Chile´s
last outstanding case recently concluded. But all have made efforts to prevent and better manage
investor-state arbitration.
CHILE
Foreign investment in Chile has grown considerably and is an important engine of its economy.
Chile reached a record level of FDI in 2012, although over a quarter of all FDI since 1974 has
gone to a single sector, mining (27.9 percent), followed by the electricity, gas and water supply
sector (15.1 percent) (Figure 3-1). Chile has also signed 49 BITs, of which 36 are in force, as
well as a number of free trade and economic association agreements (Figure 3-2).
Chile has been a respondent in three arbitration cases (see table below), which have lasted
between 5 and 14 years (although the duration of ARB/98/2 is not the norm). Chile´s one active
case concluded in December 2012.
Case
No.
Claimant
ARB/04/7
Sociedad Anónima Eduardo Vieira
Concluded
27-Feb-04
10-Dec-10
Fisheries company
ARB/01/7
MTD Equity Sdn. Bhd. and MTD
Chile S.A.
Concluded
6-Aug-01
21-Mar-07
Construction of
residential and
commercial complex
ARB/98/2
Víctor Pey Casado and President
Allende Foundation
Concluded
20-Apr-98
18-Dec-12
Publishing enterprise
Status
Date
Registered
Final
Decision
Subject Matter
The Committee on Foreign Investments in Chile manages investor-state disputes and
coordinates agencies involved in a dispute. (The coordination function was briefly transferred to
the Ministry of Economy, but then returned to the committee several years ago.) Outside
counsel is hired to support the government in its defense in ISDS cases.
Chile’s approach to ISDS prevention is ad hoc, although committee officials have made
presentations on a regional level on the committee and its role, including aspects of IIA
provisions and protections and Chile’s international responsibility. Sector-specific ministries
and ProChile promote projects of their interest to domestic and foreign investors and the
committee may promote sectors in a generic fashion.
Figure 3-1
Foreign Investment in Chile by Sector and Total
Figure 3-2
IIAs Signed by Chile
12
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
While Chile does not have a formal investor-state dispute prevention program or mechanism, it
does take steps to make its investment climate and foreign investment framework more
transparent and accountable and thereby reduce the likelihood of disputes. In general, investors
report that concerns or problems are handled directly by a sector agency and usually resolved at
that level. When investors reach out to Chile’s embassy in the home state of the investment, the
concern is always channeled back to the Committee of Foreign Investments. The committee
reports that investor requests for assistance with disputes are very rare.
Chile’s strong and predictable legal environment also seems to provide investors with an
alternative to ISDS. For example, an investor from one of Chile’s BIT partners discussed a
dispute with the Committee on Foreign Investment. Although the discussion did not result in an
agreement, the investor (who has a number of other investments in Chile) chose to take the case
before the local courts instead of pursuing the ISDS option.
Like other economies, Chile has also taken steps to refine its IIA negotiating practices and the
text of the legal instruments it signs to both ensure a balance between investment protection and
the right to regulate, and to better guide investors’ expectations.
To avoid unintended interpretations of or ambiguity in investment contracts, Chile has
introduced new language into agreements with individual investors, making clear that an
approval from the Committee on Foreign Investment to transfer capital into Chile does not
obviate the need to secure project-specific approvals and permits as required under applicable
laws and regulations. See Exhibit 3-1.
Exhibit 3-1
New Language in Chile’s Agreements with Individual Investors
Foreign Investment Contract between the State of Chile and _______
FOURTH: Foreign investor __________ and the State of Chile establish that the authorization referred to
in the present instrument does not in any way constitute an authorization for the initiation or execution of
the economic activity that the investor intends to undertake in the country. Based on the aforementioned,
the foreign investor declares that all national legislation and regulations in force and all national and/or
sector policies are applicable during the beginning and execution of the economic activity, and expressly
recognizes that the authorization contained in the present contract is without prejudice to any others that,
in conformity with such legislation and regulations, are required by competent authorities.
FIFTH: Hereby, the foreign investor declares to have knowledge of and integrally respect the national
legislation and national and/or sector policies that may be applicable in the development of his/her
activities. For its part, the State of Chile declares that the authorization to transfer capitals referred to in
the present Contract and the rights that may be established for the Foreign Investor in Decree Law 600 do
not in any way prejudge the origin of the funds or the current or future legal, economic or technical viability
of the economic activities that the Foreign Investor will try to develop in Chile, a situation which the
Foreign Investor declares to know and accept.
Note: Informal translation..
To separate regulatory and investment promotion functions and better manage investors’
expectations, the committee no longer promotes foreign investment projects. It can undertake
13
CASE STUDIES
generic promotion and has projects of interest for sector ministries listed on its website but does
not get involved in project-specific investment promotion.
COLOMBIA
Colombia has promoted foreign investment in its economy for several decades. PROEXPORT
is in charge of trade and investment promotion, and the promotion of foreign investment has
been mentioned in every national development plan since the late 1990s. Foreign investment
flows have increased significantly over the past two decades, although 45 percent is
concentrated in two sectors: oil (25 percent) and mining and quarrying (20 percent). Nineteen
percent of FDI into Colombia goes to the manufacturing sector.
Figure 3-3
Foreign Investment in Colombia
While Colombia started IIA negotiations in the 1990s, a Constitutional Court ruling regarding a
provision in Colombia’s Constitution allowing for expropriation without compensation led to a
de-facto moratorium until a constitutional amendment was approved. Since then, Colombia has
negotiated a number of IIAs and has 10 in force with 12 countries (see table below).
