Host States’ Labour Regulation in the Aftermath of International Investment Disputes: Five Levels of Impact and Interaction

Abstract

International law in the form of international investment agreements (IIAs) and investor-state dispute settlement (ISDS) judgements provide impetus to changes in domestic labour and labour market related social regulation and policies in countries hosting foreign investment. The International Centre for the Settlement of Investment Disputes (ICSID) has a leading role in defining the contents of international law in what comes to IIAs as it has administered the majority of known international investment cases and many IIAs include provisions directing investment disputes to be arbitrated through ICSID’s ad hoc tribunals. This chapter pinpoints a non-negligeable incidence of ISDS cases including labour-related claims and defenses. Irrespective of the labour related claims’ success in arbitration, the analysis finds five different levels of these cases’ impacts on domestic regulation in host states.

The views expressed in this chapter are those of the author and should not be attributed to the UNCTAD Secretariat or its member states. The author wishes to thank friends and colleagues from the ILO, ICSID, and UNCTAD as well as Dr. Jan Klabbers from the University of Helsinki who have provided comments to earlier research forming the basis for this chapter. Special thanks go to Dr. Eleanor Tighe who developed a case database and contributed to a background paper initially developed in 2016.

1 Introduction

1.1 Setting the Scene

There is a broad recognition that foreign direct investment (FDI) is a vital component of sustainable development.¹ To foster the potential benefits, states have concluded thousands of international investment agreements (IIAs)² to encourage FDI flows.³ Yet the perceived threat created by international trade and investment agreements to national sovereignty on key social protections is one of the most significant causes behind recent setbacks in negotiating agreements such as the Transatlantic Trade and Investment Partnership.⁴

This chapter contributes to research on the topic by examining how the interpretation and application of IIAs in investor-state dispute settlement (ISDS) may affect labour and labour-market related social regulation and policies in host states.⁵ While it is true that states adopting regulation with general welfare aims in good faith and in a non-discriminatory manner can do so without a duty to compensate the harmed foreign investor,⁶ the cases may impact host state legislation through different means. Indeed, irrespective of this and the direct success rate of claims, different levels of ISDS cases’ impact on national regulation can be found. This chapter identifies and presents in dedicated sections below five main levels of such impacts which can be placed on a continuous line where both ends represent an opposite extreme. At one end, direct and immediate changes to domestic regulation can be found, while a reinforcement of the status of national labour and social regulation, and situations where the outcomes of domestic legal procedures impact ISDS outcomes, can be observed at the other end. Several cases analysed reveal issues to be addressed that link with the overall criticism directed at international investment law and ISDS.⁷

The research focuses on cases arbitrated under the International Centre for the Settlement of Investment Disputes (ICSID) that has administered the majority of international investment cases. Arbitration is provided by ad hoc tribunals established in line with the provisions of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention), which has a broad global membership.⁸ Many IIAs provide for dispute settlement directly at the international level through ICSID, and typically there is no requirement to exhaust domestic remedies before investors can resort to international arbitration.⁹ ICSID arbitration therefore plays a leading role in defining the contents of international law with regard to IIAs. While ICSID tribunals are not obliged to follow prior jurisprudence, they have de facto aspired to treat similar cases similarly to form a coherent area of law.¹⁰ A degree of pursuit towards coherence in case law is thus expected, which helps to draw some more general conclusions based on the individual cases discussed. This justifies studying ICSID arbitration awards in this chapter to find out how international investment law impacts regulation and policies in host states that typically appear as defendants in investment arbitration.

1.2 Overview of Research Material

This chapter was developed based on a systematic review of case law to comprehensively identify cases relevant for labour and labour-market related social policy topics in the ICSID case database.¹¹ This process was undertaken to address one of the most prominent issues in ISDS related discussions, namely uncertainty arising from a lack of information.¹² The chosen method helped to conclude that labour and labour-market related social policy issues—in the realm of the chosen key words—were invoked in a substantive manner in 6% of total ICSID cases with publicly available material, thus representing a non-negligible share of cases. The systematic review includes all cases registered with ICSID between 1972 and 2015, thus covering a broad spectrum of developments in international investment law that considering the generally lengthy ISDS processes continue to remain topical and valid.

In the majority of the identified cases, labour-related arguments were included in the investor’s claim, but they were also referred to in state defence and independently by the tribunals. Many of the standard IIA provisions have provided the basis for such arguments, including the fair and equitable treatment (FET) standard and other standards of treatment, expropriation and actions tantamount to expropriation, umbrella clauses and so-called stabilisation clauses in investor-state agreements—chiefly relied upon by investors—as well as treaty preamble clauses, general exceptions, and definition of protected investment—often invoked by states. Thematically, the identified cases cover minimum wage increases and wage increments, the question of contribution to the host state’s development, labour market policies, fundamental human and labour rights, union activities, dismissal regimes, employment creation requirements, enterprise ownership and management quotas and affirmative action policies, as well as penalties for using foreign labour.

The success rate of the investor claims was moderate yet noteworthy.¹³ Claims of an investor directly challenging labour regulation or state action were either unsuccessful (8), settled (2); or mixed / partly successful (1).¹⁴ In one case, the investor claim was successful based partially on a human rights claim (Bernhard von Pezold).¹⁵ In the two settled cases, Foresti and Centerra Gold, however, the investors succeeded to change host state regulation through negotiations.

