A practical guide to investment treaties : Asia Pacific [1 ed.] 9780409340716, 0409340715

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A Practical Guide to Investment Treaties — Asia Pacific

Baxter Roberts LLB (Hons) (W. Aust) Associate, International Arbitration Group, Freshfields Bruckhaus Deringer LLP

Michael Feutrill LLM (Dist.), LLB, BEc (W. Aust) Fellow, UWA Law School Barrister, Francis Burt Chambers

Kanaga Dharmananda SC BJuris (Hons), LLB (Hons) (W. Aust), BCL (Oxon), LLM (Harvard), Fellow, UWA Law School Barrister, Francis Burt Chambers and Fountain Court Chambers

LexisNexis Australia

2015

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Roberts, Baxter. A Practical Guide to Investment Treaties – Asia Pacific. 9780409340709 (pbk). 9780409340716 (ebk). Includes bibliographical references index. Investments, Foreign — Law and Legislation — Pacific area. Treaties — Interpretation and construction. Commercial treaties — Pacific area. Feutrill, Michael. Dharmananda, Kanaga. 346.07.

© 2015 Reed International Books Australia Pty Limited trading as LexisNexis. This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Typeset in Plantin STD and Gillsans STD Printed in Australia. Visit LexisNexis Butterworths at www.lexisnexis.com.au

Foreword The worldwide growth in cross-border economic activity has been accompanied by an astonishing increase in the number of international investment treaties. With much of this growth centred in Asia in recent years, it should come as no surprise that many Asian countries have entered into bilateral and multilateral investment treaties, with more in the pipeline. These treaties aim to secure a stable and dependable investment environment. But their proliferation, together with the accompanying body of decisions emanating from the dispute settlement processes that have typically been established pursuant to these treaties, has made it increasingly challenging for governments, investors and their legal advisors to work their way through the framework they constitute. This is where the present text fills a vital space as it provides an admirably concise and instructive guide to this area of the law. With its focus on Asia-Pacific region, the book is particularly useful for those in our region. The authors study many treaties applicable in this part of the world and analyse and explain their typical clauses. Starting with the basics of how the categories of ‘investors’ whose ‘investments’ would qualify for protection have been defined, the authors then proceed to consider the key standards of protection that such treaties commonly offer qualifying investments. Their analysis extends to the protection that is available against expropriation as well as the content and meaning of such concepts as the guarantee of ‘fair and equitable’ treatment and the interpretation of ‘most-favoured nation’ clauses. In the final part of the book, the authors discuss key aspects of investor-State arbitration, which is the mode of dispute resolution

commonly provided for under most investment treaties. This is followed by a consideration of the remedies that an arbitral tribunal may order. Lastly, they address issues that may arise when an award is challenged in annulment, setting aside or enforcement proceedings. It is to their great credit that the authors have covered such a comprehensive sweep as thoroughly as they have, within a relatively short space. Indeed, this is just what makes this such an attractive source of guidance for those seeking practical answers. The structure of the book and the manner of its writing facilitate ready access to the authors’ insights. Each chapter begins with a roadmap of the ground to be covered and ends with a flowchart, diagrammatically presenting the key points. The authors have kept their treatment of major arbitral decisions simple without compromising on analytical rigour. They also compare and contrast the diverse approaches adopted by different arbitral tribunals interpreting similar treaty clauses and so give a flavour of the open-textured nature of some of the commonly found provisions. Those seeking a quick foundational understanding of key concepts in international investment law will undoubtedly find all of this invaluable. I warmly congratulate the authors and welcome their excellent contribution to international investment law. Sundaresh Menon Chief Justice Singapore 20 May 2015

Preface Why read this book? The protection of foreign investment under international law is a topic of much interest for academics, nations, treaty negotiators, international arbitration lawyers and arbitrators. The trajectory of growth in terms of the utility of investment treaty arbitration can only be described as spectacular. There is much activity in arbitrating disputes under investment treaties to enforce the protections that they afford. The number of States that have been named as respondent in arbitrations brought by foreign investors under investment treaties is steadily increasing. At last count more than half the nations in the world have been named as a respondent.1 There is an extraordinary amount written about international investment. Much of it is very learned and deeply reflects the approaches to the question of investment protection from the perspective of public international law. This guide serves to meet the needs of a practitioner or counsel seeking to understand the essentials of international investment law, as affected by a bilateral investment treaty (BIT) or a multilateral investment treaty (MIT). The focus is practical, and the intention is not to be exhaustive but assist in a ready understanding of international investment law. States have been interested in the protection of property rights of their citizens well before the rise of the first BIT. Much was achieved by other types of treaties and other arrangements. The bilateral investment treaty avoided the difficulties of multilateral negotiations while also furthering the objective of ensuring the protection of investment. Whereas previously one may have expected negotiations to be between

a developed State and a developing State, now there may be investment treaties between two developed States, or between two developing States. This guide aims to meet the needs of government advisors in the Asia-Pacific region who wish to come to terms with international investment treaties. All negotiations of investment treaties may involve some element of compromise but what is emerging is the rise of a model BIT. With this rise comes some similarity in the structure and contact of BITs. This paves the way for attention to turn to important themes and concepts relevant to the protection of international investment, which informs the approach taken in this book. Together with an analysis of over 500 treaties and their main protections, the text examines the key issues in a practical way.

Why we wrote this book The purpose of this book is to provide an introduction to the structure, content, and application of investment treaties, with a focus on the experiences and future of this field in the Asia-Pacific region. We wrote this book to meet a need and fill a gap. The growing significance of investment treaties in Asia-Pacific is clear and there is a gap in the general awareness of the uses and applications of investment treaties on the part of many business and industry participants in the region. The number of investment treaties concluded by States in the AsiaPacific region continues to steadily rise, as does the number of investment treaties worldwide. The United Nations Conference on Trade and Development has (UNCTAD) reported that, as at the end of 2013, the total number of investment treaties worldwide was 3,236.2 More than 500 of these involve at least one State party in the AsiaPacific region, as shown in the survey of investment treaties in the AsiaPacific Region in Appendix 1. Investment treaties are of increasing significance for countries in Asia-Pacific in view of the growth of foreign direct investment in the region. UNCTAD’s 2014 World Investment Report indicated that Asia continues to be the most popular destination for foreign direct

investment, attracting a staggering US$426 billion in foreign direct investment in 2013, which is over 30 percent of global movement of foreign direct investment in 2013.3 China, Hong Kong and Singapore each had inflows of over US$50 billion in 2013, as cross-border mergers and acquisitions continued to grow. High-income economies in the region, such as China, Hong Kong and Republic of Korea, continue to grow as leading sources of FDI outflows to other countries. The scale and regional importance of this investment activity cannot be denied. Despite the growing significance of foreign direct investment into and out of the Asia-Pacific region, the level of engagement with investment treaties and their practical applications has not grown concomitantly. While governments, businesses, legal practitioners and academics in Europe and the Americas have been at the helm in this field of international law in the past few decades, the Asia-Pacific region has been slower on the uptake. But this is changing. It is becoming more common for companies in the Asia-Pacific region looking outward to potential investment options abroad to assess, as part of their due diligence, investment treaty protections that may be available to them. States in the region are also active participants. UNCTAD identified Australia, Japan, Republic of Korea and Singapore as four of the most active negotiators of free trade agreements and other regional investment agreements in 2013.4 Legal practitioners, academics, politicians and the general public have begun a rolling dialogue on the roles that investment treaties can, and should, play in the Asia-Pacific region. This book aims to contribute to the growing awareness of, and intent in the uses and practical applications of, investment treaties for governments, business and legal advisors in the region. It is not designed to be a comprehensive academic monograph on the subject, the likes of which are recommended in the selected bibliography at the end of this book. It is intended to be practical, concise and accessible — a ‘one-stop starting shop’ for those engaged in, considering engaging in, facilitating or encouraging foreign direct investment in Asia-Pacific to familiarise themselves with the protections afforded by investment treaties and the means by which those protections can be enforced. The

treaty extracts and case examples in the body of the text and the Appendices that follow have been chosen in almost all instances for their connection to the region.

How this book is structured This book is divided into three parts. The first part comprises Chapter 2, which covers the scope of protection afforded by investment treaties. It deals with the essential preliminary questions to the application of these treaties: what is protected, who is protected and when is protection afforded? It describes the way in which investment treaties normally define the concepts of the ‘investment’ and ‘investor’, and the application of these concepts to different situations that arise in practice. It introduces the main ways in which investment treaties regulate the admission and establishment of investments that are afforded substantive protection under the treaties. The second part comprises Chapters 3–10, which cover the key substantive protections that are often afforded by investment treaties to investments that fall within the scope of protection of the relevant treaty. States that enter investment treaties will agree to grant certain forms of treatment to foreign investors from other State parties to the treaties. The starting point is perhaps the most intuitive and ubiquitous of all treatment guarantees in investment treaties – the guarantee of compensation for expropriation of investment property (Chapter 3). This is followed by the main treatment guarantees that centre on notions of reasonableness, security and non-discrimination, with discussions of the fair and equitable treatment standard (Chapter 4), the protection and security guarantees (Chapter 5), national treatment (Chapter 6), most-favoured nation treatment (Chapter 7) and protection from arbitrary, discriminatory or unreasonable measures that impair an investment (Chapter 8). The last two chapters on this part of the book deal with two unique treatment standards. Chapter 9 deals with provisions known as

umbrella clauses that require host States to respect obligations, most commonly contracts, entered into with foreign investors. Chapter 10 describes protections of the foreign investor’s right to freely transfer funds related to the investment into and/or out of the host State. The third part of the book comprises Chapters 11–14, which cover dispute resolution under investment treaties. Substantive protections offered by investment treaties are generally only as valuable to a foreign investor as the means by which they can be effectively enforced. The substantive protections offered by investment treaties are only as useful to their beneficiaries as the means by which they can be effectively enforced. Most investment treaties provide mechanisms for dispute resolution as between the contracting States and as between an investor from one State and the other State concerning the investor’s investment in that State. The latter — investor–State dispute resolution — is much more commonly used in practice than State–State dispute resolution. After briefly introducing State–State dispute resolution provisions in investment treaties (Chapter 11), the focus turns to an introduction to investor– State dispute resolution under investment treaties (Chapter 12). This is followed by an overview of the types of remedies available to investors who successfully advance claims in investor–State arbitrations (Chapter 13) and the various post-arbitration procedures for enforcement and annulment of arbitral awards (Chapter 14). Each chapter is built around the provisions of the treaty themselves. The goal is to provide real examples of the most common formulations of different treaty provisions and explain how different formulations impact the level of protection granted. The balance of each chapter deals with the interpretation and application of the treaty provisions in practice. Where relevant, we refer to the publicly available decisions of international arbitral tribunals in previous or current investor–State disputes. These decisions offer illustrative case examples and guidance on the ways in which arbitral tribunals have approached the application and interpretation of investment treaties. Twelve of the fourteen chapters that follow contain a one-page checklist to the issues discussed in the chapter, which take the form of flowcharts that appear at the end of those chapters. The flowcharts are

intended to allow the reader to identify whether an investment that is relevant to them is protected under the treaty and how that level of protection may be enforced. They are designed to be a ‘first port of call’ for a simple overview of the key issues, not a comprehensive guide to every possible issue that may be relevant to pursuing or defending potential claims under an investment treaty. _____________________________ 1.

2. 3. 4.

United Nations Conference on Trade and Development (UNCTAD), ‘Latest Developments in Investor–State Dispute Settlement’, IIA Issues Note: No 1 (February 2015), p 5. UNCTAD, ‘World Investment Report 2014, Investing in the SDGs: An Action Plan’, June 2014, p 114, available at . UNCTAD, note 2 above, at p 45. UNCTAD, note 2 above, at p 115.

Acknowledgements The authors would like to thank several law graduates of the University of Western Australia who assisted in researching and preparing the extensive analysis of Asia-Pacific investment treaties presented in Appendix 1: Christopher Bailey, Annelise Karreman, Alistair Marchesi, Charles Pym and Rui Tan. This work is of value to the book as it is a ready reckoner of relevant treaty provisions. Particular thanks go to Alistair, who spent many hours designing an Excel spreadsheet that allowed us to identify trends across the treaties surveyed in Appendix 1. We would like to thank our colleagues who read and commented on earlier drafts of this manuscript: Jeffrey Commission, Leon Firios, Ben Love, Sam Luttrell and Elizabeth Snodgrass. We are grateful also to LexisNexis. We have stated the position as we understand it as at January 2015. The table of cases in Appendices 2 and 3 take in developments to March 2015. Despite our best efforts, errors and omissions may have crept into our work, for which we take sole responsibility. We are very grateful to The Honourable The Chief Justice Sundaresh Menon, Chief Justice of the Supreme Court of Singapore for agreeing to write a foreword for this book. The authors and publisher gratefully acknowledge the permissions granted to reproduce the following documents: Agreement establishing the ASEAN–Australia–New Zealand Free Trade Area (the ASEAN–Australia–New Zealand Free Trade Agreement), entered into force 1 January 2010 © Commonwealth of Australia 2015.

Agreement between Japan and Australia for an Economic Partnership (the Japan–Australia Economic Partnership Agreement), entered into force 15 January 2015 © Commonwealth of Australia 2015. Free Trade Agreement between the Government of the Republic of Korea and the Government of Australia (the Republic of Korea–Australia Free Trade Agreement), entered into force 12 December 2014 © Commonwealth of Australia 2015. Agreement between the Government of Canada and the Government of the People’s Republic of China for the Promotion and Reciprocal Protection of Investments (the Canada–China Bilateral Investment Treaty Bilateral Investment Treaty), entered into force 1 October 2014, reproduced with the permission of the Department of Foreign Affairs, Trade and Development Canada. Agreement between the Government of Malaysia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Promotion and Protection of Investments (the Malaysia–United Kingdom Bilateral Investment Treaty), entered into force 21 October 1988, reproduced with the permission of the Ministry of Foreign Affairs Malaysia. Philip Morris Asia Limited v Commonwealth of Australia (UNCITRAL, PCA Case No 2012-12) Notice to State of Claim, 15 July 2011, reproduced with the permission of the law firm Allens (formerly Allens Arthur Robinson), David AR Williams QC, Joe Smouha QC and Philip Morris Asia Limited. Philip Morris Asia Limited v Commonwealth of Australia (UNCITRAL, PCA Case No 2012-12) Notice of Arbitration, 21 November 2011, © Commonwealth of Australia 2015. Philip Morris Asia Limited v Commonwealth of Australia (UNCITRAL, PCA Case No 2012-12) Australia’s Response to the Notice of Arbitration, 21 December 2011, reproduced with the permission of the law firm Allens (formerly Allens Arthur Robinson), David Williams QC, Joe Smouha QC and Philip Morris Asia Ltd. Mesa Power Group LLC v Government of Canada (UNCITRAL, PCA Case No 2012-17) Canada’s Request for Bifurcation, 3 December

2012, reproduced with the permission of the Department of Foreign Affairs, Trade and Development Canada. Mercer International Inc v Government of Canada (ICSID Case No ARB(AF)/12/3) Claimant’s Memorial (redacted), 31 March 2014, reproduced with the permission of the law firm Arnold & Porter LLP.

Table of Cases References are to paragraphs

A Abaclat v Argentine Republic (formerly Giovanni Beccara v Argentine Republic) (ICSID Case No ARB/07/5) Procedural Order No 3 (Confidentiality Order), 27 January 2010 …. 12.46 ADC Affiliate Limited and ADC & ADMC Management Limited v Republic of Hungary (ICSID Case No ARB/03/16) Award, 2 October 2006 …. 3.52, 4.13, 13.48 ADF Group Inc v United States of America (ICSID Case No ARB(AF)/00/1) Award, 9 January 2003 …. 4.14, 6.22, 12.32 Aguas del Tunari, SA v Republic of Bolivia (ICSID Case No ARB/02/3) Respondent’s Objections to Jurisdiction, 21 October 2005 …. 2.55 AIG Capital Partners Inc and CJSC Tema Real Estate Co v Kazakhstan (ICSID Case No ARB/01/6) Award, 7 October 2003 …. 13.35 Alex Genin v Estonia (ICSID Case No ARB/99/2) Award, 25 June 2001 …. 12.43 Ambiente Ufficio SPA (Case formerly known as Giordano Alpi) v Argentine Republic (ICSID Case No ARB/08/9) Decision on Jurisdiction and Admissibility, 8 February 2013 …. 2.25 Amco Asia Corp v Republic of Indonesia (ICSID Case No. ARB81/1) First Award, 20 November 1984 …. 2.51

American Manufacturing and Trading, Inc v Zaire (ICSID Case No ARB/93/1) Award, 21 February 1997 …. 5.13 Amoco International Finance Corp v Iran (1987) 15 Iran-US CTR 189 …. 3.32 Anatolie Stati, Gabriel Stati, Ascom Group SA and Terra Raf Trans Trading Ltd v Republic of Kazakhstan (SCC Case No 116/2010) Award, 19 December 2013 …. 4.20 Antoine Goetz v Republic of Burundi (II) (ICSID Case No ARB/01/2) Award, 21 June 2012 …. 3.18 Archer Daniels Midland Co and Tate & Lyle Ingredients Americas Inc v Mexico (ICSID Case No ARB(AF)/04/5) Award, 21 November 2007 …. 6.23 Asian Agricultural Products Ltd v Republic of Sri Lanka (ICSID Case No ARB/87/3) Final Award, 27 June 1990 …. 2.23, 5.10, 5.13 Austrian Airlines v The Slovak Republic (UNCITRAL) 20 October 2009 …. 7.26 Azurix Corp v Argentine Republic (ICSID Case No ARB/01/12) Decision on Jurisdiction, 8 December 2003 …. 2.23 — v — (ICSID Case No ARB/01/12) Award, 14 July 2006 …. 5.15, 9.29, 9.33, 13.39

B Bayindir Insaat Turizm Ticaret Ve Sanayi, AS v Islamic Republic of Pakistan (ICSID Case No ARB/03/29) Decision on Jurisdiction, 14 November 2005 …. 2.27, 9.25 Berschader v Russian Federation (SCC Case No 80/2004) Award, 21 April 2006 …. 2.58 BG Group plc v Argentina (UNCITRAL) Final Award, 24 December 2007 …. 5.17 Biloune and Marine Drive Complex Ltd v Ghana Investments Centre and the Government of Ghana (Award on Jurisdiction and Liability) (1989) 95 ILR 184 …. 3.24, 3.28 BIVAC BV v Republic of Paraguay (ICSID Case No ARB/07/09)

Decision of the Tribunal on Objections to Jurisdiction, 29 May 2009 …. 9.16 Biwater Gauff (Tanzania) Ltd v Tanzania (ICSID Case No ARB/05/22) Procedural Order No 1, 31 March 2006 …. 12.46 — v — (ICSID Case No ARB/05/22) Procedural Order No 3, 29 September 2006 …. 12.46 — v — (ICSID Case No ARB/05/22) Award, 24 July 2008 …. 5.15, 5.16, 8.16, 10.1, 12.32, 13.10 Bosh International Inc v Ukraine (ICSID Case No ARB/08/11) Award, 25 October 2012 …. 4/37 British Caribbean Bank Limited (Turks & Caicos) v The Government of Belize (UNCITRAL, PCA Case No 2010-18) Award, 19 December 2014 …. 13.10 Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC BV v Republic of Paraguay (ICSID Case No ARB/07/09) Decision of the Tribunal on Objections to Jurisdiction, 29 May 2009 …. 9.24 Burlington Resources Inc v The Republic of Ecuador (ICSID Case No ARB/08/05) Procedural Order No 1, 29 June 2009 …. 13.19 — v — (ICSID Case No ARB/08/05) Decision on Jurisdiction, 2 June 2010 …. 9.16, 12.33 — v — (ICSID Case No ARB/08/05) Decision on Liability, 14 December 2012 …. 3.25, 9.33

C Case Concerning Certain German Interests in Polish Upper Silesia (Germany v Poland) (Merits) PCIJ Series A, No 17 (1927) …. 3.24, 3.32, 13.10, 13.11, 13.28 CEMEX Caracas Investments BV and others v Bolivarian Republic of Venezuela (ICSID Case No ARB/08/15) Decision on Jurisdiction, 30 December 2010 …. 2.57 Chevron Corp and Texaco Petroleum Co v Ecuador (UNCITRAL, PCA Case No 34877) Partial Award on the Merits, 30 March 2010 …. 4.15, 11.7

— v — (UNCITRAL, PCA Case No 2009-23), Order on Interim Measures, 14 May 2010 …. 12.46 Churchill Mining PLC and Planet Mining Pty Ltd v Republic of Indonesia (ICSID Case Nos ARB/12/14 and 12/40) …. 12.25, 15.8 CME Czech Republic BV v The Czech Republic (UNCITRAL) Partial Award, 13 September 2001 …. 3.24, 3.28, 3.32, 5.16 CMS Gas Transmission Co v Republic of Argentina (ICSID Case No ARB/01/8) Objections to Jurisdiction, 17 July 2003 …. 2.56 — v — (ICSID Case No ARB/01/8) Award 12 May 2005 …. 3.18, 3.23, 3.25, 8.15, 9.14, 9.15, 9.35, 13.45 — v — (ICSID Case No ARB/01/8) Decision on Annulment, 25 September 2007 …. 9.15, 9.35 Compania de Angus del Aconquija SA and Vivendi Universal SA v Argentine Republic (ICSID Case No ARB/97/3) Decision on Annulment, 3 July 2002 …. 9.20 Consortium RFCC v Kingdom of Morocco (ICSID Case No ARB/00/6) Award, 22 December 2003 …. 3.34, 6.23 Continental Casualty Co v Argentine Republic (ICSID Case No ARB/03/9) Award, 5 September 2008 …. 9.14, 10.10 Corn Products International Inc v Mexico (ICSID Case No ARB(AF)/04/1) Award, 15 January 2008 …. 6.23, 6.27 Cross-Border Trucking Services, In the Matter of (Secretariat File No USA-MEX-98-2008-01) Final Report of the Panel, 6 February 2001 …. 11.7

D Daimler Financial Services AG v Argentine Republic (ICSID Case No ARB/05/1) Award on Jurisdiction, 22 August 2012 …. 7.26 Desert Line Projects LLC v Yemen (ICSID Case No ARB/05/17) Award, 6 February 2008 …. 13.32

E EDF International SA v Argentine Republic (ICSID Case No

ARB/03/23) Award, 11 June 2012 …. 4.37 EDF (Services) Ltd v Romania (ICSID Case No ARB/05/13) Procedural Order No 2, 30 May 2008 …. 12.46 — v — (ICSID Case No ARB/05/13) Award, 8 October 2009 …. 8.10 El Paso Energy International Co v Argentine Republic (ICSID Case No ARB/03/15) Decision on Jurisdiction, 27 April 2006 …. 9.25 — v — (ICSID Case No ARB/03/15) Award, 31 October 2011 …. 2.57, 3.18, 3.25, 4.32, 8.9, 8.10, 8.17 Elettronica Sicula SpA (ELSI) (United States v Italy) (Merits) [1989] ICJ Reports 15 …. 8.9 Emmis International Holding BV v Republic of Hungary (ICSID Case No ARB/12/2) Award, 16 April 2014 …. 3.32 Emmis International Holding, BV, Emmis Radio Operating BV, MEM Magyar Electronic Media Kereskedelmi és Szolgáltató Kft v Republic of Hungary (ICSID Case No ARB/12/2) Decision on Respondent’s Application for Bifurcation, 13 June 2013 …. 12.57 Empresas Lucchetti, SA and Lucchetti Peru SA v Republic of Peru (ICSID Case No ARB/03/4) Award, 7 February 2005 …. 11.7 Enron Corp and Ponderosa Assets LP v Argentina Republic (ICSID Case No ARB/01/3) Decision on Jurisdiction: Ancillary Claim, 2 August 2004 …. 2.34 — v — (ICSID Case No ARB/01/3) Decision on Jurisdiction, 14 January 2004 …. 2.59, 13.19 — v — (ICSID Case No ARB/01/3) Award, 22 May 2007 …. 9.11 Eudoro Armando Olguin v Republic of Paraguay (ICSID Case No ARB/98/5) Award 21 June 2001 …. 3.23 Eureko BV v Republic of Poland (UNCITRAL) Partial Award, 19 August 2005 …. 8.12, 9.11, 9.22, 9.30

F Fedax NV v Republic of Venezuela (ICSID Case No ARB/96/3) Award, 9 March 1998 …. 2.18 Feldman Karpa v United Mexican States (ICSID Case No

ARB(AF)/99/1) Award, 16 December 2002 …. 6.23 Frank Charles Arif v Republic of Moldova (ICSID Case No ARB/11/23) Award, 8 April 2013 …. 4.14 Franz Sedelmayer v Russian Federation (Ad hoc Arbitration Award) 7 July 1998 …. 2.23, 2.56 Frontier Petroleum Services Ltd v Czech Republic (UNCITRAL) Final Award, 12 November 2010 …. 5.15

G GAMI Investments Inc v United Mexican States (UNCITRAL) Final Award, 15 November 2004 …. 3.35, 3.40 Garanti Koza LLP v Turkmenistan (ICSID Case No ARB/11/20) Decision on Objection to Jurisdiction for Lack of Consent, 3 July 2013 …. 7.26 Genin, Eastern Credit Ltd Inc and AS Baltoil v Republic of Estonia (ICSID Case No ARB/99/2) Award, 25 June 2001 …. 4.37 Goetz v Republic of Burundi (ICSID Case No ARB/95/3) Award, 2 September 1998 …. 3.24, 13.25 Government of the Laos People’s Democratic Republic v Sanum Investments Ltd [2015] SGHC 15 …. 2.65 Gruslin v Malaysia (ICSID Case No ARB/99/3) Award, 27 November 2000 …. 2.22, 2.34 Guaracachi America Inc and Rurelec PLC v Plurinational State of Bolivia (UNCITRAL, PCA Case No 2011-17) Award, 31 January 2014 …. 2.57, 13.27

H Hesham Talaat M Al-Warraq v Republic of Indonesia (UNCITRAL), Final Award, 15 December 2014 …. 7.20 Hulley Enterprises Ltd (Cyprus) v Russian Federation (UNCITRAL, PCA Case No AA 226) Interim Award on Jurisdiction and Admissibility, 30 November 2009 …. 12.43 — v — (UNCITRAL, PCA Case No AA 226) Final Award, 14 July

2014 …. 3.24, 13.10, 13.29, 13.37 Hussein Nuaman Soufraki v The United Arab Emirates (ICSID Case No ARB/02/7) Award, 7 July 2004 …. 2.56

I ICS Inspection and Control Services Ltd (United Kingdom) v Argentine Republic (PCA Case No 2010-9) Award on Jurisdiction, 10 February 2012 …. 7.26 Impregilo SpA v Argentine Republic (ICSID Case No ARB/07/17) Award, 21 June 2011 …. 7.26, 13.34 — v Islamic Republic of Pakistan (ICSID Case No ARB/03/3) Decision on Jurisdiction, 22 April 2005 …. 9.29 International Thunderbird Gaming Corp v United Mexican States (UNCITRAL) Award, 26 January 2006 …. 6.29 Iurii Bogdanov, Agurdino-Invest Ltd and Agurdino-Chimia JSC v Republic of Moldova (SCC), Arbitral Award, 22 September 2005 …. 13.39

J Jan de Nul NV and Dredging International NV v Arab Republic of Egypt (ICSID Case No ARB/04/13) Decision on Jurisdiction, 16 June 2006 …. 2.75 Joy Mining Machinery Ltd v The Arab Republic of Egypt (ICSID Case No ARB/03/11) Award on Jurisdiction, 6 August 2004 …. 2.17, 2.26, 9.26

K Kampffmeyer v Commission [1967] ECHR 245 …. 13.30 Kardassopoulos and Fuchs v Georgia (ICSID Case No ARB/05/18 and ARB/07/15) Award, 3 March 2010 …. 13.34 Kiliç Insaat Ithalat Ihracat Sanayi ve Ticaret Anonim Sirketi v Turkmenistan (ICSID Case No ARB/10/01) Award, 2 July 2013 …. 7.26

Klöckner Industrie-Anlagen GmbH v United Republic of Cameroon and Société Camerounaise des Engrais (ICSID Case No ARB/81/2) Award, 21 October 1983 …. 2.53

L Lahoud v Democratic Republic of Congo (ICSID Case No ARB/10/04) Award, 7 February 2014 …. 13.27 Lauder v Czech Republic (UNCITRAL) Final Award, 3 September 2002 …. 8.12 Lemire v Ukraine (ICSID Case No ARB/06/16) Award, 28 March 2011 …. 13.32 LG&E Energy Corp v Argentina Republic (ICSID Case No ARB/02/1) Award, 25 July 2007 …. 4.21 — v — (ICSID Case No ARB/02/1) Decision on Liability, 3 October 2006 …. 9.11, 9.14, 9.35 Loewen Group Inc and Raymond L Loewen v United States of America (ICSID Case No ARB(AF)/98/3) Award, 26 June 2003 …. 2.53 Loizidou v Turkey [1995] ECHR (Series A) No 310 …. 13.30

