The New Investment Agreement of Brazil with Mozambique

Some preliminary comments and questions

by Burghard Ilge, Both ENDS, 15.4.2015

Introduction
On 30 March 2015 the government of Brazil published the text of a new
investment Agreement between Brazil and Mozambique [x1]. This comes at a
timely moment as various governments currently work on the reform of
International Investment Agreements and explore how best to translate this into
new model treaty texts. Besides the agreement with Mozambique, Brazil has
recently signed a similar treaty with Angola [x2]
Since Portuguese is the official and administrative language in Brazil,
Mozambique and Angola, we currently lack an authoritative English language
version of the treaty text.
In order to get an understanding of this new approach one therefore would have
to rely on a preliminary translation. This is not without risk, since legal treaty
texts are particularly sensitive to precise wording and the formulations chosen by
the authors that are prone to get lost in translation. However, regarding the
importance of this subject matter in the current international political debate, we
decided to use a computer-generated translation of the investment Agreement
between Brazil and Mozambique, in order to get a better understanding of the
new Brazilian approach. While such translations are by themselves totally
inadequate, they might be sufficient to get a first rough idea about this new
approach and to give rise to relevant questions that only later might be settled
based on an authoritative English language version. Having done so was already
very useful for us to further sharpen our ideas about new approaches to
International Investment Agreements.
Based on this crude approach we here present our first preliminary analysis and
hope that it can act as an inspiration to others to make their own assessment of
the text [x1].

Definition of Investment and Investor

The definition of investment seems to be very broad and to cover "any kind of
asset or right owned or controlled directly or indirectly by an investor". However,
the scope is limited by the additional requirement that only investment with the
"purpose of establishing lasting economic relations and for the production of
goods and services" would be covered.
The definition of investor seems to be so broad that also "letter box companies"
would be able to use the treaty. Art. 2 (iii) also might allow that companies (and
letterbox offices) in any part of the World would be covered as protected investor
as long as such a (letterbox) company would be "controlled" by a company or
individual from Brazil or Mozambique respectively.

The Joint Committee and "Ombudsman"

The so-called Joint Committee will play a central role in this treaty. It shall be
composed of government representatives of both parties and be appointed by
the respective governments.
Meetings of the Joint Committee shall take place at least once a year or at any
time and place the parties (the governments of Brazil and Mozambique) should
agree to. The presidency of these meetings would be altering between the two
parties.
The tasks of the Joint Committee would be quite broad. Besides monitoring the
implementation and execution of this Agreement, it would also discuss and share
opportunities for expansion of mutual investment and coordinate the
implementation of cooperative and mutually agreed facilitation agendas. Most
importantly, however, it would be the body that would have to seek consensus
and resolve amicably any issues or conflicts on investments of the Parties.
The treaty also establishes so-called Focal points that will act as the official
"Ombudsman" for a foreign investor in the host state (i.e. for investors from
Mozambique in Brazil and vice versa). The "Ombudsman" will have the mandate
to prevent disputes and to facilitate their resolution on behalf of the foreign
investor with the relevant national government authorities.
The "Ombudsman" will also have the mandate to interact with the relevant
national government authorities, to evaluate them and to make
recommendations based on suggestions and complaints received from foreign
governments and investors.

Private sector and civil society

The precise relation of the Joint Committee with the private sector and civil
society seems not to be 100% clear. Art. 4.4(iv) allows the Joint Committee to
invite (where appropriate) private sector and civil society on relevant issues
related to the work of the Joint Committee. However, later on in the text private
sector and civil society seem to be treated differently. In fact, Art. 4.4(iv) seems
to be the only place where civil society is mentioned, while the "private sector"
seems to get additional rights under the treaty in Art 4.6, Art. 7 and Art. 17.1.

Treatment and protection of Investment

The Investment Agreement between Brazil and Mozambique is not only a
cooperation and investment facilitation agreement but also a more or less
classical investment protection agreement that prohibits the expropriation or
nationalization of an investment. This is regulated in Article 9 of the treaty [f1].
The treaty is quite specific in that any "expropriation" that is not done in the
public interest would be illegal. The same applies if it could be shown that the
government measure would have been taken in a discriminatory manner. Under
all circumstances would the host state be required to provide adequate and
effective compensation to the foreign investor if an "expropriation" should have
taken place.