Three cases concerned the applicability of bilateral investment treaty (BIT) exceptions clauses. Here the investment tribunals had to decide on whether the host state had contributed to its own economic crisis through its labour and other policies with a view to granting or refusing applicability of the exceptions clause. In two out of three cases, investors successfully argued for the inapplicability of the exceptions clause (El Paso Energy¹⁶ and Impregilo¹⁷) while state defence was mostly successful in one case (Continental Casualty Company¹⁸).

. In four cases, job creation, quality of jobs and skills upgrading were brought up to justify the existence or non-existence of an investment. In three cases, jurisdiction was established to the benefit of the investor (Quiborax;¹⁹ OI European Group BV;²⁰ and Pezold); while in one case the tribunal concluded that there had been no investment in the meaning of the ICSID Convention (Malaysian Historical Salvors²¹). However, the latter award was later annulled.²² Further, due to lack of evidence, state defence was unsuccessful in one case directly invoking a BIT preamble clause on the protection of workers’ rights (Hassan Awdi²³). One case containing a statement of principle about labour and human rights remains outside of this classification (Phoenix²⁴).

Subsequent to the case analysis, the defendant host states’ labour and foreign investment legislation and policies leading to and after the ISDS cases were reviewed to identify any changes that could be linked to the ISDS cases. The findings of the analysis, together with the outcomes of the ISDS cases themselves, are discussed in the subsequent sections.

2 ISDS As a Trigger to Changes in Domestic Regulation and Policies

2.1 Direct Changes to Host State Regulation in Follow-Up to ISDS Cases

Two of the identified ICSID cases appear to have led to direct changes in domestic regulation and policies as a result of the ISDS proceedings.²⁵ In one of them, a labour market focused part of a well-known affirmative action policy in South Africa, the Black Economic Empowerment Policy, was challenged before an ICSID tribunal in the context of the mining sector. In Foresti et al. v. South Africa, ICSID Case No. ARB(AF)/07/01 (Award 2010), an unlawful expropriation claim targeted legislation-based requirements to transfer a certain percentage of mining company ownership to historically disadvantaged South Africans (HDSA) together with employment equity measures. The investor argued that unlawful expropriation had been imposed, as the required transfer allegedly could not be done at a fair market value. The investor therefore requested the ISDS tribunal to confirm a breach of the Belgium – Luxembourg – South Africa BIT (1998)²⁶ as well as the Italy – South Africa BIT (1997)²⁷.

The legislation targeted by the claim involved the Mineral and Petroleum Resources Development Act and the Mining Charter adopted in 2002. These instruments set both HDSA ownership and employment equity requirements, notably to achieve 26% HDSA ownership of mining assets by 2014 as well as 40% HDSA participation in management functions by 2009.²⁸ As such, the affirmative action instruments directly targeted the labour market, aiming to improve diversity in the mining sector’s management positions as well as in its ownership structure. While the requirement of employment equity plans increasing HDSA share in management was mentioned, the claimants did not invoke this as a direct ground for expropriation. However, employment equity requirements were negotiated as a part of the later settlement package.

An Offset Agreement was reached between the Department of Mineral Resources and the claimant in December 2008, providing that instead of selling 26% of shares to HDSAs, the investor had to provide a 21% beneficiation offset²⁹ and offer a 5% employee ownership program for employees in the operating companies. As a result, the claimant later sought discontinuance of proceedings as well as an award on the allocation of costs. The tribunal ordered the claimants to pay €400,000 to the respondent in fees and costs, and dismissed the claims with prejudice. In setting this amount relatively low, the tribunal considered the paradox that the companies in question employed significant numbers of HDSAs in the beneficiation process.³⁰

Interestingly, the Foresti dispute appears to have contributed to a change in national legislation in South Africa. In 2010, an amendment of the Mining Charter was approved, where offsetting of the 26% ownership requirement was allowed against a certain value of beneficiation.³¹ The settlement outcome achieved by a foreign investor was thus extended to the whole sector through a change in the general legal framework. The ISDS case might not have been the only contributing factor to the change in legislation, as policy proposals in that direction had already been made in 2002,³² and the mining sector legislation had also been challenged by other investors through domestic courts at the time.³³ The claimants, however, argued that their mere registering of the ISDS claim had caused the respondent to enter into an agreement with them and to grant them the requested rights.³⁴ Indeed, the claimants considered that had they opted for domestic proceedings,³⁵ they could not have obtained as favourable conditions as through initiating arbitration.³⁶

In this case, the protection of private property and the policy objective of enhancing the socio-economic status of HDSAs presented two opposing goals in the local context, both linking to international human rights law. Being faced with ISDS claims, the South African Government decided to steer its affirmative action policy from principally promoting HDSA ownership and their increased representation in management positions in natural resources sectors towards enriching the manufacturing process and enhancing workers’ skills. The affirmative action policy had been defended by the respondent in the Foresti case with the necessity to—among others—‘ameliorate the disenfranchisement of HDSAs and other negative social effects caused by apartheid in general and the 1991 Mineral Rights Act in particular’³⁷ In the same lines, Amici curiae³⁸ accepted to participate in the proceedings in Foresti put forward human rights argumentation in support of affirmative action policies, invoking, among others, the South African Constitution and several international human rights conventions and comments by their supervisory committees.³⁹ The non-disputing parties argued, among other things, that the challenged regulation had aimed to ‘proactively redress the apartheid history of exploitative labour practices, and discriminatory ownership policies’,⁴⁰ demonstrating the continued disadvantaged situation of black South Africans in the country. They raised the conflict between different areas of international law and the South African Constitution in terms of human rights promoting measures and called for ‘an interconnected approach’ to international law.⁴¹ As such, while the ISDS tribunal did not judge on merits at the end, the case’s impact on domestic legislation appears undeniable. It also changed the direction of the affirmative action policy strongly defended by the respondent and the non-disputing parties.

