Model Investment Agreements and Human Rights: What Can We Learn from Recent Efforts?
As States continue to explore how to best align foreign investment interests and human rights obligations, several recent developments in the drafting of model agreements provide instructive lessons.
Model agreements inform investment treaty negotiations and increasingly include human rights considerations. Photo: Gerd Altmann / Pixabay
By: Kabir A.N. Duggal and Nicholas J. Diamond
States prepare model agreements for purposes of negotiating future investment treaties. These pre-drafted templates seek to promote efficiency and consistency by providing a starting point for negotiating specific investment treaty provisions. The role of model agreements has expanded in recent years and increasingly reflects the intersection of foreign investment with other State priorities, such as human rights.
Why Model Agreements?
The fates of foreign investment and human rights are intertwined. Because States are directly responsible for human rights obligations arising on the international plane, they must remain attuned to whether investment treaties provide sufficient safeguards against wrongful investor conduct. States may adopt various drafting techniques in service of this objective. We argue that model agreements adopted in recent years offer instructive lessons as to how a State might advance such an objective.
Model agreements can signal to both external parties and domestic constituents how a State views foreign investment. For example, a model agreement that reflects a concerted focus on human rights considerations serves at least two signaling functions—namely, to attract like-minded investors and deter inappropriate investor conduct. This can be especially salient for emerging economies, where the desire to attract and retain foreign investment can result in a negotiating imbalance.
We briefly consider several lessons learned from recent model agreements. We focus on specific examples that may provide instructive guidance on drafting robust language regarding human rights considerations. While several such examples are already likewise reflected in investment treaties, many are not or remain very rare. As States continue to prioritize satisfaction of their direct human rights obligations, these lessons may assist States in both signaling their foreign investment objectives and providing a foundation for defending against investment disputes brought by investors.
Lessons Learned From Recent Model Agreements
1. Include Specific Language Seeking to Preserve Regulatory Autonomy
In light of concerns that investment treaties impede exercise of a State’s regulatory autonomy, there has been a concerted effort for States to expressly maintain this authority. They may do this in a variety of ways.
Some model agreements provide for the importance of preserving regulatory autonomy in their preambles. A preamble may aid in interpreting the object and purpose of the instrument, but does not per se give rise to enforceable obligations. For example, the preamble to the 2017 Colombia Model BIT reaffirms the right of States to “regulate the investments made” to protect “legitimate public welfare objectives,” including human rights and the environment.
Relatedly, some model agreements provide for related obligations in the text of the instrument, although they can take different forms. For example, some model agreements carve out “non discriminatory regulatory measures” from the scope of certain clauses, most notably the expropriation clause. The 2012 US Model BIT recognizes a State’s regulatory powers on environmental matters; however, there is an express requirement that the measure must be “reasonable” or “bona fide.”
Other model agreements contain independent chapters focused on preserving regulatory autonomy. For example, the 2017 Colombia Model BIT contains a chapter in this regard. The chapter reaffirms that a State’s “right to regulate” to achieve legitimate public policy objectives in furtherance of constitutional or international obligations that promote and protect, inter alia, human rights and the environment, do not constitute breach of any provision under the agreement, even if they adversely affect a covered investment. The 2016 Czech Model BIT adopts a similar approach. Notwithstanding, the language of these provisions could still result in considerable debate as to whether a measure was indeed “legitimate.”
2. Include Specific Obligations Regarding Human Rights, the Environment, and Sustainable Development
Critics often lament that tribunals can award large sums without considering the human rights implications of the investor’s conduct or of the investment dispute itself. At the same time, an influx of foreign capital can help alleviate poverty, and otherwise contribute to human rights and sustainable investment objectives. Some model agreements expressly provide for such considerations.
For example, the Southern African Development Community (SADC) Model Bilateral Investment Treaty Template recognizes the “important contribution investment can make to the sustainable development . . . including the reduction of poverty . . . and the furtherance of human rights and human development.” The 2016 Azerbaijan Model BIT similarly states in the preamble that the parties wish to protect and promote “foreign investments consistently with the pursuance of the sustainable development goals, and the combating of climate change.”
