Pioneering Practice in International Investment Agreements
THE AUTHOR:
Jack Bownes, Associate at Gide
On 19 February 2023, the African Union Member States adopted the Protocol to the Agreement Establishing the African Continental Free Trade Area (“AfCFTA“) on Investment (2023) (the “Protocol“).
The Protocol aims to promote and protect intra-African investment in the free trade area and will harmonise coexisting national, bilateral and regional investment laws on the continent. Notably, the 173 existing Bilateral Investment Treaties (“BIT“) between member states will be terminated and replaced by the Protocol in one of a number of significant reforms.
The Protocol is therefore an opportunity to align the African investment treaty landscape with modern treaty practice. An analysis of the final draft, published in January 2023, suggests that the Protocol will be a progressive investment treaty on a number of fronts.
Particularly innovative features include the replacement of the Fair and Equitable Treatment (“FET”) standard with “administrative and judicial treatment” (“AJT”), the Protocol’s approach to environmental protection, a greater balance between State and investor rights and obligations and the possibility for States to bring counterclaims against investors.
This article will conduct a comparative analysis of these and similar provisions of other ‘new generation’ International Investment Agreements (“IIAs”) in order to determine the extent to which the Protocol is pioneering modern treaty practice.
New Generation IIAs
The history of IIAs can broadly be divided into two generations: ‘old generation’ (1950s to 2010) and ‘new generation’ (2010 onwards).
Old generation IIAs are typically short and inadequately detailed in several regards. The substantive legal protections and definitions of these IIAs are broadly drafted and the dispute resolution mechanisms are often limited to recourse to arbitration in the event of any dispute between investor and State, with no pre-requisite to engage in attempts at amicable settlement. For these reasons, old generation treaties have come under fire for being too ‘investor-friendly’.
Consequently, efforts have been made by academics, States and investment law practitioners over the past decade to reform the investment treaty landscape through a new generation of IIAs. At the forefront of the new generation IIAs’ objectives are:
- the States’ right to regulate;
- sustainable development and environmental protection through responsible investment; and
- augmented dispute resolution mechanisms that promote systemic consistency and facilitate amicable settlement through cooperation between investor and State.
Administrative and Judicial Treatment
The most salient feature of the Protocol‘s substantive legal protections is the replacement of FET with AJT. AJT was first proposed in the Southern African Development Community (“SADC”) Model BIT (2012) (article 5, option 2) as a solution to the FET standard’s “large degree of unpredictability” and the “expansive interpretations [of the standard]… provided by some tribunals“. Whereas the FET standard traditionally provides investors certain rights such as protection from discriminatory measures and access to justice (see, for example, article 7, Morocco-Nigeria BIT (2016)), AJT focuses on governance standards and conduct.
AJT has not been widely adopted in recent treaty practice. Of the major global MITs, only the Intra-MERCOSUR Investment Facilitation Protocol (2017) (article 4) has replaced FET with the AJT standard. The fact that the Central African Republic-Rwanda BIT (2019)* is the only concluded BIT of those reviewed containing AJT (article 6, worded as “fair administrative treatment”) in lieu of FET is perhaps reflective of the reluctance of States to replace this protection through fear it might deter investors.
A more radical alternative to FET is the removal of the standard altogether. Initially proposed by the Draft Pan-African Investment Code (“PAIC”) (2016) and subsequently by the UNCTAD Reform Accelerator (2020), this approach has been adopted in several concluded IIAs. The Australia-China Free Trade Agreement (“FTA”) (2015), the Brazil-Morocco BIT (2019)* and the Colombia-Venezuela BIT (2023) omit the FET standard altogether, as does the ECOWAS Common Investment Code (“ECOWIC”) (2019).
The decision to replace FET with AJT in the Protocol is the least radical of the two trending alternatives, but still a development which should have a significant impact on intra-African investment protection.
Environmental Protection and Climate Change
Protection of the environment and mitigation against climate change are very much at the forefront of modern treaty practice. New generation IIAs approach these issues by including environmental protection measures in the right to regulate provision and as an exception to substantive legal protections. Environmental protection can additionally feature as an obligation in stand-alone provisions.