Labour-market related affirmative action policies and racial discrimination were also discussed in another context in Bernhard von Pezold and others v. Zimbabwe, ICSID Case No. ARB/10/15 (Award 2015), the second identified case that appears to have led to direct changes in domestic regulation as a result of ISDS proceedings. The case is interesting from the point of view of the ILO Indigenous and Tribal Peoples Convention, 1989 (No. 169) which contains provisions on indigenous peoples’ land-related rights, particularly as these relate to the labour market as a key factor of production. Furthermore, the case is unique in condemning racial discrimination, and in confirming the legitimacy of affirmative action policies in general before ISDS. The case concerned the land reforms carried out in Zimbabwe in the context of rising demands from the population, unrest and occupation of farmland by settlers in the early 2000s. The investors in the case, white farmers of foreign nationality, challenged the alleged expropriation of their farms by the state without compensation based on the Switzerland-Zimbabwe BIT (1996)⁴² and Germany-Zimbabwe BIT (1995)⁴³. The tribunal found that unlawful expropriation existed merely because the properties were acquired without compensation. Further, it found that sufficient evidence existed on the discriminatory basis of the expropriations, as they were based on the farmers’ skin colour. The tribunal also concluded that no legitimate purpose could be established, as the land did not seem to be further distributed to historically disadvantaged or landless population.⁴⁴ Breaches of FET and other standards of treatment were equally found.

Interestingly, in relation to the state of necessity plea of Zimbabwe, the Pezold tribunal went on to discuss the erga omnes⁴⁵ obligation not to engage in racially discriminatory acts as well as its relationship with affirmative action policies. The tribunal acknowledged the legitimacy of affirmative action, observing that ‘it is accepted by the international community that situations will arise where racial discrimination is justified and will remain so for as long as is necessary. Policies that discriminate in favour of the aboriginal inhabitants of a particular State (affirmative action) may, generally speaking, fall within this category as justifiable’.⁴⁶ In this case, however, the tribunal found that the respondent’s position had been too extreme: the programme implemented from 2000 onwards had been racially motivated. As such, the breach of an erga omnes obligation precluded the defence of necessity by Zimbabwe. Exceptionally, the Tribunal ordered not only compensation but also restitution of farmland to the claimants or, alternatively, higher amounts of compensation if restitution would not be effected. Zimbabwe sought to annul the decision, but the application of annulment was dismissed (Decision on Annulment, 21 Nov. 2018).

Once again, the ISDS case had direct impacts on national legislation. Diplomatic pressure was also comprehensively exercised against Zimbabwe’s expropriation practices at the time, and it will certainly have affected the Government’s policies in later years.⁴⁷ However, the specific role of ISDS can be directly distinguished from both the 2013 Constitution and national legislation enacted in 2020,⁴⁸ few years after the Pezold award and the decision on annulment to the favour of the investor. Zimbabwe’s Constitution of 2013 had already foreseen compensation for expropriations in the context of the land reform, and international processes⁴⁹ appear to have contributed to the inclusion of persons whose rights were guaranteed by international agreements as beneficiaries to be compensated both for land and improvements.⁵⁰

The possibility to apply for the disposal of land was enacted through the Disposal in Lieu of Compensation Regulations (Regulations) in March 2020. In the same sense as the ISDS tribunal’s reasoning, the Regulations’ objective was to ‘provide for the disposal of land to persons […] who are, in terms of section 295 of the Constitution, entitled to compensation for acquisition of previously compulsorily acquired agricultural land’ (Art. 3). The Regulations are applicable to ‘indigenous’ Zimbabweans and citizens of a Bilateral Investment Protection and Promotion Agreement (BIPPA) or a BIT country (Art. 4.1(a-b)). In line with the Regulations, the individuals concerned may apply to obtain title to an agricultural land that previously belonged to them, and their applications will be reviewed by a committee set up for the purpose (Art. 5.1-2). The state still maintains the possibility to pay compensation ‘on its own discretion’ if it ‘prefers’ (Art. 7.2 (d)). The disposal of land as a result of the process is stipulated as the ‘final settlement of any claims that the applicant may have from the State in respect of compensation’ (Art. 9.1).

As such, the ISDS awards have been enforced and further expanded to all concerned individuals through national legislation, starting from the Constitution. It is noteworthy that the Constitution provides a particularly advantageous treatment to ‘indigenous’ Zimbabweans and to BIPPA and BIT country citizens, namely compensation for agricultural land and for improvements, while white Zimbabwean farmers only receive compensation for improvements. The Regulations implement the constitutional provision in the case of the two former categories. The compensation deal targeted at white Zimbabwean farmers was separately struck in August 2020 and they were, in line with the Constitution, only compensated for improvements.⁵¹ The relatively stronger protection provided to citizens of BIT partners—together with ‘indigenous’ Zimbabweans—gives indications of the comparatively strong impact of ISDS on domestic legislation and policies.

