By Hogan Lovells Partners, Thomas Kendra and Robert Bradshaw
On 30 August 2017, the Moroccan Parliament ratified the Morocco-Nigeria bilateral investment treaty(“BIT“), which now awaits ratification by Nigeria. This treaty, part of a suite of agreements signed between Morocco and Nigeria at a ceremony in Casablanca in December 2016, is intended to herald a “strategic partnership” at a time when the two countries are embarking on an ambitious joint venture to construct a 4,000 km regional gas pipeline that will connect west African countries’ gas resources to Morocco and ultimately Europe.
The new BIT is particularly noteworthy as it is an example of the radical trend towards treaties that strike more of a “balance” between the interests of the contracting states and their investors in light of recent criticism of investment arbitration. Consistent with regional initiatives on investment treaty reform and in the aim of promoting sustainable development, the BIT includes several notable features safeguarding states’ discretion in enacting regulation and imposing obligations on investors. It also sets out an innovative pre-arbitration procedure for preventing and resolving disputes.
Commitment to sustainable development
In a nutshell, the overarching theme of the BIT is “sustainable development”, a phrase which features three times in the preamble and several more times throughout the operative provisions. For instance, Article 24 (Corporate Social Responsibility) stipulates that:
“… investors and their investments should strive to make the maximum feasible contributions to the sustainable development of the Host State and local community”.
Moreover, the definition of investment includes a condition that the investment contributes to the host state’s sustainable development. This means that states could potentially raise objections regarding sustainability in any dispute, even at the jurisdictional stage.
Reaffirming states’ right to regulate
In line with the focus on sustainability, the BIT guarantees the host state:
“… the right to take regulatory or other measures to ensure that development in its territory is consistent with the goals and principles of sustainable development and with other legitimate social and economic policy objectives”.
This reaffirmation of the “right to regulate” – also mentioned in the preamble to the treaty – addresses a growing concern that investment arbitration could have a chilling effect on states’ powers to regulate in the public interest. It is also in line with recommendations by the UN Conference on Trade and Development (UNCTAD), which has called for carve-outs in investment treaties for the protection of health or the environment in its Road Map for International Investment Agreement Reform.
Similarly, the BIT further provides that each state has the right to take:
“… in a non-discriminatory manner, any measure otherwise consistent with this Agreement that it considers appropriate to ensure that investment… is undertaken in a manner sensitive to environmental and social concerns”.
This appears to confer a broad margin of discretion on each state to introduce new regulatory measures which it “considers appropriate”.
Investor obligations
Consistent with its stated aim to seek “an overall balance of the rights and obligations among the State Parties, the investors, and the investments”, the BIT departs from more traditional investment treaties in imposing a broad range of obligations on investors as well as on states.
Among these obligations, the treaty requires investors to:
Conduct social impact assessments for potential investments (Article 14(2)).
Apply the precautionary principle in assessing the environmental impact of their investments (Article 14(3)).
Take measures to combat corruption (Article 17).
Uphold human rights, act in accordance with core labour standards and comply with environmental management standards (Article 18).
Meet or exceed nationally and internationally accepted standards of corporate governance (Article 19).
Comply with all applicable laws and operate through “high levels of socially responsible practices” (Article 24).
While the BIT confirms that breach of anti-corruption laws may expose foreign investors to prosecution in the host state, investors may also be subject to civil actions in their home state where acts or decisions made in relation to the investment lead to significant damage, personal injuries or loss of life in the host state.
Creation of a Joint Committee and “disputes prevention” provisions
The treaty is also innovative in its dispute resolution provisions. Specifically, it establishes a “disputes prevention” mechanism, overseen by a Joint Committee composed of representatives from the two states, whose primary role is to supervise the implementation and enforcement of the treaty. While the notion of a Joint Committee is not unique – the Comprehensive Economic and Trade Agreement (“CETA“) signed between EU and Canada last year establishes a similar committee – its role in “disputes prevention” is novel.
Under Article 26(1):
“… before initiating an eventual arbitration procedure, any dispute between the Parties shall be assessed through consultations and negotiations by the Joint Committee”.
Despite the reference to “any dispute between the Parties” (that is, between Morocco and Nigeria), these provisions appear to be aimed at investor-state disputes. A state may trigger the procedure by submitting a “specific question of interest” from an investor, after which the Joint Committee will meet (with the participation “whenever possible” of investor representatives) and attempt to resolve the dispute. If no settlement can be reached within six months:
“… the investor may, after the exhaustion of local remedies or the domestic courts of the host State, resort to international arbitration mechanisms”.