Agreement
Entry into Force
Free trade agreement with the United States (Chapter 10)
2012
Bilateral investment treaty with China
2012
Bilateral investment treaty with India
2012
Free trade agreement with Canada (Chapter 8)
2011
North Triangle (Guatemala, El Salvador y Honduras) FTA (Chapter 12)
2010
Free trade agreement with Chile (Chapter 9)
2009
Bilateral investment treaty with Switzerland
2009
Bilateral investment treaty with Spain
2007
Bilateral investment treaty with Peru
2003
FTA G2 with México, Chapter XVII
1995
14
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
Colombia has signed free trade agreements with the European Union and members of the
European Free Trade Association, 1 but these do not have investor-state provisions. As it
increases the number of its IIA partners, its exposure to ISDS increases as well. Colombia has
never been a respondent in an ISDS case, but its strategy for preventing and managing investorstate disputes includes having an efficient and reliable system if and when it does face a dispute.
The strategy is set out in CONPES 3684 2 of 2010 (a national policy document adopted by the
National Council of Social and Economic Policy) and Decree 1859 of 2012. CONPES 3684
says:
It is necessary to strengthen the Colombian State’s strategy to guarantee
compliance with the international commitments undertaken in IIAs, and for the
timely prevention and appropriate attention to disputes that may arise between
foreign investors and the Colombian State in the framework of these agreements.
(page 2).
The government’s stated objective is to create conditions that will best take advantage of an
IIAs it is a party to, and the first step, according to CONPES 3684, is to take steps to “reduce
the risks of non-compliance with the international commitments entered into in the IIAs” (page
4). The government identified the challenge of the state in the face of international investment
disputes based on IIAs as the central problem:
The country is not prepared to prevent and promptly and efficiently solve disputes
that may arise from IIA commitments. The current institutional framework cannot
effectively prevent and manage this type of dispute. The novelty and complexity of
IIAs, their requirements in terms of technical knowledge and the lack of experience
given that it has never been involved in arbitration under this mechanism, make the
implementation of the required adjustments urgent. (page 13).
The government recognized that public employees’ lack of experience with IIA commitments
could increase the likelihood of breaching an IIA commitment and lead to investment
arbitration. It also noted that the lack of a clear lead agency could impede efficient and effective
defense of the state, and that confusion regarding funds and administrative procedures for
managing a dispute could impede adequate response to a dispute with a foreign investor under
an IIA.
The CONPES sets out the following objectives:
•
Strengthen the state’s capacity to prevent and manage possible disputes arising from
IIAs to which Colombia is party.
•
Centralize decisions on defense and ISDS prevention and management strategy and
ensure opportune and efficient inter-institutional coordination.
•
Establish a mechanism to ensure that resources necessary to defend the state are readily
and easily accessible.
1 Members of the European Free Trade Association are Iceland, Liechtenstein, Norway, and
Switzerland.
2 CONPES 3684 of October 19, 2010. Available at
https://www.dnp.gov.co/LinkClick.aspx?fileticket=3K9mgifm1wo%3D&tabid=1063 Accessed February
2013
CASE STUDIES
•
15
Establish administrative procedures that guarantee appropriate prevention and
management of investment disputes. These include training government officials that
may affect IIA commitments, ensuring that they understand the possible consequences
of their decisions in relation to Colombia’s IIA commitments, adopting a law to secure
the confidentiality of documents in investment arbitration, and setting objective and
transparent criteria for the selection of outside legal counsel.
The CONPES recommends an action plan that includes the following:
•
Creating a high-level commission or group to guide investment disputes and to define
investment dispute prevention and management strategies.
•
Designating the Ministry of Trade, Industry and Tourism as the lead agency of an intergovernmental investment dispute defense group.
•
Allocating funds for ISDS proceedings and legal counsel.
•
Promoting a law that provides for confidentiality of documents in ISDS proceedings.
•
Defining procedures so that the agency that has triggered the dispute (involved agency)
bears the costs of the process and any amounts awarded to the claimant.
•
Delivering training programs and workshops at national and subnational levels on IIA
provisions to reduce risk of agencies or officials breaching IIA commitments.
The government issued Decree 1859 in September 2012 to implement CONPES 3684. It created
a high-level government body (HLGB) to advise and make recommendations to prevent
investment disputes and diligently manage them when they arise. The members of the HLGB
include the Minister of Justice and Law, the Minister of Finance, the Minister of Foreign
Affairs, the Minister of Trade, Industry, and Tourism, the Legal Secretary of the Office of the
President, and two external advisors (both of whom also serve as members of the Board of
Directors of the National Agency of Legal Defense of the State). The HLGB has the following
functions with regard to investor-state disputes:
1. To coordinate, direct, and develop recommendations for preventing and managing
disputes and defending national interests.
2. To recommend the application of dispute resolution mechanisms other than arbitration.
3. To recommend measures to prevent and resolve international investment disputes.
4. To recommend measures to guarantee a timely and continuous defense of the state in
any international investment disputes.
5. To make recommendations to hire outside counsel.
6. To recommend priority sectors and specific entities for actions in ISDS prevention.
The Inter-institutional Support Group is to support the HLGB and the Ministry of Trade,
Industry and Tourism in the defense of the state in ISDS proceedings. It consists of designated
officials from each HLGB agency, as well as a representative from the involved agency (agency
that took the measure that originated the dispute), and a representative from any other agency
the HLGB considers pertinent or relevant to the defense of the state. The group coordinator is
the Director of Foreign Investment and Services of the Ministry of Trade, Industry and Tourism,
who also heads all IIA negotiations.