M Maffezini v Kingdom of Spain ICSID Case No ARB/97/7) Objections to Jurisdiction, 25 January 2000 …. 2.73, 7.26 Marvin Roy Feldman Karpa v United Mexican States (ICSID Case No ARB(AF)/99/1) Award, 16 December 2002 …. 3.17 Metalclad Corp v United Mexican States (ICSID Case No ARB(AF)/97/1) Award 30 August 2000 …. 3.18, 3.24 Micula, SC European Food SA, SC Starmill SRL and SC Multipack SRL v Romania (ICSID Case No ARB/05/20) Decision on Jurisdiction and Admissibility, 24 September 2008 …. 13.19 — v — (ICSID Case No ARB/05/20) Award, 11 December 2013 …. 4.8, 4.10, 4.11, 4.37, 9.11, 12.57 Middle East Cement Shipping and Handling Co SA v Egypt (ICSID

Case No ARB/99/6) Award, 12 April 2002 …. 3.24, 13.35 Mihaly International Corp v Republic of Sri Lanka (ICSID Case No ARB/00/2) Award, 15 March 2002 …. 2.28 Mohamed Abdulmohsen Al-Kharafi & Sons Co v Libya et al (ad hoc) Final Arbitral Award, 22 March 2013 …. 13.32 Mohammed Ammar Al-Bahloul v Tajikistan (SCC Case No 064/2008) Partial Award on Jurisdiction and Liability, 2 September 2009 …. 5.15 MTD Equity Sdn Bhd and MTD Chile SA v Republic of Chile (ICSID Case No ARB/01/7) Award, 25 May 2004 …. 4.29, 7.19, 7.20, 8.14 — v — Chile (ICSID Case No ARB/01/7) Decision on Annulment, 21 March 2007 …. 13.39 Murphy Exploration and Production Co International v Republic of Ecuador (ICSID Case No ARB/08/4) Award on Jurisdiction, 15 December 2010 …. 12.33

N National Grid Plc v Argentine Republic (UNCITRAL) Decision on Jurisdiction, 20 June 2006 …. 2.75, 7.26 — v — (UNCITRAL) Award, 3 November 2008 …. 13.35 Noble Energy Inc and MachalaPower Ci Ltd v Republic of Ecuador and Consejo Nacional de Electricidad (ICSID Case No ARB/05/12) Decision on Jurisdiction, 5 March 2008 …. 9.11, 9.14 Noble Ventures Inc v Romania (ICSID Case No ARB/01/11) Award, 12 October 2005 …. 9.22, 9.30 Nykomb Synergetics Technology Holding AB v Latvia (SCC Case No 118/2001) 16 December 2003 …. 13.19

O Occidental Exploration and Production Co v The Republic of Ecuador (LCIA Case No UN3467) Award, 1 July 2004 …. 3.25, 6.23, 6.25, 6.27

Occidental Petroleum Corp and Occidental Exploration and Production Co v Republic of Ecuador (ICSID Case No ARB/06/11) Decision on Provisional Measures, 17 August 2007 …. 13.19 — v — (ICSID Case No ARB/06/11) Award, 5 October 2012 …. 13.10, 13.29, 13.37

P Pan American Energy LLC and BP Argentina Exploration Co v Argentine Republic (ICSID Case No ARB/03/3) Decision on Preliminary Objections, 22 July 2006 …. 9.25 Pantechniki SA Contractors & Engineers v Republic of Albania (ICSID Case No ARB/07/21) Award, 30 July 2009 …. 12.43 Parkerings-Compangiet AS v Republic of Lithuania (ICSID Case No ARB/05/08) Award, 14 August 2007 …. 5.17 — v — (ICSID Case No ARB/05/08) Award, 11 September 2007 …. 6.29 Patrick Mitchell v Democratic Republic of the Congo (ICISD Case No ARB/99/7) Annulment Decision, 1 November 2006 …. 2.26 Paushok v Mongolia (UNCITRAL) Award on Jurisdiction and Liability, 28 April 2011 …. 4.23, 5.14 Perenco Ecuador Ltd v Republic of Ecuador and Empresa Estatal Petroleos del Ecuador (ICSID Case No ARB/08/6) Decision on Provisional Measures, 8 May 2009 …. 13.19 Phillips Petroleum Co v Iran (1989) 21 Iran-US CTR 79 …. 3.32 Plama Consortium Ltd v Bulgaria (ICSID Case No ARB/03/24) Decision on Jurisdiction, 8 February 2005 …. 7.26, 8.12 Pope & Talbot Inc v The Government of Canda (UNCITRAL) Interim Award, 26 June 2000 …. 3.23 — v — (UNCITRAL) Award, 10 April 2001 …. 6.22

R Railroad Development Corp v Guatemala (ICSID Case No

ARB/07/23) Decision on Provisional Measures, 15 October 2008 …. 12.46 — v — (ICSID Case No ARB/07/23) Award, 29 June 2012 …. 3.18 Reinhard Hans Unglaube v Republic of Costa Rica (ICSID Case No ARB/09/20) Award, 16 May 2012 …. 5.15 Renée Rose Levy de Levi v Republic of Peru (ICSID Case No ARB/10/17) Award, 26 February 2014 …. 5.15 Renta 4 SVSA et al v Russia (SCC Case No V 024/2007) Award, 20 March 2009 …. 7.26 Republic of Italy v Republic of Cuba (Ad Hoc) Interim Award, 15 March 2005 …. 11.7 — v — Final Award, 15 January 2008 …. 11.7 Revere Copper and Brass Inc v Overseas Private Investment Corp, In the matter of (Award) 24 August 1978, 56 ILR 268 …. 3.24 Roberts v United Mexican States (United States v Mexico) (1926) IV RIAA 77, 80 …. 4.36 Rompetrol Group NV v Romania (ICSID Case No ARB/06/3) Award, 6 May 2013 …. 13.32 Ronald L Lauder v The Czech Republic (UNCITRAL) Award, 3 September 2001 …. 3.24, 8.9 RosInvestCo UK Ltd v Russia (SCC Case No V 079/2005) Decision on Jurisdiction, 5 October 2007 …. 7.26 RSM Production Corp v Saint Lucia (ICSID Case No ARB/12/10) Decision on Saint Lucia’s Request for Security for Costs with Assenting and Dissenting Reasons, 13 August 2013 …. 12.46 Rumeli Telekom AS and Telsim Mobil Telekomunikasyon Hizmetleri AS v Republic of Kazakhstan (ICSID Case No ARB/05/16) Award, 29 July 2008 …. 5.17, 8.16

S Saipem SpA v People’s Republic of Bangladesh (ICSID Case No ARB/05/7) Award, 30 June 2009 …. 12.61 Salini Costruttori SpA and Italstrade SpA v Kingdom of Morocco

(ICSSID Case No ARB/00/4) Decision on Jurisdiction, 23 July 2001 …. 2.82 Saluka Investments BV (The Netherlands) v Czech Republic (UNCITRAL), Partial Award, 17 March 2006 …. 3.51, 4.11, 5.17, 8.16 SD Myers Inc v Government of Canada (UNCITRAL) Partial Award, 13 November 2000 …. 2.23, 3.25, 6.22, 6.27, 6.28 — v — (UNCITRAL) Award, 30 December 2002 …. 6.23 Sedco Inc v National Iranian Oil Co and Islamic Republic of Iran (IUSCT Case No 129) Award No ITL 59-129-3, 27 March 1986 …. 3.48 Sempra Energy International v Argentine Republic (ICSID Case No ARB/02/16) Award, 28 September 2008 …. 9.35 SGS Société Genérale de Surveillance SA v Republic of Paraguay (ICSID Case No ARB/07/29) Decision on Jurisdiction, 12 February 2010 …. 9.22, 9.26 — v Republic of the Philippines (ICSID Case ARB/02/6) Objections to Jurisdiction, 29 January 2004 …. 2.64, 9.24 Siag and Vecchi v Arab Republic of Egypt (ICSID Case No ARB/05/15) Award, 1 June 2009 …. 4.29 Siemens AG v Argentine Republic (ICSID Case No ARB/02/8) Award, 17 January 2007 …. 3.32, 3.34, 6.27, 9.33, 13.48 — v — (ICSID Case No ARB/02/8) Award, 6 February 2007 …. 3.28, 6.27 Southern Pacific Properties (Middle East) Ltd v Egypt (ICSID Case No ARB/84/3) Award, 20 May 1992 …. 3.32 Spyridon Roussalis v Romania (ICSID Case No ARB/06/1) Award, 7 December 2011 …. 5.15, 8.16 Standard Chartered Bank v Tanzania Electric Supply Co Ltd (ICSID Case No ARB/10/20) …. 2.58 —v United Republic of Tanzania (ICSID Case No ARB/10/12) Award, 2 November 2012 …. 2.58 Starrett Housing Corp v Iran (1983) 4 Iran-US CTR 122 …. 3.24,

3.32 Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v Argentine Republic (ICSID Case No ARB/03/19) Decision on Liability, 30 July 2010 …. 4.11, 5.17, 7.26 Swisslion DOO Skopje v Republic of Macedonia (ICSID Case No ARB/09/16) Award, 6 July 2012 …. 4.17

T Tecnicas Medioambientales Tecmed SA v Mexico (ICSID Case No ARB(AF)/00/2) Award, 29 May 2003 …. 3.24 Tecnicas Medioambientales Tecmed, SA v The United Mexican States (ICSID Case No ARB(AF)/00/2) Award, 29 May 2003 …. 2.72 Teinver SA, Transportes de Cercanias SA and Autobuses Urbanos del Sur SA v Argentine Republic (ICSID Case No ARB/09/1) 21 December 2012 …. 2.57, 7.26 Tidewater Investment SRL and Tidewater Caribe CA v Bolivarian Republic of Venezuela (ICSID Case No ARB/10/5) Award, 13 March 2015 …. 12.57 Tippetts, Abett, McCarthy, Stratton v TAMSAFFA Consulting Engineers of Iran (1984) 6 Iran-US CTR 219 …. 3.24 Tokios Tokeles v Ukraine (ICSID Case No ARB/02/18) Decision on Jurisdiction, 29 April 2004 …. 2.49, 2.50 Total SA v Argentine Republic (ICSID Case No ARB/04/1) Decision on Liability, 27 December 2010 …. 9.11 Toto Costruzioni Generali SpA v Lebanon (ICSID Case No ARB/07/12) Decision on Jurisdiction, 11 September 2009 …. 12.43 Tulip Real Estate Investment and Development Netherlands BV v Republic of Turkey (ICSID Case No ARB/11/28) Award, 10 March 2014 …. 9.25 Tza Yap Shum v Republic of Peru (ICSID Case No ARB/07/6), Decision on Jurisdiction, 19 June 2009 …. 12.29

U

Ulysseas Inc v Republic of Ecuador (UNCITRAL) Final Award, 12 June 2012 …. 8.12 United States v Germany (1923) VII RIAA 32, 40 …. 13.30 Urbaser SA v Argentine Republic (ICSID Case No ARB/07/26) Decision on Jurisdiction, 19 December 2012 …. 2.57

V Venezuela Holdings BV (Case formerly known as Mobil Corp) v Bolivarian Republic of Venezuela (ICSID Case No ARB/07/27) Decision on Jurisdiction, 10 June 2010 …. 2.57 Victor Pey Casado v Republic of Chile (ICSID Case No ARB/98/2) Award, 22 April 2008 …. 4.13 Vladimir Berschader and Moïse Berschader v Russia (SCC Case No 080/2004) Award, 21 April 2006 …. 7.26, 12.32

W Waste Management Inc v United Mexican States (ICSID Case No ARB(AF)/00/3) Award, 30 April 2004 …. 3.25, 3.34, 3.35 —v — (No 2) (ICSID Case No ARB(AF)/00/3) Award, 30 August 2004 …. 3.17, 3.23 Wena Hotels Ltd v Arab Republic of Egypt (ICSID Case No ARB/98/4) Award on Merits, 8 December 2000 …. 5.13 White Industries Australia Ltd v Republic of India (UNCITRAL) Final Award, 30 November 2011 …. 4.15, 7.21, 13.10 William Ralph Clayton, Bilcon of Delaware, Inc, et al v Government of Canada (UNCITRAL) Award on Jurisdiction and Liability, 17 March 2015 …. 6.28

Y Yaung Chi Oo Trading Pty Ltd v Government of the Union of Myanmar (ICSID Case No ARB/01/1) Award, 31 March 2003 …. 2.54

Table of Statutes, Conventions, Institutional Arbitration Rules, Agreements and Treaties References are to paragraphs

COMMONWEALTH International Arbitration Act 1974 s 8(7A) …. 14.31 s 35 …. 14.25

INTERNATIONAL CONVENTIONS International Centre for Settlement of Investment Disputes (ICSID) Convention …. 12.37, 12.38, 12.55, 13.41, 14.3, 14.13, 14.21, 14.25, 14.26, 14.32, 14.33 Art 25 …. 12.39 Art 42(1) …. 12.55, 12.59 Art 47 …. 12.47 Art 49(2) …. 14.6 Art 50 …. 14.6 Art 51 …. 14.6 Art 52 …. 14.6, 14.30 Art 53 …. 14.1

Art 53(1) …. 14.22 Art 54 …. 14.23, 14.24, 14.25, 14.36 Art 54(1) …. 13.24 Art 54(3) …. 14.33 Art 55 …. 14.34, 14.36 Art 61(2) …. 13.41 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards …. 14.27, 14.28, 14.29, 14.32 Art V …. 14.16, 14.30 United Nations Convention on the Law of the Sea 1992 …. 2.61, 2.62 Vienna Convention on the Law of Treaties …. 2.2, 12.54 Art 2(1)(a) …. 12.54 Art 31 …. 2.6 Art 31(3)(c) …. 12.54

INTERNATIONAL ARBITRATION RULES Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (2010) Art 24(1) …. 12.56 International Centre for Settlement of Investment Disputes (ICSID) Arbitration (Additional Facility) Rules Art 52(4) …. 14.1 Permanent Court of Arbitration (PCA) Arbitration Rules (2012) Art 35 …. 12.56 Singapore International Arbitration Centre Arbitration Rules (2013) Art 27 …. 12.56 UNCITRAL Arbitration Rules 1976 …. 12.56, 14.13 Art 26 …. 12.47 Art 35(1) …. 12.56 UNCITRAL Arbitration Rules 2010 …. 12.56, 14.13

Art 26 …. 12.47 Art 34(2) …. 14.1 Art 35(1) …. 12.56

INVESTMENT AGREEMENTS ASEAN Agreement for the Promotion and Protection of Investments 1987 …. 1.9 ASEAN–Australia–New Zealand Free Trade Agreement …. 1.11, 2.15, 2.46, 3.10, 6.4, 7.4, 10.5, 12.28, 12.63, 13.5, 13.16, 13.39 Ch 11, Art 2 …. 2.15 Ch 11, Art 9(1) …. 3.10 Ch 11, Art 9(2)–(4) …. 3.13 Ch 11, Art 9(2) …. 13.5 Ch 11, Art 20 …. 12.28 Ch 11, Art 23 …. 12.39 Ch 11, Art 24 …. 12.39 Ch 11, Art 25 …. 12.39 Ch 11, Art 28 …. 12.39 Ch 11, Art 28(1) …. 13.16 Art 4 …. 6.8 Art 6(1) …. 4.5 Art 6(2)(c) …. 4.35 Art 14.13(1) …. 10.5 Art 14.13(3) …. 10.17 Art 22 …. 12.63 Art 28 …. 13.39 ASEAN Comprehensive Investment Agreement 2009 …. 1.9 Australia–Chile Free Trade Agreement Art 10.5 …. 4.35 Australia–New Zealand Closer Economic Relations Trade Agreement

Art 11 …. 10.18 Art 21 …. 1.38 Australia–Singapore Free Trade Agreement Ch 8, Art 14 …. 10.18 China–New Zealand Free Trade Agreement …. 12.65 Art 154(1) …. 12.63 Art 158 …. 12.65 China–Peru Free Trade Agreement …. 7.13 Art 131 …. 7.13 General Agreement on Tariffs and Trade (1949) Art X …. 4.18 India–Republic of Korea Comprehensive Economic Cooperation Agreement Art 10.21(5) …. 12.63 Japan–Australia Economic Partnership Agreement …. 15.5 Japan–Australia Economic Partnership Agreement (JAEPA) …. 1.28, 2.10, 2.38, 2.61, 7.12 Ch 1, Art 1.2 …. 2.61 Art 1.3(n) …. 2.40 Art 14.2 …. 2.69 Art 14.2(a) …. 2.10 Art 14.2(f) …. 2.11 Art 14.12(b) …. 2.38 Art 14.12(g) …. 2.38 Art 14.15 …. 7.12 Art 16.2 …. 2.11 Annex 7 …. 7.12 Annex 7, Pt I …. 7.12 Annex 7, Pt II …. 7.12 Japan–Australia Free Trade Agreement …. 1.32, 7.12

Japan–Malaysia Economic Partnership Agreement Art 76 …. 7.6 North American Free Trade Agreement (NAFTA) …. 1.9, 1.11, 11.7 Republic of Korea-Australia Free Trade Agreement …. 1.32, 4.32, 5.8, 7.12, 13.42, 15.5 Art 11.5 …. 4.35 Art 11.12 …. 7.12 Art 11.18 …. 1.38 Art 11.20 …. 13.43 Art 11.21 …. 1.38 Art 11.26(2) …. 13.42 Art 11.28(2) …. 10.12, 10.14 Annex I …. 7.12 Annex II …. 7.12 Singapore–United States Free Trade Agreement Art 15.4(3) …. 7.6 Art 15.5(1) …. 6.8

INVESTMENT TREATIES Australia–Argentina Bilateral Investment Treaty Art 4(2) …. 5.7, 6.8, 8.5 Australia–Chile Bilateral Investment Treaty Art 3(2) …. 5.6 Australia–China Bilateral Investment Treaty …. 2.76, 2.80, 10.13 Art X(1) …. 10.15 Art X(2) …. 10.13, 10.14 Art XI(1) …. 2.81 Art XIV …. 2.76 Art XIV(2) …. 2.70 Australia–India Bilateral Investment Treaty …. 6.9, 7.21

Art 4(2) …. 6.9, 7.22 Art 4(4) …. 7.10 Australia–Indonesia Bilateral Investment Treaty …. 2.14, 2.37, 2.40, 2.41, 2.46, 2.47, 2.62, 2.77, 12.25 Art I …. 2.14, 2.37, 2.62 Art I(a) …. 2.80 Art I(2) …. 2.47 Art III …. 2.41, 2.80 Art III(3) …. 2.47 Art III(4) …. 2.47 Art XI …. 12.25 Art XV(1) …. 2.77 Art XV(2) …. 2.78 Australia–Korea Bilateral Investment Treaty Art 11.5(2)(b) …. 5.8 Australia–Laos Bilateral Investment Treaty Art 12(3)(a) …. 12.27 Australia–Mexico Bilateral Investment Treaty Protocol on Art 4(1) …. 4.35 Australia–Papua New Guinea Bilateral Investment Treaty …. 8.5 Art 3(4) …. 8.5 Art 4 …. 7.7 Australia–Sri Lanka Bilateral Investment Treaty …. 6.5 Art 4(1) …. 6.5 Australia–Turkey Bilateral Investment Treaty Art 4(1) …. 7.7 Cambodia–Cuba Bilateral Investment Treaty Art 2(2) …. 4.5 Cambodia–Malaysia Bilateral Investment Treaty Art 3 …. 4.6

Cambodia–Republic of Korea Bilateral Investment Treaty Art 3(2) …. 6.13 Cambodia–Singapore Bilateral Investment Treaty Art 4 …. 7.4, 7.10 Art 5 …. 7.10 Cambodia–Vietnam Bilateral Investment Treaty Art I(3) …. 10.15 Art II(2) …. 5.5 Art VI(1) …. 10.15 Art VIII(2) …. 12.40 Canadian Model Bilateral Investment Treaty 2004 Art 5(1) …. 4.35 Art 5(2) …. 4.35 Canada–China Bilateral Investment Treaty …. 1.32 Art 6(1) …. 6.8 Art 6(2) …. 6.8 Chile–Croatia Bilateral Investment Treaty Art 3(2)–(3) …. 7.19 Chile–Denmark Bilateral Investment Treaty Art 3(1) …. 7.19 Chile–Indonesia Bilateral Investment Treaty Protocol …. 10.15 Chile–Peru Bilateral Investment Treaty …. 11.7 China–Australia Bilateral Investment Treaty Art X(1) …. 10.7 China–Canada Bilateral Investment Treaty Art 12(1) …. 10.15 China–Columbia Bilateral Investment Treaty Annex C21 …. 12.35 China–Czech Republic Bilateral Investment Treaty

Art 9(3) …. 12.35 China–Djibouti Bilateral Investment Treaty Art 3 …. 10.6 China–Germany Bilateral Investment Treaty …. 6.17 Protocol …. 6.17, 12.35 Art 9(2) …. 12.35 China–Indonesia Bilateral Investment Treaty Art 7 …. 10.6 Art 9(3) …. 12.29 China–Japan Bilateral Investment Treaty Art 11(2) …. 12.29 China–Japan–Republic of Korea Multilateral Investment Treaty Art 4(3) …. 7.24 China–Kuwait Bilateral Investment Treaty Art 6(4) …. 10.18 China–Laos Bilateral Investment Treaty …. 3.11 Art 4(1) …. 3.11, 3.14 Art 5(2) …. 10.14 China–Mongolia Bilateral Investment Treaty …. 12.51 Art 8(7) …. 12.51 China–Myanmar Bilateral Investment Treaty …. 7.4 Art 3(2) …. 6.13 Art 3(3) …. 7.4 China–New Zealand Bilateral Investment Treaty …. 7.11 Art 4(2) …. 7.11 China–Peru Bilateral Investment Treaty Art 8(3) …. 12.29 China–Philippines Bilateral Investment Treaty Art 3(2) …. 7.7

China–Singapore Bilateral Investment Treaty …. 7.10 Art 4 …. 7.7 Art 5 …. 7.10 China–Sri Lanka Bilateral Investment Treaty Art 8(3) …. 10.18 China–Syria Bilateral Investment Treaty …. 6.18 Art 1 …. 6.18 Art 3 …. 6.18 China–Thailand Bilateral Investment Treaty Art 6(2) …. 10.18 China–United Kingdom Bilateral Investment Treaty Art 6 …. 10.6 China–Uruguay Bilateral Investment Treaty Art 6(2) …. 10.14 China–Vietnam Bilateral Investment Treaty Art 3(3) …. 7.10 Art 5(2) …. 10.14 Art 8(3) …. 12.29 Ecuador–United States Bilateral Investment Treaty …. 11.7 Germany–Timor-Leste Bilateral Investment Treaty Protocol …. 10.15 Art 7(1) …. 10.14 Hong Kong–Denmark Bilateral Investment Treaty Art 6(1) …. 10.8, 10.14 Hong Kong–Netherlands Bilateral Investment Treaty …. 10.8 Art 6(1) …. 10.8 Hong Kong–New Zealand Bilateral Investment Treaty Art 1(4) …. 10.12 Art 4(2) …. 6.13 Art 7(2) …. 10.14

Hong Kong–Republic of Korea Bilateral Investment Treaty Art 2(2) …. 8.5 India–Argentina Bilateral Investment Treaty Art 3(2) …. 5.7 India–China Bilateral Investment Treaty Art 3(2) …. 4.41 India–Ghana Bilateral Investment Treaty Art 7(1) …. 10.6 India–Indonesia Bilateral Investment Treaty …. 6.20 Art 4(3) …. 6.20 Art 7(3) …. 10.14 Art 9(2) …. 12.40 India–Korea Bilateral Investment Treaty Art 3(3) …. 7.8 India–Kuwait Bilateral Investment Treaty …. 7.21 India–Myanmar Bilateral Investment Treaty Art 4(3) …. 6.15 Art 7(1) …. 10.6 India–United Kingdom Bilateral Investment Treaty Art 7 …. 10.8 Indonesia–Laos Bilateral Investment Treaty Art 3(2) …. 8.5 Art 7 …. 10.9 Indonesia–Mongolia Bilateral Investment Treaty Art 2(2) …. 5.7 Indonesia–Netherlands Bilateral Investment Treaty …. 9.6 Art 3(4) …. 9.6 Indonesia–Singapore Bilateral Investment Treaty Art VI …. 10.15

Indonesia–United Kingdom Bilateral Investment Treaty …. 5.4, 7.20, 15.5 Art 3(2) …. 5.4 Indonesia–Vietnam Bilateral Investment Treaty Art 4(1) …. 7.4 Art 4(2) …. 7.4 Japan–Laos Bilateral Investment Treaty …. 6.8, 6.12 Art 2(1) …. 6.8 Art 5(1) …. 4.35 Art 17(1) …. 12.28 Japan–Mongolia Bilateral Investment Treaty Art 2(2) …. 7.8 Art 3(1) …. 7.8 Japan–Papua New Guinea Bilateral Investment Treaty Art 3(2) …. 7.7 Japan–Republic of Korea Bilateral Investment Treaty …. 12.37, 12.42 Art 15(3) …. 12.37, 12.42 Japan–Vietnam Bilateral Investment Treaty Art 9(1) …. 4.5, 5.5 Art 16(1) …. 10.20 Annex …. 6.16 Kuwait–India Bilateral Investment Treaty Art 4(5) …. 7.22 Laos–Republic of Korea Bilateral Investment Treaty Art 3(2) …. 7.7 Malaysia–Chile Bilateral Investment Treaty …. 7.19 Malaysia–Denmark Bilateral Investment Treaty Art 8 …. 10.12 Art 8(3) …. 10.9 Malaysia–Netherlands Bilateral Investment Treaty

Art 9(4) …. 10.14 Malaysia–Sweden Bilateral Investment Treaty …. 12.27 Art 6 …. 12.27 Malaysia–United Kingdom Bilateral Investment Treaty Art 5 …. 10.18 Mongolia–Belgium Bilateral Investment Treaty Art 3(2) …. 8.5 Mongolia–Netherlands Bilateral Investment Treaty Art 4 …. 10.10 Mongolia–Republic of Korea Bilateral Investment Treaty …. 11.4 Art 6(3) …. 10.15 Art 10 …. 11.4 Mongolia–Russian Federation Bilateral Investment Treaty Art 2(1) …. 5.14 Art 2(2) …. 5.7, 7.10 Art 5 …. 7.10 Mongolia–Singapore Bilateral Investment Treaty …. 5.6 Art 2 …. 5.6 Art 3(2) …. 5.6 Art 13(2) …. 12.36 Mongolia–United States Bilateral Investment Treaty Art IV(2) …. 10.13 Myanmar–Philippines Bilateral Investment Treaty Art 3(2) …. 6.13 Myanmar–Thailand Bilateral Investment Treaty …. 10.19 Art 4 …. 7.7 Art 7(1) …. 10.19 Netherlands–Indonesia Bilateral Investment Treaty Art 7 …. 10.15 Netherlands–Paraguay Bilateral Investment Treaty

Art 3(4) …. 9.16 New Zealand–Argentina Bilateral Investment Treaty Art 4(2) …. 7.7 Philippines–Myanmar Bilateral Investment Treaty Art VI …. 10.14 Philippines–Netherlands Bilateral Investment Treaty …. 12.26 Art 9(1) …. 12.26 Philippines–Republic of Korea Bilateral Investment Treaty …. 12.31 Art 3(2) …. 7.7 Art 8 …. 12.31 Republic of Korea–China Bilateral Investment Treaty Protocol, Art 6 …. 10.15 Republic of Korea–Indonesia Bilateral Investment Treaty Art 4(3) …. 4.5 Republic of Korea–Japan Bilateral Investment Treaty …. 10.20 Art 2 …. 10.20 Art 12 …. 10.20 Art 17 …. 10.20 Art 18(1) …. 10.20 Republic of Korea–Malaysia Bilateral Investment Treaty …. 6.14 Art 3 …. 6.14 Republic of Korea–Mongolia Bilateral Investment Treaty Art 6(3) …. 10.15 Republic of Korea–Philippines Bilateral Investment Treaty Art 6 …. 10.7 Republic of Korea–Thailand Bilateral Investment Treaty …. 10.7 Art 3(2) …. 5.5 Art 6 …. 10.7 Singapore–Belgium–Luxembourg Bilateral Investment Treaty

Art 6(2) …. 10.9 Singapore–Cambodia Bilateral Investment Treaty Art 3(2) …. 5.6 Singapore–China Bilateral Investment Treaty Art 3(2) …. 5.6 Singapore–Indonesia Bilateral Investment Treaty …. 10.11 Art 2(2) …. 5.7 Art 6(1) …. 10.11 Singapore–Mauritius Bilateral Investment Treaty Art 3(2) …. 5.6 Singapore–Netherlands Bilateral Investment Treaty, Art 7(1) …. 8.5 Art 7(2) …. 5.6 Singapore–Pakistan Bilateral Investment Treaty Art 3(2) …. 5.6 Singapore–Sri Lanka Bilateral Investment Treaty Art 3(2) …. 5.6 Art 4(1) …. 7.7 Singapore–Switzerland Bilateral Investment Treaty Art 2(1) …. 5.6 Singapore–Vietnam Bilateral Investment Treaty Art 5 …. 6.15 Switzerland–Pakistan Bilateral Investment Treaty Art 11 …. 9.7 Tanzania–United Kingdom Bilateral Investment Treaty …. 2.58 Thailand–Argentina Bilateral Investment Treaty Art 4(2) …. 6.6 Art 7(2) …. 10.14 Thailand–Germany Bilateral Investment Treaty …. 8.4 Art 2(4) …. 8.4

Thailand–India Bilateral Investment Treaty Art 4(2) …. 6.13 Thailand–United Kingdom Bilateral Investment Treaty Art 7(1) …. 10.7 Thailand–Vietnam Bilateral Investment Treaty Art 3(2) …. 5.5 Timor-Leste–Argentina Bilateral Investment Treaty …. 6.6 Art 4(2) …. 6.6 United Arab Emirates–Vietnam Bilateral Investment Treaty …. 7.27 Art 10(2) …. 7.27, 12.34 United Kingdom–Laos Bilateral Investment Treaty Art 3(1) …. 7.25 Art 3(2) …. 7.25 Art 3(3) …. 7.25 United Kingdom–Sri Lanka Bilateral Investment Treaty …. 5.13 United States Model Bilateral Investment Treaty 2012 Art 5(1) …. 4.35 Art 5(2) …. 4.35 Vietnam–Cambodia Bilateral Investment Treaty Art 3(1) …. 8.5 Vietnam–United Kingdom Bilateral Investment Treaty Art 6 …. 10.12

Contents Foreword Preface Acknowledgement Table of Cases Table of Statutes, Conventions, Institutional Arbitration Rules, Agreements and Treaties Introduction Historical reflections The emergence of BITs, MITs and FTAs Concerns about BITs The utility of BITs in the Asia-Pacific region Investment protection and the arbitration process State contracts — unique and complex Controversies and reactions BITs cannot be ignored Using BITs What investment treaties can and should do

Part I: Provisions Defining Scope and Application of the Treaty Chapter 2

Provisions Defining Scope and Application of the Treaty

Premises and standard provisions What is protected? The ‘investment’ Broad language and long lists Security rights and indirect interests Criteria for an investment beyond the treaty definition Pre-contractual expenditure as investments Portfolio investment Who is protected? The ‘investor’ Nationality Corporate nationality Three issues arising in respect of the nationality of companies Where are investments protected? Territorial application of investment treaties When is an investment protected? Temporal application of investment treaties Disputes extant at time of treaty Duration of the treaty Claims after the investment has ended Termination and sunset provisions Admission and establishment of investments

Part II: Key Standards of Treatment Chapter 3 Expropriation Common features of expropriation treaty provisions Content and application of the standard for expropriation Direct expropriation Indirect expropriation and measures tantamount to expropriation Creeping expropriation The nature of the property expropriated Compensation

Other elements of the standard Relationship to other treaty standards Chapter 4 Fair and Equitable Treatment Common features of fair and equitable treatment investment treaties Content and application of the standard Procedural propriety and administrative due process Transparency Protection from arbitrary and discriminatory conduct Good faith Stability, predictability and consistency of the legal framework: the investor’s ‘legitimate expectations’ Reasonableness and proportionality Minimum standard of treatment for foreign nationals under customary international law Chapter 5 Full Protection and Security Common features of protection and security provisions in investment treaties Content of the standard Physical and non-physical protection Overlap with fair and equitable treatment Chapter 6 National Treatment Common features of the treaty provisions Comparison to investments in ‘like’ or ‘similar’ circumstances Pre- and post-establishment investment activities Sector carve-outs and other exceptions Applying the national treatment standard in practice What is the relevant comparator — investor/investment? Was the foreign investor treated differently to the relevant comparator? Is the difference in treatment justified?

