When Arbitration Protects Corporations and Domestic Courts Betray Justice, Who Defends Local Communities’ Environmental Rights?
Recently Colombia’s former Minister of Trade, Industry and Tourism, Luis Carlos Reyes, pointed out the growing concern about the legitimacy of investment arbitration, stressing that democratic states must have the authority to regulate in the public interest, especially when the practices of multinationals may undermine national policies. This critique raises important questions about power relationships between companies and governments.
What exactly are investment treaties?
Investment treaties are agreements regarding a state’s treatment of investments made by individuals or companies from another state. Companies invest abroad to access land-based resources including mining, more affordable labour (for instance in manufacturing), and new markets, among other reasons.
A Bilateral Investment Treaty (BIT) or Multilateral Investment Treaty (MIT) commits state parties to afford specific standards of treatment to foreign investors from the other state parties. These treaties grant foreign investors certain protections and benefits, including recourse to Investor-State Dispute Settlement (ISDS) arbitration to resolve disputes with host states.
In the absence of these treaties, investors would have to turn to domestic courts to seek a remedy against adverse action by a host state. Thus, in principle arbitration provides a depoliticised international forum that is independent of the host state’s judicial system.
But what is the issue at stake today?
BITs debuted in the late 1950s, and therefore were designed under different conditions, with different concerns in mind. At that time, we weren’t really considering the climate emergency, but now the fossil fuel industry has become the most prolific user of this problematic system.
Additionally, in this dispute resolution mechanism, you only have two parties: the investor and the state. Local communities are not formally part of these kinds of disputes, creating scenarios where the people who are most affected don’t have a say in making the big decisions.
Therefore, the issue is that international investment law frequently comes into conflict with international legal protections for the rights of local communities, and increasing environmental awareness is breathing new life into previously dormant environmental clauses within BITs and MITs.
These conflicting issues are exacerbated by the exclusion of local communities in the treaties, fuelling social unrest and enabling ecological destruction of ancestral lands.
From the perspective of investors, it is becoming more and more important to assess the risks posed by environmental measures as well as the legal remedies available to counter potential abuses.
In 2018 for example, the IISD (International Institute for Sustainable Development) identified various categories for integration into treaties as investor obligations, including the general obligation to comply with the host state’s domestic law; the protection of human rights and indigenous peoples’ rights; and the protection of the environment.
The Protocol on Investment (POI) to the Agreement Establishing the African Continental Free Trade Area (AfCFTA), adopted by African Heads of State in February 2023, provides a good example of taking into account some of the complexities of regulating investor obligations directly in a treaty.
This raises an important question: can we establish an investment framework that attracts the funds needed for a just transition while respecting and safeguarding the rights and livelihoods of local communities?
So, is it time to rethink investment treaties?
The Colombia-UK BIT example
The Colombia-UK BIT has been invoked in disputes where UK-based investors have challenged Colombian government measures aimed at safeguarding the environment and indigenous communities.
Context
The Colombia-UK BIT includes an Investor-State Dispute Settlement (ISDS) mechanism, allowing investors to sue governments over actions perceived to harm their investments.
In Colombia, this mechanism has been utilised by UK mining companies to contest environmental regulations and protections for indigenous territories. Such disputes underscore the friction between protecting foreign investments and upholding environmental and human rights standards.
In light of these challenges, Colombia is seeking to renegotiate its 2014 BIT with the UK, which it believes favours foreign companies over the Colombian state. Former Colombian Minister of Trade, Industry and Tourism Luis Carlos Reyes recently emphasised the importance of balancing foreign investment with sovereignty over national policies. He argued that Colombia’s judicial system could handle disputes fairly and transparently, reducing the need for international arbitration.
However, while Colombia advocates for reforms to ensure equitable treatment in its international agreements, the British-Colombian Chamber of Commerce and UK officials warn that renegotiation could deter investment and threaten the treaty's stability.