16
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
While preparing the strategy set out above, the government studied other experiences where the
ISDS lead agency and the IIA negotiating lead agency are different, but decided to concentrate
both functions in the Ministry of Trade, Industry and Tourism. The ministry is the lead agency
and sole government voice in the defense of the state in ISDS proceedings and acts as the
Technical Secretary to the HLGB, with the support of the National Agency of Legal Defense of
the State. While the involved agency will be present in relevant HLGB meetings and has a
voice, it does not vote on decisions. Additionally, the General Prosecutor may be invited to
HLGB meetings.
The HLGB defines criteria and rules for conciliation or direct agreements with investors, and
may recommend the adoption or rejection of a conciliation agreement to the Conciliation
Committee. The Ministry of Trade, Industry and Tourism, the National Agency of Legal
Defense of the State, and the involved agency are in charge of facilitating and negotiating any
out-of-court settlement with a foreign investor. The involved agency will be responsible for any
payment agreed to in conciliation.
Figure 3-4
Investor-State Dispute Management System in Colombia
The government has delivered training on Colombia’s IIA commitments in dozens of national
workshops and published Know Colombia’s Investment Commitments and Obligations in
cooperation with the Inter-American Development Bank in 2009, and Prevention and
Management of Investor-State Disputes under IIAs in cooperation with the European Union in
2012 (see Exhibits 3-2 and 3-3). The first guide presents Colombia’s obligations in IIAs, the
second advises state agencies on the prevention of IIA-based investment disputes. In the
introduction to Prevention and Management the Minister of Trade, Industry and Tourism says:
CASE STUDIES
17
This handbook establishes a guide for actions public servants should take to provide
a responsible and appropriate management of foreign investment, thus actively
integrating themselves into the strategy. The objective is to achieve coordinated
action by all State agencies to promote early alerts that can help prevent disputes or
that facilitate an appropriate and timely defense of the Colombian State before
international arbitration tribunals.
Exhibit 3-2
Outline of “Know Colombia’s Investment Commitments and Obligations”
Importance of Foreign Investment for Colombia
•
Why is foreign investment important for Colombia?
•
How do you attract foreign investment?
•
What is an international investment agreement?
•
What do IIAs have to do with attracting foreign investment?
•
What do IIAs have to do with government agencies and entities?
•
What do government agencies or entities need to keep in mind regarding foreign investment?
Fundamental aspects of foreign investment and commitments acquired by Colombia.
•
What is considered foreign investment in Colombia?
•
What types of foreign investment are there?
•
Who is considered a foreign investor?
•
What principles guide investment?
What commitments are included in an IIA?
•
Investment promotion
•
Standard of treatment (national treatment, MFN, minimum level of treatment)
•
Protection of foreign investment (expropriation, compensation for losses)
What other rights to foreign investors have?
•
Free transfers
What obligations do foreign investors have?
How are disputes for IIA breaches resolved?
Note: Full document at https://www.mincomercio.gov.co/publicaciones.php?id=16563&dPrint=1. Accessed February 2013.
The Directorate of Foreign Investment and Services, which is under the Ministry of Trade,
Industry and Tourism, is the government’s contact point for consultations and questions
regarding investment disputes. The directorate has organized dozens of training sessions and
partnered with local and regional governments, chambers of commerce, and associations to
organize seminars on the prevention of international investment disputes and arbitration. The
Ministry takes advantage of larger gatherings to make these presentations to broader crowds and
recently began reaching out to high-level officials and general counsels.
The Ministry partnered with the Department of Economic Development of Bogota to launch the
city’s strategy to strengthen the institutional capacity in foreign investment and international
contracts in the framework of the free trade agreements signed by Colombia. 3 The Office of the
Mayor sees this as a first step toward an investment dispute risk mapping exercise in city
agencies, from which specific agencies will identify recommendations. The objective for the
Mayor of Bogota is to create the skill sets to anticipate possible investment controversies. This
3 See Bogota Secretary General Circular No. 109 of 2012 on the Second Training Session of Foreign
Investment and International Contracts in the Framework of Colombia’s FTAs. Available at
http://www.alcaldiabogota.gov.co/sisjur/normas/Norma1.jsp?i=50215
18
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
project is a regional pilot, and the ministry expects to use the lessons learned to run similar
proejcts at the municipal and regional levels.
Exhibit 3-3
Outline of “Prevention and Management of Investor-State Disputes under IIAs”
Presentation (by the Minister of Trade, Industry and Tourism)
Introduction
1.
State responsibility under international investment agreements (IIAs)
1.1. Scope of IIAs
1.2. Who can affect the Colombian State’s international responsibility?
1.3. What role does Colombian law play in the international responsibility of the State?
1.4. What are the consequences of a decision that finds the State liable and therefore responsible?
1.5. How can State agencies affect State responsibility in the face of commitments in IIAs?
1.6. What should government agencies do to avoid responsibility before IIAs?
2.
Preventing international investment disputes
2.1. What is international investment dispute prevention and what does it entail?
2.2. Who implements the international investment dispute prevention strategy in Colombia?
2.3. How is the international investment dispute prevention strategy in Colombia implemented?
2.4. What can government agencies do to form part of an ISDS prevention policy?
3.
Investor-State dispute settlement mechanisms in IIAs
4.
