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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 193 February 13, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
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Common in sectors such as petroleum, investment contracts embody the well-established principle of pacta sunt servanda (“agreements must be kept”) for which there is a long history of international jurisprudence. Where they provide directly for international arbitration, such contracts can obviate the need for a specialized treaty regime. In contrast to heavily standardized international investment agreements (IIAs), contracts allow parties to tailor their commitments, often by reference to industry practice and clearly defined goals. With negotiated contractual protections in place, countries receive the benefit of FDI in the form and manner of their choosing, just as investors enjoy the assurance of host countries’ binding commitment to honor their obligations.
Given this flexibility and legal certainty, some observers have advocated investment contracts as a substitute for IIAs, partly because of suspicion over the IIA regime’s legitimacy.[2] Yet most foreign investment is not covered by individual contracts with host countries, and contract-based arbitration currently represents only a small portion of total investor-state claims.[3] The International Centre for Settlement of Investment Disputes (ICSID) reported in 2016 that investment contracts were the source of tribunals’ jurisdiction in only 17% of cases.[4] More tellingly, the portion of contract-based claims at ICSID has steadily declined since 2010, when it comprised 22% of all claims.[5] This trend may indicate that there are good reasons to be suspicious of investment contracts as a replacement of IIAs:
- Although IIAs contain indeterminate concepts such as fair and equitable treatment and indirect expropriation, some contracts do the same: albeit well-developed, the common law of commercial contracts is hardly free from ambiguity, as evidenced by recent high-level judgments.[6] Moreover, it is far from clear that there is indeed a body of international commercial rules (known as lex mercatoria, or “merchant law”) to assist in interpreting investment contracts and to fill in gaps where necessary.[7]
- Without IIAs, investors would have to negotiate contracts with countries on an individual basis. This may well be within the resources of large multinational enterprises (MNEs) in the infrastructure or extractive sectors where such contracts are more common. But the transaction costs would be onerous for small and medium-sized enterprises (SMEs) operating in other sectors where SMEs are the direct beneficiaries of IIAs signed by their home countries. This is problematic as more SMEs undertake outward FDI, relative to large MNEs.[8] Indeed, governments negotiating trade agreements with investment chapters regularly point out the strategic advantages of these instruments for SMEs.[9] Furthermore, given that more than 100,000 MNEs exist (with more than 1 million foreign affiliates), most of them SMEs, this implies the need for many contracts.[10]
- While parties can negotiate situation-specific terms in investment contracts in a manner impossible with respect to IIAs, it is equally plausible that the one-sided bargaining power thought to characterize treaty drafting may also accompany investment-contract negotiations. Highly mobile investors (likely those safest from governmental interference) may be able to extract benefits from host countries by threatening to relocate[11] or simply through more assertive negotiations assisted by expensive counsel unavailable to many governments. This may be especially the case in extractive sector concession arrangements with developing countries. Of course, unequal bargaining power can act against foreign investors, too, most notably in the case of investment contracts structured as joint ventures. Investors have demonstrated reluctance to pursue these types of contracts with host countries because of the difficulties involved in divided management, as well as the forced disclosure of technology and business secrets, both typical features of such arrangements.[12]
Finally, the use of investment contracts instead of IIAs does nothing to resolve problems associated with investor-state dispute settlement, as such contracts also tend to provide for international arbitration (at ICSID, for example). Without reform of the underlying regime, therefore, a shift from treaty-based to contract-based FDI protection would have minimal impact.
* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author do not reflect the opinions of CCSI or Columbia University or our partners and supporters.
[1] David Collins ([log in to unmask]) is Professor of International Economic Law, City University of London. The author is grateful to Jonathan Gimblett, Jeswald W. Salacuse and Louis T. Wells for their helpful peer reviews. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
[2] See, e.g., M. Sornarajah, The International Law on Foreign Investment (Cambridge: CUP, 2010), p. 301; Jeswald W. Salacuse, The Law of Investment Treaties (Oxford: OUP, 2015), pp. 19-21.
[3] Only a handful of reported claims are based on investment contracts. See, e.g., Vacuum Salt Products Ltd. v. Ghana, ICSID Case No. ARB/92/1 (Award) (Feb. 16, 1994).
[6] See, e.g., Attorney General of Belize v. Belize Telecom [2009] UKPC 10 (Privy Council) (discussing implied terms).
[7] Sornarajah, op. cit., p. 303.
[11] Avi Nov, “The ‘bidding war’ to attract foreign direct investment: the need for a global solution,” Virginia Tax Review, vol. 25 (2005), pp. 835-875.
[12] Jeswald W. Salacuse, The Three Laws of International Investment: National, Contractual and International Frameworks for Foreign Capital (Oxford: OUP, 2013), p. 208.
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “David Collins, ‘Investment contracts are not a substitute for investment treaties,’ Columbia FDI Perspectives, No. 193, February 13, 2017. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
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For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Matthew Schroth, [log in to unmask].
- No. 192, Joseph (Yusuf) Saei, “Influencing investment disputes from the outside,” January 30, 2017.
- No. 191, Tarcisio Gazzini, “Beware of freezing clauses in international investment agreements,” January 16, 2017.
- No. 190, Karl P. Sauvant, “China moves the G20 on international investment,” January 2, 2017.
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
- On February 27, 2017, CCSI and the Government of Indonesia will host “Developments in International Investment Agreements,” at Columbia University. The event will focus on issues surrounding investment liberalization as well as consider the interaction of investment treaty protections with domestic laws of the host-country. The event will bring together participants from academia, the private sector, government, and the general public to discuss and debate these issues. Registration is free, but required. Please see our website here for more information, including to register.
- In November 2016, Boston University’s Frederick S. Pardee Center for the Study of the Longer-Range Future and Global Economic Governance Initiative published a report, Trade in the Balance: Reconciling Trade and Climate Policy, to which CCSI’s Head of Investment Law and Policy, Lise Johnson, and Legal Researcher Brooke Guven contributed a chapter. Their chapter, entitled “International Investment Agreements: Impacts on Climate Change Policies in India, China and Beyond,” considers the opportunities, and challenges, posed by international investment agreements as countries shape policies surrounding climate change mitigation and adaptation obligations.
- June - August 2017: We are accepting applications for our three upcoming executive trainings: on Extractive Industries and Sustainable Development (June 5-16, 2017), Sustainable Investments in Agriculture (July 12-21, 2017), and Investment Arbitration for Government Officials (July 31-August 10, 2017). Each program is designed to equip participants with the necessary skills, analytical tools, and frameworks to address relevant challenges and opportunities, and to encourage a rich dialogue about best practices from around the globe. More information about each training, including brochures and applications, is available at the links above. Applications are accepted on a rolling basis. Participants will receive a Statement of Attendance from Columbia University.
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