INVESTMENT PROTECTION: Do BITs bite?
Most emerging market countries signed up for bilateral investment treaties (BITs) in 1990s to encourage multinational companies to invest in their privatisation programmes. Now that the economic wind has shifted and governments, especially in Argentina and Bolivia, have changed the rules under which foreign companies invested, the investors are starting to use BITs to extract compensation from host governments.
BITS allow companies to go immediately to arbitration to sort out disputes. The process is comparatively cheap and, lawyers say, often quite quickly. Disputes can be resolved under BITs within two years, they say.
The other point about BITs is that companies can enforce the results of the arbitration mandated by the BIT in any country which has a BIT with the country that loses in the arbitration. This means, for example, that an international energy company could sue for compensation, once it has demonstrated that the terms of the BIT have been broken, in virtually any jurisdiction. This in turn means that governments tend to take the arbitration seriously. Even some countries without BITs, notably Brazil, accept the result of foreign arbitration on commercial disputes that do not involve the government. In Brazil the foreign arbitration has to be ratified by the Brazilian supreme court. Once the supreme court ratifies, the winners of international arbitrations can enforce judgments through the Brazilian courts. What is not clear in Brazil is what happens if the government were to expropriate a company which felt that the Brazilian government had changed the terms on which it had invested. So far the Brazilian government has negotiated with unhappy foreign companies.
Without a BIT an international investor has to resort to either the local courts (ie where the recipient government has a clear advantage) or to diplomatic pressure to extract compensation from a government which had expropriated a local subsidiary or changed the terms on which it was doing business. International law firms see the changes Bolivia's congress made to the hydrocarbons law in May as an opportunity to use Bolivia's BITs with most countries to get compensation, or even better, enforce the terms of the original investment for their clients.
There are various places where disputes can be arbitrated. Virtually all of them report a huge surge in business over the past year or so. This is partly because there are now so many BITs: in 1990 there were only 300, now there are over 2,000. International arbitration is nothing new: the World Bank set up its arbitration agency, the International Centre for Settlement of Investment Disputes (ICSID), in 1966. Other arbitrators include the International Chamber of Commerce; the International Court of Arbitration in Paris; the Stockholm Chamber of Commerce and on top of this there are ad hoc tribunals.
Case law is developing over the enforceability and scope of arbitral decisions. Some lawyers are even arguing that arbitration is becoming too legalistic and lawyerly: its original purpose of providing quick, clear and fair resolutions to disputes, these lawyers say, is being lost. On 12 July, three international energy companies, YPF Repsol from Spain, TotalFinaElf from France and British Gas from the UK, started the process which could culminate in activating the provisions of the BIT. One of the innovations of the BITs is that their provisions can be activated, unilaterally, by investors. The three energy companies said that they wanted to negotiate with the government about the changes in the terms under which they invested: the new law keeps the royalty on the gas they extract at 18% but adds a further 32% tax which is not offsettable against the companies' expenses. The companies say that if they fail to achieve satisfaction from the negotiations, they will use the provisions in the BIT to go to international arbitration.
The interim government in Bolivia, headed by President Eduardo Rodríguez, will have to handle the negotiations. The law gave the international energy companies six months to adjust to the new scheme. The government claims that the meter started to tick when the new hydrocarbons law went to congress in mid March. It may be that the sand only started to run when congress approved the changes in mid-May.
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BITs bite |
| Foreign investors in Argentina's utility business were badly burned by the ending of convertibility in December 2001. The government had previously frozen utility prices which investors understood, when they made their investments would be pegged to the dollar and to inflation. One of the first arbitrations of a dispute covered by a BIT involved Camuzzi International, a Luxembourg company which had several substantial stakes in utility companies in Argentina. It acquired these stakes when these companies were privatised. Under the Luxembourg-Argentina BIT Camuzzi should have waited 18 months before being able to file a request for arbitration at ICSID: Camuzzi's lawyers successfully argued that the 18-month wait cut across another provision of the BIT which assured investors from both countries of most favoured nation (MFN) status. As the US-Argentine BIT does not have an 18 month wait provision, the arbitrator ruled that Camuzzi also did not have to wait for 18 months. The MFN provision, which is common to BITs means, it seems, that all investors automatically enjoy whatever elements of the BIT most favour them.