Managing international investment disputes
4.1. What is management of international investment disputes and what does it entail?
4.2. Who implements the international investment disputes management system?
4.3. How is the international investment dispute management strategy in Colombia implemented?
4.4. What can government agencies do to form part of an ISDS management policy?
5. Conclusion: What can government agencies to do appropriately integrate into the investor-State
dispute prevention and management system?
Note: Full document at http://www.asistenciatecnicaalcomercio.gov.co/noticia.php?id=303. Accessed February 2013.
Training workshops use the publications mentioned above; presentations by experts on the
importance of foreign investment, international investment agreements, and standards and
dispute settlement provisions in agreements; and simulations of situations that demonstrate the
link between IIA commitments and domestic policy. During simulations, participants are
divided into investors and state representatives, and are tasked first with finding a negotiated
outcome, and then represent the same case before an international investment arbitration panel.
In parallel with the policies and actions described above, Colombia periodically updates its
model BIT and IIA investment chapter. Examples of new language include its agreement with
Japan, which according to UNCTAD, “…offers examples for increasingly refined and
innovative treaty language. Amongst others, the Colombia-Japan BIT contains balanced
protective standards, elaborate procedural mechanisms especially with respect to ISDS and
carefully crafted policy flexibility clauses (e.g. exceptions).” (UNCTAD 2012c, 6).
Another tool that helps with early detection of investment difficulties, and therefore to dispute
prevention, is SIFAI or the Investment Attraction Facilitation System. SIFAI is a public-private
mechanism that identifies and centralizes information on opportunities to improve the
investment climate through reform of laws, regulations, or practices that could lead to
•
The cancellation or suspension of a decision to invest;
•
A modification in the characteristics of an investment, such as a reduction in the sum or
in the number of jobs it would create;
CASE STUDIES
•
The reduction of liquidation of an investment;
•
A delay in the investment;
•
An increase in the cost of an investment.
19
SIFAI’s objectives are to
•
Identify, centralize, and prioritize opportunities to improve Colombia’s investment
climate, with the support of a central database and IT platform.
•
Consolidate institutional memory of the investment climate and actions to improve it.
•
Discuss, analyze, and recommend measures that will facilitate new investment.
•
Promote, implement, and monitor initiatives, through a mixed technical committee, in
the framework of the National Competitive System.
The technical committee includes the High Presidential Advisor for Public and Private
Management; the Minister of Trade, Industry and Tourism; the President of Proexport,
Colombia’s trade and investment promotion agency; and the President of the Private Council for
Competitiveness. The committee promotes, coordinates, and monitors progress on reforms.
Once its studies a situation and approves its entry into the database, it presents proposals for
improvement and coordinates discussion and implementation with agencies. Information
collected for each issue includes the name and description of the difficulty, amount of the
investment and job creation opportunities, sector, determination of whether the measure has a
local, regional or national impact, agency involved in the measure, and recommendations for its
elimination or reform.
As the committee’s technical secretariat, Proexport identifies, analyzes, and prioritizes
opportunities to improve the investment climate and presents them for further study by the
committee. It also drafts proposals for action and reform. Proexport’s close relationship with
foreign investors means it is exceptionally well placed to identify difficulties faced by investors.
Proexport also has strong ties with regional and municipal investment promotion agencies,
which are also important sources of information on investment difficulties. While it is not
technically part of the system of dispute prevention, the mechanism allows the government to
identify difficulties at an early stage and provides a high-level setting and process to address
them.
Like SIFAI, Proexport does not promote projects or investments, but does work to improve the
general investment climate and support investors with information and logistics in their search
for investment opportunities.
20
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
COSTA RICA
FDI has increased in Costa Rica significantly since 2000. Forty-two percent of these flows have
gone into the manufacturing sector, especially to activities under special trade regimes (WTO
2007, x). The government’s foreign investment promotion strategy has shown positive results.
Figure 3-5
Foreign Direct Investment in Costa Rica
The Ministry of Foreign Trade (COMEX) is in charge of trade and investment policy in Costa
Rica. Costa Rica has signed BITs with 14 countries and FTAs with 9 partners. Costa Rica’s first
case was in 1996, and it did not have any new cases until more than 10 years later (Figure 3-6).
Since 2007 the government has had at least one if not several ongoing cases.
Figure 3-6
IIAs Signed by Costa Rica
CASE STUDIES
21
Costa Rica has been a respondent in six ICSID cases: the parties discontinued one case, four
concluded and one is ongoing.
Figure 3-7
Timeline of ICSID Cases in which Costa Rica is a Respondent
The government decided to create an institutional framework for preventing and managing IIA
disputes based on the ad hoc functioning at the time. It issued the “Regulation for the
Prevention and Management of International Trade and Investment Disputes” through Decree
N° 35452-MP-COMEX in August 2009. The decree indicates that the regulation is justified for
a number of reasons justifications:
•
The number of IIAs to which Costa Rica is a party.
•
Preventing and managing ISDSs is in the public interest given their potential impact on
trade and investment and on Costa Rica’s reputation for abiding by its commitments in
international agreements.
•
ISDS cases may involve any public sector agency, and it is therefore necessary that all
agencies involved cooperate and share information pertinent to an investor-state dispute
to ensure the best possible defense of the national interests.
•
A normative framework to address investment disputes is necessary to ensure the best
interagency coordination.
•
The Ministry of Foreign Trade implements, administers, and monitors international
trade and investment agreements and leads defense proceedings in ISDS cases; relevant
public entities and agencies must cooperate with and support the ministry as necessary
in these tasks.