Chapter 7 Most-Favoured Nation Treatment Common features of the most-favoured nation treatment provisions Comparison to investments in ‘like’ or ‘similar’ circumstances Pre- and post-establishment investment activities Sector carve-outs and other exceptions Applying the standard Application to substantive treatment standards Application to procedural rights in investment treaties Chapter 8

Arbitrary, Discriminatory Impairment Common features of the treaty provisions Content of the treatment standard Arbitrary Discriminatory Unreasonable Impairment Practical relevance of the treatment standard

or

Unreasonable

Chapter 9 Umbrella Clauses Common features of umbrella clauses Approaches to interpretation and application of umbrella clauses Nature of obligations covered Nature of breaches covered State responsibility for breach of obligations Standing to bring claims for breaches of obligations Summary Chapter 10 Free Transfer of Funds The concept of free transfer General scope of transfer rights

Application to different types of payments Convertibility rights Timing of transfers Express exceptions

Part III: Dispute Settlement Chapter 11

Disputes between the Contracting States to an Investment Treaty

Chapter 12

Disputes between a Foreign Investor and the Host State What investor–State arbitration proceedings look like in practice Pre-arbitration phase Arbitration proceedings Duration and post-arbitration phase Common features of investor–State dispute resolution provisions and related procedural considerations What are the likely merits of the potential claim? Are the conditions governing access to treaty benefits met? What is the nature and scope of consent of the host State’s consent to arbitration? Does the treaty impose any procedural or other prerequisites to arbitration? What dispute resolution forums are available and appropriate? Do the applicable arbitration rules provide for the possibility of interim relief? What is the applicable law? Does the treaty impose a time limit on bringing claims? Does the treaty limit the types of relief that an arbitral tribunal can grant? Chapter 13

Compensation, Damages and other Remedies in

Investor–State Disputes Rules in the treaty governing compensation for lawful expropriation Legal standard for assessing breaches of an investment treaty Remedies that can comprise full reparation for a treaty breach Monetary damages Non-pecuniary remedies: specific performance and injunctive relief Interest Moral damages Limitations on monetary damages Causation Mitigation Contributory negligence Express limits in the treaty on the types of remedies available Legal fees and arbitration costs Common valuation methods Market value Date of assessment Methods of market valuation Chapter 14

Annulment, Set-Aside and Enforcement of Investor–State Arbitral Awards Post-award remedies under the ICSID Convention Overview Annulment under the ICSID Convention Set-aside proceedings for non-ICSID arbitral awards Recognition, enforcement and execution of arbitral awards rendered under investment treaties Recognition and enforcement of ICSID arbitral awards Recognition and enforcement of non-ICSID awards Execution of investor–State arbitral awards

Chapter 15 Conclusion Explanatory notes to the appendices The need for case-by-case assessment Appendix 1

Overview of selected investment treaties in AsiaPacific

Appendix 2

Selected list of publicly-known investor–State disputes based on a treaty involving parties from the Asia-Pacific region as of March 2015 (alphabetical by treaty)

Appendix 3

Selected list of publicly-known investor–State disputes based on a contract involving parties from the Asia-Pacific region as of March 2015

Appendix 4

Investment Treaties from the Asia-Pacific Region

Appendix 5

Selected practice precedents

Selective bibliography and online resources Bibliograhy Online resources Index

[page 1]

Introduction Historical reflections 1.1 Investment beyond the territory of a single nation State is as old as the scriptures. Through history, investments in the territory of another State evolved through expansionism, colonialism and discrete trading and investment arrangements. European imperialism, trade and foreign investment were entwined throughout the seventeenth to the twentieth centuries in a variety of ways.1 1.2 While the historical backdrop to a particular investment treaty may not be of determinative significance, it is useful to reflect on the origins of international investment law. Kate Miles has cogently argued that many of the features of investment treaties today harken back to, or have conceptual ancestors in, the trading and investment arrangements that were in place for centuries when European and North American powers exercised authority and control over developing or less developed countries.2 The utility of reflecting on these matters may be to engender cross-cultural sensitivity in the course of negotiations over a Bilateral Investment Treaty (BIT) or concession, and in the context of attempts to resolve a dispute in the midst of such proceedings. 1.3 Whatever the merits of such arguments as to the origins of international investment law, it cannot be doubted that, from the ashes of imperialism and colonialism, there has emerged a growing number of

modern treaties between States that focus on the protection of investments. 1.4 International investment law has developed steadily and in parallel to increases in global economic activity. Customary international law was directed to the protection of the property of aliens. It gave rise to notions of an international minimum standard.3 This minimum standard saw an exchange between United [page 2] States Secretary of State, Cordell Hull, and the Mexican Minister of Foreign Affairs in 1938 which then gave rise to the Hull Formula. That formula finds its way into BITs facilitating participation in international commerce on a non-discriminatory basis. The rise in the number of modern investment treaties since the end of the Second World War (there are now well over 3000 such treaties) can be seen as a reaction to, and facilitator of, increased international economic co-operation.

The emergence of BITs, MITs and FTAs 1.5 Many countries in the Asia-Pacific region engage in investment outside their territorial boundaries. In the absence of some controlling instrument, investors may face discrimination, political risk including civil unrest, or unfavourable investment environments due to government instability. 1.6 An investment treaty is a legal agreement between two or more countries establishing reciprocal arrangements to encourage and protect foreign investment. Such treaties provide guarantees of a minimal level of protection to foreign investors from the home State investing in another country (the host State). Such protection, unlike political risk insurance or other devices, is free. 1.7 There are two broad categories of investment treaties: Bilateral Investment Treaties (BITs) and Multilateral Investment Treaties (MITs).

1.8 A BIT is an agreement between two countries that encourages and protects foreign investments between them. Most countries have entered into a BIT and many have entered into a great number of them. 1.9 MITs are similar to BITs but involve three or more countries. A classic example is the North American Free Trade Agreement entered into by Canada, Mexico and the United States, which came into force in January 1994. In the Asia-Pacific region, the best example of a MIT is probably the 2009 ASEAN Comprehensive Investment Agreement between Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam,4 though there are other MITs in force and under negotiation in the region too. 1.10 A Free Trade Agreement (FTA) may be made between two or more countries and is designed to form a free trade area by eliminating tariffs, quotas and other barriers on most or all of the trade between the countries. Some FTAs contain provisions protecting investments. 1.11 An investment treaty is made between two or more States to safeguard investments made in the territory of the signatory States.5 Despite attempts by [page 3] larger developed countries to establish regional MITs,6 investment treaties usually take the form of BITs. States are said to enter BITs to activate the flow of private capital into the economies of the contracting States by creating an enforceable set of rules that minimise risks that might otherwise confront an investor.7 BITs became common during the 1980s and 1990s as a means of encouraging capital investment in developing markets. Capital exporting countries, including the United States, Western European States and Japan, were the original and most vigorous proponents of the negotiations of BITs, principally with countries in developing regions. 1.12 BITs have blossomed, particularly from the 1980s onward and again from the mid-1990s, with China’s relaxation of its regime in relation to foreign investment. Today, States from all regions of the

world and in all stages of development have entered into BITs. BITs are no longer restricted to a pairing between developed and developing countries and are increasingly concluded between, and among, developing and transitioning economies. According to one study, by the end of 2004, a quarter of all BITs were so called ‘South–South’ BITs concluded between developing countries.8

Concerns about BITs 1.13 There are persistent concerns about the perceived inequity of the investor–State arbitration process in BITs, in particular that it prioritises the interests of the individual investor over the broader societal responsibilities of the host State.9 [page 4] 1.14 The imperative for a re-consideration of the content and operations of BITs is apparent from a report from the United Nations Conference on Trade and Development (UNCTAD): The regime of international investment agreements [IIAs] is at a crossroads. With close to 6,100 treaties, many ongoing negotiations and multiple dispute-settlement mechanisms, it has come close to a point where it is too big and complex to handle for governments and investors alike, yet remains inadequate to cover all possible bilateral investment relationships (which would require a further 14,000 bilateral treaties). The policy discourse about the future orientation of the IIA regime and its development impact is intensifying.10

The utility of BITs in the Asia-Pacific region 1.15 Despite arguments and perspectives to the contrary, those supporting the current structure of investment treaties assert that they are favourable in the following three respects: 1. BITs may be expected to contribute to attracting foreign direct investment by effectively reducing regulatory risk. 2. The existence of BITs may enhance a legal system, which,

3.

in turn, may be a foundational part of the creation of one rule of law, relevant not only to economic growth but political development.11 It is said that the increase in participation in the investment treaty system by developing countries means that outward investment by these countries merits equal protection.12

Investment protection and the arbitration process 1.16 The raison d’être of an investment treaty is to protect investment. The host State commits to compensate expropriation of investment interests, with foreign investment given ‘equality’ with local investors, and against an internationally-referenced ‘fair and equitable treatment’ (FET) standard.13 States enter modern investment treaties in order to create stable investment environments and, thereby, the general promotion of foreign investment. [page 5] 1.17 The investor has a direct right of action against the host State and there is international arbitration for disputes, most commonly under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) or under the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL). 1.18 The vast majority of BITs contain two basic mechanisms for protecting foreign investment. First, State parties agree to respect certain standards of treatment for ‘investments’ in their territory by investors from the other State. As will be explained in Chapter 2, these treatment guarantees are made available to ‘investments’ of ‘investors’, as those terms are defined in the investment treaty. The most common standards of protection offered include assurances of appropriate compensation for expropriation of an investment and other guarantees

of treatment that revolve around fairness, equity, reasonableness, nondiscrimination and security. The main substantive treatment standards that regularly appear in modern investment treaties are described in further detail in Chapters 3–10. 1.19 Second, State parties often consent to the arbitration of disputes for breaches of the substantive rights provided in relation to the relevant ‘investment’. This allows the investor to commence an international arbitration directly against a State without necessarily concluding a separate concession agreement with the State. An investor’s ability to access a dispute settlement mechanism outside the influence of the host State is perhaps the most significant advantage offered by modern investment treaties. 1.20 This system is of a hybrid character in that it cannot exclusively be rationalised either as a pure form of public international law or as a pure private transnational method of dispute resolution. The relevant rights are protected by international treaty obligations but liability for any breach gives rise to a civil or commercial award for enforcement purposes.14 In many respects arbitration under investment treaties closely resembles commercial arbitration, both being rights-based dispute resolution processes and predominantly involving claims for monetary compensation.15 Despite this there are significant differences in procedure and culture to arbitrating disputes under private contracts as opposed to under investment treaties, many of which stem from the participation of sovereign States and the applicability of international law as the governing law in the case of the latter. 1.21 Chapters 11–14 consider dispute resolution under investment treaties, including the availability of remedies where a host State is found to have breached a substantive treatment guaranteed in the treaty. [page 6]

State contracts — unique and complex 1.22

The notion that a State can make contracts just as a private

person may, and that a private person may contract with a State, through another, raises complex legal issues. Such contractual undertakings do not necessarily fit well into the traditional pattern of international law as a law between States. Neither can BITs be easily approached as a contract between private parties.16 The contractual restriction of public powers, and the impact of this on notions of sovereignty, remains to be fully explored.17 1.23 The focus of concern in international investment law is the protection of property. To some extent, no doubt, this is a reflection of the terms of the BITs themselves. In a larger sense, it may be seen that the protection of foreign property lies at the heart of public international law. As Voss observes, disputes between States as to alleged violations of a nation’s property reached back to the end of the eighteenth century.18 1.24 This hybrid or blended character of international investment law cloaks the tension between the two main actors in the process: host States desiring the benefit of foreign investment with the least divestiture of regulatory power, and investors seeking to reduce political and commercial risks. This tension raises the potential for interpretative conflicts.19

Controversies and reactions 1.25 In the past few years investment treaties have come under the spotlight of increasing scrutiny and criticism, particularly in the AsiaPacific region. Much of the controversy concerns the method of dispute resolution provided for in many investment treaties. Curiously, the loudest challenges have come from the developed world. 1.26 The Australian Government’s Productivity Commission commissioned a detailed study of its examined trade agreements. Its November 2010 report has three significant conclusions: [page 7]

Australia should not accept dispute resolution provisions that favour international investors over local, and Australia should not foist such a system on other countries.20 2. Better long-term results arise from improving domestic institutions and capacity to be able to address the disputes.21 3. Where IIA dispute resolution systems are proposed, their drafting could be improved to reduce risk. 1.27 This third point is of interest. The Productivity Commission identified the following recommendations to address this concern: 1.

There are several mechanisms that governments can use to seek to minimise or ameliorate the risks associated with ISDS [Investor–State Dispute Settlement]. [These include:] careful drafting of IIAs that precisely define ‘investment’, ‘indirect expropriation’ and ‘equitable and fair treatment’…; the inclusion of clauses in IIAs that change the default rules of the ICSID or UNCITRAL. … Indeed, Australia followed this course in its agreement with Chile …; time-limiting agreements between countries…; limit[ing] the application of ISDS to a subset of the member countries.22

1.28 Since the demise of the Gillard Government, Australia has adopted a case-by-case approach as to whether to include investor– State dispute resolution within any BITs.23 There is no provision for it in the Japan–Australia Economic Partnership Agreement (JAEPA)24 which entered into force on 15 January 2015, despite the agreement extensively addressing the subject of foreign investment. 1.29 Concerns have been raised about investor–State dispute resolution in other countries in the region too. The Indonesian Government announced an intention to terminate BITs.25 In March 2014 the Indonesian Government indicated it would terminate all 67 of its BITs but has not yet revealed when or whether it would seek to renegotiate them. Likewise, the Indian Government announced a review of its existing investment agreements in 2012 in response to a mounting series of investor–State arbitrations brought against India by foreign investors, primarily in [page 8]

the telecommunications sector. A new draft Indian BIT was presented to the Indian cabinet in November 2014. 1.30 Such turbulence in the investment treaty space is reflective, in many ways, of the growing significance of investment treaties and their impact on the economic and social development of many States.

BITs cannot be ignored 1.31 The significance of investment treaties can be measured on a purely numerical basis in that the UNCTAD World Investment Report 2014 reveals that developing Asia remains the number one investment destination26 and that the global investment treaty regime saw the addition of 44 new treaties in 2013, bringing the total number of investment treaties worldwide to well over 3000.27 There has at the same time been an increasing number of developing countries disengaging from the regime. 1.32 Despite the public scrutiny in recent years over the role of BITs and MITs in the Asia-Pacific region, treaty making in the region continues. Australia has entered into two significant treaties in the past year with Japan and the Republic of Korea respectively.28 The Canada– China BIT entered into force in October 2014. China signed a trilateral investment treaty with Japan and the Republic of Korea in May 2012, which is yet to come into force. Singapore and the European Union initialled a draft treaty in September 2013 that is now being finalised. Several major regional treaties are also under discussion, most notably the Trans-Pacific Partnership (involving eleven Asia-Pacific countries and the United States) and the Regional Comprehensive Economic Partnership, which was first announced at the ASEAN Summit in Cambodia in November 2012 (involving ASEAN and a number of other Asia-Pacific countries). All of these initiatives suggest that the rise (and rise) of investment treaties in the region cannot be ignored. 1.33 A separate litmus test for the importance of investment treaties is the growing number of claims brought against States under these treaties. The UNCTAD 2014 Report records that 2013 saw the second largest number of known investment arbitrations commenced in a

single year.29 It is reported that investors brought an unusually high number of cases against developed States but, importantly, 23 percent of the respondents were in Asia and Oceania, second only to respondent States in Latin America and the Caribbean.30 1.34 Regardless of the observable antipathy in some quarters towards investor–State dispute resolution, or to the institution of investment treaties themselves, BITs are here [page 9] to stay. Their importance has attracted comment from judicial officers in domestic courts, apparently concerned with a loss of authority.31 All the while as the battle of words wages of the desirability of investment treaties, the list of pending disputes being arbitrated between foreign investors and host States in the Asia-Pacific region grows steadily. This can be seen from the case tables that appear in Appendices 3 and 4.

Using BITs 1.35 It cannot be doubted that an investor considering investments outside his home jurisdiction would be well advised to structure his investment through corporations or shareholding so as to obtain the benefit of protections under applicable investment treaties. The protection afforded by investment structuring, in terms of the remedies available and the capacity to enforce an award, would be of immense importance. 1.36 An issue arises where, for example, an Australian investor chooses to invest in a country where Australia does not have a BIT with that country. Ordinarily, the investment would not be given the protections provided by investment treaties. The investor might see if it could negotiate certain safeguards into its contract with the relevant State prior to making the investment and take out insurance, or it could structure its investment to fall within a treaty. An investor may also

incorporate a vehicle in a country with a treaty and then use that vehicle to invest.

What investment treaties can and should do 1.37 On analysis of the numerous treaties applicable or relevant to the Asia-Pacific region, three matters emerge quite clearly. First, there is a great degree of commonality in both the structure and text of the provisions. This is highlighted in Appendix 1. 1.38 Second, in many cases there are restrictions on the ability of foreign investors to ‘treaty shop’ or to bring frivolous or vexatious claims. For example, there are often carve-outs for matters involving tax, especially in more recently-concluded treaties, as there is, for example, in Art 21 of the Australia–New Zealand Closer Economic Relations Trade Agreement. There are also provisions that limit the time within which foreign investors must bring claims under the treaty, as is done by Art 11.18 of the Australia–Republic of Korea FTA. Recognising the public interest in the adjudication of particular disputes involving matters of national concern, there are provisions to ensure transparency, and the publication of documents, as is done by Art 11.21 of the Australia–Republic of Korea FTA. [page 10] 1.39 Third, from the perspective of the home State or investors within the home State, there is something in the adage that less is more. If the FET standard is appropriately drafted and interpreted by reference to international minimum standards, there may be no necessity for certain other treatment standards in investment treaties that may serve only to cloud the operation of the FET standard. 1.40 In the end, the core provisions in investment treaties appear to be capable of clear and effective expression so as to serve the underlying purpose of protection and, perhaps, to advance other objectives. To this end there appears to be a growing preference for provisions limiting

remedies available to foreign investors who bring claims under the treaties, and for provisions advancing sustainable development, a matter specifically noted by UNCTAD in its 2014 Report.32 1.41 There is still, more often than not, an imbalance in the capacities of foreign investors and host States when it comes to deploying investment treaties. Professor Vaughan Lowe records that many governments are not familiar with BITs and have no established procedures for dealing with litigation initiated under them. The BIT may be signed by one government department but the request for arbitration may have been sent to another. Professor Lowe describes a revealing situation in Pakistan: Even if there is some awareness of investment treaties, the government may not fully appreciate the nature and extent of the obligations that arise under them. At a public meeting held by the International Centre for Settlement of Investment Disputes in November 2006, the Attorney-General of Pakistan said that to his knowledge fiftyseven of Pakistan’s BITs had been signed simply as photo-opportunities with visiting dignitaries from foreign States, and that those who signed them on behalf of Pakistan — his own department not being involved in the process at that time — appeared to be unaware that the BITs were anything other than expressions of mutual respect and cooperation. The discovery that they entailed concrete legal consequences was, it seems, a surprise which dawned only after the SGS v Pakistan litigation.33

1.42 A partial solution to this imbalance may be a reverent regard for the text, its proper negotiation, and its proper interpretation. To that end, we hope Appendix 1 assists in revealing trends, showing a standard approach and assisting in negotiations. 1.43 Each nation will develop its own approach to the negotiation of investment treaties. This approach will be informed by that State’s experience and political imperatives. What is incontrovertible is that in view of the number of investment treaties in the region, the effect and operation of such treaties cannot be ignored by any person engaged in business in the Asia-Pacific region, nor by those advising them. _____________________________ 1. 2. 3.

A Anghie, Imperialism, Sovereignty and the Making of International Law, Cambridge University Press, New York, 2004, pp 67–74, 84–6. See K Miles, The Origins of International Investment Law: Empire, Environment and the Safe Guarding of Capital, Cambridge University Press, New York, 2013, Pt 1. S Schill, The Multilateralization of International Investment Law, Cambridge University Press, New York, 2009, p 26.

4. 5.

6.

7.

8. 9.

10. 11. 12. 13.

14. 15.

16.

2009 ASEAN Comprehensive Investment Agreement. This treaty replaces a predecessor in the 1987 ASEAN Agreement for the Promotion and Protection of Investments. For an excellent summary of the basic elements of investment treaties and the expectations behind the BIT network, see S Franck, ‘Foreign Direct Investment, Investment Treaty Arbitration and the Rule of Law’ (2007) 19 Pacific McGeorge Global Business & Development Law Journal 341–5. See, eg, the FTAs in the ASEAN and North American regions: ASEAN–Australia–New Zealand FTA; North American FTA. On the recent trend towards multilateralism, see the excellent monograph by Schill, note 3 above; and also C McLachlan, L Shore and M Weiniger, International Investment Arbitration: Substantive Principles, Oxford University Press, Oxford, 2007, pp 34–41. An extended discussion can be found in J Salacuse and N Sullivan, ‘Do BITs Really Work?: An Evaluation of Bilateral Investment Treaties and Their Grand Bargain’ (2005) 46 Harvard International Law Journal 75. S Schill, The Multilateralization of International Investment Law, Cambridge University Press, New York, 2009, p 42. See N Bernasconi-Osterwalder and L Johnson (eds), International Investment Law and Sustainable Development: Key Cases From 2000–2010, International Institute for Sustainable Development, 2011, pp 18–19, accessed 10 February 2015; Productivity Commission, Bilateral and Regional Trade Agreements, Research Report, Commonwealth of Australia, Canberra, 2010, pp 271–7; A Lehavi and A Licht, ‘Bits and Pieces of Property’ (2011) 36 The Yale Journal of International Law Issue 1, pp 129–30; G Mayeda, ‘Sustainable International Investment Agreements: Challenges and Solutions for Developing Countries’, in M Segger, M Gehring and A Newcombe (eds), Sustainable Development in World Investment Law, Kluwer Law International, Alphen aan den Rijn, 2011, pp 541–2; G Harten et al, ‘Public Statement on the International Investment Regime’ (Speech delivered at Osgoode Hall Law School, York University, 31 August 2010). UNCTAD, Non-Equity Modes of International Production and Development, World Investment Report 2011, United Nations, New York and Geneva, 2011, p 93. See W M Reisman and R D Sloane, ‘Indirect Expropriation and its Valuation in the BIT Generation’ (2004) 74 British Year Book of International Law 115 at 117. See J O Voss, The Impact of Investment Treaties on Contracts Between Host States and Foreign Investors, Martinus Nijhoff Publishers, Leiden, 2011, p 54. Lehavi and Licht, note 9 above, at p 129; K Gallagher and E Shrestha, Investment Treaty Arbitration and Developing Countries: A Re-Appraisal, Global Development and Environment Institute Working Paper No 11-01, Tufts University, Medford, 2011, p 5. See Z Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2004) 74(1) British Yearbook of International Law 152. See discussion in M Schneider, ‘Investment Disputes — Moving Beyond Arbitration’, in L Boisson de Chazournes, M Kohen and R Viñuales, Diplomatic and Judicial Means of Dispute Settlment, Martinus Nijhoff Publishers, Leiden, 2013, pp 119–51. A similar dynamic is observed of government agreements: N Miranda, ‘Concession Agreements: From Private Contract to Public Policy’ (2007) 117(3) The Yale Law Journal 510 at 532 (explaining that a concessions agreement should be understood as a public policy process and not a contract between two parties); see also E Schanze et al, ‘Mining Agreements in Developing Countries’ (1978) 12 Journal of World Trade 135 at 142

17. 18. 19. 20. 21.

22. 23. 24.

25.

26. 27. 28. 29. 30. 31.

32. 33.

(agreements should not be seen as a permanent static deal but instead a way to formalise procedures for an ongoing relationship, allowing adaptation in future circumstances). I Alvik, Contracting with Sovereignty: State Contracts and International Arbitration, Hart Publishing, Oxford, 2011. Voss, note 12 above, at pp 1–3. Voss, note 12 above, at p 5. Productivity Commission, note 9 above, at pp 276–7. The Productivity Commission observed ‘if perceptions of problems with a foreign country’s legal system are sufficient to discourage investment in that country, a bilateral arrangement with Australia to provide a “preferential legal system” for Australian investors is unlikely to generate the same benefits for that country than if its legal system was developed on a domestic non-preferential basis’: Productivity Commission, note 9 above, at p 277. Productivity Commission, note 9 above, at pp 274–5. L Trakman, ‘Investor–State Arbitration: Evaluating Australia’s Evolving Position’ (2014) 15(1–2) The Journal of World Investment and Trade 152. L Nottage, ‘Why No Investor–State Arbitration in the Australia–Japan FTA?’ on Japanese Law and the Asia Pacific (8 April 2014) accessed 10 February 2015. B Bland and S Donnan, ‘Indonesia to Terminate More Than 60 Bilateral Investment Treaties’, Financial Times Asia-Pacific (online) accessed 26 March 2014. UNCTAD, Investing in the SDGS: An Action Plan, World Investment Report 2014, United Nations, New York and Geneva, 2014, p 2. UNCTAD, note 26 above, at p 114. See Australia–Republic of Korea FTA and the Japan–Australia FTA. UNCTAD, note 26 above, at p 124 and XXV. UNCTAD, note 26 above, at p 125. See the remarks of Chief Justice R S French AC ‘Investor–State Dispute Settlement — A Cut Above the Courts?’ (Speech delivered at the Supreme and Federal Courts Judges’ Conference, Darwin, 9 July 2014). UNCTAD, note 26 above, pp 116–18. V Lowe, ‘The Manifold Respondent: Multiparty Issues Involving States in Investor–State Arbitration’, in Permanent Court of Arbitration (ed), Multiple Party Actions in International Arbitration, Oxford University Press, 2009, p 283.

