One of the main reasons for the growing discontent with international
investment agreements (IIAs) is the perception that undue restrictions
are being placed on the regulatory powers of governments. Indeed,
adequate protection of regulatory powers has been a key feature of
initiatives aimed at rethinking the legal protection of foreign
investors, either by progressively replacing IIAs with domestic
legislation,[1] or by reconsidering model
bilateral investment treaties (BITs).[2]
In this context, it is rather surprising to find in IIAs clauses like
those contained in a significant number of Italy’s BITs, normally in
combination with preservation-of-rights clauses. Article 12(3) of
the BIT concluded in 1998 between Italy and Mozambique, for instance,
provides:
Whenever, after the date when the investment has been made, a
modification should take place in laws, regulations, acts or measures of
economic policies governing directly or indirectly the investment, the
same treatment shall apply upon request of the investor that was
applicable to it at the moment when the investment was agreed upon to be
carried out.[3]
The meaning of Article 12(3) seems sufficiently clear. It provides all
investors of the other contracting party a total exemption from
unfavorable laws, regulations, acts, or measures of economic policies
adopted by host countries. From a different perspective, it neutralizes
the exercise of subsequent regulatory powers to the extent that such
exercise is directly or indirectly detrimental to covered investors. One
may assume that the clause was included at the insistence of the
capital-exporting party.
The clause can be considered as the treaty equivalent of the most robust
form of stabilization provisions, the so-called “freezing clauses”.[4] Traditionally inserted in
government contracts, these clauses protect foreign investors against
subsequent unilateral action by host countries in the form of total or
partial exemption from regulations enacted during the term of a contract.
They arise mainly within extractive industries in sub-Saharan Africa,
Eastern and Southern Europe and Central Asia.[5]
Freezing clauses remain problematic, although their drafting has recently
been more respectful of the rights and duties of host countries regarding
the protection of societal values. They may prevent governments from
pursuing their economic and social policies, and even have a “chilling
effect” due to the exposure to claims of breach of contract, especially
before arbitral tribunals. Israel’s Supreme Court has recently struck
down a natural gas plan due to a freezing clause exempting foreign
investors from regulatory changes in taxation, antitrust limitation and
export quota for ten years.[6]
The decision is a powerful reminder of the importance not to restrict
unduly the regulatory powers of host countries.
The inclusion in IIAs of clauses such as Article 12(3) above has
much more serious consequences than contractual freezing clauses, for at
least three main reasons:
- First, unlike freezing
clauses contained in contracts, whereby specific commitments are
given to particular investors, a treaty clause applies to all current
and future investments covered by a treaty, making these immune to
subsequent regulatory activities.
- Second, clauses like
Article 12(3) are drafted in particularly broad terms as to the
nature and content of the legal instruments affecting foreign
investors as well as their impact on foreign investments.
- Third, investors of other
countries that have a treaty with the host country may invoke the
most-favored-nation treatment obligation to benefit from clauses
such as Article 12(3). This could amplify exponentially the
effects of freezing clauses (according to UNCTAD’s database,[7] for instance, Italy and
Mozambique have, respectively, 75 and 20 BITs in force with third
countries). One may wonder whether the contracting parties were
fully aware of the potential implications of applying these clauses
beyond the treatment of their respective investors.
Freezing clauses can turn treaties into treacherous legal products, and
governments should have a clear and compelling interest in neutralizing
them. Indeed, concerned governments may be advised to closely review
their IIAs to detect these clauses and carefully assess their
implications. If appropriate, they should take steps to remove these
clauses. This could be achieved simply and inexpensively through
exchanges of letters, preferably with effect from the date at which the
other party accepts the proposed amendment. Alternatively, parties may
avail themselves of any other means permitted under the law of treaties,
including the conclusion of protocols, a task facilitated by the
bilateral character of most of these treaties.
* Tarcisio Gazzini (tarcisio.gazzini@unil.ch) is senior
researcher at the University of Lausanne. The author is grateful to Tony
Cole, Anna De Luca and Kenneth Vandevelde for their helpful peer reviews.
The views
expressed by the author of this Perspective do not necessarily reflect
the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a
peer-reviewed series.
[1] South African Protection of Investment
Act (2015), art. 12.
[2] Indian Model BIT (2016), art. 16.
[3] Identical or similar clauses are
contained in Italy’s BITs with Angola, Armenia, Azerbaijan, Bosnia,
Cameroon, Kazakhstan, Macedonia, Moldova, Tanzania, Uganda, and
Uzbekistan.
[4] For an explanation of the different
types of stabilization clauses, see
Audley Sheppard and Antony Crockett, “Are stabilization clauses a threat
to sustainable development?,” in Marie-Claire Cordonier Segger et al., eds., Sustainable Development in
World Investment Law (Leiden: Kluwer, 2010), pp. 333-50.
[6] See
Joel Greenberg, “Israel’s supreme court blocks Leviathan gasfield deal,” Financial Times,
Mar. 28, 2016.
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