2.2 ISDS As a Contributor to a Broader Policy Shift

Similarly to the cases discussed in the previous section, three others seem to have influenced domestic regulation and policies. However, in these cases the role of ISDS seems to be that of one contributing variable among various factors, leading to changes within a broader policy shift.

These interesting developments can be traced based on the three ISDS cases that discussed the possibility to exclude from treaty protection investments allegedly not contributing to the host state economic development because of either insufficient job creation (Malaysian Historical Salvors v. Malaysia, ICSID Case No. ARB/05/10 (Award on Jurisdiction 2007; and Decision on the application for annulment, 2009)) or inappropriate working conditions maintained by the enterprise (Quiborax v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2 (Decision on jurisdiction 2012) and OI European Group B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/11/25 (Award 2015)). In these cases, the state defenses arguing for inadmissibility to arbitration based on lack of contribution to the host state’s development were largely unsuccessful. The resulting impacts at the national level—mostly as a response to ISDS as a whole—have taken two directions: on the one hand distancing the country from the case outcome and the ISDS in its entirety, and on the other hand converging with the judgement.

In these three cases, the success of the state defenses was partially dependent on the choice of interpretation line by the ISDS tribunal. A part of the tribunals based their analysis of the definition of an investment on the applicable BIT only, arguing that the ICSID Convention, in line with its travaux préparatoires,⁵² does not include a definition of an investment. BIT definitions of an investment are typically broad and do not often include references to expected development effects. Other tribunals considered both the ICSID Convention—Art. 25 (1) and the preamble alluding to the investments’ expected economic development impacts—and the applicable BIT (so called ‘double-barrel test’).⁵³ The latter approach has enabled tribunals to take into account development impacts as an element of a protected investment, yet with varying results.

In OI European Group B.V., the dispute arose out of the expropriation of two glass container production plants based on various grounds, including alleged ‘contraventions of environmental law and workers’ rights’, ‘violations of free competition’,⁵⁴ ‘food security’, ‘endogenous development’ and ‘protection of fundamental constitutional principles’.⁵⁵ The Dutch claimant contended various breaches of the Netherlands–Venezuela BIT (1991)⁵⁶.

. The employment-related discussion in the case concerned again the assessment of admissibility to arbitration. The respondent argued for the use of a ‘double keyhole’ (double-barrel) test, in this contemplating that no necessary contribution to the host state’s development had been made. The tribunal considered it appropriate to apply the double-barrel test and analysed admissibility under both the BIT and the ICSID Convention.⁵⁷ Applying a teleological interpretation focusing on the treaties’ objectives to promote economic development and generation of wealth in the host state, the tribunal concluded that the requirement of contribution to the host state’s development had been fulfilled.⁵⁸ It found that when an investment manifests itself in business assets in the receiving country, particularly where the investor exercises the management of the enterprise, there cannot be any doubt about the existence of an investment. It considered two types of inputs, contribution in money (aporte en dinero) and contribution in industry (aporte en industria), stating that these provided the types of results that were expected when FDI was promoted.⁵⁹ The company had—through its investment—realised a contribution to the industry by improving the management of Venezuelan enterprises. The results had been successful: the companies had broadened their activity and created more jobs. On these grounds, the existence of an investment was confirmed and admission to arbitration granted.

Interesting developments in Venezuela’s FDI regulation can be observed after and leading to the award cited—all in response to a range of concerns over ISDS. A Decree⁶⁰ passed in 2014 linked productive investment to national development (Art. 1) and removed the possibility of submitting FDI disputes to international arbitration, applicable to any IIAs negotiated after the publication of the Decree (Art. 5). The only possible exception left to the rule of national jurisdiction on international investment disputes were dispute settlement mechanisms developed in the framework of the Latin American and Caribbean integration. The definition of an investment (Art. 6) provided different developmental characteristics related to employment policy, including contribution to employment creation and promotion of small and medium enterprises (SMEs).

More followed after the OI European Group B.V. award through the adoption of a Constitutional law on productive foreign investment (Ley Constitucional de Inversión Extranjera Productiva)⁶¹ in 2017, introducing further requirements of sustainable development impact, including explicitly with regard to decent working conditions. Among the objectives of the law figure the promotion of productive foreign investment to foster a comprehensive development of the nation, supreme happiness of the people and strengthening of a productive and diversified economy; and generating decent, fair and productive work (Art. 2 (i) and (iv)).⁶² In the definition of an investment, reference is no longer made to contributions through ‘employment creation’ but to ‘creation of decent work’ (Art. 7.1). Generating decent, fair and stable work is also included as one of the objectives to be considered in national FDI incentive programs (Art. 22 (under 10)). The jurisdiction over international investment disputes was scoped further, maintaining domestic courts as the main arena for such disputes. However, the door to ‘other integration schemes’ beyond the regional ones was re-opened, in both cases after having exhausted national remedies and with an existing prior agreement (Art. 6).