[page 11]

PART I

Provisions Defining Scope and Application of the Treaty Chapter 2 Provisions Defining Scope and Application of the Treaty

[page 13]

Chapter 2

Provisions Defining Scope and Application of the Treaty Premises and standard provisions 2.1 Bilaterial Investment Treaties (BITs) rest on the premise that they promote investment from investor countries to investment receiving countries. BITs are ordinarily concluded to provide a greater standard of protection to foreign investors than may be accorded under customary international law. The first logical question is whether any treaty applies in the context of loss suffered, or adversity visited upon an investor’s investment interests, in a particular territory. From a practical perspective, the first question to be asked is which BIT covers the investment, and does it in fact apply to that investment. 2.2 Such questions are properly ones of treaty interpretation. In that regard, many have advocated the explicit and conscious application of the rules of treaty interpretation, embodied in the Vienna Convention on the Law of Treaties, in the context of interpreting investment treaties.1 2.3 At one level, through the force of convention or tradition, there is a similarity in the various BITs. Appendix 1 reveals the similarities by reason of close analysis. 2.4 Ordinarily, a BIT will begin with a general expression as to the objectives of the treaty involving the mutual protection of investments in the two contracting States. After this declaration, there is a specification of the categories of property that are protected and the

requisite connection between a party to one of the contracting States; this is the gateway to obtaining the protection of the treaty. 2.5 As discussed in the introduction, other aspects of BITs are also emerging as standard. This is confirmed by Appendix 1. [page 14] 2.6 While the prefatory statement of the purpose of the BIT may not involve the specific and positive expression of a duty or a right, it may be relevant to its interpretation, providing context for the BIT. This is consistent with Art 31 of the Vienna Convention on the Law of Treaties. Often, particularly in the context of treaties concluded with developing countries, language is inserted with a view to making explicit that the promotion of investment ought not to sacrifice notions of sustainability and public health.2 2.7 Ordinarily, the key to answer whether a particular investment is covered will turn on the definitions deployed in the BIT.

What is protected? The ‘investment’ 2.8 The BIT will usually define, to various degrees of specificity, the type of investment that will merit protection under the BIT. The terms ‘investment’ or ‘covered investment’ are often used. 2.9 A standard formulation, which finds its way into a number of treaties the subject of analysis in Appendix 1, is to define an investment as ‘any asset’. Such an expression is then supported by a non-exhaustive list of assets that can qualify as an investment. 2.10 For example, the Japan–Australia Economic Partnership Agreement (JAEPA) contains in Chapter 14, the following definition: For the purposes of this Chapter: (a) the term ‘covered investment’ means, with respect to a Party, an investment in its Area of an investor of the other Party, in existence as of the date of entry into force of this Agreement or established, acquired or expanded thereafter; …3

2.11 The definition of ‘covered investment’ in turn raises the defined term ‘investment’. Investment in the JAEPA is defined as follows: The term ‘investment’ means every kind of asset owned or controlled, directly or indirectly, by an investor, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: (i) an enterprise and a branch of an enterprise; (ii) shares, stocks or other forms of equity participation in an enterprise; (iii) bonds, debentures, loans and other forms of debt; (iv) futures, options and other derivatives; (v) rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts;

[page 15] (vi)

claims to money or to any contractual performance related to a business activity and having an economic value; (vii) intellectual property as defined in Article 16.2 (Intellectual Property — Definitions); (viii) rights conferred pursuant to laws and regulations or contracts such as concessions, licences, authorisations and permits; and (ix) any other tangible and intangible, movable and immovable property, and any related property rights, such as leases, mortgages, liens and pledges; Note: Investments may also include amounts yielded by investments that are reinvested, in particular, profit, interest, capital gains, dividends, royalties and fees. A change in the form in which assets are invested does not affect their character as investments.4

2.12 Each word will come to bear significance in the context of the issues that arise in a particular case in determining whether a treaty has jurisdiction over the investment that is the subject of claim. We will deal with the significance of the words ‘control’, and ‘directly or indirectly’ below. 2.13 These non-exhaustive lists of assets that comprise an ‘investment’, which appear in many investment treaties, are exceptionally broad. In most cases they encompass ‘every kind of asset’. Aside from more obvious physical property rights, contract claims are covered, as are various debt instruments together with futures, options and other derivatives. The inclusion of explanatory notes, now

becoming more common, work to clarify and broaden the apparently wide definition. 2.14 A similar approach is revealed in the Australia–Indonesia BIT which provides for a definition of ‘investment’ as follows: 1.

For the purposes of this Agreement: (a) ‘investment’ means every kind of asset owned or controlled and invested by investors of one Party and admitted by the other Party in its territory in conformity with the laws, regulations and investment policies of the latter applicable from time to time including, but not exclusively: (i) movable and immovable property including rights such as mortgages, liens and pledges; (ii) shares, stocks, bonds and debentures and any other form of participation in a company; (iii) a loan or other claim to money or a claim to performance related to investment having economic value; (iv) intellectual and industrial property rights including rights with respect to copyright, patents, trademarks, trade names, industrial designs, trade secrets, know-how and goodwill; (v) business concessions and any other rights required to conduct economic activity and having economic value conferred by law or under a contract, including rights to engage in agriculture, forestry, fisheries and animal husbandry, to search for, extract or exploit natural resources and to manufacture, use and sell products; and (vi) activities associated with investments, such as the organisation and operation of business facilities, the acquisition, exercise and disposition

[page 16] of property rights including intellectual property rights, and the raising of funds including purchase and sale of foreign exchange…5

2.15 The formulation in the ASEAN–Australia–New Zealand FTA is as follows: For the purposes of this Chapter: (a) covered investment means with respect to a Party, an investment in its territory of an investor of another Party, in existence as of the date of entry into force of this Agreement or established, acquired or expanded thereafter, and which, where applicable, has been admitted by the host Party, subject to its relevant laws, regulations and policies; (b) […] (c) investment means every kind of asset owned or controlled by an investor,

including but not limited to the following: (i) movable and immovable property and other property rights such as mortgages, liens or pledges; (ii) shares, stocks, bonds and debentures and any other forms of participation in a juridical person and rights derived therefrom; (iii) intellectual property rights which are recognised pursuant to the laws and regulations of each Party and goodwill; (iv) claims to money or to any contractual performance related to a business and having financial value; (v) rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts; and (vi) business concessions required to conduct economic activity and having financial value conferred by law or under a contract, including any concession to search for, cultivate, extract or exploit natural resources. For the purpose of the definition of investment in this Article, returns that are invested shall be treated as investments and any alteration of the form in which assets are invested or reinvested shall not affect their character as investments.6

2.16 By way of summary, the types of investments that generally fall within the protective scope of investment treaties include the following. movable and immovable property and any other property rights such as mortgages, liens or pledges; shares, stocks, bonds, debentures or any other types of participation in companies; returns from an investment that are reinvested; intellectual property rights, including copyright, patents, trademarks, trade names, technical processes, know-how and goodwill; and concessions and any other rights required to conduct an economic activity conferred by law or under contract, including concessions to search for, extract, exploit or cultivate mineral resources, and to manufacture, use and sell products.

Broad language and long lists 2.17 Language of such breadth as exemplified by the extracts above would appear to ensure that virtually all activities will fall within the definition of investment.

[page 17] However, history reveals that certain activities have been seen as excluded from the relevant definition. For example, the provision of guarantees has been held to be excluded.7 2.18 An early award to consider the meaning of investment was Fedax NV v Republic of Venezuela.8 That case concerned a claim by a party that was a beneficiary, by way of endorsement, of debt instruments issued by Venezuela. The party had not made any direct inward investment into Venezuelan territory, and had no formal relationship with Venezuela. The tribunal held that there was an investment.9 2.19 An article of significance, written by an eminent practitioner in this field, puts the matter this way: The basic features of an investment have been described as involving a certain duration, a certain regularity of profit and return, assumption of risk, a substantial commitment and a significance for the host State’s development.10

This is significant because it provides a touchstone for analysis relevant to determining whether a particular activity will be an investment. 2.20 From the language used in each of the extracts, and generally, an investment refers to property as a tangible thing, or a right in relation to a thing such as a mortgage. From a practical perspective, what is important is the capacity to identify within the category the type of investment activity that has been engaged in. In many cases, this will be a relatively simple exercise. It is normally only necessary to look deeper into the principles that have developed in the case authorities as to what constitutes an ‘investment’ when the ‘usual’ forms of foreign direct investment are not present — ie, physical property, rights in companies, intellectual property, investment returns or rights under law or contract.

Security rights and indirect interests 2.21 Security interests in property are usually covered by the language of a BIT. Such security interests, in the form of a mortgage, lien or pledge, are to be distinguished from investment securities.

Investment securities are issued by corporations or other entities and create property in either equity or in debt. They include shares, bonds, debentures and promissory notes. One feature of investment securities is their negotiability which can generate issues of nexus. This is illustrated by the Fedax case described in 2.18 above. 2.22 It was previously thought that bare contractual rights to unit investment funds would not fall within the definition of an investment. This issue was dealt with in Gruslin v Malaysia.11 In that case, an investor from Belgium bought US$2.3 million [page 18] in securities that were listed on the stock exchange in Kuala Lumpur via a mutual fund. The fund itself was registered in Luxemburg. Following the Asian financial crisis, and the imposition of exchange controls by Malaysia, Gruslin claimed that he had suffered losses and sought recovery. Malaysia argued that no investment was made by Gruslin because he had no separate, specific property right in the investments made by the fund. Ultimately, the tribunal upheld the objection to jurisdiction on another ground and did not rule on the issue of a proprietary interest. 2.23 The use of the words ‘directly or indirectly’ to qualify the nature of the control exercised by an investor broadens, in part, the scope of the application of the BIT. The following propositions are clear: the shareholding in a local company used for an investment can ground a claim;12 the language used in a treaty will be given full effect when referring to the concept of indirect control; there can be recovery for the loss caused by a diminution in the value of shares; even if the language is not sufficiently broad, tribunals may allow claims by shareholder or related corporate entities by reference to ideas of joint venture, branch offices, loans,13 or the contractual rights held by the subsidiary;14

minority shareholdings are at times taken to be included within the definition of an indirectly controlled investment; an ultimate beneficiary, standing behind a corporate structure of great elaborateness, may also bring a claim.15

Criteria for an investment beyond the treaty definition 2.24 Given that ultimately the question is one of the proper interpretation of the provision in the BIT, inclusion of broad general language referring to ‘every kind of asset’ would tend to suggest that where the activity involves readily recognisable investments, no issue will arise. 2.25 It is sometimes more difficult to identify with precision the ‘investment’ for more complex investment projects. For example, projects involving concessions over natural resource deposits often involve many local and foreign companies engaged in upstream activities (eg, exploration, construction, development, extraction) and downstream activities (eg, transportation and sale of the resource), each of which own property and contract rights that are connected to the overall economic goal of the ‘investment’ (eg, extracting a resource and [page 19] selling it profitably to buyers). In such cases, arbitral tribunals often consider the totality of the investor’s economic activities in a holistic manner to determine the scope of the protected investment.16 Every kind of asset connected to the overall economic goal of the investment should normally be protected by a treaty containing this broad definition of investment. 2.26 Some arbitral tribunals have considered a range of indicative factors for an investment. Guidance may be sought by attention to the following factors: the duration of an activity, as investment projects tend to have an

extended duration and single instant sales or purchase of goods may not necessarily qualify as investments; there is ordinarily a repetition of profit and return, or, at least, the expectation of a cycle of entirety. In Joy Mining Machinery v Egypt,17 the claim related to performance guarantees given by a claimant to a State controlled Egyptian operation. The tribunal18 found that no investment had been made. It was found to be a normal sales contract rather than an investment activity and the lack of regularity in return was a reason for this conclusion as there was only one payment made;19 the assumption of risk by both parties will be an indicator of the existence of an investment, although this criteria can become complicated given all activity involves some measure of risk.20 In Joy Mining21 the tribunal noted that although the price under the contract was substantial, as was the amount put up in terms of the guarantees, it was a very small part of the entire project and not substantial enough; and the level of contribution to the economic development of the host State. This factor focuses not on the nature of the investor’s participation but the impact of the transaction on the host State. While some tribunals have taken this factor into account,22 the factor assumes a lesser significance if the other criteria are satisfied. 2.27 There were once reservations about whether large scale construction contracts could be investments but the tide is very much in favour of holding such contracts as investments: Bayindir Insaat Turizm Ticaret Ve Sanayi, AS v Islamic Republic of [page 20] Pakistan.23 In that case, the tribunal held that a project to construct a significant road in Pakistan was an investment.

Pre-contractual expenditure as investments 2.28

Despite the wide definition of investment in BITs, the general

approach to pre-contractual expenditure is that, in the absence of clear consent from the host State, such costs are ordinarily not covered. In Mihaly International Corp v Republic of Sri Lanka,24 parties sought reimbursement of amounts spent pursuing a power project in Sri Lanka that never eventuated. No investment was found, it being held that Sri Lanka had made clear that it was not until after the execution of contract, that it was willing to accept that contractual relations had been entered into and an investment had been made. 2.29 It cannot be doubted that expenditure incurred by successful bidders produce economic value. This was the view of David Suratgar in the Mihaly case who considered that such expenditures ought to be able to obtain protection. Broad provisions, and the reference to investment activities covering contractual rights, many of which may well precede the formal execution of relevant project instruments, may ground a claim for pre-contractual expenditures constituting an investment. Indeed, the definition of investments in many BITs may well cover such pre-contractual expenditures.25 2.30 From a practical perspective, leaving aside reliance upon broad definitions, the way to deal with protection to be afforded to precontractual expenditure would be to deal with it as a matter of contract. Sophisticated parties are familiar with the steps required to obtain such protection or, alternatively, to deny liability.

Portfolio investment 2.31 The issue of which investments are covered could be seen as determining which entities may bring a claim. This is certainly the case with respect to indirect investment through corporate structures, discussed further at 2.54–2.58. 2.32 A portfolio investor is one who takes an interest in an instrument which is either directly connected with the company (such as shares) or is only indirectly connected through promissory notes or bonds. Such instruments are used to obtain capital and may be freely traded. 2.33 Where a party’s interest gives no stake for the purposes of management or control, particular issues arise as to whether such a

holding is sufficient to qualify as an investment. Much will turn on the language used in the BIT and where there is a reference to an asset being ‘indirectly’ held, that is the beginning of the recognition of an indirect investment. [page 21] 2.34 The approach to portfolio investment varies. Some treaties include portfolio investments but others expressly exclude them. As discussed, the issue arose in Gruslin v Malaysia but the tribunal did not rule on that issue. In Enron Corp and Ponderosa Assets LP v Argentina Republic,26 the tribunal recognised the necessity to create a blue line beyond which claims would not be permissible. Depending on the language of the BIT, it will be difficult validly to establish a basis to deny jurisdiction on the basis of the distance of the connection. Rather, the matter may well be determined by reference to provisions affecting covered persons and entities.

Who is protected? The ‘investor’ 2.35 BITs provide protection to persons, both natural and legal, such as corporations, who are investors of appropriate nationality within the definition under the BIT. 2.36 While sometimes determining whether an investor satisfies the nationality requirement can become complicated, especially if the transaction involves intricate investment structures, ordinarily the question will be a simple one. The terms of the BIT can be reasonably straightforward, or descend to levels of detail. 2.37 For example, the Australia–Indonesia BIT contains the following more detailed definition of investor: (b)

‘Investor’ means: (i) in respect of the Republic of Indonesia: (A) a natural person who according to the laws of the Republic of Indonesia is an Indonesian national; and (B) any company with a limited liability incorporated in the territory

of the Republic of Indonesia or any juridical person constituted in accordance with its laws; and (ii) in respect of Australia: (A) a natural person who is a citizen or permanent resident of Australia; and (B) any corporation, association, partnership, trust or other legally recognised entity that is duly incorporated, constituted, set up or otherwise duly organised: i under the law of Australia, or ii under the law of a third country and owned or controlled by a natural person described in paragraph (ii)(A) or by an entity described in paragraph (ii)(B)i regardless of whether or not the entity is organised for pecuniary gain, privately or otherwise owned, or organised with limited or unlimited liability.27

2.38 In contrast, the JAEPA adopts very simple language. It provides, in material part, as follows: The term ‘enterprise of a Party’ means an enterprise constituted or organised under the law of a Party.

[page 22] The term ‘investor of a Party’ means a natural person or an enterprise of a Party, that seeks to make, is making, or has made, an investment in the Area of the other Party.28

Nationality 2.39 Regardless of the extent or specificity of the definition, ultimately there will be a question to be addressed as to whether a party holds the relevant nationality. Disputes can arise in relation to corporate investors and whether a controlling interests test is to be applied. 2.40 For natural persons, the matter is usually less complex. Many BITs simply provide for the contracting State’s citizenship laws to determine the issue of nationality of natural persons. This is the position with respect to the Japan–Australia Agreement29 as well as the position in relation to the definition of investor in the Australia– Indonesia BIT as it applies to Indonesia, whereas in relation to

Australian citizens, the reference is to a natural person who is a citizen or permanent resident of Australia, that question being left to determination in accordance with Australia’s laws. 2.41 Other provisions in the Australia–Indonesia BIT accentuate the capacity to limit the catchment of claimants. The provision relevantly states: 6.

This Agreement shall not apply to a natural person who is an investor of a Party where: (a) the provisions of an investment protection agreement between the other Party and a third country of which that person is a citizen have already been invoked in respect of the same matter; or (b) the person is a citizen or national of the other Party according to its laws.30

It may be seen that the definition of an investor may not necessarily be the same for both contracting States. The text must be examined carefully. 2.42 Variations may occur and at times there may be attempts to exclude persons who have a dual nationality, or add a criterion of residency. Where the treaty specifies that a person’s nationality is to be determined under the applicable law of a contracting party, then analysis will turn to the terms of that law. Where the treaty is silent, it would appear that most tribunals would give substantial weight to the law of the home State of the claimant.31 2.43 Dual nationality raises a particular problem in the context of individuals but, ultimately, where the treaty is silent, the approach may be to consider nationality in terms of the effective connection of the individual to a particular place.32 [page 23]

Corporate nationality 2.44 BITs make reference to a juridical person, or a corporation. These definitions are wide and do not necessarily require any particular formal structure nor even dedication to the generation of profit. 2.45 There are three general approaches to the treatment of

nationality of companies in BITs: there could be a reference to the nation of incorporation; there could be a reference to the place of control; or there could be a reference to the key management place. 2.46 The ASEAN–Australia–New Zealand FTA refers to where a juridical person is ‘constituted or organised’. The Australia–Indonesia BIT refers to the incorporation or constitution of a company. In the case of Australia, the reference is to any corporation, association, partnership, trust or other legally recognised entity that is duly incorporated, constituted, set up or otherwise duly organised. The latter provision is of great width. 2.47 BIT provisions may deal with control expressly. For example, the Australia–Indonesia BIT provides: An investor shall be regarded as controlling an entity as described in paragraph 1(b) (ii)(B)ii or an investment if the investor has a substantial interest in such entity or investment. Any question arising out of this Agreement concerning the control of such an entity or investment shall be resolved to the satisfaction of the Parties.33 Where an investor of a Party is owned or controlled by a citizen or a company of any third country, the Parties may consult with a view to deciding not to extend the rights and benefits of this Agreement to such investor.34 An investor duly organised under the law of a Party shall not be treated as an investor of the other Party, but any investments in that first investor by investors of that other Party shall be protected by this Agreement.35

Three issues arising in respect of the nationality of companies 2.48 There are three significant issues affecting the determination of nationality in the context of corporations. These issues relate to, first, the capacity of a company to pursue a claim where it is subject to control by shareholders from the host State. Second, questions arise as to the impact of a corporation’s ceasing to be registered in the home State after the claim is brought. Third, attention may turn to the impact of a finding that a foreign national had mere legal, as opposed to factual, control. [page 24]

Control by shareholder in host State 2.49 In Tokios Tokelés v Ukraine36 the claimant was a Lithuanian corporation. It incorporated a wholly-owned subsidiary under Ukrainian law. The claimant raised a breach of the Ukraine–Lithuania BIT. Both the claimant and the subsidiary filed a request for arbitration. The subsidiary was removed as a claimant after Ukraine and Lithuania did not agree that the subsidiary was a national of Lithuania. The BIT defined investors as natural persons who are nationals of Ukraine under Ukrainian law and entities established in Ukraine. There was a further category of nationals. This was defined as any entity set up in a third State that was controlled, directly or indirectly, by nationals of either Ukraine or Lithuania or by entities with their seat (ie, place of incorporation) in the contracting party. 2.50 Tokios, while notionally a Lithuanian company, was 99 percent owned by nationals of Ukraine. Ukrainian nationals were also effectively in charge of management. Arguments were made that Tokios was, in effect, a Ukrainian entity. The majority in the Tokios case adopted a formal approach to conclude that the claimant was an investor of Lithuania if it had a practical legal existence in the territory of Lithuania. There was no necessity to pierce the veil to restrict the range of investors within the meaning of the BIT. To the contrary, the provision within the BIT could be used to expand, rather than confine, the question of jurisdiction. A forceful dissent by Weil identified the necessity to examine the source of capital. That has not gained universal support over the years. 2.51 In Amco Asia Corp v Republic of Indonesia37 Amco sought arbitration in relation to the construction and running of a hotel. Difficulties arose in relation to the work of an Indonesian company called upon to build the hotel. Ultimately, Amco Asia was to finish building the hotel and to run the hotel for a number of years. Amco Asia was controlled by a Hong Kong company called Pan American Development Ltd, and in turn, subject to control by Mr Tan, a Dutch citizen. Amco Asia formed a locally incorporated Indonesian company called PT Amco to carry out the investment. After construction, the Indonesian counterpart called upon the Indonesian Government, which

allegedly took the hotel by force, and revoked the licence of PT Amco, Amco Asia’s Indonesian subsidiary. 2.52 Consequent upon the failure to obtain relief in Indonesia, the Amco group of companies brought an arbitration against Indonesia. This was done pursuant to the International Centre for Settlement of Investment Disputes (ICSID) convention. It was asserted that the United States company, Amco Asia, could bring a claim against Indonesia. Indonesia argued that the true controller was, in fact, Mr Tan, a Dutch citizen. Indonesia urged the arbitral tribunal to pierce Amco Asia’s corporate veil. The tribunal refused to take up any enquiry into the ultimate shareholding of the foreign controlling party once it identified one entity with the capacity to sue. Amco Asia’s status as an investor of a contracting State (the United States) was enough to dispose of the enquiry. [page 25]

Continuity of nationality 2.53 In relation to the requirement for continuous nationality, it appears tolerably clear, despite criticism,38 that claimant’s nationality should remain unchanged from the date of the events giving rise to the claim through to, at least, the date of submission to the claim and, possibly, on one view, even to the date of the resolution of the claim.39 It appears, however, that the growing consensus is that nationality must be maintained only until the submission of the claim. Indeed, a party may, to mitigate, dispose of its investment, or a part of it, before proceedings come to a close.

Legal or factual control? 2.54 Some BITs may specify that a company incorporated in one contracting party will be protected provided there is control or a substantial interest in the company by the nationals of the other party. This notion of control invites attention to whether such control should exist as a matter of formality or whether as a matter of fact. Various

formulations exist. Some treaties require both incorporation and effective management to be located in the State which is party to the treaty.40 2.55 The short point is that despite an observable tendency to view control as a question of legal capacity as opposed to fact,41 the matter will turn on a textual analysis. On one view, it allows for the restructuring of corporations or corporate chains so as to effect control to enable claims to be advanced.

Indirect claims down the corporate chain 2.56 Depending upon the words of the BIT, claims may be pursued on behalf of a subsidiary and even minority shareholders rights may be included within the definition of investment.42 At the level of principle by reference to the textual [page 26] provisions, there is nothing to prevent claims being brought by a holding company,43 or indeed by ultimate beneficiaries.44 2.57 Some investment treaty tribunals have held that indirect investments qualify as protected investments under treaties with broad definitions of the term ‘investment’ such as the BIT, even when those treaties did not explicitly mention indirect investments.45 2.58 A minority of arbitral tribunals have seen fit to establish a ‘cutoff point’ beyond which claims would not be permissible as they would have only a remote connection to the affected company. For example, in Standard Chartered Bank v Tanzania,46 an ICSID arbitral tribunal rejected jurisdiction and decided that SCB, an English Bank, had not made an investment pursuant to the Tanzania–United Kingdom BIT because the loans at stake were not investments ‘of’ SCB, but rather of its subsidiary, SCB Hong Kong.47 The tribunal decided that SCB’s passive ownership of its subsidiary (which owned the actual loans that it did not control) was not sufficient to qualify as an investment under the Tanzania–United Kingdom BIT.48

2.59 Arbitral tribunals in other cases have accepted jurisdiction despite the foreign investor having a remote connection to the affected locally-incorporated investment company through several corporate layers.49 [page 27]

Where are investments protected? Territorial application of investment treaties 2.60 Each BIT will have a field of operation demarcated by the territory of the relevant contracting parties, as specified in the text of the treaty. 2.61 The Japan–Australia Economic Partnership Agreement (JAEPA) specifies that it applies to measures adopted or maintained by the Party relating to investors of the other Party’s covered investments. When attention turns to the definition of a covered investment there is mention made of an investment in its Area. The term ‘Area’, in turn, is defined as follows: The term ‘Area’ means: (i) for Australia, the Commonwealth of Australia: (A) excluding all external territories other than the Territory of Norfolk Island, the Territory of Christmas Island, the Territory of Cocos (Keeling) Islands, the Territory of Ashmore and Cartier Islands, the Territory of Heard Island and McDonald Islands, and the Coral Sea Islands Territory; and (B) including Australia’s territorial sea, contiguous zone, exclusive economic zone and continental shelf, over which Australia exercises sovereign rights or jurisdiction in accordance with international law; and (ii) for Japan, the territory of Japan, and all the area beyond its territorial sea, including the sea-bed and subsoil thereof, over which Japan exercises sovereign rights or jurisdiction in accordance with international law and the laws and regulations of Japan; Note: Nothing in this subparagraph shall affect the rights and obligations of the Parties under international law, including those under the United Nations Convention on the Law of the Sea done at Montego Bay on 10 December 1982.50

2.62 The Australia–Indonesia BIT uses the notion of territory, defined as follows: ‘Territory’: (i) in respect of the Republic of Indonesia means the territory under the sovereignty of the Republic of Indonesia and such parts of the continental shelf and the adjacent seas over which the Republic of Indonesia has sovereignty, sovereign rights as well as other rights in accordance with the 1982 United Nations Convention on the Law of the Sea; (ii) in respect of Australia means the territory under the sovereignty of Australia and the adjacent seas over which Australia exercises its sovereignty consistent with the 1982 United Nations Convention on the Law of the Sea, and other adjacent seas and the continental shelf over which Australia exercises sovereign rights or other rights in accordance with that Convention.51

2.63 What unites the approaches to drafting in each treaty is that the BIT only applies in the context of investments within a particular geographical area. To the extent that some States control or otherwise exercise authority over particular [page 28] territories, those areas, subject to an exclusionary provision, will be within the bounds of the treaty’s geographical scope. 2.64 Tribunals normally adopt a practical, common sense approach to the question of where an activity is located, examining, as a whole, where the benefit of the activity was enjoyed. For example, in SGS Société Générale de Surveillance SA v Republic of the Philippines52 the tribunal decided that the work of pre-shipment customs inspection, requiring deliveries of a certificate in the territory of the State, took place in the host State, although the bulk of SGS’s expense occurred outside the host State’s territory. 2.65 Issues of the application of a BIT in the context of territory of itself will ordinarily not be difficult. However, issues may arise in the context of the handover of territories. Such an issue was the subject of a recent decision in the High Court of Singapore. In Government of the Laos People’s Democratic Republic v Sanum Investments Ltd53 Edmond Leow JC had to consider whether Macau was within territory of the

People’s Republic of China for the purposes of a BIT between the People’s Republic of China and Laos. 2.66 Edmond Leow JC considered only the text of the treaties, not other correspondence passing between the parties, and concluded that the BIT did not apply to Macau. Some significance was attached to letters written by the Laos Ministry of Foreign Affairs to the PRC embassy in Laos, and the reply from the PRC embassy, both stating that the BIT did not apply to Macau unless separate arrangements were made in the future. This may seem to be counter-intuitive but such an approach has an established pedigree.

When is an investment protected? Temporal application of investment treaties 2.67 Ordinarily, an investor would naturally examine whether there was a treaty in force relevant to the investment the subject of claim. Subject to the terms of the BIT, there may be limitations on the capacity to claim in respect of disputes which arose before the investment treaty entered into force. 2.68 It will not generally be necessary for the investment to be made after the BIT has come into force so as to gain protection. Many BITs will state that the treaty applies to investments made both prior and subsequent to the entry into force of the BIT. 2.69 Article 14.2 of the JAEPA requires the investment to have been ‘in existence’ at the date of entry into force of the Agreement. There is, of course, provision for investments that are established, acquired or expanded after that date. The use of [page 29] the concept of an investment being ‘in existence’ allows, on a plain reading, for investments made before the entry into the agreement to be covered.

2.70 Other BITs adopt a different approach, such as Art XIV(2) of the Australia–China BIT, which states that the BIT ‘shall apply to investments made after a particular date’. In the case of the Australia– China BIT that date is 21 December 1972. 2.71 Sometimes, there may be no express stipulation in the BIT. There appears to be no reason, in principle, for investments made before an investment treaty has entered into force to obtain the protection under the treaty. Certainly, through corporate reorganisation or transactional adjustment, an existing investor may become a new investor for the purposes of a BIT, having come into force after the original investment. 2.72 Generally, express stipulations as to the application of a BIT to investments made before or after the BIT came into force raise little in the way of difficult issues. Tribunals will, however, be astute to prevent an argument about the retroactive application of substantive obligation under a BIT which are expressed to connote duties with respect to future acts.54

Disputes extant at time of treaty 2.73 It is possible for a BIT to specifically provide that no protection is afforded where a dispute arises before the date the treaty comes into force. This may require analysis of the meaning of the word ‘dispute’ or ‘claim’. This occurred in Maffezini v Kingdom of Spain.55 In that case, the tribunal maintained jurisdiction on the basis that unless there was a clear identification of the difference between the parties, no dispute arose in the context of the circumstance until after the entry into force of the treaty. So, the prohibition on extant disputes, at the date of the treaty, did not bite.

