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Brazil’s effort to prevent disputes provides no effective solution to those disputes which cannot be resolved through negotiation and could potentially lead to the exit of the investor. (Sao Paulo photo: Lukaaz - Marcelo)
Wednesday, April 15, 2015
Perspectives

Brazil: Investment Promotion More than Protection

Brazil’s new investment agreements focus on investment promotion more than protection, and on dispute prevention more than resolution.

BY JONATHAN C. HAMILTON
& MICHELLE GRANDO

The efficacy of treaties for the promotion and protection of investment constitutes a critical debate of our era with respect to investment and development. After two decades with a web of investment treaties in place, one of the central lines of the debate centers on whether such treaties effectively promote investment. Another central line of the debate centers on the efficacy of investment protections – including investor-State dispute settlement (ISDS) mechanisms, an issue that is in the spotlight of public commentaries regarding the Transatlantic Trade and Investment Partnership  (TTIP) and Trans-Pacific Partnership (TPP).

In the midst of this debate, Brazil has signed new Cooperation and Facilitation Investment Agreements (CFIAs) aimed at providing an alternate approach to both investment promotion and investment protection. Brazil’s Foreign Trade Secretary, Daniel Godinho, notes that the agreements take “a positive approach towards investment agreements through institutional cooperation and facilitation of investment flows.”  What are these agreements and what do they portend for Brazilian investment promotion and protection and for the future of investment treaties generally?

Brazil is a curious new entrant into the field of investment-related treaties. When other countries around Latin America and the world began to ratify investment treaties, Brazil demurred.  Brazil negotiated and signed fourteen bilateral investment treaties (BITs) in the 1990s, but it never ratified any of the agreements, bucking a trend that led to waves of investment treaty disputes in some countries in the Americas and beyond. This proved a double-edged sword: it insulated Brazil from potential claims, but also impeded protections that may have been afforded to outbound investment by Brazilian multinationals.  Depending on one’s views of investment treaties, the lack of ratification of such treaties may also thus have hindered investment promotion and the interconnectedness of the rule of law that are an aim of investment treaties; whereas others have argued that Brazil opted out of an ineffective system.

As outbound Brazilian investment continues to grow in Lusophone Africa and beyond, Brazil signed CFIAs with Angola and Mozambique on 30 March and 1 April 2015, respectively. In addition, Brazil is negotiating similar agreements with South Africa, Algeria, Malawi, Morocco, and Tunisia. The CFIAs have little in common with the BITs that Brazil did not ratify in the past or with most of the investment treaties that form a worldwide web of treaties. 

The new Brazil agreements focus on investment promotion more than protection, and on dispute prevention more than resolution. This article explores the details and particulars of the new Brazil agreements based on a review of the original Portuguese language agreements.


1.            Investment Promotion Under the New Brazil Agreements 

The new Brazil agreements place an emphasis on investment promotion including “enhanced institutional governance” and “thematic agendas for investment cooperation and facilitation.” With this approach the agreements seek to look ahead to new methods of investment promotion by focusing on State-to-State cooperation and mechanisms to promote investment, rather than viewing the investment protections as the corresponding source of investment promotion, as some have interpreted most existing investment treaties.

The backbone of the investment promotion component of the CFIAs is the creation of a joint governmental committee (Joint Committee) and a focal point (Focal Point or Ombudsmen) inside the governmental structure of each State-Party (Party or Parties).

The Joint Committee is the body responsible for monitoring the implementation of the CFIA. Its main functions are to explore and foster opportunities for the expansion of investment, and establish and implement an agenda for the promotion and facilitation of investment, including the establishment of working groups in which the private sector may be invited to participate. Both the Angola and Mozambique CFIAs have included in the form of Annex I, an initial agenda of topics to be addressed by their respective Joint Committee, including business visas – Brazil and Angola have already signed a visas agreement – payments and currency remittances, environmental and technical regulation, institutional cooperation in energy planning and management, technology and science promotion and exchanges, labor force training, logistics and transportation.     