Similar changes at the national level were recorded in Bolivia after the Quiborax case, arbitrated under the Bolivia – Chile BIT (1994))⁶³. In its pleadings, the host state argued against the admissibility of the case to arbitration, claiming that the investor’s job creation did not contribute to its economic development. The host state contended that the foreign company’s workers were allegedly working without contracts, on a temporary basis, receiving irregular salary payments and using their own tools. In essence, the host state’s argumentation indicates a desire to a certain level of job quality provided by investments that it considers meriting protection.

Differing from the line of interpretation adopted in the OI European Group B.V., the tribunal in Quiborax concluded from the start that the definition of an investment did not comprehend a requirement on a contribution to the host state’s economic development. It came to this conclusion by considering previous case law as well as by viewing even a failed investment still an investment.⁶⁴ Therefore, an assessment of whether there had been a development contribution was not necessary in the tribunal’s view. Nevertheless, and while not relevant to gain jurisdiction, the tribunal still considered that a contribution to the state’s economic development had been made, as the mining concessions had generated a growing level of economic activity.⁶⁵ The quality of employment offered was not discussed.

Bolivia responded at the national level, although not only based on the above case but a range of ISDS claims that the country had faced. A new investment law (Ley de Promoción de Inversiones)⁶⁶ was adopted in 2014, and a new arbitration law in 2015 (Ley de Conciliación y Arbitraje),⁶⁷ stressing the need for investments to contribute to the state’s economic and social development and legislating on arbitration of investment disputes exclusively at the national level. The specific conditions laid down for investments require, among other things, technology transfer in the form of providing training to Bolivian personnel as well as technology itself, and respect for general labour law (Art. 11, Investment Law). So-called ‘preferred investments’ need to generate decent work and technology transfer (Art. 22, Investment Law). The Arbitration Law, Chapter on investment disputes with the state, provides that investment disputes will be submitted to the ‘jurisdiction, laws and authority’ of Bolivia (Art. 127, Arbitration Law) and that conciliation and arbitration are carried out at the national level (Art. 129). The arbitral tribunal must apply the Bolivian Constitution, laws, and norms to decide on the fundaments of the dispute (Art. 133.3).

Nevertheless, while the legislation adopted in 2014–2015 put an emphasis on the investment’s contribution to development, brought investment arbitration as a whole to the national sphere, and included explicit wording on labour law and the objective of generating decent work, the changes were not brusque in the national context. In fact, it is possible to observe a continuum in the policy direction of gradual disengagement from ISDS since several years, in response to a range of ISDS claims.⁶⁸ In 2007, Bolivia withdrew from ICSID, being the first country in the world to do so. In 2009, a significant Constitutional reform was carried out. This reform introduced, inter alia, provisions specific to investments and dispute settlement in the oil and gas industry, stipulating that ‘[n]o foreign jurisdiction or international arbitration will be accepted in any case […]’ (Art. 366 Constitution).⁶⁹ As such, ISDS cases as a whole, but also other policy drivers seem to have contributed to the changes promoting national approaches in FDI management.

The policy choices in Malaysia, on the other hand, took quite the opposite turn after the annulment decision in Malaysian Historical Salvors. In the main proceedings of the case, the tribunal applied the ‘double-barrel test’ in assessing its jurisdiction to arbitrate on the case concerning a marine salvage operation that led to a dispute on payments to the investor. It analysed the definition of an investment in the ICSID Convention (Art. 25 (1)), and on that basis considered a contribution to the host state’s economic development a necessary element of an investment, which needed to be particularly strong to compensate for other ‘typical characteristics’ of an investment that were missing in the marine salvage operation. The tribunal acknowledged that the jobs created by the project had, to some extent, contributed to the host state’s development.⁷⁰ However, the public benefit of the marine salvage contract was not considered ‘of the same quality or quantity envisaged in previous ICSID jurisprudence’: the operation was not comparable for instance to large infrastructure development.⁷¹ The case was dismissed as the investment was not found to fit the definition of an investment in the ICSID Convention; no assessment in light of the BIT provisions was carried out.

Nevertheless, the 2007 award was later annulled, as the annulment committee found that the tribunal had manifestly exceeded its powers by not having considered the Malaysia – UK BIT (1981)⁷², which provided a broad definition of an investment, as well as the travaux préparatoires of the ICSID Convention indicating that the negotiating parties had explicitly decided not to include a definition of an investment in it. The tribunal was found to have erroneously elevated the elements of an investment under the ICSID Convention into ‘jurisdictional conditions’⁷³ and interpreted these in a way to exclude small contributions of a cultural and historical nature.

There were significant changes in Malaysia’s FDI policies at the juncture of the Malaysian Historical Salvors annulment decision of 2009. The World Bank reports on a ‘wave of liberalization’ that took place between 2009 and 2012, where certain previously applied limitations to foreign participation and equity requirements of 30% participation of indigenous Malaysians (bumiputera) were removed from 44 services sub-sectors.⁷⁴ Among the sectors liberalised in the first phase of the process in 2009 were vessel salvage services.⁷⁵ Further, an objective of clearly scoping out developmental tests from BITs can be seen in the sole BIT concluded by the country after 2009, as reported through online repositories.⁷⁶ This BIT was signed with San Marino in 2012,⁷⁷ and it includes a broad definition of an investment accompanied with a reference to the characteristics of investment only requiring: ‘commitment of capital, the expectation of gain or profit, or the assumption of risk’ (Art. 2.1 (a)). This clearly writes off the requirement of a contribution to the host state’s development that was part of the so called Salini criteria,⁷⁸ and was initially promoted by Malaysia in the main proceedings of Malaysian Historical Salvors.