Duration of the treaty 2.74 A BIT will ordinarily provide for a fixed duration and will allow for the continuation of the treaty unless otherwise provided. It is possible that following termination, there will be a further period

during which investments originally covered could continue to be covered.

Claims after the investment has ended 2.75 It may be possible to make a claim in relation to an investment under an investment treaty even when the investment has ended. This includes where the investment has been a failure in economic terms. Once an investment is brought into existence, it will continue for the purposes of the application of the treaty in accordance with its terms.56 [page 30]

Termination and sunset provisions 2.76 Investment treaties will almost always expressly provide for termination. For example, the Australia–China BIT provides as follows: Entry into force, duration and termination 1. This Agreement shall enter into force on signature. It shall remain in force for a period of ten years and thereafter shall remain in force indefinitely, unless terminated in accordance with paragraph 3 of this Article. 2. This Agreement shall apply to investments made after 21 December 1972. 3. At the end of the first period of ten years referred to in paragraph 1 of this Article and thereafter at any time either Contracting Party may terminate this Agreement by giving one year’s written notice to the other Contracting Party. 4. Notwithstanding its termination in accordance with paragraph 3 of this Article, this Agreement shall continue to apply, for a further period of ten years from the date of its termination, to investments made or acquired prior to the date of its termination.57

2.77

Similarly, the Australia–Indonesia BIT provides as follows:

Entry into force, duration and termination 1. This Agreement shall enter into force thirty days after the date of the later notification by either Party of the fulfilment of its constitutional requirements for coming into force of the Agreement. It shall remain in force for a period of fifteen years and shall continue in force thereafter for a further period of fifteen years and so forth unless terminated by notice in writing by either Party one year before its expiration. 2. In respect of investments made prior to the date of termination of this

Agreement, the provisions of the Agreement shall continue to be effective for a further period of fifteen years from the date of termination of the Agreement.58

2.78 The extract from Art XV(2) above indicates that the ‘sunset date’ in this BIT is 15 years after termination. This may well become significant given recent statements by some States about terminating their BITs.59

Admission and establishment of investments 2.79 The whole purpose of a BIT is to encourage investment. In addition to the prefatory remarks, at times a BIT may call for an investment to be established within the framework of a State’s laws and regulations. Such a provision, depending upon its exact manner of expression, may condition the capacity of an investor to claim that its activity involves an investment. [page 31] 2.80 A number of BITs will include a requirement that the types of assets admitted as investments must be in accordance with the laws and regulations of that State. For example, Art 1(a) of the Australia– Indonesia BIT requires that an investment be admitted by a State in its territory and conform with the laws, regulations and investment policies of that party applicable from time to time. Further, Art 3 of the Australia–Indonesia BIT provides as follows: 1.

2.

This Agreement shall apply to: (a) investments by investors of Australia in the territory of the Republic of Indonesia which have been granted admission in accordance with the Law No. 1 of 1967 concerning Foreign Investment or with any law amending or replacing it; and (b) investments by investors of the Republic of Indonesia in the territory of Australia whenever made. Notwithstanding the provisions of paragraph 1, if a Party shall accord to a legally admitted investment of an investor of a third country any treatment, benefit or protection of a kind provided for in this Agreement, then the scope of this Agreement shall extend to investments of investors of the other Party similarly

admitted.

2.81 The Australia–China BIT also calls for an investment to be admitted by a party subject to its laws and investment policies, applicable from time to time. Article 11(1) of the Australia–China BIT contains an obligation to admit investments in accordance with a party’s laws and investment policies. There is a right to refuse admission if control of the ‘investment’ is in the hands of nationals of a third country, or the company has no substantial business activities in the territory of the other contracting party. 2.82 On a plain reading of such provisions it is clear that investments that are not sound from a regulatory perspective, and are thus illegal, will not obtain protection under a BIT. The provision will be construed to raise issues of legality and not issues of structure or definition.60 Matters of bribery or other corrupt conduct may well lead to an investment being held to be illegal and outside the protection of a provision. 2.83 The local law of the host State will also have relevance to a determination of whether an investment has taken place.61 Different roles may well be played by domestic and international law in this process. This issue will be covered in further detail in a discussion of applicable law in Chapter 12. 2.84 In practical terms, these admission requirements mandate close scrutiny of the process by which an investment was made, so that an investor is well appraised of any likely argument against jurisdiction on the basis that the investment was not established in accordance with the laws of the host State.62 [page 32]

Figure 2.1: Issues flowchart for considering whether an investment treaty applies to an investment

_____________________________ 1.

2.

See T H Yen, The Interpretation of Investment Treaties, Brill-Nijhoff, Netherlands, 2014; See also J R Weeramantry, Treaty Interpretation in Investment Arbitration, Oxford University Press, Oxford, 2012. United Nations Conference on Trade and Development (UNCTAD), Bilateral Investment

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

17. 18. 19. 20.

21. 22. 23. 24. 25.

Treaties 1995–2006: Trends in Investment Rule Making, Research Paper, United Nations, New York and Geneva, 2007, p 3. JAEPA, Art 14.2(a). JAEPA, Art 14.2(f). Australia–Indonesia BIT, Art I. ASEAN–Australia–New Zealand FTA, Ch 11, Art 2. Joy Mining Machinery Ltd v The Arab Republic of Egypt (ICSID Case No ARB/03/11) Award on Jurisdiction, 6 August 2004. (ICSID Case No ARB/96/3) Award, 9 March 1998. See Fedax NV v Republic of Venezuela (ICSID Case No ARB/96/3) Award, 9 March 1998, at [199]. C Schreuer, ‘Commentary on the ICSID Convention’ (1996) 11(2) ICSID Review-Foreign Investment Law Journal 316 at 372. (ICSID Case No ARB/99/3) Award, 27 November 2000 (Preliminary objections). Asian Agricultural Products Ltd v Republic of Sri Lanka (ICSID Case No ARB/87/3) Final Award, 27 June 1990. SD Myers Inc v Government of Canada (UNCITRAL) First Partial Award, 13 November 2000 (Hunter P, Schwartz and Chiasson). Azurix Corp v The Argentine Republic (ICSID Case No ARB/01/12) Decision on Jurisdiction, 8 December 2003 (Sureda P, Lauterpacht and Martins). Franz Sedelmayer v Russian Federation (Ad hoc Arbitration Award), 7 July 1998 (Magnusson P, Wachler and Zykin). Ambiente Ufficio SPA (Case formerly known as Giordano Alpi) v Argentine Republic (ICSID Case No ARB/08/9) Decision on Jurisdiction and Admissibility, 8 February 2013, at [428] (‘The doctrine of the “general unity of an investment operation” is well-established in international investment law. Hence, when a tribunal is in presence of a complex operation, it is required to look at the economic substance of the operation in question in a holistic manner’). See also C Schreuer, U Kriebaum, ‘At What Time Must Legitimate Expectations Exist?’, in J Werner and A Ali (eds), A Liber Amicorum: Thomas Wälde: Law Beyond Conventional Thought, CMP Publishing, London, 2009, p 272. (ICSID Case No ARB/03/11) Award on Jurisdiction, 6 August 2004. Vincuna, Weeramantry and Craig. Joy Mining Machinery v Egypt (ICSID Case No ARB/03/11) Award on Jurisdiction, 6 August 2004, at [57]. See C Dugan, N Rubins, B Sabahi, and D Wallace, Investor–State Arbitration, Oxford University Press, New York, 2011, pp 269–70; the commitment should be substantial and not de minimis. (ICSID Case No ARB/03/11) Award on Jurisdiction, 6 August 2004, at [57]. See, eg, Patrick Mitchell v Democratic Republic of the Congo (ICSID Case No ARB/99/7) Annulment Decision, 1 November 2006, at [33]. (ICSID Case No ARB/03/29) Decision on Jurisdiction, 14 November 2005 (KaufmannKohler P, Berman and Böckstiegel). (ICSID Case No ARB/00/2) Award, 15 March 2002. See C Chatterjee, ‘When Pre-Investment or Development Costs May or May not be

26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38.

39.

40.

41. 42. 43. 44. 45.

Regarded as Part of “Investment” under Article 25(1) of the ICSID Convention; The Mihaly Case’ (2003) 4(5) Journal of World Investment and Trade 909 at 923. (ICSID Case No ARB/01/3) Decision on Jurisdiction: Ancillary Claim, 2 August 2004. Australia–Indonesia BIT, Art I. JAEPA, Art 14.12(b) and (g), respectively. See JAEPA, Art 1.2(n). Australia–Indonesia BIT, Art III. Dugan et al, note 20 above, at p 297. See Dugan et al, note 20 above, at pp 300–4. Australia–Indonesia BIT Art I (2). Australia–Indonesia BIT Art III (3). Australia–Indonesia BIT Art III (4). (ICSID Case No ARB/02/18) Decision on Jurisdiction, 29 April 2004. (ICSID Case No ARB/81/1) First Award, 20 November 1984. See, notably, M Mendelson, ‘The Runaway Train: the “Continuous Nationality Rule” From the Panevezys-Saldutiskis Railway case to Loewen’, in T Weiler (ed), International Investment Law and Arbitration: Leading Cases from ICSID, NAFTA, Bilateral Treaties and Customary International Law, CMP Publishing, London, 2005. See also J Paulsson, Denial of Justice in International Law, Cambridge University Press, Cambridge, 2005, pp 183–4, and his ‘Continuous Nationality in Loewen’ (2004) 20(2) Arbitration International 213, and E Gaillard, ‘Centre International pour le Reglement des Differends relatifs aux Investissements (CIRDI): Chronique des Sentences Arbitrales’ (2004) Journal du Droit International 213 at 230–3. See The Loewen Group Inc and Raymond L Loewen v United States of America (ICSID Case No ARB(AF)/98/3) Award, 26 June 2003. See also Klöckner Industrie-Anlagen GmbH v United Republic of Cameroon and Société Camerounaise des Engrais (ICSID Case No ARB/81/2) Award, 21 October 1983, reprinted at 2 ICSID Rep 9 (1993). The ASEAN Investment Treaty contains this formula. See also Yaung Chi Oo Trading Pty Ltd v Government of the Union of Myanmar (ICSID Case No ARB/01/1) Award, 31 March 2003. See Aguas del Tunari, SA v Republic of Bolivia (ICSID Case No ARB/02/3) Respondent’s Objections to Jurisdiction, 21 October 2005. CMS Gas Transmission Co v Republic of Argentina (ICSID Case No ARB/01/8) Objections to Jurisdiction, 17 July 2003. Hussein Nuaman Soufraki v The United Arab Emirates (ICSID Case No ARB/02/7) Award, 7 July 2004 at [83]. Franz Sedelmayer v Russian Federation (Ad hoc Arbitration Award), 7 July 1998. See, eg, Guaracachi America Inc and Rurelec PLC v Plurinational State of Bolivia (UNCITRAL, PCA Case No 2011-17) Award, 31 January 2014, at [352]–[361]; Teinver SA, Transportes de Cercanias SA and Autobuses Urbanos del Sur SA v Argentine Republic (ICSID Case No ARB/09/1) 21 December 2012, at [231]–[232]; Urbaser SA v Argentine Republic (ICSID Case No ARB/07/26) Decision on Jurisdiction, 19 December 2012, at [249]–[250]; El Paso Energy International Co v Argentine Republic (ICSID Case No ARB/03/15) Award, 31 October 2011, at [199]–[214]; CEMEX Caracas Investments BV and others v Bolivarian Republic of Venezuela (ICSID Case No ARB/08/15) Decision on

46. 47.

48. 49.

50. 51. 52. 53. 54. 55. 56.

57. 58. 59. 60. 61. 62.

Jurisdiction, 30 December 2010, at [140]–[158]; Venezuela Holdings BV (Case formerly known as Mobil Corp) v Bolivarian Republic of Venezuela (ICSID Case No ARB/07/27) Decision on Jurisdiction, 10 June 2010, at [165]. Compare Z Douglas, The International Law of Investment Claims, Cambridge University Press, Cambridge, 2009, p 310, who contends that a BIT which does not explicitly refer to coverage of direct and indirect investments should be taken to cover only direct investments. (ICSID Case No ARB/10/12) Award, 2 November 2012. Standard Chartered Bank v United Republic of Tanzania (ICSID Case No ARB/10/12) Award, 2 November 2012, at [200], [225], [230]–[232], [257]–[270]. The ‘sister’ case to these proceedings — Standard Chartered Bank v Tanzania Electric Supply Co Ltd (ICSID Case No ARB/10/20) — is yet to be decided. See also Berschader v Russian Federation (SCC Case No 80/2004) Award, 21 April 2006, at [142] (in refusing to extend the terms of the Belgium–Russian Federation BIT to cover the claimant’s indirect investments, the tribunal stated that: ‘[The definition of investment] makes no reference to indirect investments and it is noteworthy that this definition is not particularly broad … The Tribunal does not find any reason to assume that the Contracting Parties took for granted that such investments were covered …’). Standard Chartered Bank v United Republic of Tanzania (ICSID Case No ARB/10/12), Award, 2 November 2012, at [230]. See, eg, Enron Corp v Argentine Republic (ICSID Case No ARB/01/3) Decision on Jurisdiction, 14 January 2004, at [42]–[57]. This case is subject to a re-submission proceeding, which the parties have agreed to suspend until 12 July 2015. JAEPA, Ch 1, Art 1.2. Australia–Indonesia BIT, Art I. (ICSID Case ARB/02/6) Objections to Jurisdiction, 29 January 2004. [2015] SGHC 15. Tecnicas Medioambientales Tecmed, SA v The United Mexican States (ICSID Case No ARB(AF)/00/2) Award, 29 May 2003. (ICSID Case No ARB/97/7) Objections to Jurisdiction, 25 January 2000. National Grid Plc v Argentine Republic (UNCITRAL) Decision on Jurisdiction, 20 June 2006; Jan de Nul NV and Dredging International NV v Arab Republic of Egypt (ICSID Case No ARB/04/13) Decision on Jurisdiction, 16 June 2006. Australia–China BIT, Art XIV. Australia–Indonesia BIT, Art XV(1) and (2). See 2014 Investment Climate Statement — Indonesia, published by the United States Department of State. Salini Costruttori SpA and Italstrade SpA v Kingdom of Morocco (ICSSID Case No ARB/00/4) Decision on Jursidiction, 31 July 2001. Z Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2004) 74 British Yearbook of International Law 151. See, for further reading, T Obersteiner, ‘“In Accordance with Domestic Law” Clauses: How International Investment Tribunals Deal with Allegations of Unlawful Conduct of Investors’ (2014) 31(2) Journal of International Arbitration 265.

[page 33]

PART II

Key Standards of Treatment Chapters 3 4 5 6 7 8 9 10

Expropriation Fair and Equitable Treatment Full Protection and Security National Treatment Most-Favoured Nation Treatment Arbitrary, Discriminatory or Unreasonable Impairment Umbrella Clauses Free Transfer of Funds

[page 35]

Chapter 3

Expropriation 3.1 During the immediate post-colonial era of the 1950s a number of States implemented programs of nationalisation. The programs involved the direct seizure or confiscation of economically important assets such as oil fields, refineries, factories, mines and agricultural land. More often than not these assets were owned by foreign investors and compensation was not provided. 3.2 Nationalisation describes expropriation on a national scale and is specifically directed against foreign investors (ie, the object is to nationalise the assets). Expropriation is not unlawful per se in customary international law. It is lawful if the State provides the foreign investor with prompt, adequate and effective compensation.1 This classic formulation of lawful expropriation is often referred to as the Hull Formula.2 Thus, a prime purpose of investment treaties is to affirm the States’ right to expropriate investments for public purposes as long as foreign investors are promptly, adequately and effectively compensated. 3.3 In the investment treaty era it is unlikely that a State would engage in direct acts of seizure of the assets of a foreign investor without providing compensation. Rather than passing nationalisation legislation, States now more commonly take measures that indirectly affect foreign investments. Such measures may have the effect of permanently depriving the foreign investor of its investment without compensation. Measures of this kind often involve regulation or administrative acts designed to force the foreign investor to abandon its investment in the State. 3.4 All States make laws that affect or interfere with the property

rights of nationals and foreigners alike who hold property within the State. Tax laws involve the [page 36] compulsory taking of part of the wealth of the taxpayer and give it to the State. Planning and environmental laws place restrictions on the use of real property within a State. Mining laws place restrictions on the ability to exploit natural resources within a State. Customs laws may place restrictions on the import or export of goods or products. There are countless other examples of State regulation that affects property rights. All acts of this nature are within the sovereign powers and rights of a State. 3.5 While the precise meaning of expropriation may not be settled in customary international law, there are many examples of international tribunals accepting that substance takes precedence over form. In substance, an expropriation takes place when an act of an organ of a State directly or indirectly results in the permanent deprivation of a property right.3 Such acts may include regulation within the sovereign powers and rights of a State. 3.6 Almost every investment treaty in the Asia-Pacific region summarised in Appendix 1 contains a provision guaranteeing protection from expropriation. Investment treaties in the Asia-Pacific (and elsewhere) typically define expropriation (the circumstances in which compensation must be paid for depriving an investor of an investment) in wide terms. Measures directly or indirectly resulting in expropriation or tantamount to expropriation are usually covered. Likewise, the kinds of investments covered by the expropriation provision are also normally defined broadly. A measure of a State may result in expropriation requiring compensation if the foreign investor is deprived of intangible property (such as contractual rights, intellectual property, and shares) or discrete parts of a larger investment. 3.7 There is an obvious tension between the expectation of the foreign investor that it will not be deprived of its investment by a State without payment of compensation and the State’s sovereign powers and

rights to make laws for peace, order and good governance without having to compensate foreign investors for any incidental adverse economic effects of those laws on investments. That is, from the State’s perspective, investment treaties should not be tantamount to insurance against business risk associated with bona fide regulation. It should come as no surprise then, that many investment treaty disputes concern regulatory or administrative measures that are alleged to have rendered foreign investments economically unviable. Regulatory expropriation remains one of the most contentious topics in investment treaty disputes. 3.8 This Chapter provides an introduction to: common features of expropriation treaty provisions; the content and application of the expropriation standard; the relationship of expropriation to other treaty standards; and a checklist of issues for an expropriation claim. [page 37]

Common features of expropriation treaty provisions 3.9 It is common for investment treaties to prescribe the circumstances in which a lawful expropriation may take place under the treaty. These provisions usually: define expropriation to include direct and indirect expropriation and measures tantamount (equivalent) to expropriation; and require that expropriation be: – for a public purpose, – non-discriminatory, – in accordance with due process, and – on payment of prompt, adequate and effective compensation. 3.10 For example, the ASEAN–Australia–New Zealand Free Trade

Agreement (FTA) provides: A party shall not expropriate or nationalise a covered investment either directly or through measures equivalent to expropriation or nationalisation (expropriation), except: (a) for a public purpose; (b) in a non-discriminatory manner; (c) on payment of prompt, adequate and effective compensation; and (d) in accordance with due process of law.4

3.11 The China–Laos Bilateral Investment Treaty (BIT) is in similar, but slightly more concise, terms: Neither Contracting State shall expropriate, nationalise or take similar measures (here and after referred to as ‘expropriation’) against investments of investors of the other Contracting State in its territory, unless the following conditions are met: a. as necessitated by the public interest; b. in accordance with domestic legal procedures; c. without discrimination; d. against appropriate and effective compensation.5

3.12 In addition to providing protection against a wide range of expropriatory measures (direct, indirect, ‘equivalent’ or ‘tantamount’ to expropriation) investment treaties typically define the investments covered by the treaty (and therefore protected from expropriation) in very broad terms. As explained in detail in Chapter 2, definitions of investment typically refer to ‘every kind of asset’ and include nonexhaustive lists of qualifying assets, such as property rights, shares and other participation rights in companies, intellectual property, rights under contracts and concessions. As we will see below in this Chapter, many of these types of assets can be seen in the case examples dealing with expropriatory measures. [page 38] 3.13 It is also common for investment treaties to be quite prescriptive of the standard of compensation that is to be provided for an expropriated investment: 2.

The compensation referred to in paragraph 1(c) shall: (a) be paid without delay;

be equivalent to the fair market value of the expropriate investment at the time when or immediately before the expropriation was publicly announced, or when the expropriation occurred, whichever is applicable; (c) not reflect any change in value because the intended expropriation had become known earlier; and (d) be effectively realisable and freely transferrable between the territories of the Parties. The compensation referred to in paragraph 1(c) shall include appropriate interest. The compensation, including any accrued interest, shall be payable in either the currency or the expropriating Party, or if requested by the investor, in a freely useable currency. If an investor requests payment in a freely useable currency, the compensation referred to in paragraph 1(c) including any accrued interest, shall be converted into the currency of payment at the market rate of exchange prevailing on the date of payment.6 (b)

3.

4.

3.14 Other treaties, while less prescriptive, will usually equate adequate compensation with (fair market) value: The compensation mentioned in paragraph 1(d) of this Article shall be equivalent to the value of the expropriating investments at the time when expropriation is proclaimed, be convertible and freely transferable. The compensation shall be paid without unreasonable delay.7

3.15 Therefore, investment treaties usually require the State to pay the investor promptly the fair market value of expropriated investments (whether by direct or indirect means or measures tantamount to expropriation). The expropriation must also be for a public purpose, non-discriminatory and in accordance with due process.

Content and application of the standard for expropriation Direct expropriation 3.16 Cases of direct expropriation (confiscation, seizure, dispossession, transfer etc) are obvious and require little explanation. As noted above, it is unlikely that a foreign investor will be confronted with a classic direct act of expropriation without payment of compensation. Many, if not all, States

[page 39] will have laws that permit the State (or its organs) to acquire property compulsorily for public purposes with mechanisms for assessment and payment of compensation. It would only be in circumstances where the State frustrated those mechanisms or they fail that the State may be in breach of its treaty obligations.

Indirect expropriation and measures tantamount to expropriation 3.17 Indirect expropriation and measures tantamount to expropriation are more difficult to define. Further, it is unclear whether the concept of measures tantamount to expropriation is a distinct or coterminous with indirect expropriation.8 In practice, it will rarely matter because tribunals tend to approach consideration of the facts in the same way irrespective of the meaning given to ‘measures tantamount to expropriation’. This will become clearer on a review of the examples of expropriation discussed below. 3.18 The core meaning that may be derived from the many tribunal awards is that expropriation includes ‘covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State’.9 The essential question is whether the investor’s enjoyment of the investment has been effectively neutralised. Substantial deprivation requires not only destruction of economic value, but loss of effective ownership and (or) control, use and benefit of the investment.10 3.19 It is widely accepted that the relevant question for determination is whether the measures resulted in expropriation (or something tantamount to expropriation). The intention of the State to ‘expropriate’ the investment is not a determinative factor. Thus, the emphasis is on the effect of the measure and not the State’s intention when undertaking the measure.11

3.20 Nonetheless, there is a sense in which intention plays a role in expropriation. The intention to take property is manifest in the case of direct expropriation. In the [page 40] case of indirect expropriation, it is evident that the State’s measures are designed to result in neutralisation or abandonment of the investment. The State may not have a specific intention to take the investment when implementing the measures, but the effect of depriving the investor of control and the economic benefit of the investment will be manifestly the natural and foreseeable consequence of those measures.12 3.21 A measure the State implements may have the effect of substantially depriving an investor of the reasonably-to-be-expected economic benefit of the investment even if the State has not directed the measure towards the investor or investment with that design in view. A question that frequently arises in international investment treaty disputes is whether a measure of this kind amounts to indirect expropriation or is tantamount to expropriation. 3.22 The circumstances in which tribunals have found that State measures amount to indirect expropriation or are tantamount to expropriation usually fall into one of two categories. First, cases where the investor abandons the investment as a result of the measures (or the investment is otherwise effectively transferred to the State). Second, cases where the State dismantles the regulatory framework upon which the investment was based in circumstances where the State agreed that it would not (or induced the investor to believe that it would not) make fundamental changes to that framework or otherwise alters the regulatory framework in an unfair, inequitable, arbitrary or discriminatory manner. 3.23 Regulatory measures that are fair, equitable, nondiscriminatory, not arbitrary and for a public purpose are difficult to characterise as ‘confiscation’ or ‘taking’ or tantamount to ‘confiscation’ or ‘taking’ simply because the measures result in destruction of the

economic value of an investment.13 Cases involving this kind of regulation produce the greatest difficulty in the area of expropriation. 3.24 The concepts of indirect expropriation and measures tantamount to expropriation are best illustrated by reference to some examples. Contractual and intellectual property rights arising under agreements between an investor and a third party factory owner that a State appropriated for its use after taking possession of the third party’s factory was expropriation of the investor’s contractual and intellectual property rights.14 Increasing mining royalties (contrary to the terms of a concession contract) rendering the investment (including the concession contract) economically [page 41] unviable and resulting in loss of effective control over the use and operation of the investment was expropriation of the investment.15 Issuing a stop work order, demolishing part of the project and arresting and expelling the investor, therefore preventing the investor from pursuing the project, was expropriation of the investor’s contractual rights and the value of the investor’s interest in the project.16 Putting a State appointed manager in charge of a project interfering with the investor’s property rights to such an extent as to render them useless was expropriation of the project although there was no formal transfer of the project to the State.17 Revocation of free zone certificates preventing the investor from continuing to operate the business of the investment was a measure having a similar effect to expropriation of the investment.18 Revocation of a building permit and making an environmental law declaration preventing the investor from proceeding with its

project and depriving the investor of the whole or a significant part of its reasonably-to-be expected economic benefit of the investment was expropriation.19 Revocation of an operating licence rendering the investment economically unviable was expropriation of the investment.20 Interference by a State regulatory authority in a joint venture agreement between a foreign-owned local company and a nationally-owned local company (through various measures over a number of years) which caused variations to the agreement and permitted, encouraged and resulted in the nationally-owed local company depriving the foreign-owned company of its investment in the joint venture was expropriation.21 Effectively destroying the business of an oil company through a series of coordinated actions over several decades, including the arrest and detention of the company’s chief executive officer and another principal shareholder for more than a decade, procedural irregularities during criminal trials of company employees, freezing of assets that led to non-payment of tax debts and eventual bankruptcy, arbitrarily imposing over US $13 billion in value added tax on exported oil over a four year [page 42] period, and the seizure and ‘sham’ sale at auction for well below market price of the company’s most valuable subsidiary (which was transferred to a State-owned company three days after the auction) was also expropriation.22 3.25 Examples of measures not amounting to indirect expropriation or something tantamount to expropriation include the following situations. An export ban on certain waste from Canada to the United States that affected the investor’s business because it could not export the waste for remediation, was not tantamount to expropriation because it was temporary.23

Breach of exclusivity provisions, an obligation to provide a landfill site and obligations to pay amounts due under a waste management concession contract was not an expropriation of the investor’s interest in the local company that was the party to the contract because the investor withdrew from the investment not because it had been seized, or because its activity as a whole had been blocked, but because — as a result of contractual defaults, changes of circumstances and the fragility of the underlying business plan — the investment was persistently uneconomic.24 Imposition of taxes or failure to maintain tax concessions were not expropriation because the investors remained in possession and control of the investments and were able to derive an economic return from them.25 Government regulations ‘that reduce the profitability of an investment but do not shut it down completely and leave the investor in control will generally not qualify as indirect expropriations even though they might give rise to liability for violation of other standards of treatment, such as national treatment or fair and equitable treatment’.26 Suspension of laws permitting gas tariffs to be adjusted contrary to the investor’s expectation that the gas tariff regulatory framework would not be dismantled was not expropriation because the investor’s shares in the local company affected by the change of regulations retained some residual value and there was not a substantial deprivation of the investment because the investor remained in effective control of it.27

Creeping expropriation 3.26 Tribunals and academic writers sometimes refer to measures of a State as ‘creeping expropriation’. Creeping expropriation is indirect expropriation that takes place over a period of time and through a series of acts. No single act can be said [page 43]

to result in expropriation, but the combination of all acts have that effect. It may also be difficult to identify precisely which act at what time was the straw that broke the proverbial camel’s back.28 Creeping expropriation may also describe measures tantamount to expropriation. 3.27 A simple example of creeping expropriation is provided by the facts of Biloune and Marine Drive Complex Ltd v Ghana Investments Centre and the Government of Ghana.29 There the conduct of the State consisted of a stop work order, demolition of part of the works and the summons, arrest, detention and deportation of the investor. The conjunction of these acts resulted in the irreparable cessation of the investor’s project.30 3.28 A more complex example is provided by CME Czech Republic BV v Czech Republic.31 CME was a major shareholder in CNTS (a Czech company). CNTS and CET 21 (also a Czech company) were joint venture partners in a media enterprise. CET 21 provided the broadcast licence and CNTS provided the management and operations. The broadcast licence was granted on conditions approved by the Czech Media Council (CMC), a State regulatory authority. CMC also considered and approved the terms of the agreement between CET 21 and CNTS before granting the broadcast licence. A term of the joint venture agreement was that CET 21 grant CNTS the exclusive use of the broadcast licence. 3.29 The media enterprise was very successful. The attitude of CMC towards CNTS changed. It brought apparently unfounded administrative proceedings against CNTS for alleged breaches of broadcasting laws. Under the pressure of these proceedings CNTS agreed to amendments to the joint venture agreement in exchange for CMC withdrawing the complaint in its administrative proceedings. Under the amendments CET 21 was no longer obliged to grant CNTS exclusive use of the broadcast licence. After the amendments CET 21 began to assert its entitlement to grant non-exclusive use of the broadcast licence. CMC took various actions to support and encourage CET 21 to assert and act upon those rights. Ultimately, CET 21 terminated its arrangement with CNTS and granted the use of the broadcasting licence to an affiliated company. CNTS thereby lost the

value of its investment, as did CME. The combined effect of all the acts of CMC resulted in the loss of CME’s investment through CNTS. [page 44]

The nature of the property expropriated 3.30 As noted earlier in this Chapter and in further detail in Chapter 2, investment treaties typically define what is meant by an ‘investment’ in broad terms. These terms are wide enough to capture all forms of tangible and intangible property. A consideration of all the potential kinds of investment that may be expropriated and trigger an obligation to pay compensation under an investment treaty is beyond the scope of this text. The short point is that any form of property right is capable of meeting the definition of an ‘investment’ in most treaties and, therefore, is a candidate for compensation if that right is expropriated. 3.31 However, it is worth giving brief consideration to two common questions that arise in the context of expropriation of investments. First, the extent to which a breach of contract may be expropriation of the contractual rights and, second, the extent to which there may be partial expropriation of investments.

