EJIL : Talk ! | 12 September 2017
The MERCOSUR Protocol on Investment Cooperation and Facilitation : regionalizing an innovative approach to investment agreements
by Facundo Perez Aznar and Henrique Choer Moraes
The States Parties of the MERCOSUR (Argentina, Brazil, Paraguay and Uruguay) signed in April 2017 the Protocol on Investment Cooperation and Facilitation (“MERCOSUR Protocol”).
As discussed in this post, the Protocol draws significantly on the Brazilian model investment agreement (the Agreement on Cooperation and Facilitation of Investments – ACFI), which stands out for departing from the traditional design of Bilateral Investment Treaties (BITs), particularly – but not only – by excluding the possibility of investor-State dispute settlement (ISDS).
The emergence of the MERCOSUR Protocol has implications at the level of investment policy, as it represents a step towards the regionalization of the Brazilian model. It reflects the attempt to include in a single document the realities of four countries with important political, economic and investment policy differences, as expressed by the varying trajectories of Argentina and Brazil in the investment area.
It also raises interesting questions from an international law perspective. It highlights the legal challenges faced by Brazil, which not only joined the network of international investment agreements (IIAs) as a late-comer but also opted for embracing a particular approach to investment treaties. Accordingly, aside from provisions that innovate in investment law-making, the MERCOSUR Protocol incorporates provisions whose intention seems to be to insulate Brazil from applying protection standards often found in the over 3,000 treaties that now comprise the network of BITs, but which have been deliberately absent in the ACFI.
The regionalization of the Brazilian model of investment agreement
The recently signed MERCOSUR Protocol represents the second attempt by the South American trading bloc to agree on a regional discipline for investments. A first attempt took place in 1994, when its States Parties adopted two protocols that provided for BIT-like protection and ISDS mechanisms, one covering investors from MERCOSUR (“Colonia Protocol”) and another investors from outside the bloc (“Buenos Aires Protocol”). None entered into force and were later ‘derogated’.
By drawing inspiration on the current Brazilian approach to investment law-making, the MERCOSUR Protocol differs considerably from the two previously drafted instruments.
Brazil stands out for being one of the major economies never to have ratified a BIT in the traditional sense. Even though it negotiated BITs in the 1990s, these treaties had their domestic approval process discontinued in the face of opposition in the Brazilian Congress.
When Brazil did decide to join the network of IIAs, this was done based on a model that departs significantly from the traditional design of BITs as it incorporates the following features : (i) emphasis on investment facilitation and dispute prevention ; (ii) national treatment and most-favored nation, subject to a number of limitations ; (iii) encouragement of sustainable development and corporate social responsibility practices by foreign investors ; (iv) State-to-State dispute settlement ; and (v) exclusion of standards such as “fair and equitable treatment” (FET), “full protection and security” (FPS), and protection against indirect expropriation.
The MERCOSUR Protocol is the eighth investment agreement signed by Brazil under its model. While the core features of the ACFI outlined above pervade all the agreements signed so far, the more recent treaties are in many ways more detailed and wider in coverage.
The first ACFIs, signed with African countries in 2015 (Angola, Mozambique and Malawi, in chronological order), can be distinguished by essentially laying down the core elements of the ACFI. A second approach can be discerned in the agreements signed subsequently with Latin American countries (Mexico, Colombia, Chile and Peru), which follow the template of the ACFI, but add, among others, a wider range of regulatory carve-outs (including a clause of non-precluded measures into some of these ACFIs), a provision on the fight against corruption and illegality, detailed regulation of arbitration, as well as clarifications to a number of provisions. A third approach could be underway, with an agreement between Brazil and India possibly emerging in the near future.
The MERCOSUR Protocol follows to a great extent the Latin American approach, although it also introduces provisions not found in previous ACFIs, as examined in the next section.
But the MERCOSUR Protocol also innovates by regionalizing the Brazilian model : while the other MERCOSUR countries are Parties to traditional BITs – and Argentina also has a background of no less than 60 investment disputes -, by signing the Protocol Argentina, Paraguay and Uruguay have decided to discipline the relations amongst themselves based on this model.