2.3 Towards Development-Oriented Provisions in IIAs

Some of the identified cases touching on labour law and policies seem not to have resulted in immediate changes in labour law at the national level, but could have been a trigger in changing countries’ positions in IIA negotiations. IIAs adopted by Argentina after the cases raised against the country as a result of emergency legislation enacted during the economic and social crisis of early 2000s provide indications of a movement towards development-oriented provisions in investment agreements. Beyond ISDS cases themselves, also the work of many international organisations and NGOs could have influenced such a movement.⁷⁹

Labour regulation came into play in the above-mentioned cases in two different ways: labour law was directly challenged in one case (Sempra Energy International v. Argentine, ICSID Case No. ARB/02/16 (Award 2007)) and in the three others Argentina’s labour and economic policies in general were assessed to find out whether the country could resort to an exceptions clause or state-of-necessity plea so as not to be tried before the ICSID tribunal (El Paso Energy v. Argentina, ICSID Case No. ARB/03/15 (Award 2011); Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17 (Award 2011) and Continental Casualty Company v. Argentine Republic, ICSID Case No. ARB/03/9 (Award 2008)).

The outcomes of these cases varied due to the differing interpretation of the applicability of the exceptions clause—or state-of-necessity plea—in arbitration. In Sempra Energy International, the investor challenged the Emergency Law that restricted the lay-off of workers and increased the company’s costs, claiming a breach of the Argentina – USA BIT (1991)⁸⁰. The tribunal did not find merit in investigating this peripheral claim on its own but viewed the regulation’s impacts as a part of the overall impact of the crisis on the business. This was based on three principal grounds: (i) the labour regulation did not impede lay-offs (but only increased the compensation to be paid); (ii) it was applied to the whole economy, not only to the claimant; and (iii) obligations were eased as employment conditions improved.⁸¹ While the tribunal found a breach of FET on other aspects of the claim, the decision was later annulled on grounds of manifest excess of powers based on the non-application of the BIT’s exceptions clause.⁸²

On the other hand, labour policies entered the equation indirectly in the three other Argentina cases. Crisis-time emergency measures were challenged in Continental Casualty Company, El Paso Energy, and Impregilo. In the two former cases, Argentina evoked the Argentina-US BIT’s (1991) exceptions clause and in the latter case made a state-of-necessity plea under customary international law,⁸³ in the absence of an exception clause in the applicable Argentina – Italy BIT (1990)⁸⁴, so as not to be tried for the challenged crisis measures.

In the 2008 award on Continental Casualty Company, the tribunal accepted Argentina’s plea under the applicable exceptions clause in the Argentina-US BIT⁸⁵ regarding most of the emergency measures that were challenged by the claimant. It concluded, as the El Paso Energy and Impregilo tribunals three years later, that the exceptions clause (or state-of-necessity plea) was applicable on economic crises except where the state had substantially contributed to create its own crisis. The tribunal found that Argentina had taken the challenged measures due to necessity and with no other reasonable options available at that time.⁸⁶ Analysing the hypothesis that Argentina’s labour and economic policies could have substantially contributed to the crisis, it concluded, among other things, that Argentina had followed policies recommended by relevant international organisations—or left some unimplemented with their blessing—in the years leading up to the crisis. The tribunal made a clear point about not judging on any policies adopted by Argentina, but simply assessing whether the measures taken were well-founded.⁸⁷ With the exceptions clause applicable to most measures challenged, Argentina was ordered to compensate the claimant on one measure only, where the plea was not accepted.⁸⁸

However, the conclusion was the opposite when the same policies were assessed by the El Paso Energy and Impregilo tribunals three years later. In El Paso Energy, the tribunal, relying on two expert reports by the claimant’s and the respondent’s economists, found that Argentina had contributed to the emergence of the crisis situation in a substantial manner. Both sides’ experts concurred on a finding that the ‘absence of fiscal discipline’ and ‘failure to liberalise labour markets and trade policies played a significant role in bringing about the crisis’.⁸⁹ The tribunal came to the conclusion that ‘Argentina’s failure to control several internal factors, in particular the fiscal deficit debt accumulation and labour market rigidity, substantially contributed to the crisis’.⁹⁰ Consequently, Argentina could be held accountable for its crisis-time measures and was found to be in breach of the FET standard.⁹¹ Similarly, in Impregilo, the tribunal concluded that Argentina had significantly contributed to the state of necessity with its policies, including inappropriate labour and trade policies, which is why the state of necessity plea was not accepted. In both cases Argentina filed an application for annulment, but these were dismissed.⁹²

At the national level, no immediate changes were directly observable in labour regulation after the Argentina awards. Indeed, the crisis-time labour regulation was extended until 2007, with a gradual relaxation of the measures. Further, a payroll subsidy was introduced to cushion the impacts of the crisis (Productive Recovery Program, REPRO)—a tool that continued to be used in the following—global—financial crisis of 2008–2009.⁹³