In turn, the Focal Points act as a liaison between investors and the host State; they interact with the other organs of the host State to answer questions received from investors, provide information, and communicate suggestions and feedback received from investors. The Focal Points also interact with each other to share and provide relevant information to the other Party.

The private sector does not have an institutionalized role in the investment promotion strategy under the terms of the CFIAs. It may be consulted and invited to participate in working groups, but it does not have a guaranteed place in them. It will be for to the Joint Committee and the Focal Points to shape the exact role of the private sector.


2.            Investment Protection and Dispute Resolution Under the New Brazil Agreements 

The new Brazil agreements adopt an alternate approach to investment protection and dispute resolution including “mechanisms for risk mitigation and disputes prevention.” Interestingly, these mechanisms which seek to break with the recent approach of investment treaties in some ways are looking backwards to an older method of diplomatic protection in which investor-State disputes are resolved through State-to-State mechanisms.  


a.            Standards of Treatment 

The alternate approach to substantive investment protections is based on the establishment of standards of treatment that mirror to a certain extent those found in most BITs.

Such standards include:


  • Direct expropriation: the CFIAs contain in Article 9 a prohibition on direct expropriations except for a public purpose, in a non-discriminatory manner, on payment of prompt, adequate, and effective compensation, and in accordance with due process of law. Compensation must be based on the fair market value of the investment right before (Brazil-Mozambique CFIA) or on the date of the taking (Brazil-Angola CFIA), and must not reflect any change in value occurring because the intended expropriation has become known earlier. Moreover, the compensation must be fully realizable and freely transferable. Except for the exclusion of indirect expropriations from the language of Article 9 of the CFIAs, the expropriation provision is almost a mirror image of the expropriation provision of the U.S. Model BIT.
  • Measures related to war and similar situations: also in a similar fashion to the U.S. Model BIT, the CFIAs contain a provision (Article 12) requiring treatment no less favorable than that accorded to domestic and investors of Third Parties with respect to compensation, restitution, or other measures adopted to address loss of the investment due to war or armed conflict, state of emergency, revolts, revolutions, or disorder.
  • National and most-favored-nation treatment: the CFIAs also provide in Article 11 for treatment no less favorable than accorded to domestic investors (national treatment) and investors of Third Parties (most-favored-nation treatment) with respect to the establishment and operation of the investment. Detracting in part from this, the Brazil-Angola CFIA in Article 11.6 allows the Parties to impose additional formalities on the operation of investments from the other party.
  • Umbrella clause: the Brazil-Angola CFIA also establishes an obligation to observe undertakings expressly assumed with respect to investments of investors of the other Party, the so-called umbrella clause (Article 11.8).
  • Transfers: both CFIAs provide that the Parties shall allow all transfers relating to an investment (Article 14).
  • Transparency obligations: Article 13 of the CFIAs establish transparency obligations, including publication of laws and regulations, and best efforts to provide an opportunity to those interested to comment on proposed measures.  


Some of the most notable differences in terms of standards of treatment between the CFIAs and most BITs are the absence of a prohibition on indirect expropriations and the obligation to ensure investments and investors fair and equitable treatment. Another noteworthy difference concerns those who the standards are intended to protect. The Brazil-Mozambique CFIA explicitly restricts the definition of investment to those destined to the production of goods and services (Article 3.1). Most BITs do not contain such limitation.  