Whether breach of contract can amount to expropriation of contractual rights 3.32 Contractual rights are capable of being expropriated.32 If contractual rights may be expropriated, it naturally begs the question of whether a breach of contract may amount to expropriation. 3.33 A sufficiently significant breach or a repudiation of a contract may substantially deprive the investor of the economic benefit of the contract. Thus, considering the effect of the breach one could conclude that the contract was expropriated. 3.34 A simple breach of contract, even a repudiatory breach, will not in itself amount to expropriation. First, the conduct of the State-party to the contract is not normally an act of the State qua investor, but an

act of contracting party qua contracting party. In other words, a simple breach of contract is not normally an act performed in the State’s capacity as sovereign. Second, breach or repudiation would normally entitle the innocent party-investor to damages or other compensation through domestic court process or arbitration. In other words, there would not be a substantial deprivation of the ‘investment’ by mere breach because ‘loss of bargain’ damages (also known as ‘expectation’ damages) may be recovered. [page 45] 3.35 A breach of contract or repudiation that is attributable to a State may amount to expropriation if the conduct is not referable to the State-party in its capacity as contractor and the State refuses or through State organs (such as courts) frustrates the investor recovering damages.33 Mere non-payment of a debt, even a judgment debt, would not be sufficient to convert simple contractual breach into expropriation.34 3.36 As discussed in the chapters that follow, breaches of contract may result or form part of breaches of other treaty-based standards irrespective of whether the breach amounts to expropriation.

Partial expropriation 3.37 The question of partial versus entire expropriation of investments is important because one looks to the effect of measures to consider if there has been substantial deprivation of economic benefit of the investment. Partial deprivation of economic benefit may not amount to expropriation. However, if the investment is divisible, substantial deprivation of a component of the investment may amount to expropriation of that component as a separate investment. Thus, recovery for ‘partial’ expropriation of investments may turn on how one characterises the investment. 3.38 Consider a company that is in the business of iron ore mining. It may have several mining operations from which it transports ore on

common railway infrastructure, and processes and exports from common facilities. If the State takes a measure that has the effect of dispossessing the company of one mine leaving all other mines intact, has there been an expropriation of the investment? Unless the mine expropriated was the only thing keeping the investment profitable, there would be no substantial deprivation of the economic benefit of the overall mining operation. However, there has plainly been a ‘taking’ of property that would meet the description of investment under an investment treaty. That mine, as a separate and discrete investment, has been expropriated. 3.39 What if the company undertaking the mining operation is a local subsidiary of a foreign investor? The local company could not claim for expropriation under an investment treaty. Has there been an expropriation of the foreign investor’s investment? The shares in the local subsidiary would clearly have significant residual value based on the value of the remaining mines and, therefore, it could not be said that there was a substantial deprivation of the economic benefits resulting from the taking of one mine. 3.40 These questions arose, but were not resolved, in GAMI Investments Inc v United Mexican States.35 The tribunal in that case suggested that diminution in the [page 46] value of the shares could not be ‘expropriation’ since the measures in question had no effect on the ownership of the shares. Thus, if the measures were to be covered by the treaty in that case they had to be ‘tantamount to expropriation’. The tribunal appeared to favour a purposive interpretation of the treaty that would admit the possibility of a measure being regarded as tantamount to expropriation. As the taking of the mine would be an expropriation if the subsidiary was a foreign investor and as the foreign investor’s investment was its interest in the subsidiary, the diminution in the value of the foreign investor’s shares caused by the taking of the property of the subsidiary may be tantamount to expropriation even though there remained substantial

value in the shares.36 Thus, partial deprivation of the economic benefit of an investment may be tantamount to expropriation where the measure leading to the partial deprivation is an act of taking. 3.41 In short, partial deprivation of the economic benefit of an overall investment may result in expropriation in some cases. The question of whether it is expropriation will depend on the manner in which the deprivation takes place. Taking discrete components of an overall investment would be expropriation. Diminution of value of an investment may be tantamount to expropriation. These arguments will be stronger if the relevant investment treaty refers to a protection from expropriation of ‘all or part’ of an investment. 3.42 There is probably a limit to how far an investor can take the compartmentalisation of its investment to claim expropriation of a discrete investment. Likewise, there is a limit on how far the language of tantamount to expropriation can be stretched to capture partial deprivation of value of investments. For present purposes it is sufficient to note that investment treaty claims may be made in circumstances other than where the value of the whole enterprise has been destroyed.

Compensation 3.43 In general terms, investment treaties permit a State to expropriate investments if the expropriation is accompanied by prompt, adequate and effective compensation. Common valuation methods for assessing adequate and effective compensation, such as fair market value, are addressed in Chapter 13. 3.44 Expropriation under an investment treaty is only lawful if it meets the requirements of the treaty, including payment of compensation. In the vast majority of investment disputes concerning indirect expropriation, creeping expropriation or measures tantamount to expropriation, the State will not have provided the investor with any compensation. Thus, the State will be in breach of the expropriation provision of the investment treaty.37 3.45 In terms of international law, breach of a treaty obligation invokes customary international law principles concerning State responsibility for wrongful acts. In accordance with those principles the

investor may be entitled to compensation (as reparation) assessed in accordance with customary international law principles. [page 47] That sum may be greater than the amount to which the investor would be entitled for ‘adequate’ or ‘just’ or some other compensation under the relevant treaty.38 3.46 The investor may also be entitled to other forms of reparation and not confined to monetary compensation for the investment. For example, restitution in the form of reinstatement of a licence taken from the investor or an injunction to restrain collection of tax.39 3.47 The requirement to pay compensation may not be breached if there is a genuine dispute as to the obligation to pay compensation or the amount of the compensation. If these matters are dealt with through due process in the national legal system of the State, the obligation to pay prompt, adequate and effective compensation will probably be met. 3.48 If compensation, which on the face of it is not unreasonable, is paid, but is subsequently found to be inadequate, the failure to pay adequate compensation immediately may not result in a breach of the treaty.40 The dispute in such a case is as to the amount of compensation to be paid in accordance with the treaty, not a failure to compensate at all.

Other elements of the standard 3.49 The other usual elements required for a lawful expropriation are that it be for a public purpose, non-discriminatory and carried out with due process. These criteria afford additional protection to the foreign investor. 3.50 In international law, as with domestic law, States have power to appropriate property of foreign investors and national investors alike on the basis that individual interests give way to public interest and

welfare. It is part of the limits inherent in property rights. However, the exercise of those powers for non-public purposes is a breach of the treaty. Most expropriations — whether direct, indirect or creeping — are undertaken, at least notionally, for public purposes. It is usually difficult to prove the contrary. 3.51 The concept of discrimination in investment treaties is discussed in more detail in Chapters 6, 7 and 8. In essence discrimination occurs when relevantly similar cases are treated differently without reasonable justification.41 Put another way: Takings that invidiously single out property of persons of a particular nationality would be unreasonable; classifications, even if based on nationality, that are rationally related to the State’s security or economic policies might not be unreasonable.42

[page 48] 3.52 Due process entitles investors access to a legal procedure that gives them ‘a reasonable chance within a reasonable time to claim [their] legitimate rights and have [their] claims heard’.43 Due process is discussed further as part of the fair and equitable treatment standard in 4.13–4.15. It is sufficient if there is a post-expropriation procedure available for assessment of claims.

Relationship to other treaty standards 3.53 Public interest, non-discrimination and due process are linked concepts. These concepts also overlap with other treaty standards such as fair and equitable treatment, national treatment and arbitrary, discriminatory or unreasonable impairment discussed in Chapters 4, 6 and 8. 3.54 Expropriation that is unlawful in that it is discriminatory and (or) implemented without due process may also result in breaches of one or more of these standards. In other words, treaty standards are not mutually exclusive. Further, if a measure is not indirect expropriation or tantamount to expropriation because there has not been a

substantial deprivation of the economic benefit of the investment, if the measures were discriminatory or there were elements of arbitrariness in the process, the investor may recover compensation for the diminution in the value of the investment caused by the measure. For this reason investors will often bring successful claims for breach of a fair and equitable treatment guarantee and other treatment standards in an investment treaty on the basis of the same measures that are said to be indirectly expropriatory. 3.55 In the case of measures that affect contractual rights, those measures may involve breaches of umbrella clauses. As with the other treaty standards referred to above, breaches of umbrella clauses may be independent of or coexistent with expropriation. Umbrella clauses are discussed in Chapter 9. [page 49]

Figure 3.1: Issues flowchart for identifying potential claims based on expropriation

_____________________________ 1. 2.

Brownlie, Principles of Public International Law, 7th ed, Oxford University Press, New York, 2008, p 533. The Hull Formula is named after a former United States Secretary of State, Cordell Hull, who described the United States’ expectations of the Mexican Government to compensate American nationals who lost farmlands and oil interests during the agrarian land reforms in Mexico in the 1920s and 1930s. See United States, ‘The Secretary of State of the United States (Cordell Hull) to Mexican Ambassador at Washington DC’ (1938) 32

3. 4. 5. 6. 7. 8.

9. 10.

11. 12. 13.

14. 15. 16. 17. 18.

19.

American Journal of International Law Supplement 181. I Brownlie, note 1 above, at pp 531–2. ASEAN–Australia–New Zealand FTA, Ch 11, Art 9(1). China–Laos BIT, Art 4(1). ASEAN–Australia–New Zealand FTA, Ch 11, Art 9(2)–(4). China–Laos BIT, Art 4(2). For example, in Marvin Roy Feldman Karpa v United Mexican States (ICSID Case No ARB(AF)/99/1) Award, 16 December 2002, at [100], the tribunal considered indirect expropriation and a measure tantamount to expropriation to be functionally equivalent. In Waste Management Inc v United Mexican States (No 2) (ICSID Case No ARB(AF)/00/3) Award, 30 August 2004, at [143], the tribunal said that indirect expropriation is a taking of property whereas, by contrast, a measure tantamount to expropriation does not require a transfer but an effect on property that makes formal distinctions of ownership irrelevant. Metalclad Corp v United Mexican States (ICSID Case No ARB(AF)/97/1) Award 30 August 2000, at [103]. CMS Gas Transmission Co v The Argentine Republic (ICSID Case No ARB/01/08) Award 12 May 2005, at [262]–[264]. See also, more recently, Railroad Development Corp v Guatemala (ICSID Case No ARB/07/23) Award, 29 June 2012, at [151]; El Paso Energy International Co v Argentine Republic (ICSID Case No ARB/03/15) Award, 31 October 2011, at [249]–[256]; and Antoine Goetz v Republic of Burundi (II) (ICSID Case No ARB/01/2) Award, 21 June 2012, at [194]. W M Reisman and R D Sloane, ‘Indirect Expropriation and its Valuation in the BIT Generation’ (2003) 74 The British Year Book of International Law 115 at 121. Reisman and Sloane, note 11 above, at 124. CMS Gas Transmission Co v The Argentine Republic (ICSID Case No ARB/01/08) Award, 12 May 2005, at [262]–[263]; Pope & Talbot Inc v The Government of Canda (UNCITRAL) Interim Award, 26 June 2000, at [102]; Eudoro Armando Olguin v Republic of Paraguay (ICSID Case No ARB/98/5) Award, 21 June 2001 (Unofficial English Translation), at [84]. Reisman and Sloane, note 11 above, at pp 129–30. In Waste Management Inc v United Mexican States (No 2) (ICSID Case No ARB(AF)/00/3) Award, 30 August 2004, at [144], the tribunal said that a non-discriminatory measure of general application, in relation to a debt security or loan which imposed costs on the debtor causing default, would not be considered expropriatory or even potentially so as a matter of international law. Case Concerning Certain German Interests in Polish Upper Silesia (Germany v Poland) (Merits) PCIJ Series A, No 7 (1927). In the matter of Revere Copper and Brass Inc v Overseas Private Investment Corp (Award), 24 August 1978, 56 ILR 268. Biloune and Marine Drive Complex Ltd v Ghana Investments Centre and the Government of Ghana (Award on Jurisdiction and Liability) (1989) 95 ILR 184. Starrett Housing Corp v Iran (1983) 4 Iran-US CTR 122; Tippetts, Abett, McCarthy, Stratton v TAMS-AFFA Consulting Engineers of Iran (1984) 6 Iran-US CTR 219. Goetz v Republic of Burundi (ICSID Case No ARB/95/3) Award, 2 September 1998 and Middle East Cement Shipping and Handling Co SA v Egypt (ICSID Case No ARB/99/6) Award, 12 April 2002. Metalclad Corp v United Mexican States (ICSID Case No ARB(AF)/97/1) Award, 30

20. 21.

22. 23. 24. 25.

26. 27. 28.

29. 30.

31. 32.

33.

August 2000. Tecnicas Medioambientales Tecmed SA v Mexico (ICSID Case No ARB(AF)/00/2) Award, 29 May 2003. CME Czech Republic BV v The Czech Republic (UNCITRAL) Partial Award, 13 September 2001. Another tribunal reached the conclusion on essentially the same facts that the measures did not result in the expropriation of that investor’s investment in the local company: Ronald L Lauder v The Czech Republic (UNCITRAL) Award, 3 September 2001. Hulley Enterprises Ltd (Cyprus) v Russian Federation (UNCITRAL, PCA Case No AA 226) Final Award, 14 July 2014, at [1580]–[1586]. SD Myers Inc v Government of Canada (UNCITRAL) Partial Award, 12 November 2000. Waste Management Inc v United Mexican States (ICSID Case No ARB(AF)/00/3) Award, 30 April 2004. Burlington Resources Inc v The Republic of Ecuador (ICSID Case No ARB/08/05) Decision on Liability, 14 December 2012; Occidental Exploration and Production Co v The Republic of Ecuador (LCIA Case No UN3467) Award, 1 July 2004. El Paso Energy International Co v Argentine Republic (ICSID Case No ARB/03/15) Award, 31 October 2011, at [255]. CMS Gas Transmission Co v Argentine Republic (ICSID Case No ARB/01/08) Award, 12 May 2005. Reisman and Sloane, note 11 above, at pp 122–8. The concept of composite acts amounting to a breach of an international obligation is also recognised in customary international law. See International Law Commission, ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts’ adopted by the International Law Commission at its fifty-third session in 2001, November 2001, Supp No 10 (A/56/10), Art 15. (Award) (1989) 95 ILR 184. See also, Siemens AG v Argentine Republic (ICSID Case No ARB/02/8) Award, 6 February 2007, at [267]–[273] (finding that the investor’s investment in an Argentine company that provided information technology services to Argentina under a contract had been expropriated through a series of actions. These included orders from Argentina to suspend performance of the contract, the imposition of a renegotiation for the sole purpose of reducing the contract price, and the issuance of a decree which ultimately led to the termination of the contract). (UNCITRAL) Partial Award, 13 September 2001. Case Concerning Certain German Interests in Polish Upper Solesia (Germany v Poland) (Merits) PCIJ Series A, No 7 (1927), p 44; Starrett Housing Corp v Iran (1983) 4 Iran-US CTR 122, p 156; Amoco International Finance Corp v Iran (1987) 15 Iran-US CTR 189, at [108]; Phillips Petroleum Co v Iran (1989) 21 Iran-US CTR 79, at [76]; Southern Pacific Properties (Middle East) Ltd v Egypt (ICSID Case No ARB/84/3) Award, 20 May 1992, at [164]–[167]; CME Czech Republic BV v Czech Republic (UNCITRAL) Partial Award, 13 September 2001, at [591]–[609]; Siemens AG v Argentine Republic (ICSID Case No ARB/02/8) Award, 17 January 2007, at [245]–[273]; and Emmis International Holding BV v Republic of Hungary (ICSID Case No ARB/12/2) Award, 16 April 2014, at [159]–[164] (adding at [169] that ‘the loss of a right conferred by contract may be capable of giving rise to a claim of expropriation but only if it gives rise to an asset owned by the claimant to which a monetary value may be ascribed’). Consortium RFCC v Kingdom of Morocco (ICSID Case No ARB/00/6) Award, 22

34.

35. 36. 37.

December 2003 (French), at [65]; Waste Management Inc v United Mexican States (ICSID Case No ARB(AF)/00/3) Award, 30 April 2004, at [163]–[176]; Siemens AG v Argentine Republic (ICSID Case No ARB/02/8) Award, 17 January 2007, at [245]–[273]. Waste Management Inc v United Mexican States (ICSID Case No ARB(AF)/00/3) Award, 30 April 2004, at [160]; SGS Société Générale de Surveillance SA v Republic of the Philippines (ICSID Case No ARB/02/6) Decision on Jurisdiction, 29 January 2004, at [161]. (UNCITRAL) Final Award, 15 November 2004. GAMI Investments Inc v United Mexican States (UNCITRAL) Final Award, 15 November 2004, at [123]–[131]. See further discussion on the effect on monetary damages in Chapter 14.

38. See further discussion in Chapter 13 on the customary international law standard of full reparation (14.4-14.11) and compensation for lawful and unlawful expropriation (14.4414.50). 39. See further discussion in paragraph 14.25 below. 40. Sedco Inc v National Iranian Oil Co and Islamic Republic of Iran (IUSCT Case No 129) Award No ITL 59-129-3, 27 March 1986 (Separate opinion of Judge Brower). 41. Saluka Investments BV (The Netherlands) v Czech Republic (UNCITRAL), Partial Award, 17 March 2006, at [313]. 42. American Law Institute, Restatement of the Law (Third) — The Foreign Relations Law of the United States, 1987, Philadelphia, at [712], Comment f. 43. ADC Affiliate Limited and ADC & ADMC Management Limited v Republic of Hungary (ICSID Case No ARB/03/16) Award, 2 October 2006, at [435].

[page 50]

Chapter 4

Fair and Equitable Treatment 4.1 Together with protection from expropriation, fair and equitable treatment has become the central guarantee of modern investment treaties. It is the standard most often invoked by investors in investorState arbitrations. Almost all of the treaties surveyed in Appendix 1 contain such a provision. Although it is difficult to define its specific content, this treatment standard generally requires the host State to act in a consistent and transparent manner, free from arbitrariness and discrimination, and in accordance with the principle of good faith. It is now fairly well settled that it also requires the host State to respect the legitimate expectations of foreign investors at the time they make their investments, a topic that will be discussed further below. 4.2 The guarantee of ‘fair and equitable’ treatment is generally understood to serve a ‘gap-filling’ role in the protections afforded by investment treaties. It is always framed in general terms and requires case-by-case application. It plays a similar role to overarching notions of good faith in many civil code systems by complementing the application of more specific obligations. It is also reminiscent of (though by no means equivalent to) the role of equity in common law legal systems, which introduces a degree of flexibility to the otherwise strict application of common law rules in situations where the conduct of the parties justifies discretion being exercised. In the words of one commentator, ‘if “equity” means anything it suggests a balancing process and weighing up of what is right in all the circumstances’.1 4.3 This Chapter provides an introduction to: common features of provisions in investment treaties that deal with ‘fair and equitable treatment’ for protected investments;

content and application of the standard; the relevance of the minimum standard of treatment for foreign nationals under customary international law; and a checklist of issues for a fair and equitable treatment claim. [page 51]

Common features of fair and equitable treatment investment treaties 4.4 The simplest examples of the fair and equitable treatment standard appear in stand alone terms: Investments and returns of investors of each Contracting Party shall at all times be accorded fair and equitable treatment in the territory of the other Contracting Party.2

4.5 It is common for fair and equitable treatment to be textually linked with other specific investment protection guarantees: Each Party shall accord to covered investments fair and equitable treatment and full protection and security.3 … investments made by investors of one Party in the territory of the other Party shall be accorded fair and equitable treatment not less favourable than that which the latter Party accords to its own nationals or companies according to its applicable laws and regulations.4

4.6 Some provisions link the standard of treatment expected of the host State to domestic laws: Investments made by investors of either Contracting Party in the territory of the other Contracting Party shall receive treatment which is fair and equitable in accordance with the laws, regulations and national policies of the Contracting Parties and not less favorable than that accorded to investments made by investors of any third State.5

4.7 A final broad category of treaty provisions links fair and equitable treatment to the minimum standard of treatment in customary international law. The relationship between fair and equitable treatment and the international minimum standard in customary international law is discussed further in 4.34–4.37 below.

Content and application of the standard 4.8 The application of the fair and equitable treatment standard in practice has not been a simple or consistent exercise. Beyond the phrase ‘fair and equitable’, or other seemingly interchangeable synonyms such as ‘reasonable’, ‘just’ or ‘adequate’, investment treaties do not define the normative elements that underpin this treatment standard. Attempts by arbitral tribunals or commentators to do so often rely on equally ambiguous synonyms or examples of the types of State conduct that could potentially amount to a violation of the standard. In the words of one arbitral tribunal, ‘[w]hether a state has treated an investor’s investments unfairly and [page 52] inequitably defies abstract analysis or definitions, and can only be assessed when looking at the totality of the state’s conduct’.6 4.9 Each fair and equitable treatment provision must be interpreted in accordance with its own wording. In practice, this interpretive exercise cannot be done in a vacuum. Arbitrators, legal counsel and State representatives alike seek guidance from the prior decisions of other arbitral tribunals that have considered claims by investors that the host State has failed to accord fair and equitable treatment to their investments. While these case authorities are not binding on anyone but the parties to the particular case, they often provide useful points of comparison for applying this flexible standard to a range of common scenarios that arise in practice. 4.10 The prevailing view of recent case authorities suggests that the fair and equitable treatment standard requires the host State to treat protected investments in a manner that: is procedurally proper, by ensuring procedural fairness and a transparent legal framework; is substantively proper, by not being grossly unfair, unjust, discriminatory, politically motivated, arbitrary or contrary to basic principles of good faith; and

respects the ‘legitimate expectations’ of investors in relation to their investments in the host State as at the time of making those investments.7 4.11 In addition, some arbitral tribunals have considered it relevant, when assessing a potential breach of this standard, to strike a fair balance between the investor’s ‘legitimate expectations’ on the one hand and the legitimate regulatory interests of the host State on the other.8 4.12 These core principles identified in the case authorities as forming part of the fair and equitable treatment are explained in further detail below.

Procedural propriety and administrative due process 4.13 Fair and equitable treatment requires fair procedure. A ‘denial of justice’ caused by the courts of the host State or by legislative or government acts can amount to a failure to accord fair and equitable treatment. A breach requires something more than a mere procedural irregularity. As a general rule, the claimant investor must prove that it suffered a ‘manifest injustice’ of procedure in connection with its investment. A denial of access, unwarranted delay or gross deficiencies in judicial processes of local courts, are among the clearer examples of an infringement of due process. Failures to [page 53] provide procedural mechanisms for an investor to address its interests and an inordinate protraction in court proceedings have been found to constitute a breach of the standard.9 4.14 A denial of justice claim advanced in an investment treaty arbitration cannot merely be the guise for an appeal against a municipal decision.10 International tribunals invariably state their intention to refrain from assuming an appellate function and often decline to review

fine points of domestic law. The extent to which investors must pursue all available avenues of domestic appeal before raising this type of claim at the treaty level is the subject of ongoing controversy and will vary depending on the treaty text. 4.15 The threshold for host State conduct to constitute a denial of justice is a high one. This is illustrated by the decision in White Industries Australia Ltd v Republic of India.11 In that case, White Industries, an Australian investor, alleged that a failure by the Indian courts to effectively enforce an International Chamber of Commerce (ICC) arbitration award in favour of the investor for more than nine years amounted to a denial of justice. The investment treaty tribunal took into account the ‘seriously overstretched judiciary’ in India, the complexity of the issues in dispute and the ‘obvious significance’ of an eventual decision on the domestic application for commercial arbitration in India. In the circumstances, the tribunal found that while there was a failure in terms of efficient administration of justice, the claimant’s grievances had not ‘reached the stage of constituting a denial of justice’.12 In the tribunal’s view, a denial of justice only arises from a ‘particularly serious shortcoming’ or ‘egregious conduct that “shocks or at least surprises, a sense of judicial propriety”’.13

Transparency 4.16 Alongside procedural propriety, fair and equitable treatment requires the host State to be transparent in its legal regime and regulatory procedures. This means that the legal framework for planning, initiating and operating the investment should be readily apparent. Administrative decisions affecting the investment should be linked to that legal framework. A failure in these respects can give rise to a breach of fair and equitable treatment. 4.17 General indicators of a transparent legal system include: unambiguous and readily accessible legislation, regulations, policy documents and other texts affecting legal rights and obligations; [page 54]

readily accessible information that discloses government activities and policy in the investment sector; and clear procedures for administrative and judicial review.14 4.18 The notion of transparency in this context overlaps with other notions that inform fair and equitable treatment: a guarantee of procedural due process, protection of the investor’s legitimate expectations and the principle of proportionality. It is also a feature of the legal principles common to trade disputes in the World Trade Organisation dispute fora.15 Obligations of transparency are often found in provisions in investment treaties and usually provide for a broad range of governmental information to be published and, in some cases, the methods by which that information must be made available.

Protection from arbitrary and discriminatory conduct 4.19 Fairness and equity inherently preclude arbitrary and discriminatory conduct. The importance of a guarantee of protection from arbitrary and discriminatory treatment is reflected in the fact that State parties will often give a separate expression to this guarantee in investment treaties. Arbitrary and discriminatory impairment provisions and two main types of non-discrimination provisions are discussed in Chapters 6–8.

Arbitrary conduct 4.20 Host State actions towards an investment that are capricious, idiosyncratic or discriminate against the investment will violate the fair and equitable treatment standard. Put simply, it is unfair and inequitable for a host State to ‘blow hot and cold’ with respect to the treatment of an investment. Harassment or coercion by the host State is also likely to be considered as arbitrary treatment.16 4.21 A measure taken by a host State is unlikely to be arbitrary or discriminatory if it can be justified by the reasonable pursuit of a rational regulatory goal. The context in which the impugned conduct or measure is taken provides a crucial reference point for determining

arbitrariness. In LG&E Energy Corp v Argentina Republic,17 the tribunal emphasised that certain measures taken by Argentina during a severe [page 55] economic and financial crisis were not arbitrary in that context as they resulted from reasoned judgment rather than a disregard for the rule of law.

Discriminatory conduct 4.22 Protection from discriminatory treatment is generally considered to require that a protected investor be treated no less favourably than other national or foreign investors in similar circumstances, absent a reasonable justification for the distinction in treatment. A host State measure will be considered discriminatory if it there is evidence of a discriminatory intent or effect. 4.23 Context is important when dealing with allegations of discriminatory treatment. For example, the Russian investors in the Mongolian gold mining sector in Paushok v Mongolia18 alleged that a windfall profits tax regime on gold sales introduced by Mongolia was arbitrary and discriminatory. The investors argued that the windfall profits tax should have applied to other sectors of the Mongolian economy other than the mining industry and unfairly discriminated between gold and copper. The Russian investors brought evidence to the effect that the windfall profits tax regime had been enacted by Mongolia contrary to the advice of the World Bank. However, the tribunal was not convinced that Mongolia’s conduct violated the treaty. While the tax was generally considered to be excessive, the key finding was that it did not target the claimants in particular or foreign investors in a wider sense.19

Good faith 4.24 Good faith is an overarching broad principle of international law that is generally considered a useful yardstick in assessing allegations of

unfair and inequitable treatment.20 While it is not necessary to prove that a host State acted in bad faith by pursing a certain measure that adversely affected an investment, evidence that it nonetheless failed to act in good faith will support an argument that it failed to treat an investment fairly and equitably. 4.25 For example, a lack of bona fide conduct by the host State might be evidenced by a conspiracy to procure the withdrawal or failure of a foreign-owned investment. Coercion, harassment and protectionist political motives could also be relevant. While fair and equitable treatment claims are rarely brought solely on the basis of an alleged lack of good faith, such allegations are often used to give colour to a wider narrative of unfair and inequitable conduct by the host State. [page 56]

Stability, predictability and consistency of the legal framework: the investor’s ‘legitimate expectations’ 4.26 Where a host State creates certain expectations through its regulatory framework and administrative actions that induce an investor to make an investment, it can be considered unfair and inequitable for the host State to subsequently cancel or frustrate those expectations that it has been instrumental in creating. 4.27 The concept of an investor’s ‘legitimate expectations’ has in recent years firmly taken root as a central and self-standing element of the fair and equitable treatment standard.21 This concept bears similarities to the common law doctrine of estoppel and the principle of legal certainty that is at the heart of the rule of law. An investor’s legitimate expectations will be breached if the host State induces the investor to make its investment on the basis of a particular state of affairs and subsequently alters that state of affairs to the detriment of the investor. The critical time for assessing the investor’s expectations is the time at which the investment was made.