Nonetheless, there can be a disconnect between which human rights considerations are included in a draft model agreement and the final version. For example, the Draft Indian Model BIT had several provisions regarding human rights, such as specifically referring to law relating to “human rights” and “conservation of natural resources” as law of the host State with which investors must comply. Similarly, Article 12 specifically also provides that investors “should” recognize the rights and traditions of local indigenous communities. None of these provisions were ultimately included in the final version in 2015.
Other model agreements address human rights at the damages stage, thereby providing another incentive for investor compliance. For example, the 2019 Netherlands Model BIT requires the tribunal to take into account non-compliance by the investor of its commitments under the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises in determining the amount of compensation claimant-investors are awarded. It is not exactly clear how this may operate in principle, but one argument could be that non-compliance can be a basis to reduce damages potentially through theories of contributory fault.
While these various efforts must be commended, it is likely that in any given situation, there can be considerable debate as to the precise obligations of an investor.
3. Establish Direct Investor Obligations
Investment treaties primarily establish obligations for the parties, but many contain operative provisions oriented towards investors. Most commonly, such provisions are couched in nonbinding language, such as requiring investors to “strive to achieve” human rights-related objectives. As such, the practical impact on investor conduct is likely minimal or at least difficult to confidently ascertain. Several model agreements, however, provide instructive examples of operative provisions that establish direct and binding obligations for investors. Importantly, such obligations can be strategically relevant for States seeking to bring counterclaims against investors.
For example, Article 7(1) of the 2019 Netherlands Model BIT requires investor compliance with domestic laws regarding, inter alia, human rights. As another example, Article 20.4 of the 2019 Morocco Model BIT requires that investors manage and operate their investments in compliance with, inter alia, international human rights and labor obligations. Finally, the Draft Pan-African Investment Code includes investor obligations to, inter alia, refrain from bribery of government officials, ensure that their economic objectives do not conflict with social and economic development objectives of the host State, refrain from exploiting natural resources, respect the rights of local populations (e.g., avoid “land grabbing”), and adhere to several business ethics and human rights principles.
As noted above, these efforts must be celebrated. However, how exactly these may play out in a dispute still remains to be seen. We do think the lack of precision, despite creating direct and binding obligations, will still result in considerable differences between the parties to any dispute.
4. Define “Investment” to Support Human Rights
The 2018 Ecuadorian Model Agreement reflects a unique nuance among model agreements. It defines “Investment” to require a positive contribution to the host State “with full respect of human rights and the environment.” Depending on its breadth of interpretation, this provision could exclude investments that breach human rights or environmental obligations either under the laws of the host State or international law. Such an investment would, therefore, not constitute a covered investment, thereby removing it from protection.
Indeed, this gatekeeping function may prove more impactful than operative provisions establishing human rights-related obligations because the latter would merely provide grounds for a potential counterclaim, whereas the approach in the 2018 Ecuadorian Model BIT could give rise to a jurisdictional defense which, if successful, may preclude a dispute from proceeding.
Looking Ahead
As foreign investment dynamics continue to evolve, not least due to the effects of the ongoing COVID-19 pandemic, how States approach human rights considerations will only become more salient. We see a concerted effort to place human rights, environmental, and sustainable provisions in different ways in model agreements.
Ultimately, the efficacy of these provisions will depend on how one views the situation. If the goal is to strike a balance between investor and State rights, these provisions would definitely be seen as an improvement. If the goal is to reduce the “costs” of an arbitration, these provisions would likely fail because there will often be heated discussions between the parties on the scope of these provisions. Time will tell whether and how these provisions are eventually placed within investment treaties and subsequently considered in disputes.
Dr. Kabir A.N. Duggal is an SJD candidate at Harvard Law School and a Lecturer-in-Law at Columbia Law School. Nicholas J. Diamond is a doctoral candidate at Leiden Law School and an Adjunct Professor of Law at Georgetown University Law Center. The views expressed are personal to both authors, and do not reflect the views of any of their institutional affiliations, employers, or clients. Both authors reserve the right to change their position.