The Camuzzi case was significant for several reasons. One important one is that the ICSID rejected Argentina's contention that under Barcelona Traction and Light & Power (BTLP) precedent, shareholders could not claim for injuries to companies in which they held shares. The ICSID tribunal ruled that the BTLP decision in 1970 was inapplicable and, effectively, superseded by the BIT. The Argentine government was also disconcerted to find that its effort to lobby the Italian government to prevent Italian bondholders, who had been enticed into buying Argentine lira bonds, failed. The bondholders were also able to use the provisions of the BIT. |
Brazil
Brazil claims that its domestic commercial code is good enough for foreign investors. It has passed a series of laws which, effectively, guarantee that foreign investors will be treated in the same way as local investors. In December 2004, congress approved and President Lula da Silva signed the Public-Private Investment (PPP) bill that promotes joint ventures in infrastructure investment. The law creates a federal guarantee fund to protect investors in federal PPPs. In almost all cases, at least 30% of the investment in the project must come from the private sector.
Brazil is not a member of the ICSID, though it is a party to the New York Convention of 1958 on the recognition and enforcement of foreign arbitration awards. Arbitration clauses in contracts are not automatically enforceable. Foreign arbitral awards require confirmation by a court of the country in which the award was rendered and by the Brazilian Supreme Court. This confirmation is procedural in nature, and not meant to consider the merits of the case. Confirmation by the Supreme Court allows the claimant to enforce the arbitral award through Brazilian courts.
There is some legal controversy in Brazil over binding foreign arbitration between foreign investors and state entities. Some Brazilian legal interpretations claim this is prohibited under Brazilian law on the grounds that it infringes the sovereign rights of the state. The Federal Government nevertheless maintains, in the absence of a definitive judicial ruling on the issue, that it can agree to binding foreign arbitration and routinely enters into contracts that allow for such arbitration.
This legal uncertainty, as well as congressional politics, has held up ratification of the BITs. Given the doubts about the applicability under Brazilian law of these international arbitration provisions to Brazilian government entities, in December 2003, the Lula government withdrew the agreements from consideration for Senate ratification. Brazil's involvement in the Bolivian gas industry goes through the state-owned energy company, Petrobras. Arguably, the Brazilian oil company is the most important foreign investor in the country because of its stake in the Bolivian end (and ownership of Brazilian bit) of the Bolivia-Brazil gas pipeline. So far Brazil has taken a lofty line saying that although it will not pull out of Bolivia it may not invest quite as much in that country as it has done in the past. Brazil also has the diplomatic leverage of being the major regional power and being by far Bolivia's most important trading partner.
Some international lawyers also argue that Petrobras and Brazilian government officials are being disingenuous because they do have the option of going to international arbitration through a BIT. As Petrobras's involvement in Bolivia's gas industry derives from Perez Companc, an Argentine oil company Petrobras acquired in 2002, Petrobras could actually use the Bolivia-Argentine BIT to protect its investment. Argentina and Bolivia are not the only countries where foreign investors are itching to use BITs. Venezuela's government, led by President Hugo Chávez , is determined to make foreign oil companies operating in the country pay more for the privilege. There are currently 32 joint ventures between the state oil company, Pdvsa, involving 22 foreign oil companies. The government claims that its predecessors allowed the foreign oil companies to tilt the deals too far in favour of the foreign companies. It claims that the poor drafting in half of these contracts means that Pdvsa pays out US$260m a year to foreign operators.
On 16 May President Chávez announced that Pdvsa will not reimburse contracted oil firms in dollars for their expenses. Until 15 May Pdvsa paid oil firms with operating contracts in dollars for expenses in Venezuela such as vehicles, business trips and clothing. The 32 joint ventures produce around 1.1m bpd of crude oil. The country's overall output is around 2.5m bpd. In mid July, the Venezuelan tax office said that it would take out a court order to get Chevron to release information that the oil company had previously refused to provide.
Oil companies are bracing themselves for tax increases and contract changes ordered by Pdvsa and the national tax office. On 8 May President Chávez said that the joint ventures would have to pay "taxes they have skipped plus interest or leave the country." He admitted that nobody knew how much tax the joint-ventures owed: he said that he had ordered Pdvsa and the tax office (Seniat) to work out what was owed. The court order sought by the tax office, Seniat, is part of this process. Subsequently, the energy minister, Rafael Ramírez, said that the oil companies could owe as much as US$3bn in skipped taxes.
On 14 July the Seniat said that Shell, another of the international oil companies operating in Venezuela, owed US$131m in back taxes. The Seniat said that the oil company would be fined a further 10% of the unpaid taxes, which should have been paid from 2001 to 2004. The Seniat added that if Shell does not pay by the end of July, the fine will increase to 250% of the skipped taxes.