The decree created the Inter-institutional Commission (CISC) for the settlement of international
trade and investment disputes. Members include multiple ministries (foreign trade, foreign
22
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
affairs, finance, justice) and any agency the commission considers necessary for the defense of
the state. The Ministry of the Office of the President is the coordinator. The commission
coordinates and monitors investment and trade disputes against the state; makes decisions for
ISDS proceedings; provides the technical secretariat with instructions to manage, monitor, and
prevent disputes; requests support from other agencies; and hires outside counsel as necessary.
The commission meets at least once a year if there are no cases against Costa Rica, and at least
once every three months if there is a case.
The Director for the Implementation of International Trade Agreements (Ministry of Foreign
Trade) is the Technical Secretariat. The secretariat provides the commission with technical
advice on international trade and investment disputes, prepares documentation, follows the
commission’s instructions on cases or dispute prevention, and manages day-to-day activities in
ongoing trade and investment disputes.
The Ministry of Foreign Trade reports that the system works well. In general, investors with
concerns reach out to the ministry when problems arise with sector ministries or other entities.
The Minister can convene the commission and call the relevant sector minister to join and seek
resolution of the potential dispute.
The Ministry of Trade has carried out some training with officials on IIA provisions and their
impact on foreign investors, which have enhanced the understanding and knowledge of the
commitments made by Costa Rica in its international investment agreements.
CASE STUDIES
23
MEXICO
Foreign Investment in Mexico has been an important source of resources, although flows tend to
be irregular. Between 1999 and 2011 they were concentrated in manufacturing (44 percent) and
the financial and insurance sector (21 percent).
Figure 3-8
Foreign Investment in Mexico
Mexico has signed 28 BITs and has 12 free trade agreements with 44 countries. The Secretary
of Economy negotiates IIAs, renegotiates old agreements to update or clarify language that may
have been agreed to decades ago, and, where necessary, works with partners to clarify the scope
of commitments included in an agreement. An example of this is the NAFTA Parties 2001 “Free
Trade Commission Clarifications Related to NAFTA Chapter 11.” The clarification adopts
interpretations of Chapter 11 (Investment) to “clarify and reaffirm the meaning of certain of its
provisions” regarding access to documents and Minimum Standard of Treatment (Exhibit 3-4).
Clarity with regard to commitments provides solid ground for ISDS prevention. Many IIAs
explicitly provide for interpretations of provisions and, although this is not a frequent practice,
give governments a means to clarify commitments even after an agreement has entered into
force, and avoids ambiguity for investors as they decide on the applicability of IIA provisions to
their specific circumstances.
Mexico faced its first ISDS case in 1997, and has been a respondent in 15 cases before the
ICSID since then. Thirteen cases have been concluded, and the average case for Mexico has
lasted less than four years. Cases have spanned a range of sectors including telecommunication
services, debt instruments, manufacturing and waste disposal services (see table below).
24
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
Figure 3-9
IIAs Signed by Mexico
Budgeting and resource allocation can be a challenge for governments when designing a
strategy to address investor-state dispute settlement. The lack of predictability in the number of
cases, their complexity, duration and number of involved agencies explains in part why states
have prevention policies. Mexico is an example of this challenge. Figure 3-10 shows the number
of active ICSID ISDS cases in any given month in Mexico since the filing of the first case.
While there were seven active cases at the end of 2005, there was only one for almost two years
from mid-2010 to mid-2011.
CASE STUDIES
25
Exhibit 3-4
NAFTA Free Trade Commission Clarifications Related to NAFTA Chapter 11, July 31, 2001
Having reviewed the operation of proceedings conducted under Chapter Eleven of the North American
Free Trade Agreement, the Free Trade Commission hereby adopts the following interpretations of
Chapter Eleven in order to clarify and reaffirm the meaning of certain of its provisions:
A. Access to documents
1. Nothing in the NAFTA imposes a general duty of confidentiality on the disputing parties to a Chapter
Eleven arbitration, and, subject to the application of Article 1137(4), nothing in the NAFTA precludes the
Parties from providing public access to documents submitted to, or issued by, a Chapter Eleven tribunal.
2. In the application of the foregoing:
(a) In accordance with Article 1120(2), the NAFTA Parties agree that nothing in the relevant arbitral rules
imposes a general duty of confidentiality or precludes the Parties from providing public access to
documents submitted to, or issued by, Chapter Eleven tribunals, apart from the limited specific exceptions
set forth expressly in those rules.
(b) Each Party agrees to make available to the public in a timely manner all documents submitted to, or
issued by, a Chapter Eleven tribunal, subject to redaction of:
(i) confidential business information;
(ii) information which is privileged or otherwise protected from disclosure under the Party's domestic law;
and
(iii) information which the Party must withhold pursuant to the relevant arbitral rules, as applied.
c) The Parties reaffirm that disputing parties may disclose to other persons in connection with the arbitral
proceedings such unredacted documents as they consider necessary for the preparation of their cases,
but they shall ensure that those persons protect the confidential information in such documents.
(d) The Parties further reaffirm that the Governments of Canada, the United Mexican States and the
United States of America may share with officials of their respective federal, state or provincial
governments all relevant documents in the course of dispute settlement under Chapter Eleven of NAFTA,
including confidential information.
3. The Parties confirm that nothing in this interpretation shall be construed to require any Party to furnish
or allow access to information that it may withhold in accordance with Articles 2102 or 2105.
B. Minimum Standard of Treatment in Accordance with International Law
1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as
the minimum standard of treatment to be afforded to investments of investors of another Party.
2. The concepts of "fair and equitable treatment" and "full protection and security" do not require
treatment in addition to or beyond that which is required by the customary international law minimum
standard of treatment of aliens.