The Protocol is no exception. It is heavily influenced by the SADC Model BIT (2012), the PAIC (2016) and the African Arbitration Academy (“AAA”) Model BIT (2022), which suggest providing both State and investor obligations to protect the environment. The Protocol’s State obligations include a requirement to provide environmental protections in accordance with international best practice (Article 25.1), an undertaking to encourage investors to incorporate the relevant practices into their internal policies (Article 38.3) and a prohibition on relaxing environmental protection laws in order to encourage investment (Article 25.2). These State obligations are ubiquitous in new generation IIAs; only a handful, such as the Indonesia-Switzerland BIT (2022)*, omit the prohibition on relaxing environmental protection legislation, whilst the obligation to provide and encourage environmental protection standards is similarly phrased as a State obligation in a significant number of new generation BITs (See Canada-Mongolia (2016) (article 15), Burkina Faso-Canada (2015) (article 15), and India-Kyrgyzstan BIT (2019)* (article 12)).
Article 26 of the Protocol operates as an incentive for climate-friendly investors; States undertake to promote, facilitate and encourage investments that, inter alia, mitigate against greenhouse gas emissions and climate change impacts on natural resources, aid transition to low-carbon technologies in specific sectors, support new low-carbon investment regimes and co-operate with States on climate change policies and measures. Several IIAs provide a similar State undertaking to promote investments that mitigate against climate change generally, but through vague and non-committal wording (See article 19 of the Energy Charter Treaty (“ECT”) (1994)). Very few IIAs contain the level of detail provided in Article 26 of the Protocol; of the IIAs reviewed, only the Moldova-United Kingdom Trade and Cooperation Agreement (2020) lists detailed environmental protection and climate change mitigation policies (articles 83-87).
The pioneering aspects of the Protocol with respect to environmental protection also extend to investor obligations. The bulk of investor obligations relating to environmental protection are provided in Article 34 of the Protocol. They consist of, inter alia, respecting “the [human] right to a clean, healthy and sustainable environment” and compliance with principles of prevention and precaution. Article 34.2 of the Protocol prohibits investors from exploiting natural resources “to the detriment…of the Host State and local communities“.
Very few IIAs provide investor obligations on environmental protection, and those that do contain provisions that also feature in the Protocol. By way of example, the Central African Republic-Rwanda BIT (2019)* (articles 16 and 17), the Democratic Republic of the Congo-Rwanda BIT (2021)* (articles 15 and 16) and the Morocco-Nigeria BIT (2016)* (articles 14(1) and 18(1)) oblige investors to comply with environmental impact assessments prior to establishment in the Host State and post-establishment. The Protocol mirrors these obligations at Article 34.1(c) and (d).
Finally, the Protocol excludes measures taken to ensure investment compliance with environmental and climate action policy objectives from its scope by way of the right to regulate provision (Article 24) and exceptions to the Protocol’s substantive legal protections (See Article 13(1), exceptions to national treatment). Carve-outs of this kind are common practice in new generation IIAs, the Australia-Uruguay BIT (2019) (article 15) being a notable example.
The Protocol takes a very progressive stance on environmental protection, and one that is much needed given the urgency of the climate crisis. The fact that several recently concluded IIAs (for example, the Hong Kong-UAE BIT (2019)) make no reference whatsoever to environmental protection and climate change highlights the ongoing shortcomings in treaty practice on this issue. That the Protocol not only adopts contemporary treaty practice but goes further than most other IIAs in its efforts to promote and maintain environmental protection through climate-friendly investments should be emulated by future IIAs.
Other Investor Obligations
The Protocol contains significant non-environmental investor obligations. Addressed in chapter 5, these relate largely to sustainable development, Corporate Social Responsibility (“CSR”) and Environmental, Social and Governance (“ESG”) and include:
- an obligation to comply with high standards of business ethics, human rights and labour standards (Article 33);
- an obligation to adopt socially responsible practices (Article 38); and
- an obligation to meet national and international standards of corporate governance (Article 39).
The common practice in new generation IIAs is to phrase such provisions as State, as opposed to investor, obligations. By way of example, CSR, corruption and health and safety standards provisions are worded as State obligations in the Argentina-Japan BIT (2018)* (articles 9, 17 and 22). Of the IIAs reviewed, only a handful follow the Protocol’s approach to some extent: the Morocco-Nigeria BIT (2016) obliges investors to maintain internationally accepted standards of corporate governance (article 19(1)(a)), whilst the Central-Africa Republic-Rwanda BIT (2019)* and the Democratic Republic of the Congo-Rwanda (2021)* have both adopted the considerable sustainable development investor obligations suggested by the SADC Model BIT (2012).