Not unlike some BITs, the definition of “investor” in the Brazil-Mozambique CFIA requires that juridical persons have their seat and center of economic activities in the territory of a Party (Article 3.2). In turn, the Brazil-Angola CFIA (Article 3) does not define “investment” or “investor,” but instead refers to the domestic legislation of each party for such definitions. It achieves a similar result to the definition of investor in the Brazil-Mozambique CFIA through the inclusion of a denial of benefits clause (Article 16.3 of Brazil-Angola CFIA). The clause provides that upon notification and consultations the Parties may deny the benefits of the agreement to certain investors, including when they do not have their seat and substantial business activities in the territory of a Party. 


b.            Investor-State Dispute Settlement Mechanisms

Most existing investment treaties critically include not only substantive investment protections, but also a procedural mechanism for investors to pursue directly against a host State claims for alleged violations of those standards, effectively removing investor-State disputes from the purvey of State-State relations and foreign affairs. The new Brazil agreements change that model and look backwards to more traditional State-to-State methods of resolving investment disputes, a method which contributed to the advent of the contemporary investor-State reliance on international arbitration.

The CFIAs do not to give investors access to arbitration to enforce the standards of treatment described above as is usually the case with BITs. Instead, the CFIAs (Articles 4.4(v), 5.4(ii) and (iii), and 15) rely heavily on the Joint Committee and the Focal Points to act as a sort of mediator between the investors and the Parties, seeking to resolve problems before they rise to the level of a dispute or intervening to help those concerned to resolve a dispute through negotiations.

State-to-State arbitration is envisioned as an option to resolve disputes (Article 15.6), but only after a specific negotiation procedure before the Joint Committee fails to resolve the dispute. Such procedure before the Joint Committee must be started by a Party (not the investor), and representatives of the investor and of the government entities involved in the issue in question are, if possible, to be invited to participate in the negotiations. The Joint Committee procedure concludes by request of either Party, with the presentation at a meeting of the Joint Committee of a summary of the dispute and the position of the Parties.

It is only after the conclusion of this procedure that the Parties (not the investor) may have recourse to a State-to-State arbitration mechanism to be developed by the Joint Committee. The use of the plural “the Parties may have recourse” in Article 15.6 of both CFIAs, and the phrase “when deemed convenient between the Parties” in the Brazil-Mozambique CFIA suggests that the governments of both Brazil and Mozambique or Angola must agree to go to arbitration. This not only means that the system created is one of diplomatic espousal, but that, moreover, there is no consent in the CFIAs to the submission of a dispute to arbitration. Such consent will have to be established somewhere else, and if not done before the dispute arises, it might involve a considerable diplomatic effort and, ultimately, not be successful at establishing an arbitration.

Brazil’s effort to prevent disputes and seek to resolve them through negotiations is commendable. However, it only addresses part of the problem, and provides no effective solution to those disputes which cannot be resolved through negotiation. Brazil’s strategy seems to be based on the belief that “litigation hinders the development of harmonious long term relationships between foreign investors and host countries.”  While this might be true, when negotiations fail to provide a solution – and there are very few investors who choose to go to litigation if the dispute can be resolved through negotiations–, not guaranteeing access to an effective and neutral mechanism to resolve the dispute, such as arbitration, means that the problem will remain unaddressed. This will perpetuate an unhealthy relationship between the investor and the host State and potentially lead to the exit of the investor.

The rise of investor-initiated dispute resolution mechanisms arose in part of historical and political concerns regarding diplomatic espousal of claims, which may politicize a dispute and impact international relations between the States. If the home State of the investor is not materially involved in the dispute procedure, the isolated dispute is more insulated from foreign relations, and vice versa. Home State involvement may advantage or disadvantage particular investors and bring States into a sphere that is allocated to individual investors under most existing investment treaties. Such treaties also allow for other filtering mechanisms (e.g., deposits and loser pays rules) beyond State involvement to reduce frivolous claims. The new CFIA mechanism thus appears to be a new century variant of an older approach to address investor-State disputes as State-to-State issues.

Whatever their scope, the new Brazil agreements mark a new direction for investment promotion and protection, albeit a distinct one from the recent generation of investment treaties.  Brazil agreements also present significant issues as to the future of investment protections, for Brazil and beyond.  

Jonathan C. Hamilton is Partner and Head of Latin American Arbitration with global law firm White & Case. Michelle Grando is a member of the Latin American Arbitration team at White & Case.

Republished from Latin Arbitration Law with permission.

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