Intuitively, some changes could be expected at the level of new IIAs, considering the vulnerable situation where the unclarity on the interpretation of exceptions clauses had led the country in the ISDS cases. Testing this hypothesis against actual concluded IIAs, some changes towards ‘new generation IIAs’⁹⁴ can indeed be observed after the Argentina awards. First, a gap in concluding new BITs can be observed between 2001 and 2016, while prior to 2001 there were BITs concluded every year or even several per year. Only three BITs were signed by Argentina after the Argentina awards. A similar break can be observed in concluding other Treaties with Investment Provisions (TIPs) between 2005 and 2016, with only three TIPs signed after the awards cited.⁹⁵

Second, a tendency to incorporate more elaborate safeguard or development-oriented clauses in IIAs can be observed. While the exceptions clause added in the BIT concluded with Qatar in 2016⁹⁶ was rather restrictive, focusing principally on security interests in the military sense, much more comprehensive exceptions were included in the Argentina – United Arab Emirates BIT (2018)⁹⁷, extending to measures in view of protecting human, animal and plant life or health, the environment and national treasures or monuments, among other matters. The Argentina – Japan BIT (2018)⁹⁸ ended up incorporating Article XX of the General Agreement on Tariffs and Trade (GATT) 1994⁹⁹ and Article XIV of the General Agreement on Trade in Services (GATS)¹⁰⁰ as exceptions clauses. Furthermore, a range of different ‘new generation’ provisions were included in these BITs, such as right to regulate; compliance with the laws of the host state and corporate social responsibility (Qatar), right to regulate; investment and environmental, health and other regulatory objectives; compliance with the host country’s laws; corporate social responsibility (United Arab Emirates), and preamble provisions with objectives on the non-relaxation of health, safety and environmental measures and cooperation between labour and management in promoting investment; measures against corruption; corporate social responsibility; and health, safety and environmental measures and labour standards (Japan). Similar ‘new generation’ clauses can be found in the TIPs concluded after the awards, including the Argentina – Chile FTA (2017)¹⁰¹, Intra-MERCOSUR Cooperation and Facilitation Investment Protocol (2017)¹⁰² and Argentina – US Trade and Investment Framework Agreement (2016)¹⁰³.

3 Mirror Effect: Consideration of Domestic Law Before ISDS

3.1 ISDS Boosting the Status of Domestic Law

When ISDS tribunals reach judgements that include statements explicitly reaffirming the status of national legislation from the perspective of international investment law, could these be considered as boosting the status of host state legislation? It is important once again to underline the sovereign right of states to legislate regardless of IIA provisions—however, with the risk of becoming liable to compensate an investor if found to be in breach of any. Therefore, it is interesting to reflect on whether such ‘confirmations of legality’ can have impacts of their own.

Two such examples of ISDS judgements can be presented from the identified cases. In Elsamex v. Republic of Honduras, ICSID Case No. ARB/09/4 (Award 2012), a peripheral claim raised based on a public works contract concerned a retroactive raise in minimum wages. In the year in question, Honduras had promulgated the yearly update of minimum wages in March instead of the start of the year, with a retroactive effect since January. The investor argued that introducing the update later than usual and applying the new rates retroactively amounted to an unjustified and unpredictable change of contract terms. The tribunal, however, found the state action legitimate. The yearly minimum wage update process was foreseen in the Minimum Wage Law¹⁰⁴: an administrative process established in law or other regulation, due to its public character, should be known to any investor. Considering the ‘protective character’ of labour law (‘la esencia proteccionista del derecho laboral’), updating of minimum wages was predictable and retroactive application possible. In addition, the tribunal underlined the fact that the Honduran Constitution¹⁰⁵ gave labour law the status of public order and made specific reference to the minimum wage setting process. This was found to seal the conclusion that the tribunal had reached on the question.¹⁰⁶ Similarly, in Astaldi S.p.A. v. Republic of Honduras, ICSID Case No. ARB/07/32 (Award 2010), the tribunal concluded that enterprises participating in public procurement bids had the obligation to know the constitutionally guaranteed, predictable minimum wage revision system in Honduras and calculate their offers on that basis.¹⁰⁷

No changes were observed in the Honduran legal framework after the two awards: the constitutional provision relating to minimum wage (Art. 128.5) and the minimum wage setting process (Labour Code N° 189/1959)¹⁰⁸ remained the same. The ISDS judgement certainly did not give reason to change the regulation. Nonetheless, since year 2012, no updates to minimum wages have been gazetted any later than in January of the year in question, and updates for years 2012–2013¹⁰⁹ and 2014–2016¹¹⁰ were concluded at once. Such a tendency to increasingly ensure timely publication and predictability of minimum wages, agreed in a tripartite setting, could be a result of efforts to avoid further challenges on the matter.