To provide balance, the Protocol offers incentives to investors for investments that promote sustainable development (Article 8). Under this provision, States may offer either pecuniary or non-pecuniary incentives. This has been suggested by several model IIAs. The AAA Model BIT (2022) encourages the exploration of “incentives that contribute to sustainable development” (article 3.3), whilst the PAIC (2016) and ECOWIC (2019) each contain a provision on investor incentives for investments of particular strategic interest (articles 6 and 19 respectively), wording which could cover sustainable development should this be of strategic importance to the Host State.
The Protocol’s approach to investor obligations is relatively extreme when compared to other new generation IIAs. It remains to be seen whether the balancing act between State obligations, investor incentives and investor obligations produces an IIA of greater equilibrium between investor and State and whether it can successfully promote, maintain and reward sustainable investments.
Counterclaims
The Protocol refers in several places to an annex titled “Rules and Procedures governing Dispute Prevention, Management and Resolution of disputes covered by this Protocol” (the “Dispute Resolution Annex“) which is still under negotiation. For the purposes of this article, reference is made to the most recently published draft of the Dispute Resolution Annex from November 2021, which provides for ICISID, UNCITRAL or any other institutional arbitration (Article 6), after failed attempts of amicable settlement over a six month cooling-off period (Article 5).
Commentary on the procedural clauses of the Protocol is therefore particularly speculative, but nonetheless significant given the inclusion of a counterclaims provision in the November 2021 draft of the Dispute Resolution Annex (Article 10). States are expressly afforded the right to bring a counterclaim against investors “for damages or other relief resulting from an alleged breach of the Protocol.” This provision works in tandem with Article 9 of the Dispute Resolution Annex, which provides that, “by submitting a claim to arbitration, the investor also consents to counterclaims by the Host State for an alleged breach of the Protocol“.
Despite suggestions in the SADC Model BIT (2012) (article 19.2) and the PAIC (2016) (article 43), counterclaims provisions are yet to become established treaty practice. IIAs expressly permitting counterclaims are limited to only a handful of treaties currently in force, such as the Iran-Slovakia BIT (2016) (article 17.1(a)(ii)). The COMESA Investment Agreement (2007) (article 28(9)) and the Argentina-UAE BIT (2018)* (article 28.4) contain a counterclaims provision, but neither is in force at the time of writing.
With this in mind, a counterclaims provision in the finalised Dispute Resolution Annex would be a significant development for African ISDS and another indication that the finalised Protocol will rank alongside the most advanced new generation IIAs.
Conclusion
The Protocol is well-placed to answer the calls for investment treaty reform on the African continent. Given that the Protocol will replace 173 intra-African BITs, many of them old generation, its adoption is an immensely important step for African investment and ISDS. The pioneering features discussed supra should hopefully contribute to a balanced IIA that produces consistent treaty interpretation and ISDS outcomes and ensure compliance with international ESG, CSR and environmental protection commitments, a bi-product of which would be significant contributions by intra-African investments to sustainable development. Further still, the Protocol’s impact on treaty practice will not be limited to Africa. Its signatories are required to align all new extra-African bilateral instruments with its contents; indeed, since the adoption of the Protocol in February 2023, Angola has concluded progressive IIAs with China (2023), the EU (2023) and Japan (2023) respectively. Accordingly, it would appear that Africa has set the new standard for consistent, progressive and fairer treaty practice on the international stage.
* Denotes concluded IIAs that are not in force at the time of writing.
Disclaimer: the views and opinions expressed in this article are those of the author and do not necessarily reflect those of Gide Loyrette Nouel LLP.
ABOUT THE AUTHOR:
Jack Bownes qualified as a solicitor (England & Wales) in 2023 and is an Associate in the International Dispute Resolution group in Gide‘s London office.
Jack specialises in international arbitration and dispute resolution. He has acted in investment and commercial arbitration proceedings in both English and French across a variety of sectors, including construction, energy and mining. He has experience of disputes under the auspices of various arbitral institutions and rules (ICSID, ICC, SIAC, LCIA) at all stages of arbitral proceedings. Jack also advises governmental institutions and international tribunals on matters of public international law and dispute resolution.
He is a Member of the Chartered Institute of Arbitrators, and a member of a number of associations for young arbitration practitioners including London Very Young Arbitration Practitioners, Young-OGEMID and Young ITA.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