4.28 The clearest cases involve specific representations or commitments by the host State to the investor as to a particular state of affairs that the investor relied upon at the time of making the investment. 4.29 For example, the Malaysian investor in MTD Equity Sdn Bhd and MTD Chile SA v Republic of Chile22 successfully argued that Chile failed to treat its investment fairly and equitably by first approving a construction project (through a contract entered into by the Foreign Investment Committee) and then cancelling it (by letter from the relevant government minister) almost two years later because it was contrary to an urban development policy that had been in force at the time of the investment. The arbitral tribunal in that case found that Chile had an ‘obligation to act coherently and apply its policies consistently, independently of how diligent an investor is’.23 It emphasised the ‘inconsistency of action between two arms of the same Government vis-à-vis the same investor’.24 According to the arbitral tribunal in that case, the approval of the construction project by the Foreign Investment Committee created an expectation for the investor that its investment project was feasible. The fact that the approval was given despite the project’s inconsistency with [page 57] the government’s urban development policy was found to breach the obligation to treat the investment fairly and equitably. 4.30 Expectations as to the stability of the legal framework at the time of the investment are often central to a claim based on legitimate expectations. An investor is entitled to rely on the legislation and treaties in force in the host State at the time of making its investment, together with assurances or representations contained in licences, decrees or other documents issued by the host State that give rise to an expectation as to a particular state of affairs. A substantial amendment of a host State’s legal framework or the reversal of an assurance created by that framework after the time of the investment can have dire

consequences for the viability of that investment, which may be considered unfair and inequitable in all the circumstances. 4.31 Expectations as to a predictable and transparent legal framework in the host State must be balanced against the right of host States to amend and update their laws and regulations in a reasonable manner. Not every change in law by a host State will necessarily frustrate an investor’s legitimate expectations as to stability, nor does fair and equitable treatment amount to a general guarantee equivalent to a stabilisation clause or operate as an insurance policy against poor business decisions by an investor. Legitimate expectations of an investor will only normally be frustrated in circumstances where the amendment of the relevant legal framework is unreasonable or unjustifiable in some way, such that it would be unfair and inequitable for the host State to have to do so without compensating the investor accordingly.

Reasonableness and proportionality 4.32 Investment treaty tribunals often interpret the scope of fair and equitable treatment through the lens of reasonableness and proportionality.25 The function of these principles is to control the extent to which host States can legitimately interfere with foreign investment. The analytical process involves balancing the reasonable and legitimate interests of the foreign investor against those of the host State. Tribunals often look to identify a causal relationship between the means and the end pursued by a host State. 4.33 Although the concept of proportionality is familiar to many domestic and international legal regimes, its application by investment treaty tribunals to date has been rather rudimentary, unstructured and inconsistent. This practice makes it difficult to ascertain whether a given tribunal would be receptive to proportionality arguments and how it would apply the principle. [page 58]

Minimum standard of treatment for foreign nationals under customary international law 4.34 To the extent that fair and equitable treatment provisions expressly refer to the minimum standard of treatment for foreign nationals in customary international law, the latter is likely relevant in interpreting the meaning of fair and equitable treatment. Many recent BITs and FTAs in the Asia-Pacific region have adopted this approach. These recent treaties have also tended to identify the duty of care expected of the host State with further specificity. 4.35 For example, the Korea–Australia FTA provides: 1.

2.

Each Party shall accord to covered investments treatment in accordance with the customary international law minimum standard of treatment of aliens, including fair and equitable treatment and full protection and security. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of ‘fair and equitable treatment’ and ‘full protection and security’ shall not require treatment in addition to or beyond that which is required by that standard, and shall not create additional substantive rights. The obligation in paragraph 1 to provide: a. ‘fair and equitable treatment’ includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and b. ‘full protection and security’ requires each Party to provide the level of police protection required under customary international law.26

4.36 The idea of an international minimum standard emerged in the early 1900s as an attempt to reconcile arbitral awards and State practice on the fundamental standard of treatment for aliens to which all ‘civilised states’ were obliged to adhere. It is by no means a definite or definable concept. The essential privileges normally associated with the international minimum standard relate to the person, namely the rights to life, reasonable treatment for prisoners and the basic rights connected to earning a living. Early arbitral awards suggest that the test is ‘broadly speaking, whether aliens are treated in accordance with the ordinary standards of civilisation’.27 Unjustified discrimination or arbitrariness of State

[page 59] conduct has been a common feature of successful claims for a breach of the international minimum standard.28 Denial of justice and due process are also well-established elements. 4.37 A minority view adopted by some investment treaty tribunals suggests that even where an investment treaty is silent on this issue, the fair and equitable treatment standard is equivalent to the international minimum standard.29 However, most investment treaty tribunals have considered that in the absence of an express linkage to the international minimum standard in the treaty language, fair and equitable treatment is an independent standard with an autonomous meaning.30 [page 60]

Figure 4.1: Issues flowchart for identifying potential claims based on a breach of fair and equitable treatment

_____________________________ 1.

2.

P Muchlinski, ‘Caveat Investor? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard’ (2006) 55 International Comparative Law Quarterly 527 at 532. India–China Bilateral Investment Treaty (BIT), Art 3(2).

3. 4. 5. 6. 7.

8.

9.

10.

11. 12. 13.

14.

15.

16.

17. 18. 19. 20.

ASEAN–Australia–New Zealand Free Trade Agreement (FTA), Art 6(1). Republic of Korea–Indonesia BIT, Art 4(3). See also, for further examples, Cambodia– Cuba BIT, Art 2(2); Japan–Vietnam BIT, Art 9(1). Cambodia–Malaysia BIT, Art 3. Micula v Romania (ICSID Case No ARB/05/20) Award, 11 December 2013, at [517]. On the content of fair and equitable treatment generally, see Micula v Romania (ICSID Case No ARB/05/20) Award, 11 December 2013, at [503]–[534]; and Joseph Charles Lemire v Ukraine (ICSID Case No ARB/06/18) Decision on Jurisdiction and Liability, 14 January 2010, at [284]–[285]. Saluka Investments BV v Czech Republic (UNCITRAL) Partial Award, 17 March 2006, at [306]; Micula v Romania (ICSID Case No ARB/05/20) Award, 11 December 2013, at [665]–[673]. See also Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v Argentine Republic (ICSID Case No ARB/03/19) Decision on Liability, 30 July 2010, at [221]–[231]. ADC Affiliate v Republic of Hungary (ICSID Case No ARB/03/16) Award, 2 October 2006, at [435], [445]; Victor Pey Casado v Republic of Chile (ICSID Case No ARB/98/2) Award, 22 April 2008, at [656]–[674]. See, eg, the tribunal’s comments in Frank Charles Arif v Republic of Moldova (ICSID Case No ARB/11/23) Award, 8 April 2013, at [441]; and ADF Group Inc v United States of America (ICSID Case No ARB(AF)/00/1) Award, 9 January 2003, at [190]. (UNCITRAL) Final Award, 30 November 2011. White Industries Australia Ltd v Republic of India (UNCITRAL) Final Award, 30 November 2011, at [10.4.22]. White Industries Australia Ltd v Republic of India (UNCITRAL) Final Award, 30 November 2011, at [10.4.23], citing Chevron Corp and Texaco Petroleum Co v Ecuador (UNCITRAL, PCA Case No 34877) Partial Award on the Merits, 30 March 2010, at [244]. See, eg, Swisslion DOO Skopje v Republic of Macedonia (ICSID Case No ARB/09/16) Award, 6 July 2012, at [272]–[300] (where the tribunal found that Macedonia breached fair and equitable treatment requirement in the Macedonia–Switzerland BIT based in part on Macedonia’s failure to publish a decision on a criminal investigation concerning the investor and failure to inform the investor of its reservations as to the investor’s compliance with contractual requirements under domestic law). See, eg, General Agreement on Tariffs and Trade (1949), Art X. See also United States — Import Prohibition of Certain Shrimp and Shrimp Products, WTO Dispute Settlement Body (Case No WT/DS58/AB/R), Report of the Appellate Body, 12 October 1998, at [182]– [183]. See, eg, Anatolie Stati, Gabriel Stati, Ascom Group SA and Terra Raf Trans Trading Ltd v Republic of Kazakhstan (SCC Case No 116/2010) Award, 19 December 2013, at [1086], [1092]. (ICSID Case No ARB/02/1) Award, 25 July 2007. (UNCITRAL) Award on Jurisdiction and Liability, 28 April 2011. Paushok v Mongolia (UNCITRAL) Award on Jurisdiction and Liability, 28 April 2011, at [321]. See, eg, Siag and Vecchi v Arab Republic of Egypt (ICSID Case No ARB/05/15) Award, 1 June 2009, at [450] (where the tribunal noted that it is ‘widely recognised that the principle of good faith underlies fair and equitable treatment’ and that the ‘general, if not

21.

22. 23. 24. 25. 26.

27. 28. 29. 30.

cardinal, principle of customary international law that States must act in good faith is thus a useful yardstick by which to measure the fair and equitable standard’). See also See B Cheng, General Principles of Law Applied by International Courts and Tribunals, Cambridge University Press, Cambridge, 1956, pp 121–36 and 141–9. For a recent commentary on the development of ‘legitimate expectations’ in case authorities dealing with fair and equitable treatment claims, see M Potestà, ‘Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept’ (2013) 28(1) ICSID Review: Foreign Investment Law Journal 88. See also E Snodgrass, ‘Protecting Investor’s Legitimate Expectations: Recognizing and Delimiting a General Principle’ (2006) 21(1) ICSID Review: Foreign Investment Law Journal 1. (ICSID Case No ARB/01/7) Award, 25 May 2004. MTD Equity Sdn Bhd and MTD Chile SA v Republic of Chile (ICSID Case No ARB/01/7) Award, 25 May 2004, at [165]. MTD Equity Sdn Bhd and MTD Chile SA v Republic of Chile (ICSID Case No ARB/01/7) Award, 25 May 2004, at [163]. See, eg, El Paso Energy International Co v Argentine Republic (ICSID Case No ARB/03/15) Award, 31 October 2011, at [372]–[373]. Korea–Australia FTA, Art 11.5. See also Japan–Laos BIT, Art 5(1), n 1; ASEAN– Australia–New Zealand FTA, Art 6(2)(c); Australia–Mexico BIT, Protocol on Art 4(1); Australia–Chile FTA, Art 10.5. The most recent United States and Canadian Model BITs also adopt similar wording: see United States Model BIT (2012), Art 5(1) and 5(2); and Canadian Model BIT (2004), Art 5(1) and 5(2). Roberts v United Mexican States (United States v Mexico) (1926) IV RIAA 77, 80 [8]. E Brochard, ‘Minimum Standard of the Treatment of Aliens’ (1940) 38 Michigan Law Review 445, 458. See, eg, Genin, Eastern Credit Ltd Inc and AS Baltoil v Republic of Estonia (ICSID Case No ARB/99/2) Award, 25 June 2001, at [367]. See, eg, Micula v Romania (ICSID Case No ARB/05/20) Award, 11 December 2013, at [503]–[504]; Bosh International Inc v Ukraine (ICSID Case No ARB/08/11) Award, 25 October 2012, at [212]; and EDF International SA v Argentine Republic (ICSID Case No ARB/03/23) Award, 11 June 2012, at [998]–[1002].

[page 61]

Chapter 5

Full Protection and Security 5.1 Over half of the investment treaties from the Asia-Pacific region surveyed in Appendix 1 provide for the ‘full protection and security’ of covered investments. This treatment standard requires the host State to exercise due diligence or reasonable care to prevent injury to covered investments (including in-country employees). This standard of care covers injurious acts by any State actors and private third parties in the territory of the host State. For example, a failure by the host State to prevent injury arising to the investment and related persons in the host State from violent acts perpetrated by government troops, rebel militia or collective civil actions could breach this treatment standard. 5.2 In many instances protection and security guarantees have been considered to extend beyond physical protection to include legal protection for covered investments too. Some arbitral tribunals considering investor claims based on these provisions in investment treaties have found host State measures disrupting the stability of the legal environment applicable to the investment as capable of breaching this treatment standard. Interpretations of this kind give rise to a considerable degree of overlap in practice with the level of protection afforded by the fair and equitable treatment standard. 5.3 This Chapter provides an introduction to: common features of protection and security provisions in investment treaties; the content of the standard; to what extent and in what cases the protection afforded extends beyond physical protection; the significance of the overlap in content with fair and equitable

treatment; and a checklist of issues for a protection and security claim.

Common features of protection and security provisions in investment treaties 5.4 The most common formulation of this standard provides for ‘full protection and security’ and appears in the same clause as the fair and equitable treatment [page 62] standard. For example, the Indonesia–United Kingdom Bilateral Investment Treaty (BIT) provides: Investments of nationals or companies of one Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party.1 (Emphasis added.)

5.5 Other treaties use different adjectives such as ‘constant’ and ‘adequate’ but this is not generally considered to create a different standard of care for the host State: Investments of nationals or companies of one Contracting Party in the territory of the other Contracting Party shall enjoy the most constant protection and security under the laws of the latter Contracting Party.2 (Emphasis added.) Each Contracting Party shall accord to investments in its Area of investors of the other Contracting Party fair and equitable treatment and full and constant protection and security.3 (Emphasis added.) Investments of nationals of either Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy adequate protection and security in the territory of the other Contracting Party.4 (Emphasis added.)

5.6 Some variations omit adjectives altogether (ie, simply refer to ‘protection and security’) or restrict the guarantee to protection and not ‘security’.5 Many of Singapore’s BITs refer only to ‘protection’. For example, the Mongolia–Singapore BIT provides: Investments approved under Article 2 shall be accorded fair and equitable treatment and protection in accordance with this Agreement.6 (Emphasis added.)

5.7 Other examples of protection and security provisions refer to ‘full legal protection and security’7 or ‘adequate physical security and protection’.8 5.8 As with the fair and equitable treatment standard, protection and security provisions are sometimes textually linked to the international minimum standard. For example, the Australia–Republic of Korea FTA clarifies that ‘full protection and security’ requires the host State ‘to provide the level of police protection required under customary international law’.9 [page 63]

Content of the standard 5.9 Full protection and security is not a strict liability standard, nor is it an absolute protection for investors or their investments from any form of physical or legal infringement. It imposes a due diligence requirement. A host State can meet this requirement by taking reasonable preventative actions in the circumstances, even if that action is ultimately unsuccessful in preventing damage to the investment. Full protection and security provisions in investment treaties therefore do not provide the investor with insurance against every risk in the investment. 5.10 Due diligence ‘is nothing more nor less than the reasonable measures of prevention which a well-administered government could be expected to exercise under similar circumstances’.10 It involves both prevention and repression. It is a duty on the host State to prevent injuries to property and persons connected to covered investments by taking reasonable actions within its power when it is (or should be) aware that there is a risk of injury. The precise standard of care in each case will depend on all the circumstances. A determination of whether the host State is liable for an alleged failure to provide protection and security will involve an assessment of the nature of the injury and the preventative or repressive actions taken by the host State in response to the risk of injury.

5.11 An obligation of due diligence to protect foreign nationals is an established responsibility on States as a matter of customary international law. Protection and security guarantees in modern investment treaties cannot be inferior to the minimum standard of due diligence required by international law and, in many cases, are textually linked to that standard.

Physical and non-physical protection 5.12 Whether the scope of the protection afforded is limited to physical injury or extends to include non-physical injury is a matter of some controversy in arbitral case authorities. The starting point is always the wording of the applicable treaty. Where the relevant investment treaty specifically refers to ‘physical’ protection and security, there can be little doubt that the standard requires host States to exercise due diligence to avoid physical injury as opposed to nonphysical injury. Recent arbitral awards suggest a growing consensus that where such provisions are not specifically limited to ‘physical’ protection and security the scope of the protection afforded can include non-physical injuries. 5.13 Early arbitral decisions under modern investment treaties interpreted protection and security provisions almost exclusively in terms of physical protection of persons or assets arising from actions of third parties such as mobs, revolutionaries or [page 64] insurrectionists. For example, the arbitral tribunal in Asian Agricultural Products Ltd v Sri Lanka11 found that Sri Lanka breached the United Kingdom–Sri Lanka BIT by failing to take all reasonable measures to prevent the deaths of staff and property destruction caused to a shrimp farming business owned by an English investor during a counterinsurgency operation by government troops against local rebels.12 5.14 Likewise, where the treaty provision expressly mentions ‘legal’

security, some degree of non-physical protection is more clearly anticipated. For example, the arbitral tribunal in Paushok v Mongolia13 preferred the wide approach when interpreting the wording of the Mongolia–Russian Federation BIT, where the Contracting States agreed to provide investors ‘in accordance with [their] laws and regulations, full legal protection to investments’.14 The arbitral tribunal contrasted this wording with examples of provisions that provide for ‘full physical protection and security’ and concluded that there was ‘no reason to limit the protection guaranteed to mere physical protection’.15 5.15 Some tribunals have interpreted the treatment standard to extend beyond mere physical protection even where the wording of the provision in question does not refer expressly to ‘legal’ security. For example, the arbitral tribunal in Renée Rose v Peru16 ‘fully agree[d]’ with the investor’s submission in that case that ‘the standard of full protection and security has evolved from referring to mere physical security and to include, more generally, the rights of investors’.17 The relevant investment treaty in that case provided for ‘full protection and security’.18 5.16 A number of other arbitral tribunals have suggested the adjective ‘full’ can extend the scope of protection to legal, as well as physical, protection. As the tribunal in Biwater Gauff v Tanzania put it: … when the terms ‘protection’ and ‘security’ are qualified by ‘full’, the content of the standard may extend to matters other than physical security. It implies a State’s guarantee of stability in a secure environment, both physical, commercial and legal.19

[page 65] 5.17 Other tribunals have given less weight to the precise wording of the provision20 or have rejected the ‘legal protection’ view altogether in favour of the traditional approach based on physical safety and security.21

Overlap with fair and equitable treatment

5.18 There is a considerable degree of overlap between protection and security obligations and fair and equitable treatment as a matter of both concept and practice. The nature or extent of this overlap will depend on the wording of the relevant treaty provisions. 5.19 The practical upshot of this overlap is that investors can often frame claims based on a breach of protection and security guarantees as also constituting a breach of fair and equitable treatment. Indeed, it is difficult to conceive of a situation where a breach of the protection and security guarantee does not amount to a failure to accord fair and equitable treatment to an investment. This means that investors need not be overly concerned if an applicable investment treaty does not contain a protection and security guarantee. Fair and equitable treatment appears in almost every modern BIT and FTA and provides a substantially similar level of protective treatment. [page 66]

Figure 5.1: Issues flowchart for identifying potential claims based on a breach of a protection and security provision

_____________________________ 1. 2. 3.

Indonesia–United Kingdom BIT, Art 3(2). Republic of Korea–Thailand BIT, Art 3(2). See also, Thailand–Vietnam BIT, Article 3(2); and Republic of Korea–Thailand BIT, Art 3(2). Japan–Vietnam BIT, Art 9(1).

4. 5. 6.

7. 8. 9. 10. 11. 12.

13. 14. 15. 16. 17.

18. 19.

20. 21.

Cambodia–Vietnam, Art II(2). See, eg, Australia–Chile BIT, Art 3(2). Mongolia–Singapore BIT, Art 3(2). See also Singapore–Cambodia BIT, Art 3(2); Singapore–China BIT, Art 3(2); Singapore–Mauritius BIT, Art 3(2); Singapore– Netherlands BIT, Art 7(2); Singapore–Pakistan BIT, Art 3(2); Singapore–Sri Lanka BIT, Art 3(2); and Singapore–Switzerland BIT, Art 2(1). See, eg, see India–Argentina BIT, Art 3(2); Australia–Argentina BIT, Art 4(2); and Mongolia–Russian Federation BIT, Art 2(2). Singapore–Indonesia BIT, Art 2(2). See also Indonesia–Mongolia BIT, Art 2(2) (‘adequate protection and security’). Australia–Korea BIT, Art 11.5(2)(b). Asian Agricultural Products Ltd v Sri Lanka (ICSID Case No ARB/87/3) Final Award, 27 June 1990, at [77]. (ICSID Case No ARB/87/3) Final Award, 27 June 1990. See also Wena Hotels Ltd v Arab Republic of Egypt (ICSID Case No ARB/98/4) Award on Merits, 8 December 2000, at [84]; American Manufacturing and Trading, Inc v Zaire (ICSID Case No ARB/93/1) Award, 21 February 1997, at [6.05]–[6.06]. (UNCITRAL) Award on Jurisdiction and Liability, 28 April 2011. Mongolia–Russia BIT, Art 2(1). Paushok v Mongolia (UNCITRAL) Award on Jurisdiction and Liability, 28 April 2011, at [326]. (ICSID Case No ARB/10/17) Award, 26 February 2014. Renée Rose Levy de Levi v Republic of Peru (ICSID Case No ARB/10/17) Award, 26 February 2014, at [406]. See also Spyridon Roussalis v Romania (ICSID Case No ARB/06/1) Award, 7 December 2011, at [320]–[321]; Reinhard Hans Unglaube v Republic of Costa Rica (ICSID Case No ARB/09/20) Award, 16 May 2012, at [281]; Frontier Petroleum Services Ltd v Czech Republic (UNCITRAL) Final Award, 12 November 2010, at [262]–[273]; Mohammed Ammar Al-Bahloul v Tajikistan (SCC Case No 064/2008) Partial Award on Jurisdiction and Liability, 2 September 2009, at [246]; Biwater Gauff (Tanzania) Ltd v Tanzania (ICSID Case No ARB/05/22) Award, 24 July 2008, at [729]; and Azurix Corp v Argentine Republic (ICSID Case No ARB/01/12) Award, 14 July 2006, at [408]. Azurix Corp v Argentine Republic (ICSID Case No ARB/01/12) Award, 14 July 2006, at [408]. Biwater Gauff (Tanzania) Ltd v Tanzania (ICSID Case No ARB/05/22) Award, 24 July 2008, at [729]. See also CME v Czech Republic (UNCITRAL) Partial Award, 13 September 2001, at [613] (‘The host State is obligated to ensure that neither by amendment of its laws nor by actions of its administrative bodies is the agreed and approved security and protection of the foreign investor’s investment withdrawn or devalued’). See, eg, Parkerings-Compangiet AS v Republic of Lithuania (ICSID Case No ARB/05/08) Award, 14 August 2007, at [354]. Suez, Sociedad General de Aguas de Barcelona SA, and Vivendi Universal SA v Argentina (ICSID Case No ARB/03/19) Decision on Liability, 30 July 2010, at [173]; Rumeli Telekom AS and Telsim Mobil Telekomunikasyon Hizmetleri AS v Republic of Kazakhstan (ICSID Case No ARB/05/16) Award, 29 July 2008, at [668]; Saluka Investments BV v

Czech Republic (UNCITRAL) Partial Award, 17 March 2006, at [484]; BG Group plc v Argentina (UNCITRAL) Final Award, 24 December 2007, at [324]–[326].

[page 67]

Chapter 6

National Treatment 6.1 The national treatment standard in investment treaties restricts the host State from treating foreign and domestic investments and/or investors differently in a manner that disadvantages foreign investors. It is aimed at ensuring a level playing field for foreign investments vis-àvis similar investments by nationals of the host State. Measures that expressly treat foreign and domestic investments differently or are intended to have a disproportionately adverse effect on foreign investment compared to domestic investment can violate national treatment provisions. For example, changes to schemes for tax rebates or VAT refunds that negatively impact (either in fact or in effect) foreign-owned companies and not local producers in the same economic sector could give rise to a failure to accord national treatment to protected foreign investments. 6.2 For many States, national treatment represents an untenable restriction on their ability to regulate their internal market. A national treatment standard in an investment treaty might require difficult changes to existing policies or financial incentives that promote the competitiveness of domestic industries. It is an anti-protectionist provision. For this reason, States with a large public sector or significant State-owned industries are often reluctant to include national treatment provisions in investment treaties. 6.3 This Chapter provides and introduction to: common features of national treatment provisions in investment treaties; the three-step analysis that arbitral tribunals will generally apply when dealing with national treatment claims; and

a checklist of issues for a national treatment claim.

Common features of the treaty provisions 6.4 The national treatment standard is not found in every investment treaty. Less than two-thirds of the treaties surveyed in Appendix 1 provide for national treatment. Notably, for example, the ASEAN– Australia–New Zealand Free Trade Agreement (FTA) does not contain such a provision. 6.5 The Australia–Sri Lanka Bilateral Investment Treaty (BIT) provides an example of a basic national treatment provision: [page 68] Each Party shall, subject to its laws, regulations and investment policies, grant to investments made in its territory by investors of the other Party, treatment no less favourable than that which it accords to investments of its own investors.1

6.6 Most national treatment provisions protect ‘investments’ as opposed to ‘investors’ but some appear to expressly protect the latter.2 For example, the Timor-Leste–Argentina BIT provides: Each Contracting Party shall in its territory accord to investors of the other Contracting Party as regards the management, use, enjoyment or disposal of their investments, treatment which is fair, equitable, non-discriminatory and not less favourable than that which it accords to its own investors or to the investors of any third State, whichever may be more favourable to the investors concerned.3 (Emphasis added.)

6.7 For those investment treaties that contain a national treatment standard, there are three main issues that affect the scope and content of the particular provisions: the reference (or not) to a particular comparison analysis; the types of investment activities to which the treatment standard applies; and any sector carve-outs or other exceptions.

Comparison to investments in ‘like’ or ‘similar’

circumstances 6.8 National treatment is a relative standard that involves a comparison between the circumstances affecting a foreign investor/investment and those affecting a comparable domestic investor/investment. This comparator analysis is sometimes signalled in the provision by referring to ‘similar situations’ or ‘like circumstances’. For example, the Japan–Laos BIT states: Each Contracting Party shall in its Area accord to investors of the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and their investments with respect to the establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments. 4 (Emphasis added.)

6.9 However, most national treatment provisions do not expressly refer to a comparator analysis. For example, the Australia–India BIT provides: Each Contracting Party shall, subject to its laws, regulations and investment policies, grant to investments made in its territory by investors of the other Contracting Party treatment no less favourable than that which it accords to investments of its own investors.5

[page 69] 6.10 It is generally accepted that the absence of a reference to ‘similar’ or ‘like circumstances’ is not legally significant and that the fundamental comparison analysis remains the same.6 6.11 This makes sense from a policy perspective. National treatment does not require the host State to treat a foreign investment as favourably as every investment in its territory in every respect. For example, an investment in an offshore oil and gas project by a foreign investor might be required to obtain permits for certain activities or environmental approvals that would not apply to a small business owner who happens to be a national of the host State. Read literally, and in the absence of comparator language in the treaty provision, there could be a breach of national treatment here because the host State has treated the foreign investment differently. However, this difference could well be justified when the two investments are compared side-by-

side. They are different in almost every respect, including economic sector, scale and business model.

Pre- and post-establishment investment activities 6.12 Another important feature of a national treatment provision is the time at which the treatment is guaranteed. Some treaties guarantee national treatment for the foreign investor from the very first establishment activities to the final sale or disposal of the assets after the investment is completed. For example, the Japan–Laos BIT extracted above specifies that national treatment for foreign investors/investments will extend to activities such as ‘the establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments’. 6.13 This broad scope of national treatment is common to Japan’s treaty practice but is otherwise a less favoured formulation of the provision. The majority of treaties containing a national treatment provision extend protection only to established investments. Under this ‘controlled entry’ model, the host State can freely regulate the establishment activities of a foreign investor at the very early stages of an investment if it so chooses without infringing a ‘post-establishment’ national treatment provision. Such provisions — more common to treaties involving European States — require the host State to provide only ‘treatment not less favorable than that accorded to the investments and associated activities by its own investors’7 or limit the covered activities to ‘management, maintenance, use, enjoyment or disposal’.8

Sector carve-outs and other exceptions 6.14 One way that contracting States commonly limit the scope of a national treatment provision is to include carve-outs for certain economic sectors or subject

[page 70] matters. Certain sectors of an economy may be entirely excluded from the scope of a national treatment standard where they are especially significant politically, economically or culturally for one of the contracting States. Common examples are petroleum, defence, taxation and public procurement. For example, the Republic of Korea–Malaysia BIT provides the following exclusion for national treatment: However, with respect to investments and returns in banking and insurance sectors, such treatment shall be accorded in compliance with the relevant laws and regulations of each Contracting Party.9

6.15 Other common subject-specific exceptions relate to matters such as taxation, intellectual property rights, financial incentives and public procurement. General exceptions sometimes include measures aimed at protecting public health or national security. Contracting States can make further reservations for a ‘special advantage’, ‘preference’ or ‘privilege’ enjoyed by its own nationals under a customs, economic or other union agreement with a third State.10 6.16 These exceptions to the national treatment standard are not always located in the same section of the investment treaty as the national treatment provisions. For example, the Annex to the Japan– Vietnam BIT contains a list of economic activities that are excluded from the national treatment obligations of each country. This negative list strategy allows contracting States to control inward investment in sectors that may not be able to withstand full competition. 6.17 Some investment treaties also provide for exceptions in relation to non-conforming measures that exist at the date of entry into the treaty. The China–Germany BIT includes such a provision and envisages that China ‘will take all appropriate steps in order to progressively remove the non-conforming measures’.11 6.18 On a rare occasion, contracting States agree to distinguish between each other as to the scope of protection afforded by the national treatment provision. For instance, the China–Syria BIT provides: The treatment and protection referred to in Article 3 of this Agreement, a) in respect of the People’s Republic of China, shall not be less favorable

b)

than that accorded to investments and activities associated with such investments of investors of a third State, provided that such treatment and protection shall not include any preferential treatment accorded by the People’s Republic of China to investments of investors of a third State based on customs union, free trade zone, economic union, agreement relating to avoidance of double taxation or for facilitating frontier trade; in respect of the Syrian Arab Republic, shall not be less favorable than that accorded by the Syrian Arab Republic to investments and activities associated with such investments of its own investors.12

6.19 A small number of investment treaties make national treatment expressly subject to domestic laws. Such clauses appear to suggest that domestic laws and [page 71] regulations can provide for de jure distinctions in treatment between domestic and foreign investments but that foreign investments should not receive less favourable treatment in the application of those laws and regulations. 6.20 For example, the India–Indonesia BIT provides: Each Contracting Party shall, subject to its laws and regulations, accord to investments of investors of the other Contracting Party treatment no less favorable than that which is accorded to investments of its investors.13

Applying the national treatment standard in practice 6.21 Arbitral tribunals will generally follow a three-step analytical approach when determining whether a host State has failed to accord national treatment to an investment of a foreign investor.