Art. 11.1 also seems to protect pre-establishment rights of foreign investors (e.g.
the right to buy land), but only if such rights would be in accordance with the
legal system of the host state. It is unclear whether a breach of the requirement
"to create favorable conditions for investments" could be challenged under this
treaty.
Art.11 also requires to permit investors of another Party to establish investments
and conduct business on terms no less favorable than those available to other
domestic or foreign investors.[f2]
While Most Favorite Nation treatment (MFN) related to trade agreements and
taxation seems to be excluded, better treatment granted in other International
Investment Agreements seems not to be excluded from the MFN clause.

Capital controls
Capital controls, such as limits or outright prohibitions that a nation's
government can use to regulate flows from capital markets into and out of the
country's capital account, seem to be banned under the treaty, at least if they
concern capital flows related to the covered investment as defined in Art. 14.2
Apparently, only in the situation of "serious balance of payments difficulties"
non-discriminatory capital control measures that are consistent with the Articles
of Agreement Establishing the International Monetary Fund would be permitted.

Dispute resolution
No Investor to State Dispute Settlement (ISDS) mechanism
The most significant element of the treaty is that it does not contain an Investor
to State Dispute Settlement (ISDS) mechanism. Instead, it contains a dispute
resolution mechanism which would be more properly described as a State to
State Dispute Settlement mechanism.
In contrast to ISDS, it would not be the investor that could submit a specific
issue to dispute resolution. Instead, only the home sate of the investor could
submit in writing their request to the Joint committee.
In order to facilitate the search for a solution between the two governments,
investor representatives as well as representatives of governmental and nongovernmental organizations involved in the issues addressed in the complaint,
should wherever possible participate the meetings of the Joint committee that
address the complaint.
However, how inclusive and transparent this dispute settlement mechanism will
be remains unclear.
Only if the dispute cannot be resolved via such a procedure might the
governments resort to arbitration mechanisms between States.
How such a state-to-state arbitration mechanism would look like is not stated in
the treaty. Such a mechanism would have to be developed by the Joint
Committee [f3].

Termination of the Treaty

Like other International Investment Agreements, this treaty includes a
termination clause. The treaty will remain in force for a period of 20 years and
cannot be terminated during this period. It will be automatically renewed for
successive 20 year periods, unless either Party notifies the other at least 1 year
prior to the next automatic renewal that it wants to terminate the treaty.
In contrast to other International Investment Agreements, this treaty does not
include a Survival clause. Consequently, after the treaty has been terminated it
indeed will not be applicable any longer.

Corporate Social Responsibility

Corporate Social Responsibility is addressed in the treaty in two places: In Article
10 and in a separate Annex. [x1]
Article 10 might be translated as follows:
Investors and their investments should strive to achieve the highest possible
level of contributions to the sustainable development of the receiving State
and the local community, through the adoption of a high degree of socially
responsible practices, with reference to the voluntary principles and standards
set in Annex II - "Corporate Social Responsibility". (emphasis added)
It seems unclear how the provisions on Corporate Social Responsibility could be
used or in how far they could have any effect on corporate behavior, since the
translation suggests that it has been decided to only use "a best endeavor
language".[f4]
If, as believed, the text in the treaty on Corporate Social Responsibility (CSR)
would indeed only be "best endeavor language" it would be important to
understand how such a text could still be useful in the real political struggles, like
in a case were a company breaches one of the requirements on Corporate Social
Responsibility listed in the Annex.
It seems clear that violation of the Corporate Social Responsibility by an investor
does not directly affect the investor rights granted under the treaty, nor does the
treaty seem to provide any direct means to address problems related to a foreign
investor or its investment.
However, the text in the treaty on Corporate Social Responsibility could provide
guidance to the government when it comes to the proactive facilitation and
support of foreign investment.
Another possibility could be that the home state could use these CSR criteria as a
possible reason why the government does not bring a claim of one of its national
investors to the dispute resolution mechanism of this treaty. In how far an
investor has the legal right that its home state indeed has to bring its complaint
to the dispute resolution mechanisms is not part of this treaty. And it is not clear

if a state has to bring such a complaint to the dispute resolution mechanism and
under what circumstances.
It most likely will depend on national law if an investor can for example sue the
home state government at the national courts if the government should reject
the request to bring a claim to dispute resolution. Depending on the national
laws of a treaty country, the government might need specific text in the treaty
that could clarify under what circumstances a state might reject to bring a claim
of an investor to dispute resolution under the treaty. Some countries might not
need such a text since under national law an investor could not sue the
government to protect its rights granted under an international treaty.