3. A determination that there has been a breach of another provision of the NAFTA, or of a separate
international agreement, does not establish that there has been a breach of Article 1105(1).
Closing Provision
The adoption by the Free Trade Commission of this or any future interpretation shall not be construed as
indicating an absence of agreement among the NAFTA Parties about other matters of interpretation of the
26
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
Agreement.
The Secretary of Economy’s Legal Adviser for Negotiations General Directorate manages
investment disputes, while the General Directorate for Negotiations designs and implements
policy to prevent disputes. To raise awareness of commitments, the government—with support
from the Organization of American States (OAS)—designed and implemented the Investment
Promotion and Prevention of International Disputes project. 4 The project disseminates the
national and international rules adopted by Mexico to promote and protect investments,
provides training on Mexico’s IIA commitments; creates channels of communication between
and among relevant agencies and the Secretary of Economy (the contact point for ISDS
consultation); and produces educational material on the subject matter. To support project
objectives the Secretary of Economy has delivered training in many central government
agencies, regions, and municipalities on IIA commitments and their impact on day-to-day
4 http://www.economia.gob.mx/comunidad-negocios/comercio-exterior/tlc-acuerdos/acuerdosinternacionales-de-inversion/promocion-de-las-inversiones-y-prevencion-de-controversias-internacionales
accessed February 2013
CASE STUDIES
27
28
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
Figure 3-10
Timeline of ICSID Cases in which Mexico is a Respondent
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Telefónica S.A.
Abengoa, S.A. y COFIDES, S.A.
Cargill, Incorporated
Bayview Irrigation District and others
Archer Daniels Midland Company and Tate & Lyle
Ingredients Americas, Inc.
Talsud, S.A.
Gemplus, S.A., SLP, S.A. and Gemplus Industrial,
S.A. de C.V.
Corn Products International, Inc.
Fireman's Fund Insurance Company
Waste Management, Inc.
Técnicas Medioambientales Tecmed, S.A.
Marvin Roy Feldman Karpa
Waste Management, Inc.
Robert Azinian and others
Metalclad Corporation
CASE STUDIES
29
activities and policy decisions. 5 The Secretary and the National Institute for Federalism and
Municipal Development, (INAFED) have also explained how the project is partly a response to
the fact that regional and municipal governments are entering into concessions and other types
of contracts with foreign investors. Training helps ensure that local authorities provide legal
certainty and predictability for these investments and are aware tools that are available to them
to avoid international investment disputes. The Secretary of Economy is exploring other
potential partners, such as regional development boards and universities, to identify
opportunities for broader dissemination of its message.
Also with the support of the OAS, Mexico disseminated “The Promotion of Foreign Investment
and the Prevention of International Disputes, a pamphlet that succinctly answers the following
questions:
•
•
•
•
•
•
How can I help promote and protect investments?
What is the legal framework for foreign investment in Mexico?
What can cause an international dispute between a foreign investor and the Mexican
State?
How are disputes resolved?
What is the role of Mexican authorities in attracting investment?
How important is foreign investment in Mexico?
The Mexican authorities are now preparing a handbook for public servants on IIA obligations
and their impact on public policy (see Exhibit 3-5).
The Secretary of Economy’s website on investment promotion and prevention of international
disputes provides information on IIA commitments, investment-related news, and information
to generate interest and identify the site as a resource for consultation. It is also in establishing a
network of state officials involved in foreign investment to share information and discuss
investment and investment disputes.
The investment promotion agency, ProMexico, is also important in investment attraction and
aftercare. It provides investors with accurate and timely information on Mexico’s legal
framework, supports an investor’s “soft landing,” maintains constant communication with
investors, and is often the first resource for investor wishing to express a concern. ProMexico is
often a mediator with an agency or institution that takes or threatens to take a measure that
could affect an investor. While not formally in the early detection and prevention roadmap,
ProMexico’s relationship with investors means it well placed to detect possible disputes and
alert authorities. ProMexico also tries to resolve conflicts with foreign investors before they
become full blown disputes and promotes alternative routes to ISDS that may result in a
continued relationship with the investor. If its efforts fail and the case goes to arbitration, then
communication with the investor ceases, and the office that manages investment disputes in the
Ministry of Economy takes over.
Mexico has no legal or regulatory provisions to support its international dispute prevention
policy, but has fostered understanding of IIA commitments at all levels of government,
providing government officials and agencies with the tools to analyze the impact of planned
5
Mexico has 31 states (32 with Mexico City), and over 2,400 municipalities.
30
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
actions and policies on IIA commitments. Although it is difficult to measure the impact of the
knowledge base, it probably prevents the institution of measures that could be later challenged.
Exhibit 3-5
Outline: Mexico’s Guide to IIA Commitments
Introduction
The importance of understanding investment commitments and obligations
Fundamental aspects of foreign investment – the national legal framework
•
What is foreign investment? What types are there?
•
What is the legal framework for foreign investment in Mexico?
•
What is the foreign investment law about?
•
Are there any authorizations for the entry of foreign investment?
•
Is there a registry for foreign investment in Mexico?
•
What is the impact of foreign investment?
How to attract foreign investment
•
What variables attract FDI?
•
What are the factors that contribute to investor’s decisions to select Mexico as the main investment
destination?
•
What are some international principles that guide foreign investment?
•
What are agreements for the mutual promotion and protection of investments (AMPPI)?
•
What disciplines do AMPPIs incorporate? What is the scope of investment protection in an AMPPI?