Analysis
The Morocco-Nigeria BIT bears the hallmarks of two trends in investment treaties:
The perceived and much-commented “backlash” against investment arbitration as it has developed.
A growth in the number of intra-African agreements, aimed at boosting trade and investment within the continent.
Morocco is a prime example, in recent years concluding new BITs with Mali, Guinea-Bissau, Rwanda and Ethiopia. Certain features of the BIT merit closer examination.
Notably, several of the obligations imposed on investors can also be found in the 2008 Supplementary Act of the Economic Community of West African States (“ECOWAS“), which aims to harmonise investment protections within the 15-member regional bloc. Nigeria is a founding member of ECOWAS, whereas Morocco applied to join earlier this year. The inclusion of these obligations in the Nigeria-Morocco BIT suggests regional efforts at reform are now being followed by national governments. However, while the BIT specifies that breach of investor obligations may lead to liability before domestic courts, it does not expressly address whether such claims may also be raised by a respondent state in arbitration. International tribunals do appear increasingly to admit counterclaims by states, so this may nevertheless remain a possibility.
Furthermore, the Joint Committee and associated “dispute prevention” mechanism are relatively novel elements of the BIT and it will be interesting to see in practice how these are applied. Negotiations through the Joint Committee can only be triggered by one of the state parties. It seems that the onus in discussions is on the state, which “may” make submissions on behalf of an investor. In all cases, if negotiations fail to resolve the dispute within six months, there will be some time before any final arbitration, since the treaty first requires the exhaustion of local remedies.
Overall, the treaty’s emphasis on sustainable development, the sovereignty of the host state to regulate and reciprocal obligations for investors suggest that campaigns by UNCTAD, ECOWAS and other bodies to shape the next generation of BITs are bearing fruit. Such developments are likely to be well received by states, particularly in the developing world. Conversely, the proposed disputes prevention procedure remains novel, and in practice means that, although investors are granted the possibility to commence arbitration, there are various steps to complete beforehand. The BIT’s amendment provisions and the requirement for a periodic review every five years to assess its “operation and effectiveness” provide important opportunities to clarify these issues.
It remains to be seen whether the Morocco-Nigeria BIT will become a new model for investment treaties, particularly in the context of intra-African investment. For the moment, it appears to be an example of an ambitious effort to modernise the balance between investors and states in contemporary BITs.
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| Kendra Thomas |
The new BIT is particularly noteworthy as it is an example of the radical trend towards treaties that strike more of a “balance” between the interests of the contracting states and their investors in light of recent criticism of investment arbitration. Consistent with regional initiatives on investment treaty reform and in the aim of promoting sustainable development, the BIT includes several notable features safeguarding states’ discretion in enacting regulation and imposing obligations on investors. It also sets out an innovative pre-arbitration procedure for preventing and resolving disputes.
Commitment to sustainable development
In a nutshell, the overarching theme of the BIT is “sustainable development”, a phrase which features three times in the preamble and several more times throughout the operative provisions. For instance, Article 24 (Corporate Social Responsibility) stipulates that:
“… investors and their investments should strive to make the maximum feasible contributions to the sustainable development of the Host State and local community”.
Moreover, the definition of investment includes a condition that the investment contributes to the host state’s sustainable development. This means that states could potentially raise objections regarding sustainability in any dispute, even at the jurisdictional stage.
Reaffirming states’ right to regulate
In line with the focus on sustainability, the BIT guarantees the host state:
“… the right to take regulatory or other measures to ensure that development in its territory is consistent with the goals and principles of sustainable development and with other legitimate social and economic policy objectives”.
This reaffirmation of the “right to regulate” – also mentioned in the preamble to the treaty – addresses a growing concern that investment arbitration could have a chilling effect on states’ powers to regulate in the public interest. It is also in line with recommendations by the UN Conference on Trade and Development (UNCTAD), which has called for carve-outs in investment treaties for the protection of health or the environment in its Road Map for International Investment Agreement Reform.
Similarly, the BIT further provides that each state has the right to take:
“… in a non-discriminatory manner, any measure otherwise consistent with this Agreement that it considers appropriate to ensure that investment… is undertaken in a manner sensitive to environmental and social concerns”.
This appears to confer a broad margin of discretion on each state to introduce new regulatory measures which it “considers appropriate”.