The Protocol also borrows the existing MERCOSUR dispute settlement mechanisms, which includes a permanent appeal jurisdiction (see below). In so doing, it marks a step in the institutionalization of investment dispute settlement, a topic that stands at the core of current discussions on the IIA reform.
The provisions of the MERCOSUR Protocol
Most of the features of Brazilian ACFIs are found in the MERCOSUR Protocol, although it also adds provisions or commitments not found in some of the previous ACFIs, such as :
– The definition of “investment” (Article 3.3) includes “the commitment of capital, the objective of establishing a lasting interest, the expectation of profit or utility and the assumption of risks”, a wording which implies expressly including objective criteria to that concept.
– The substantive provisions include “access to justice” and “due process” (Articles 4.1 and 4.2), which generally do not appear in the other ACFIs.
– The Protocol also includes an article relating to the “obligations of investors” (Article 13), using language similar to a provision appearing in the recent Qatar-Argentina BIT. However, unlike this latter treaty, the MERCOSUR Protocol excludes this provision from the dispute settlement clause.
Also in line with prior ACFIs, the Protocol puts forward the institutional layout for the main rationales of the ACFI – cooperation and investment facilitation – by establishing national investment “Focal Points or ‘Ombudsmen’” as well as procedures for “dispute prevention”.
The disciplines governing the settlement of disputes are also worthy of notice as they resort to the 2002 MERCOSUR Olivos Protocol for the Settlement of Disputes. The procedures set out therein include direct State-to-State negotiations (Article 4), intervention by the MERCOSUR’s (diplomatic level) Common Market Group (Articles 6-9), and ‘ad hoc’ State-to-State arbitration (Articles 9-16). Interestingly, the Olivos Protocol provides for a permanent review procedure (Articles 17-22) as well as a procedure for claims submitted by (natural and legal) private persons (Articles 39-44).
Clarifying state practice and opinio juris ? Explicit exclusion of the application of FET, FPS and indirect expropriation
Since the first ACFI, Brazil has consistently rejected standards found in traditional BITs, such as FET, FPS and indirect expropriation.
Yet, while the ACFIs signed with African countries simply ignored these provisions, the Brazilian agreements with Latin American countries adopt a more active dismissal of such standards (e.g., Colombia – Article 5.3(b) – and Chile – Article 6.3(b) -, excluding from dispute settlement those standards agreed with a third Party).
The MERCOSUR Protocol goes in this same direction, but innovates in the acquis of the ACFIs by explicitly rejecting from its scope the standards of “fair and equitable treatment” and “full protection and security” (Article 4.3).
The Protocol also expressly excludes the protection against indirect expropriation (Article 6.6), in a language similar to that found in the agreements with Chile (Article 7.5) and Peru (Article 2.7.6). In contrast, the provisions on expropriation included in the first ACFIs were silent on indirect expropriation.
These “ring fencing” provisions seem directed to interpreters of the MERCOSUR Protocol. After all, although the ACFIs provide for State-to-State dispute settlement, measures adopted by Brazil (as well as the other MERCOSUR Parties, for this matter) might be subject to the scrutiny of an arbitral tribunal – or the MERCOSUR Permanent Appeals Court.
Therefore, in a moment when some actors are resorting to provisions that clarify the content of open-textured concepts such as “fair and equitable treatment” (e.g. Article 9.6 of the TPP investment chapter), Brazil has been spelling out in increasingly detailed terms, as it signs ACFIs, that it does not intend to see standards such as these applied to it – be it through the channel of customary law, MFN clauses or by whatever means of treaty interpretation.
A question open for discussion is what effects, if any, do these provisions entail for the other MERCOSUR States, which have concluded numerous BIT including FET and FPS without similar carve-outs. The extended use of the phrase “for greater certainty” could suggest that the intention of the contracting Parties was in part to clarify provisions that appear in other IIAs.
The MERCOSUR Protocol and the reform of IIAs
The Protocol might suggest a broader trend is underway. It points to a scenario where countries operate with different geometries with respect to the formats of their investment agreements. In the immediate case, countries holding significant portfolios of traditional BITs opted for signing up to an agreement that significantly differs from the BIT.
Should countries be expected to follow one and only approach to investment law-making ? The answer so far appears to be negative, since countries that have negotiating ACFIs with Brazil keep on concluding traditional BITs.