•
What aspects are covered in FTA investment chapters?
•
What is the main difference between an AMPPI and an investment chapter in an FTA?
Treatment standards for investors that can be found in an AMPPI or in an investment chapter in an
FTA
•
National treatment
•
Most favored nation treatment
•
Minimum level of treatment
Protecting foreign investment
•
What other rights do foreign investors have?
•
Where can IIAs signed by Mexico and rest of the world be consulted?
•
What authority is responsible for negotiating AMPPIs and FTA investment chapters?
•
What is the role of authorities in promoting investment and preventing international disputes?
•
What should a government official at any level of government keep in mind regarding foreign
investment?
•
What obligations do foreign investors have?
•
What can trigger an international dispute between a foreign investor and the Mexican State?
•
How are these disputes resolved?
•
What is an amicable solution?
•
What is a notification of intent by an investor?
Conclusions
Contacts
CASE STUDIES
31
PERU
Peru’s vigorous promotion of FDI has led to a spike in FDI over the past decade, especially in
services (communication 34 percent and finance 17 percent).
Figure 3-11
Foreign Investment in Peru
Peru is also very active in IIA negotiations, and enters into contracts with investors that contain
international investor-state provisions. Peru has a good deal of experience with ISDS; it is
managing eight ICSID cases and one UNCITRAL case and is in direct negotiations with other
investors. 6
6 http://www.mef.gob.pe/index.php?option=com_content&view=article&id=379&Itemid=101183&lang=es
Accessed February 2013
32
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
Figure 3-12
Timeline of ICSID–UNCITRAL Cases in which Peru is a Respondent
The Ministry of Foreign Affairs managed Peru’s first cases, after which an ad hoc interinstitutional committee, which included the Ministry of Economy and Finance, was set up to
manage disputes. The increasing number of disputes led the government to create the State
Coordination and Response System for International Investment Disputes (Response System) in
2006. In so doing, Peru sought to address the following:
•
The increasing number of agreements with international investment arbitration clauses.
•
The lack of a centralized agency to coordinate and lead the defense of the state.
•
The lack of accountability in agencies that originated investment disputes.
•
The difficulty in meeting the financial requirements of arbitration, including hiring legal
counsel and paying arbitration costs.
•
The high risk of new disputes due to lack of understanding of IIA commitments in
general (UNCTAD 2011).
The Response System was created by Law Nº 28933 (December 2006) and has two regulatory
decrees: Supreme Decree 125-2008-EF (October, 2008) and Supreme Decree 002-2009-EF
(January 2009). Article 2 of Law 28933 sets out the following objectives:
•
Optimize public sector coordination and response to international investment disputes
and secure a timely and appropriate defense of the state.
•
Centralize information on agreements and treaties entered into by Peru related to
investment that contain international dispute settlement provisions.
•
Establish a warning system for investment disputes.
•
Centralize information on international investment disputes.
•
Define coordination procedures for government agencies involved in a dispute.
•
Assume costs incurred in dispute settlement proceedings.
•
Standardize dispute settlement clauses included in agreements and treaties as much as
possible.
CASE STUDIES
33
The Response System Law created a Special Commission to represent the state in international
investment arbitrations, with four permanent members: Ministry of Economy and Finance
(MEF), Ministry of Foreign Affairs, Ministry of Justice and ProInversion, Peru’s private
investment promotion agency. Non-permanent members of the commission are the Ministry of
Foreign Trade and Tourism (which joins as a member of in any IIA-based dispute) and the
agency that adopted the measure triggering the dispute (involved agency). The MEF is the
coordinator or lead agency of the system, and acts as the Technical Secretary to the Special
Commission (Figure 3-13).
Figure 3-13
Peru’s Investor-State Dispute Management System
The Special Commission analyzes each case, determines the feasibility of an amicable
resolution, and conducts negotiations for resolution. It represents the state in negotiations with
an investor and before the relevant body in an ISDS proceeding, coordinates information
gathering, determines need for outside counsel and other advisers, designates ISDS arbitrators,
ensures that funds to cover costs are readily available, and determines the responsibility of the
involved agency in the dispute. The commission may also present regulatory or reform
proposals to improve the state’s ability to defend its interests in investment disputes.
The law specifies that it is applicable to government agencies at all levels, national, regional and
municipal, and to any enterprise in which the state has control via voting rights, as well as
regulatory and supervisory bodies. It requires government agencies to report any agreement or
treaty under the scope of the system, and to report any potential investment controversy. The
law provides for the confidentiality of documents in ISDS proceedings, which had been an issue
before the system was adopted, and sets out provisions on conciliation, mediation and direct
negotiation, as well as provisions for funding of ISDS processes and the payment of arbitral
awards.
Peru’s response system foresees continuous training and capacity building on IIAs and their
commitments, as well as on the structure and functioning of the Response System and of its
benefits and main characteristics, including the role of MEF as lead agency. The law creates the
obligation for all public servants to cooperate with the Special Commission in relevant ISDS
cases.
The MEF is designing a web-based platform so agencies can quickly report on treaties,
agreements, or potential disputes. The platform will also provide information about IIAs entered
into by Peru and the commitments therein; ISDS cases, including awards; and dispute settlement
34
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
clauses. It will allow for contacting the Special Commission and provide a gateway for investors
to report possible disputes that are within the scope of the system to the Special Commission.
The MEF has also provided training, mainly with central government agencies, and will
redouble its efforts once the platform is completed. Training is an ongoing endeavor given
turnover in government and the large number of agencies and institutions that adopt measures
that may affect foreign investors
.