Investor obligations
Consistent with its stated aim to seek “an overall balance of the rights and obligations among the State Parties, the investors, and the investments”, the BIT departs from more traditional investment treaties in imposing a broad range of obligations on investors as well as on states.
Among these obligations, the treaty requires investors to:
Conduct social impact assessments for potential investments (Article 14(2)).
Apply the precautionary principle in assessing the environmental impact of their investments (Article 14(3)).
Take measures to combat corruption (Article 17).
Uphold human rights, act in accordance with core labour standards and comply with environmental management standards (Article 18).
Meet or exceed nationally and internationally accepted standards of corporate governance (Article 19).
Comply with all applicable laws and operate through “high levels of socially responsible practices” (Article 24).
While the BIT confirms that breach of anti-corruption laws may expose foreign investors to prosecution in the host state, investors may also be subject to civil actions in their home state where acts or decisions made in relation to the investment lead to significant damage, personal injuries or loss of life in the host state.
Creation of a Joint Committee and “disputes prevention” provisions
The treaty is also innovative in its dispute resolution provisions. Specifically, it establishes a “disputes prevention” mechanism, overseen by a Joint Committee composed of representatives from the two states, whose primary role is to supervise the implementation and enforcement of the treaty. While the notion of a Joint Committee is not unique – the Comprehensive Economic and Trade Agreement (“CETA“) signed between EU and Canada last year establishes a similar committee – its role in “disputes prevention” is novel.
Under Article 26(1):
“… before initiating an eventual arbitration procedure, any dispute between the Parties shall be assessed through consultations and negotiations by the Joint Committee”.
Despite the reference to “any dispute between the Parties” (that is, between Morocco and Nigeria), these provisions appear to be aimed at investor-state disputes. A state may trigger the procedure by submitting a “specific question of interest” from an investor, after which the Joint Committee will meet (with the participation “whenever possible” of investor representatives) and attempt to resolve the dispute. If no settlement can be reached within six months:
“… the investor may, after the exhaustion of local remedies or the domestic courts of the host State, resort to international arbitration mechanisms”.
Analysis
The Morocco-Nigeria BIT bears the hallmarks of two trends in investment treaties:
The perceived and much-commented “backlash” against investment arbitration as it has developed.
A growth in the number of intra-African agreements, aimed at boosting trade and investment within the continent.
Morocco is a prime example, in recent years concluding new BITs with Mali, Guinea-Bissau, Rwanda and Ethiopia. Certain features of the BIT merit closer examination.
Notably, several of the obligations imposed on investors can also be found in the 2008 Supplementary Act of the Economic Community of West African States (“ECOWAS“), which aims to harmonise investment protections within the 15-member regional bloc. Nigeria is a founding member of ECOWAS, whereas Morocco applied to join earlier this year. The inclusion of these obligations in the Nigeria-Morocco BIT suggests regional efforts at reform are now being followed by national governments. However, while the BIT specifies that breach of investor obligations may lead to liability before domestic courts, it does not expressly address whether such claims may also be raised by a respondent state in arbitration. International tribunals do appear increasingly to admit counterclaims by states, so this may nevertheless remain a possibility.
Furthermore, the Joint Committee and associated “dispute prevention” mechanism are relatively novel elements of the BIT and it will be interesting to see in practice how these are applied. Negotiations through the Joint Committee can only be triggered by one of the state parties. It seems that the onus in discussions is on the state, which “may” make submissions on behalf of an investor. In all cases, if negotiations fail to resolve the dispute within six months, there will be some time before any final arbitration, since the treaty first requires the exhaustion of local remedies.
Overall, the treaty’s emphasis on sustainable development, the sovereignty of the host state to regulate and reciprocal obligations for investors suggest that campaigns by UNCTAD, ECOWAS and other bodies to shape the next generation of BITs are bearing fruit. Such developments are likely to be well received by states, particularly in the developing world. Conversely, the proposed disputes prevention procedure remains novel, and in practice means that, although investors are granted the possibility to commence arbitration, there are various steps to complete beforehand. The BIT’s amendment provisions and the requirement for a periodic review every five years to assess its “operation and effectiveness” provide important opportunities to clarify these issues.
It remains to be seen whether the Morocco-Nigeria BIT will become a new model for investment treaties, particularly in the context of intra-African investment. For the moment, it appears to be an example of an ambitious effort to modernise the balance between investors and states in contemporary BITs.
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