It is plausible to assume a certain deterring or preventative effect of this type of awards on investors’ willingness to bring claims concerning increases in minimum wages more generally. Observing this empirically, however, does not fully confirm the assumption. In Veolia Propreté v. Egypt, ICSID Case No. ARB/12/15, an alleged refusal by the host government to modify contract terms in response to an increase in minimum wages was challenged based on a stabilisation contract. Stabilisation contracts can be far-reaching in terms of requirements for a status quo of the legislative environment surrounding the investment in the host state and can make states liable to compensate investors on a stricter basis than BITs. For instance, in a labour-related case arbitrated outside ICSID, the ISDS tribunal considered that had there been a stabilisation agreement with specific provisions on the disputed matter (new legislation restricting the use of foreign workers), the outcome of arbitration would likely have been negative for the state.¹¹¹ Combined with umbrella clauses in BITs, as in the Veolia case, stabilisation agreements may enable investors to access ISDS. However, the Veolia case was decided in favour of the state in 2018, i.e. no IIA breach was found.¹¹²

3.2 National Court Decisions Impacting ISDS Outcomes

In two of the identified cases, national court decisions concerning the investor came to influence later ISDS judgements. This demonstrates that the impact of ISDS is not merely unidirectional, but also court sentences in host states can provide decisive evidence at the international level.

First, in Hassan Awdi v. Romania, ICSID Case No. ARB/10/13 (Award 2015), the respondent Romania invoked a preamble clause¹¹³ in the US-Romania BIT (1992)¹¹⁴ to seek inadmissibility based on an alleged breach of the Fundamental Principles and Rights at Work by the investor.¹¹⁵ Romania claimed that the investor’s breach of the applicable investment contract’s social obligations with a view to maintaining a certain number of employees and specific employment conditions had compelled contract termination. According to the respondent, the claimant had organised a scheme to replace the existing employees with labour brought from Honduras, subjected to forced labour and paid less than the promised wages. The defendant claimed bad faith and actions against internationally recognised workers’ rights and the well-being of employees on the part of the claimant—actions that should deprive the investor from treaty rights based on the BIT state parties’ intention to protect workers’ rights.¹¹⁶

The tribunal, however, concluded that there was not enough evidence to draw conclusions on wrong doings that could amount to inadmissibility based on the good faith principle or misrepresentation. The fact that a national criminal court had released the investor of charges against human trafficking and lowered sentences for economic crimes played a key role in this determination.¹¹⁷ While noting that the threshold for inadmissibility is high, it can be drawn from the tribunal’s reasoning that with sufficient evidence on the lack of good faith, inadmissibility would be considered. The judgement in Phoenix v. Czech Republic, ICSID Case No. ARB/06/5 (Award 2009) provides support to this conclusion, as there the tribunal—as a matter of principle—explicitly excluded investments entailing gross human rights violations from the scope of BIT protection.¹¹⁸ As in Hassan Awdi, any future tribunals may take into account evidence from cases decided at the national level, be it to award protection or deny it at the international level.

Second, in Swisslion DOO Skopje v. The Former Yugoslav Republic of Macedonia, ICSID Case No. ARB/09/16, the investor claimed a breach of the FET principle and expropriation in the implementation of an acquisition contract. The contract included a commitment to increase employment in the acquired company, but due to a national minority shareholder’s actions, this was not possible. The investor had decided to create employment in subsidiaries instead. The latter had been considered a contract breach by a domestic court. Analysing the national court decision and administrative practice, as well as the investor’s actions, the ISDS tribunal considered that both sides were correct in their interpretations of the job creation commitment. The tribunal thus found no expropriation. Instead, it concluded a breach of FET, as the investor had not been advised in the problematic situation and the state had interfered in its activities.¹¹⁹

4 Conclusions: Impacts Beyond the Immediately Perceivable

The analysis presented in the preceding sections leads to the conclusion that impacts of ISDS decisions on national labour and labour market related social regulation and policies extend beyond the immediately discernible. In quantitative terms, 6% of total ICSID cases with publicly available material were found to be directly relevant. Among the analysed cases, the success of labour related claims was moderate. However, the analysis of the cases’ impacts on host state regulation tells a different story: almost all of the analysed cases had some impact at the national level, organised at five different levels in this analysis. These impacts range from direct changes in national legislation, induced by ISDS judgements, to a mirror-effect where national court decisions have come to impact ISDS outcomes. In addition, reference cases from outside the ICSID framework also indicate potential impacts, requiring only minor differences in the legal facts—such as existence of a stabilisation agreement in Paushok¹²⁰—to cause a different ISDS outcome and possibly corresponding impacts on host state legislation.

Linking to sociology of law, it is interesting to observe such impacts in light of the world polity theory.¹²¹ The theory builds on the conception that the legal systems of the world evolve towards the same direction with the help of international governmental and non-governmental organisations that through their work spread ‘conceptions of sovereignty and universalistic principles’ into national legal systems around the world.¹²² ICSID, as an organ established under the World Bank, can in a conceptual sense be assimilated to such international organisations. As seen in this chapter, ISDS tribunals established under ICSID have produced judgements and facilitated settlement outcomes that have contributed to changes in national legislation.

This leads to a question on whether there is scope to speak about a ‘global convergence’ of legal systems based on the material discussed in this chapter. Intriguingly, the immediate response could indicate the opposite: while some legal systems have indeed followed certain ISDS outcomes, others have gone to the opposite direction, taking distance from the ISDS as a whole. Nevertheless, it is plausible to discern a tendency, albeit partial, towards development-oriented provisions in national regulation and newly concluded IIAs, as well as increased efforts towards transparency and predictability in national legislation, in follow-up to ISDS challenges. While not the focus of this chapter, such theoretical considerations could be further developed in subsequent research on the topic.