4. Conclusion
International investment disputes can result in costly, resource-intensive, lengthy arbitration that
is unpredictable in outcome. Such disputes pose reputational risks to states and investors and
can sever otherwise mutually beneficial relationships. They can lead to large monetary awards,
and entail legal and administrative fees that can go well into the millions of dollars during the
arbitration period alone, diverting human and financial resources from other government
objectives. The case studies presented herein provide a broad overview of government strategies
for minimizing the incidence of investment disputes as transnational investment, number of
IIAs, and volume of ISDS all increase.
Governments tend to address ISDS management and prevention in parallel, and in some cases
one institution is responsible for both. Sometimes the lead agency for ISDS is the same one that
negotiates IIAs; sometimes the institutions are distinct. The governments of Costa Rica and Peru
have transitioned from ad hoc institutional setups for responding to investment arbitration into
formal structures with functions and responsibilities defined by laws and regulations. The
government of Mexico has introduced policies on training and information sharing without
changing existing institutional arrangements. And Colombia has created formal mechanisms to
respond to possible disputes even though it has never had an ISDS case. Given the range of
agencies that a dispute could involve, however, several governments have formally designated a
lead agency for ISDS purposes.
Having a strong ISDS management framework strengthens a government’s capacity to respond
effectively in investor-state disputes. The path of an ISDS case may involve a number of
government parties: IIA negotiators (central government), Congress, Constitutional Courts
(some governments require prior constitutional review), the agency that takes the measure
challenged under ISDS (may be at any level of government or from any branch of government),
government defense teams, etc. Given the number of actors, the demanding information
requirements for a proper defense, and the need for efficient and effective inter-agency
coordination, the governments of Colombia, Costa Rica, and Peru have formally created the
team and competencies necessary to manage an investor-state dispute. Certainty about its legal
capability to manage an ISDS case is increasingly important when a government is confronted
with several cases simultaneously.
All governments broadly disseminate information on IIA-related obligations and commitments
among agencies and branches (judicial, legislative and executive) and at all levels (central,
regional, municipal). Tools of dissemination include publications, websites dedicated to IIA
disciplines, training, and platforms for discussing IIAs, including how they affect policy making
and the design of measures that may affect investors. Published guides tend to be clear and
simple and to present the most important investor protection provisions in IIAs. Some use reallife examples to help officials relate day-to-day decisions with ISDS and its costs and
36
INVESTOR-STATE DISPUTE PREVENTION STRATEGIES
consequences. These guides also include contact points for agencies to be able to request
additional information.
One strategy for understanding of IIA commitments in regional governments is opening the
negotiations themselves to the participation of regional officials. While it is difficult to generate
enough interest to obtain the necessary commitments in terms of time and efforts in smaller
negotiations, and a politically sensitive decision given that the authority to negotiate
international agreements generally lies with the central government, an economically significant
agreement may generate enough interest to engage regional governments in such a way that
officials are tasked with taking part in negotiations or monitoring them very closely.
Given the vast range of government entities that may adopt measures that affect IIA
commitments, investment authorities should prioritize audiences for information dissemination
and training: central, regional, and municipal governments; officials from the executive,
legislative and judicial branches; and entities exercising delegated authority (e.g., state
enterprises and investment promotion agencies).
Some governments, such as those of Colombia and Mexico, have systems that foster permanent
contact with domestic and foreign investors to identify challenges or where action can be taken
to improve the investment climate. These systems provide investors with a communication
channel other than the agency with which they may be experiencing difficulty, and allow
investment climate agencies to detect possible problems early on. These systems may not be
designed with ISDS prevention in mind but they are useful in detecting investment obstacles
that could become points of dispute.
After more than 60 years of international treaty making in international investment and the
introduction of ISDS provisions in individual investment agreements, a government may have a
vast number of instruments that form the legal universe of its ISDS exposure. Some agreements
may be are several decades old and different agencies and government offices can introduce
ISDS provisions into individual contracts. The case studies showed that dispute prevention and
management can be improved by consolidating legal instruments in a single place.
To make IIA obligations more consistent and coherent, some economies are renegotiating old
agreements, setting clear mandates and guidelines for current negotiations, and making
language in agreements more precise, in part by adopting model treaties and clauses. More
precise and carefully crafted language gives officials, investors and arbitrators guidance with
regard to the intent of the negotiators and states as they enter into agreements, and is useful in
explaining IIA commitments to other government agencies and officials who are bound by these
commitments. Clearer language improves understanding of commitments, and may help prevent
passage of inconsistent measures.
Finally, it is difficult to assess the impact of ISDS prevention policies because the desired
outcome is an absence of cases—and a dispute can be prevented anywhere in the chain of
relationships between and investor and the host state. Formal prevention strategies, such as
those described in this report, seem to be recent. Nevertheless, the general impression is that
these policies are having a positive effect on investment climates and on the capabilities and
skills of officials as they design and implement measures that may affect IIA commitments, and
as they report possible disputes to central authorities at an early stage.
CONCLUSION
37
Different cases confront different situations with regard to investment, and investment dispute
prevention and management. Nevertheless, the policy options presented in this report provides a
useful reference for governments seeking to implement investment dispute prevention
strategies. As investment flows increase, the number of IIAs continues to grow, and the
international IIA system remains complex, efforts in early detection of investment disputes,
communication of IIA commitments and the creation of a better system overall, will only
support the role of investment in generating jobs, improving livelihoods and contributing to
economic and social development.
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