Brazil's Innovative Approach to International Investment Law
By Nathalie Bernasconi-Osterwalder, Martin Dietrich Brauch, September 15, 2015
One of the more contentious aspects of international economic law are so-called bilateral investment agreements (BITs).
Dating back more than 50 years, these treaties are geared primarily towards protecting foreign investors. They are characteristically unbalanced as a result, containing hard rules for state conduct—enforceable through international arbitration—while demanding little in the way of reciprocal responsibilities for investors.
Today governments want to attract investment, but not at any cost. And they want to settle disputes that arise with investors, but in a way that is fair, balanced, and predictable for all parties involved.
Enter Brazil, which has broken the mold with its new Cooperation and Investment Facilitation Agreements (CIFAs—or ACFIs in their Portuguese acronym). Unlike traditional BITs, Brazil’s model focuses on cooperation and investment facilitation. CIFAs promote amicable ways to prevent and settle disputes and propose state–state dispute settlement as a backup; notably, they do not include provisions for investor–state arbitration.
While Brazil has not published its template, the texts of the four CIFAs concluded so far—with Angola, Malawi, Mexico, and Mozambique—allow us to understand the most important aspects of the new CIFA model.
An active Joint Committee with wide-ranging responsibilities and competences
Each CIFA creates a joint committee of government representatives of both parties to the agreement. Like committees with the same name in U.S. free trade agreements and in the Canada–European Union Comprehensive Economic and Trade Agreement, the CIFA joint committees serve to monitor and implement investment issues under the agreement. But they also have the broader mandate to coordinate detailed investment cooperation and facilitation agendas, involving private sector and civil society where appropriate. The committee also has a role to help prevent and resolve conflicts that may arise out of investments or with investors in an amicable way.
The Angola CIFA additionally allows the joint committee to invite non-governmental organizations to deliver presentations on certain matters—a process that could be used to bring to the attention of the joint committee certain types of investor conduct or concerns of local communities about a specific investment.
Focus on cooperation and facilitation rather than investment protection
The CIFAs do contain certain investment protection provisions, such as articles on expropriation, non-discrimination, and free transfer of capital. However, they generally are formulated to leave significantly more policy space for government action than the traditional provisions. And overall, the principal focus of the agreements is not on protecting foreign investors and investments, but on promoting state–state cooperation and facilitating bilateral investments.
In particular, the joint committee has a mandate to develop thematic agendas of cooperation and facilitation in areas relevant to promote and increase bilateral investments and to coordinate their implementation through specific commitments.
An Annex to each CIFA presents initial lists of topics and objectives, in areas such as transfers and payments, visas, and environmental and technical regulations. Their language suggests that it is not about agreeing on common standards, but ensuring a better mutual understanding and swift application of each other’s respective laws and regulations. The focus is more on fostering cooperation than on being prescriptive.
Putting the thematic agendas into practice ensures ongoing engagement between the two countries and has the potential to contribute significantly to increasing investment flows based on trust and common objectives. This contrasts with the approaches taken in traditional investment treaties where the home and host states largely disengage once the treaty is signed, at best communicating once a dispute has arisen or an investor has launched a formal arbitration against the host country.
Fostering responsible business conduct
Traditional BITs give rights to investors without imposing responsibilities on them. In another shift away from this paradigm, the CIFAs expressly mandate foreign investors and investments to strive to contribute to the sustainable development of the host state and local communities. In particular, the agreements explicitly set out a detailed list of voluntary principles and standards for responsible business conduct, directing investors to apply their best efforts to comply with these.
The principles and standards range from protecting the environment and achieving sustainable development; respecting human rights of those involved in the activities of the companies; strengthening local capacities through close cooperation with the local community; incentivizing the formation of human capital; abstaining from seeking or accepting exemptions other than those established in the law of the host state with respect to the environment, health, safety, labour, financial incentives or other matters; and so forth. The effectiveness of the provision will depend on how they are monitored and encouraged.
Focal Points or Ombudsmen to provide support to investors and help avoid disputes
Each party to a CIFA is required to establish a focal point—also referred to as an ombudsman—within the government to provide support to the foreign investors.
Two different functions are combined in one. On the one hand, the functions of a focal point pertain more to receiving or providing information or assistance, including aftercare. These are among the typical roles of an investment promotion agency, but are not often included in the institutional structures of BITs. Those of an ombudsman, on the other hand, pertain to investigating complaints and attempting to resolve conflicts. While there are examples of countries having set up such investment ombudsman functions, such as South Korea’s national ombudsman for investment set up under the Foreign Investment Promotion Act, this is not a provision typically seen in investment agreements.
Along with the joint committee, the focal points could have an important role in preventing investment-related disputes and facilitating their resolution. For the dual role of focal point and ombudsman to work, the officials or agencies designated for the ombudsman function should be independent and insulated against corruption. Depending on its design, the ombudsman could contribute effectively to avoiding that grievances raised by foreign investors escalate into international arbitration, and also deal with grievances raised by communities affected or harmed by an investment.
Formal dispute settlement as the last resort, and only between states
Traditional BITs typically recommend that the parties to an investment dispute should seek to resolve it through consultation and negotiation, but allow a foreign investor to skip these steps and submit the dispute to arbitration in a formal proceeding against the host state. The Brazilian CIFA adopts a fundamentally different logic.
The focal points and joint committees are empowered to act pro-actively to prevent investment-related disputes, as well as to manage and resolve them. The CIFAs use strong language to give an important role to state–state consultations and negotiations, making them mandatory. A preliminary examination of the dispute by the joint committee is also mandatory.
Only a state party may initiate a proceeding before the joint committee, by submitting “a specific question of interest of an investor.” Not only the investor but also relevant government agencies and civil society organizations are allowed to participate in the proceedings. The rules set out in the CIFAs formalizes Brazil’s promise of a swift and non-confrontational mechanism for preventing and resolving disputes.
If not resolved through consultations, negotiations, and joint committee proceedings—all mandatory—the dispute may be submitted to international arbitration. However, unlike traditional BIT-type agreements, investors may not initiate arbitration, as the CIFAs only provide for arbitration between the state parties. The CIFA with Mexico is the only one so far to include the actual rules on state–state arbitration, focusing on ensuring compliance with the agreement. A tribunal may only assess and grant damages if the disputing states expressly agree to it. Arbitrators are subjected to professional qualification requirements and ethical standards.
The future of the Brazilian CIFA model
Brazil's approach is innovative and, if adopted more broadly, would reshape global investment law frameworks for the better. To enhance this approach, Brazil and its negotiating partners could focus on the aspects of the CIFA model that merit further clarification or elaboration—as discussed in our recently published Comparative Commentary to Brazil’s Cooperation and Investment Facilitation Agreements (CIFAs) with Mozambique, Angola, Mexico, and Malawi.
The potential for further development does not cancel the merits of this novel approach. In the context of increasing criticism of the investor protection paradigm and the numerous flaws in investor–state arbitration, the CIFAs remind host countries that, to promote foreign investment inflows that contribute to domestic sustainable development, they do not necessarily need “more of the same.”