The key point of contention of the treaty lies in the clause requiring disputes between British companies and the Colombian government to be resolved through international arbitration panels. While these clauses are a common feature of treaties globally, they have faced growing criticism for fostering unequal outcomes. Many argue that arbitration mechanisms disproportionately favour multinational corporations, leaving host states, particularly developing nations like Colombia, to shoulder significant financial and legal burdens.
Consequently, renegotiation is the only viable path to ensuring a more balanced and equitable framework that protects Colombia's sovereignty, addresses concerns over arbitration bias, and aligns the treaty with indigenous consideration and environmental protection.
Minister Reyes' proposal to strengthen Colombia’s domestic legal institutions by relying on national courts for dispute resolution offers potential benefits. It could bolster trust in Colombia’s legal system and encourage foreign investors to engage more collaboratively with local authorities.
However, the main concern is whether Colombia's judiciary can consistently offer protections comparable to those provided by international arbitration, which has long been viewed as a neutral and reliable means for resolving such disputes.
Thus, while strengthening domestic institutions is an important step, Colombia must also ensure that these reforms do not inadvertently discourage foreign investment by creating an environment where investors feel their interests are inadequately protected.
Where could this kind of practice go wrong?
The 2009 international investment dispute of Deutsche Bank AG v. Sri Lanka (ARB/09/2) serves as a reminder of the risks that foreign investors may face when relying solely on domestic legal systems.
Context
Deutsche Bank AG held rights under an oil hedging agreement (2007) with Ceylon Petroleum Corporation (CPC), Sri Lanka’s 100% state-owned oil company, to shield against rising oil prices.
While initially profitable, these contracts led to heavy losses when oil prices collapsed in late 2008.
CPC and the banks involved faced criticism from politicians, citizens and the media. Several Supreme Court petitions were filed alleging corruption in the contracts, prompting the Sri Lankan court (the domestic legal system) to temporarily halt payments to their investors.
Deutsche Bank, having found no support in the domestic legal system, then filed an arbitration claim against the Sri Lankan government over the disputed hedging contracts. The claim, registered on 24 March 2009 with the International Centre for Settlement of Investment Disputes (ICSID), alleges that the government of Sri Lanka had breached the German-Sri Lanka Bilateral Investment Treaty.
Consequently, in October 2012, two of three arbitrators ruled that Sri Lanka broke its investment treaty with Germany by stopping payments to Deutsche Bank, and awarded a settlement of over $60 million plus legal fees.
This highlights the risks foreign investors face when relying on domestic legal frameworks that may not always be perceived as impartial or efficient.
Conclusion
The BIT between Colombia and the United Kingdom illustrates the tension between protecting foreign investment and safeguarding the rights of local communities. The inclusion of arbitration clauses has led to disputes that often favour corporate interests over environmental and human rights considerations. Colombia's efforts to renegotiate the BIT reflect a desire to balance these conflicting interests by strengthening domestic legal institutions.
However, as seen in Deutsche Bank AG v Sri Lanka, reliance on domestic courts presents risks for foreign investors. Therefore, renegotiating investment treaties to better align with modern priorities, such as environmental protection and human rights, is a necessary step to ensure a more balanced and equitable framework.
By Fayrouz Ynes Boina Idjihadi, Student Blog Writer at QMLAC and LLB Law Student.
The information provided here does not replace professional guidance, for which you should consult an estate planning specialist.
This blog is for information only and does not constitute legal advice on any matter. While we always aim to ensure that information is correct at the date of posting, the legal position can change, and the blogs will not ordinarily be updated to reflect any subsequent relevant changes. Anyone seeking legal advice on the subject matter should contact a specialist legal representative.
Sources
Colombia seeks renegotiation of investment treaty with the UK - https://on.ft.com/4luzBaP
Rethinking Investment Treaties A roadmap IISD REPORT - https://www.iisd.org/publications/report/rethinking-investment-treaties-roadmap
Viñuales JE. Foreign investment and the climate change regime. In: Foreign Investment and the Environment in International Law. Cambridge Studies in International and Comparative Law. Cambridge University Press; 2012:253-278.
DEUTSCHE BANK AG V. DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA ICSID CASE NO. ARB/09/02