Environmental legislation
and technical regulations and cooperation in sectoral legislation
Article 3 of Annex 1 seems to address the concerns that national procedures
related to business registration, technical requirements and environmental
standards might be time-consuming and therefore have implications for the
prompt establishment and maintenance of an investment. While it might be okay
to see how related processes can be made less burdensome and timeconsuming, it should be guarded that the related provisions in this treaty are not
at the expense of the quality of technical requirements and environmental
standards. This is of particular importance since requirements and procedures
related to Environmental Impact Assessments have in the past frequently led to
investment claims under International Investment Agreements.
Article 4 of Annex 1 deals with cooperation in sectoral legislation and institutional
exchanges. This text does not look like the controversial proposals on "regulatory
cooperation" that are currently made in TTIP negotiations, but it would be
important to get a clear understanding of how the proposed cooperation in
sectoral legislation might influence the national legislation process when it comes
e.g. to social, environmental or health regulations.
The focus of this treaty on investment facilitation and the rights that are granted
to the private sector could lead to unbalanced regulations in the future that
might be - similar to the concerns in TTIP - too investors or business friendly at
the expense of high social, environmental or health standards. For this the text
of Annex 1 would have to be read in context of other provisions in the treaty
such as those in Art.4.4.(vi), Art.4.6, Art. 5.4(iii), Art.6.3, and most importantly
Art.7.1 & Art.17.1

Conclusions
Even a limited computer-generated translation of the investment agreement
between Brazil and Mozambique [x1] shows that it contains some major
innovative elements that would be major improvements of the current models of
International Investment Agreements. The most important aspects are the
omission of an Investor to State Dispute Settlement (ISDS) mechanism and the
omission of a survival clause.

However, the included National Treatment and MFN clause still might to be
considerably broad. The same holds for the definition of Investor and for the
requirements related to capital controls.
While text on Corporate Social Responsibility has been included, the relevance
and significance of the included text -if any- is unclear.
The text on environmental legislation and technical regulations and cooperation
in sectoral legislation seems to us one of the most unclear parts of the text.
While it does not look like the controversial proposals on "regulatory cooperation"
that are currently made in TTIP, it would be important to ensure that it does not
have a similar pro-investors or pro-business bias that could go at the expense of
high social, environmental or health standards.
An official translation of the treaty text into English seems essential to better
understand the risks and opportunities of the apparent new Brazil model for
bilateral investment treaties that could act - if not as a template - for sure as an
important inspiration for other government in their efforts to reform International
Investment Agreements.

-------------------Footnotes:
[f1] The scope of what type of state intervention would be considered to be an
"expropriation" under this treaty is not 100% clear. For example it seems not
immediately clear if so-called indirect expropriation also would be covered. While the
translation doesn't contain anything that would make it explicit that indirect
expropriation would be covered, there also seems to be no disclaimer.
[f2] Apparently a clarification is missing in these National treatment (Art. 11.2) and MFN
(Art. 11.3) clauses that would clarify that the ban on discrimination would only apply to
investors of different nationality "in like circumstances".
[f3] If this would be done on a case by case basis or if the Joint Committee would
develop such a mechanism only once that than would also apply for any future disputes,
is not clear based on the presently available translation.
[f4] The use of "best endeavor language" is also found in the translation of the relevant
part of the ANNEX. The first sentence reads as follows: "Investors and their investments
will develop its best efforts to comply with the following voluntary principles and
standards for responsible business conduct, consistent with the laws adopted by the
State Party receiving the investment:"
[x1] The original text of the "Acordo Brasil-Moambique de Cooperao e Facilitao de
Investimentos (ACFI) - Maputo, 30 de maro de 2015" is available online here
http://www.itamaraty.gov.br/index.php?option=com_content&view=article&id=8511:aco
rdo-brasil-mocambique-de-cooperacao-e-facilitacao-de-investimentos-acfi-maputo-30de-marco-de-2015&catid=42&Itemid=280&lang=pt-BR or http://bit.ly/1GOwLHG
[x2] The original text of the "Acordo Brasil-Angola de Cooperao e Facilitao de
Investimentos (ACFI) - Luanda, 1 de abril de 2015" is available online here
http://www.itamaraty.gov.br/index.php?option=com_content&view=article&id=8520:aco
rdo-brasil-angola-de-cooperacao-e-facilitacao-de-investimentos-acfi-luanda-1-de-abrilde-2015&catid=42&Itemid=280&lang=pt-BR or http://bit.ly/1GkKfL1