What is the relevant comparator — investor/investment? 6.22 Arbitral tribunals generally adopt a comparison with ‘domestic investments in the same business or economic sector’.14 The relevant

comparator in the same sector might be reasonably intuitive if, for example, the foreign investor is in direct competition with a local business who sells the same product to the local consumers. The fact that both businesses produce the same product or service and are in competition with each other could signal that a comparison is possible.15 6.23 The approach taken by arbitral tribunals to defining the relevant comparators has not, however, been consistent in the case authorities. Some arbitral tribunals have limited the pool of relevant comparators to only those investments that are in ‘identical’ circumstances,16 or those that are in a directly competitive relationship to the claimant.17 Other arbitral tribunals have accepted comparisons even with companies that are not engaged in the same sector of activity as the relevant foreign investment.18 [page 72] 6.24 For example, in Feldman Karpa v United Mexican States19 the foreign investor was a company who traded cigarettes by purchasing Mexican cigarettes from local retailers and exporting those cigarettes abroad. The tribunal found that the appropriate comparator for determining whether Feldman was afforded national treatment by Mexico under a tax rebate scheme was a local business that re-sold cigarettes rather than Mexican cigarette manufacturers who exported their own products. 6.25 The tribunal in Occidental Exploration and Petroleum Co v Republic of Ecuador20 took a much broader approach. The foreign investor in that case was an American oil exploration company. In determining whether the withdrawal of a value-added tax rebate for oil producers breached Ecuador’s national treatment obligations, the tribunal compared the foreign investor, not only to others in the oil sector, but also by ‘local producers in general … since the purpose of national treatment is to protect foreign investors as compared to local producers and this cannot be done by addressing exclusively the sector in which that particular activity is undertaken’.21

Was the foreign investor treated differently to the relevant comparator? 6.26 A measure taken by the host State can discriminate against a foreign investor vis-à-vis a national investor on its face as a matter of law (de jure discrimination) or by an otherwise discriminatory effect (de facto discrimination). 6.27 Arbitral tribunals assess whether a measure taken by a host State, either on its face or in practical effect, treats the relevant foreign investment protected by the investment treaty less favourably than comparable investments by nationals of the host State. The focus is on the actual effect of the measure on the foreign investor and its investment. The foreign investor need not prove discriminatory intent on the part of the host State in order to establish breach of a national treatment provision.22 Evidence that the host State pursued a protectionist or otherwise discriminatory policy with respect to the foreign investment could nonetheless be indicative of a failure to accord national treatment.

Is the difference in treatment justified? 6.28 There is tentative support in arbitral practice to recognise that the host State may not breach the national treatment standard if there is a justified, non-protectionist policy reason for the differential treatment towards the foreign investor. [page 73] Unlike the first two steps in the national treatment analysis, it is for the host State to prove that its measures are justified, not for the investor to prove the opposite. While the precise nature and scope of these potential justifications are not clear, measures taken ‘in order to protect the public interest’ might exempt the State from national treatment obligations if the measure is rationally linked to the justifiable public policy.23

6.29 For example, at least one tribunal has found that the host State’s interests in ‘historical and archaeological preservation and environmental protection’ justified its decision to approve one development project over another as part of a tender process for a multi-storey car parking development project.24 Another tribunal has considered that a foreign investor could never succeed in a claim for a breach of the national treatment standard where the conduct of the investor (in that case, operating gambling venues) was illegal under domestic law.25 In the special context of emerging markets, the developmental status of the host State could also influence the perceived legitimacy of any such justifications. [page 74]

Figure 6.1: Issues flowchart for identifying potential claims based on a breach of a national treatment provision

_____________________________ 1. 2. 3.

Australia–Sri Lanka BIT, Art 4(1). See, for example, Thailand–Argentina BIT, Art 4(2); Timor-Leste–Argentina BIT, Art 4(2). Timor-Leste–Argentina BIT, Art 4(2).

4.

5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

18. 19. 20. 21. 22.

23.

24. 25.

Japan–Laos BIT, Art 2(1). See also China–Canada BIT, Art 6(1) and (2); ASEAN– Australia–New Zealand FTA, Art 4; Singapore–United States FTA, Art 15.5(1). For an example of a provision referring to ‘similar situations’, see Australia–Argentina BIT, Art 4(2). Australia–India BIT, Art 4(1). See discussion in A Newcombe and L Paradell, Law and Practice of Investment Treaties, Kluwer Law International, The Netherlands, 2009, pp 160–1. See, eg, China–Myanmar BIT, Art 3(2). See, eg, Hong Kong–New Zealand BIT, Art 4(2); Thailand–India BIT, Art 4(2); Cambodia–Republic of Korea BIT, Art 3(2); Myanmar–Philippines BIT, Art 3(2). Republic of Korea–Malaysia BIT, Art 3. See, eg, India–Myanmar BIT, Art 4(3); Singapore–Vietnam BIT, Art 5. See, eg, China–Germany BIT, Protocol. China–Syria BIT, Protocol Art 1. India–Indonesia BIT, Art 4(3). See Pope & Talbot Inc v Canada (UNCITRAL) Award, 10 April 2001, at [78]; SD Myers Inc v Canada (UNCITRAL) Partial Award, 13 November 2000, at [250]. This reasoning was applied in ADF Group Inc v United States of America (ICSID Case No ARB(AF)/00/1) Final Award, 9 January 2003, at [150]–[158]. See Consortium RFCC v Morocco (ICSID Case No ARB/00/6) Award, 22 December 2003, at [53]. See SD Myers Inc v Canada (UNCITRAL) Award, 30 December 2002, at [251]; Corn Products International Inc v Mexico (ICSID Case No ARB(AF)/04/1) Award, 15 January 2008, at [120]; Archer Daniels Midland Co and Tate & Lyle Ingredients Americas Inc v Mexico (ICSID Case No ARB(AF)/04/5) Award, 21 November 2007, at [198]. Occidental Exploration and Petroleum Co v Republic of Ecuador (LCIA Case No UN3467) Final Award, 1 July 2004, at [168]–[177]. (ICSID Case No ARB(AF)/99/1) Award, 16 December 2002. (LCIA Case No UN3467) Final Award, 1 July 2004. Occidental Exploration and Petroleum Co v Republic of Ecuador (LCIA Case No UN3467) Final Award, 1 July 2004, at [173]. See Corn Products International Inc v Mexico (ICSID Case No ARB(AF)/04/1) Award, 15 January 2008, at [138]; Siemens AG v Argentine Republic (ICSID Case No ARB/02/8) Award, 6 February 2007, at [321]; Occidental Exploration and Production Co v Republic of Ecuador (UNCITRAL) Final Award, 1 July 2004, at [177]; and SD Myers, Inc v Canada (UNCITRAL) Partial Award, 13 November 2000, at [252]–[254]. SD Myers, Inc v Canada (UNCITRAL) Partial Award, 13 November 2000, at [250]. See also discussion in William Ralph Clayton, Bilcon of Delaware, Inc, et al v Government of Canada (UNCITRAL) Award on Jurisdiction and Liability, 17 March 2015, at [720]– [724]. Parkerings-Compagniet AS v Republic of Lithuania (ICSID Case No ARB/05/8) Award, 11 September 2007, at [392]. International Thunderbird Gaming Corp v United Mexican States (UNCITRAL) Award, 26 January 2006, at [183].

[page 75]

Chapter 7

Most-Favoured Nation Treatment 7.1 Like national treatment, most-favoured nation treatment is a relative standard of treatment that is designed to create competitive equality for investments. It ensures that the host State treats protected investments at least as favourably as it treats investments by investors from third States. 7.2 Both national treatment and most-favoured nation treatment prohibit nationality-based discrimination. While national treatment ensures that the host State treats protected foreign investments at least as favourably as it treats investments by its own nationals, most-favoured nation treatment targets investments by other foreign investors. Mostfavoured nation treatment provisions have a generalising effect that renders the treatment guaranteed to protected investments under one treaty just as ‘strong’ as the treatment guaranteed to similar investments under any other treaty to which the host State is party. 7.3 This Chapter introduces: the common features of most-favoured nation treatment provisions; how these provisions have been applied to host State ‘treatment’ of investments and investors in practice in relation to both substantive and procedural rights in more favourable third treaties; and a checklist of issues for identifying potential claims based on a breach of a most-favoured nation treatment provision.

Common features of the most-favoured nation treatment provisions 7.4 Most-favoured nation treatment provisions appear in over 98 percent of the investment treaties surveyed in Appendix 1, making it the most common provision in the survey sample. A notable exception is the ASEAN–Australia–New Zealand Free Trade Agreement (FTA). Most of these provisions adopt the traditional wording, along the lines of the China–Myanmar BIT: Neither Contracting Party shall subject investments and activities associated with such investments by the investors of the other Contracting Party to treatment less favorable

[page 76] than that accorded to the investments and associated activities by the investors of any third State.1

7.5 As with national treatment provisions, there are three main issues that affect the scope and content of most-favoured nation treatment provisions: the reference (or not) to a particular comparison analysis; the types of investment activities to which the treatment guarantee applies; and any sector carve-outs or other exceptions.

Comparison to investments in ‘like’ or ‘similar’ circumstances 7.6 Very few investment treaties in Appendix 1 make specific reference to ‘like circumstances’ or another formulation of a specific comparator analysis in the provisions on most-favoured nation treatment.2 However, as mentioned in 6.10–6.11 in relation to the national treatment standard3, it is doubtful that this removes the need to go through a comparative exercise in every case when considering the application of a most-favoured nation provision.

Pre- and post-establishment investment activities 7.7 Most-favoured nation provisions normally apply to postestablishment investments. This is made explicit in some investment treaties.4 Other treaties stipulate that most-favoured nation treatment only extends to the ‘management, maintenance, use, enjoyment or disposal’ of investment.5 A minority of treaties more broadly refer to ‘investment-related activities’ or otherwise make it explicit that the treatment obligation operates to pre-establishment investments.6 7.8 While the beneficiary of most-favoured nation treatment is almost always an ‘investment’, some clauses also protect investors.7 This can have significant consequences, especially where the mostfavoured nation treatment expressly includes establishment activities but does not extend to cover the investor (ie, only covers the investment). In such cases, if the host State were to deny the establishment of the investment, it is possible that the foreign investor will be left without a claim, as the ‘investment’ never came into existence and the ‘investor’ cannot claim in its own right. [page 77]

Sector carve-outs and other exceptions 7.9 Almost all most-favoured nation provisions surveyed in Appendix 1 contain exceptions to the general application of the provisions. State practice with respect to express exceptions is becoming increasingly refined, with more and more detailed exceptions included in recently concluded treaties. This makes it important for every investor considering a potential claim and every State entering into an investment treaty to consider the impact of these exceptions. 7.10 The most common exceptions relate to taxation and benefits related to regional treaties. For example, the China–Singapore BIT provides: 1

The provisions of this Agreement relating to the grant of treatment not less

2

favorable than that accorded to the nationals and companies of any third State shall not be construed so as to oblige one Contracting Party to extend to the nationals and companies of the other Contracting Party the benefit of any treatment, preference or privilege resulting from: (a) any regional arrangement for customs, monetary, tariff or trade matters (including a free trade area) or any agreement designed to lead in future to such a regional arrangement; or (b) any arrangement with a third State or States in the same geographical region designed to promote regional cooperation in the economic, social, labor, industrial or monetary fields within the framework of specific projects. The provisions of this Agreement shall not apply to matters of taxation in the territory of either Contracting Party. Such matters shall be governed by any Avoidance of Double Taxation Treaty between the two Contracting Parties and the domestic laws of each Contracting Party.8

7.11 Other investment treaties identify specific economic sectors to which the treatment obligation applies by way of express carve-outs or inclusive lists. For example, the China–New Zealand BIT provides: Neither Contracting Party shall in its territory subject the investment related activities of nationals and companies of the other Contracting Party involving the purchase, sale and transport of raw and secondary materials, energy, fuels and means of production and operation of all types to treatment less favourable than that accorded to the investment related activities carried out by nationals and companies of any third state.9

7.12 Exceptions clauses in recent state practice have become more tailored to the objectives of the individual States. Australia’s recent FTAs with Japan and the Republic of Korea are a good example, each providing a number of general and sector-specific exceptions to both most-favoured nation and national treatment. General exceptions include measures taken by a host State to protect public morals, national treasures, exhaustible natural resources and human, animal or plant life.10 Subject-specific exceptions are set out for each State in a separate annex to the [page 78] treaty.11 For example, in JAEPA, Australia expressly reserved its right to adopt or maintain more favourable treatment towards third parties to the treaty in respect of aviation, fisheries, maritime matters and financial services,12 while Japan did the same in respect of its energy

industry, fisheries, land transactions and the supply of services in public law enforcement.13 7.13 Another example is the China–Peru FTA, which reserves the rights of the host State to ‘adopt or maintain any measure that accords differential treatment’ to ‘socially or economically disadvantaged minorities and ethnic groups’, as well as ‘cultural industries related to the production of books, magazines, periodical or printed or electronic newspapers and music stores’.14

Applying the standard 7.14 Due to the different formulations of the most-favoured nation treatment standard, the scope of protection for protected investors or investments varies from treaty to treaty. In every case, the first task is to interpret the wording of the provision in question in light of the object and purpose of the investment treaty. 7.15 A claim based on a breach of most-favoured nation treatment can arise in circumstances where the host State has granted more favourable treatment to investors or investments of a third State under a treaty with that State, a domestic legal enactment or as a de facto practice. 7.16 The analytical approach for claims based on most-favoured nation treatment is identical to national treatment claims. This process is described in Chapter 6 on national treatment and will not be repeated here, except to summarise the three-step analysis as follows: 1. Identify the relevant comparator, being a similar foreign investor and/or investment from a third State. 2. Compare the treatment received by the protected beneficiary under the relevant treaty and the comparator to determine if the former has been treated less favourably than the latter. 3. Consider whether any difference in treatment is justified by the host State’s pursuit of a reasonable objective. 7.17 Most case authorities considering the application of most-

favoured nation provisions have dealt with the situation where a protected investor wishes to take advantage of a more favourable provision in another investment treaty to which the host State is a party. As will be discussed below, while most-favoured nation treatment is generally understood to extend the benefits of more favourable [page 79] substantive treatment guarantees in other investment treaties to which the host State is party, there is some controversy as to whether it can also apply to more favourable ‘treatment’ in the form of procedural rights and dispute settlement provisions in other investment treaties.

Application to substantive treatment standards 7.18 For provisions that refer to ‘treatment’ of ‘investors’ or ‘investments’, there is no doubt that the most-favoured nation treatment applies to the substantive treatment guarantees in the investment treaty. 7.19 This understanding is reflected in the case authorities. For example, the Malaysian investor in MTD Equity Sdn Bhd (Malaysia) and MTD Chile SA v Republic of Chile15 successfully argued that the most-favoured nation treatment it was afforded under the Malaysia– Chile BIT entitled it to benefit from the higher level of protection afforded by two of Chile’s other investment treaties. The MTD case concerned a refusal by Chile’s Ministry for Housing and Urban Planning to approve the Malaysian investor’s application for zoning changes that were necessary to undertake a development project that had been approved by another government department, Chile’s Foreign Investment Committee. 7.20 The Malaysian investor sought to rely on the several provisions in Chile’s investment treaties with Croatia and Denmark, which deal with the admission of investments in accordance with host State laws and the obligation to grant necessary permits for an investment once it

is admitted.16 The arbitral tribunal held that the Malaysian investor was entitled to rely on these provisions to extend the scope of protection afforded to it under the fair and equitable treatment provision in the Malaysia–Chile BIT as this outcome was consistent with the purposes of that treaty and did not violate any exceptions in the most-favoured nation treatment.17 7.21 Another instructive case is White Industries Australia Ltd v Republic of India.18 In that case, an Australian investor, White Industries, successfully argued that India was in breach of its mostfavoured nation treatment obligations in the Australia–India BIT by not treating White’s investment in India in the same way as [page 80] it treated similar Kuwaiti investments protected by the India–Kuwait BIT. White Industries brought an investment treaty claim against India when it was unable to enforce an earlier commercial arbitral award in its favour against an Indian state-owned entity, Coal India. That award was issued by an arbitral tribunal constituted under the dispute settlement provisions in a commercial contract between White Industries and Coal India to develop a coal mining project in Uttar Pradesh, India. White Industries brought proceedings in the Indian courts to enforce the award but to no avail. The domestic court proceedings were still pending after nine years. 7.22 In the subsequent investment treaty arbitration proceedings, the arbitral tribunal agreed with the Australian investor that this delay in enforcement by the Indian courts deprived White Industries of an ‘effective means of asserting claims and enforcing rights’. This treatment standard appears in India’s investment treaty with Kuwait, but not in the Australia–India BIT. The tribunal held that the investment by White Industries was entitled to no less favourable treatment than Kuwaiti investments by reason of the most-favoured nation treatment provision in Art 4(2) of the Australia–India BIT, which it took to incorporate the provisions of Art 4(5) of the Kuwait–

India BIT that in turn obliged India to ensure an ‘effective means’ for White Industries to be able to enforce the earlier arbitral award.

Application to procedural rights in investment treaties 7.23 It is less clear if most-favoured nation treatment extends the benefit of more favourable procedural rights that might be available in third State treaties. For example, if State A enters into investment treaties with State B and State C, can more-favourable dispute resolution provisions in the treaty with State B be relied upon by an investor of State C in a dispute it brings against State A under the treaty with State C? On a purely textual reading of many most-favoured nation provisions, this may appear to be possible. ‘Treatment’ of a beneficiary could arguably include its procedural rights under an investment treaty, which might be just as significant as the substantive protections in the same treaty. In practice, this question has arisen where the investor has sought to avoid an unfavourable procedural requirement in the dispute provisions of a treaty (eg, a long prearbitration negotiation period or a requirement to first submit disputes to the domestic courts) or to extend the subject-matter jurisdiction of the investment treaty tribunal. 7.24 Most-favoured nation treatment provisions do not usually refer to dispute resolution clauses as expressly falling within the protected scope of the provision. Some treaties clarify that investors may not rely on most-favoured nation provisions in relation to dispute resolution. For example, Article 4(3) of the China-Japan-Republic of Korea trilateral investment treaty provides: 3.

It is understood that the treatment accorded to investors of the third Contracting Party or any non-Contracting Party and to their investments as referred to in paragraph 1 does not include treatment accorded to investors

[page 81] of the third Contracting Party or any non-Contracting Party and to their

investments by provisions concerning the settlement of investment disputes between a Contracting Party and investors of the third Contracting Party or between a Contracting Party and investors of any non-Contracting Party that are provided for in other international agreements.

7.25 Only very few of the investment treaties surveyed in Appendix 1 clarify that most-favoured nation treatment extends to all the provisions of the treaty, including the dispute resolution clauses. The United Kingdom–Laos BIT is among the clearest examples, expressly extending the guarantee of most-favoured nation treatment in Art 3(1) and (2) to cover a range of provisions in the treaty, including the investor–State dispute settlement provisions in Art 8: For the avoidance of doubt it is confirmed that the treatment provided for in paragraphs (1) and (2) above shall apply to the provisions of Articles 1 to 11 of this Agreement.19

7.26 The vast majority of most-favoured nation treatment provisions simply refer to ‘treatment’ of an investor or investment. Arbitral tribunals are divided on the question of whether treatment extends to include procedural rights. Some tribunals have adopted the presumption that most-favoured nation treatment applies to dispute settlement unless the investment treaty expressly excludes this outcome,20 whereas other tribunals have found that certain mostfavoured nation clauses did not cover more favourable procedural rights in other treaties.21 As observed by a recent arbitral tribunal, this issue remains a ‘fiercely contested no-man’s land in international law’.22 [page 82] 7.27 The conflicting jurisprudence on this issue must await further elaboration and resolution. But recently concluded investment treaties have addressed this uncertainty by expressly clarifying the position. For example, the United Arab Emirates–Vietnam BIT provides: For greater certainty the Most-Favoured Nation treatment provision in this Agreement does not encompass a requirement to extend to the investors of the other Contracting Party dispute settlement procedures other than those set out in this Agreement.23

[page 83]

Figure 7.1: Issues flowchart for identifying potential claims based on a breach of a mostfavoured nation treatment provision

_____________________________ 1. 2. 3. 4. 5. 6.

7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

17.

18. 19. 20.

China–Myanmar BIT, Art 3(3). See also Cambodia–Singapore BIT, Art 4; Indonesia– Vietnam BIT, Art 4(1) and (2). For an example of the ‘like circumstances’ formulation, see Japan–Malaysia Economic Partnership Agreement, Art 76; Singapore–United States FTA, Art 15.4(3). See paragraphs 6.10–6.11. See, eg, New Zealand–Argentina BIT, Art 4(2); China–Singapore BIT, Art 4; Myanmar– Thailand BIT, Art 4. Philippines–Republic of Korea BIT, Art 3(2); Laos–Republic of Korea BIT, Art 3(2). Australia–Turkey BIT, Art 4(1); Singapore–Sri Lanka BIT, Art 4(1); Japan–Papua New Guinea BIT, Art 3(2); China–Philippines BIT, Art 3(2); and Australia–Papua New Guinea BIT, Art 4. See, eg, India–Korea BIT, Art 3(3); Japan–Mongolia BIT, Arts 2(2) and 3(1). China–Singapore BIT, Art 5. See also Australia–India BIT, Art 4(4); China–Vietnam, Art 3(3); Cambodia–Singapore BIT, Arts 4 and 5; Mongolia–Singapore BIT, Art 5. China–New Zealand BIT, Art 4(2). JAEPA, Art 14.15; Australia–Republic of Korea FTA, Art 11.12. JAEPA, Annex 7; Australia–Republic of Korea FTA, Annexes I and II. JAEPA, Annex 7, Pt I, items 19 (p 1055), 21–24 (pp 1057–1062). JAEPA, Annex 7, Pt II, items 9 (p 1074), 12–14 (pp 1079–1082). China–Peru FTA, Art 131. (ICSID Case No ARB/01/7) Award, 25 May 2004. Chile–Croatia BIT, Arts 3(2)–(3); Chile–Denmark BIT, Art 3(1). See also MTD Equity Sdn Bhd (Malaysia) and MTD Chile SA v Republic of Chile (ICSID Case No ARB/01/7) Award, 25 May 2004, at [100] and [105]. MTD Equity Sdn Bhd (Malaysia) and MTD Chile SA v Republic of Chile (ICSID Case No ARB/01/7) Award, 25 May 2004, at [100]–[104]. See also Hesham Talaat M Al-Warraq v Republic of Indonesia (UNCITRAL), Final Award, 15 December 2014, at [540]–[555] (where the Agreement on Promotion, Protection and Guarantee of Investments among Member States of the Organisation of the Islamic Conference (OIC Agreement), under which the claim was brought, did not contain a fair and equitable treatment guarantee, and the arbitral tribunal accepted the investor’s arguments that it was entitled to benefit the fair and equitable treatment provision in another of Indonesia’s BITs — the IndonesiaUnited Kingdom BIT — by operation of most-favoured-nation treatment in the OIC Agreement). (UNCITRAL) Final Award, 30 November 2011. United Kingdom–Laos BIT, Art 3(3). See, eg, Maffezini v Kingdom of Spain (ICSID Case No ARB/97/7) Decision on Objections to Jurisdiction, 25 January 2000, at [55]–[63]; Plama v Bulgaria (ICSID Case No ARB/03/24) Decision on Jurisdiction, 8 February 2005, at [183]–[227]; Suez, Sociedad General de Aguas de Barcelona SA and Vivendi Universal SA v Argentina (ICSID Case No ARB/03/19) Decision on Jurisdiction, 3 August 2006, at [52]–[68]; National Grid Plc v Argentine Republic (UNCITRAL) Decision on Jurisdiction, 20 June 2006, at [79]–[94]; RosInvestCo UK Ltd v Russia (SCC Case No V 079/2005) Decision on Jurisdiction, 5 October 2007, at [124]–[139]; Impregilo SpA v Argentine Republic (ICSID Case No

ARB/07/17) Award, 21 June 2011, at [98]–[108] (compare concurring and dissenting opinion of Brigitte Stern); and Teinver SA, Transportes de Cercanías SA and Autobuses Urbanos del Sur SA v Argentine Republic (ICSID Case No ARB/09/1) Decision on Jurisdiction, 21 December 2012, at [159]–[186]. 21. See, eg, Vladimir Berschader and Moïse Berschader v Russia (SCC Case No 080/2004) Award, 21 April 2006, at [159]–[208]; Renta 4 SVSA et al v Russia (SCC Case No V 024/2007) Award, 20 March 2009, at [86]–[120]; Austrian Airlines v The Slovak Republic (UNCITRAL) 20 October 2009, at [119]–[140] (compare separate opinion of Charles N Brower); Daimler Financial Services AG v Argentine Republic (ICSID Case No ARB/05/1) Award on Jurisdiction, 22 August 2012, at [160]–[281]; ICS Inspection and Control Services Ltd (United Kingdom) v Argentine Republic (PCA Case No 2010-9) Award on Jurisdiction, 10 February 2012, at [274]–[317]; Kiliç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v Turkmenistan (ICSID Case No ARB/10/01) Award, 2 July 2013, at [7.1.1]– [7.9.1]. 22. Garanti Koza LLP v Turkmenistan (ICSID Case No ARB/11/20) Decision on Objection to Jurisdiction for Lack of Consent, 3 July 2013, at [40]. 23. United Arab Emirates–Vietnam BIT, Art 10(2).

[page 84]

Chapter 8

Arbitrary, Discriminatory or Unreasonable Impairment 8.1 Investment treaties sometimes make specific reference to a prohibition of arbitrary, discriminatory and unreasonable measures that impair protected investments. Just over a third of the Asia-Pacific investment treaties surveyed in Appendix 1 contain such a clause. 8.2 Protection from arbitrary, discriminatory and unreasonable measures is an integral part of a host State’s obligation to treat an investment fairly and equitably. As such, it is unclear whether a guarantee of protection against arbitrary, discriminatory and unreasonable impairment of an investment adds anything to other standards in investment treaties that protect investors from such treatment — the fair and equitable treatment, national treatment and most-favoured nation treatment standards. 8.3 This Chapter provides an introduction to: common features of the treaty provisions; the content of the treatment standard; the practical relevance of the treatment standard; and a checklist of issues for an arbitrary, discriminatory and unreasonable impairment claim.

Common features of the treaty provisions 8.4 The original formulation of the prohibition on arbitrary and discriminatory impairment arose in the United States’ treaty practice as

part of its Friendship, Commerce and Navigation treaties. The Thailand–Germany Bilateral Investment Treaty (BIT) provides an example of the most common formulation of such a provision: Neither Contracting Party shall in any way impair by arbitrary or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its territory of investors of the other Contracting Party.1 (Emphasis added.)

[page 85] 8.5 Asia-Pacific investment treaties more commonly refer to ‘unreasonable’ measures in place of ‘arbitrary’.2 Some investment treaties refer to ‘unjustified’ measures3 or a combination of adjectives. For example, the Australia–Papua New Guinea BIT provides: [R]ights related to investments and activities associated with investments in the territory of the other Contracting Party shall not in any way be subjected to or impaired by arbitrary, unreasonable or discriminatory measures.4

8.6 While prohibitions on ‘discriminatory’ measures provide a similar level of protection for investments as the national and most-favoured nation treatment standards discussed in Chapters 6 and 7, there are several differences in the drafting of these provisions. 8.7 Unlike national and most-favoured nation treatment provisions, prohibitions on discriminatory measures normally do not: expressly identify the beneficiary or the comparator. In general terms, most discriminatory measures provisions are drafted broadly enough to encompass all impairment to an investment caused by a discriminatory measure. However, in practice, any assessment of what is discriminatory will normally require a comparison with similar (but possibly also dissimilar) investments in the same sector; refer to a nationality basis for discrimination (ie, any type of discrimination is presumably prohibited); or provide that protection is subject to specific sector-based exceptions (in addition to any generally applicable exceptions in the investment treaty).

Content of the treatment standard 8.8 While there are minor variations in the drafting from treaty to treaty, prohibitions on arbitrary, discriminatory or unreasonable measures generally apply to: investments and not investors; measures undertaken by the host State rather than its ‘treatment’ of an investment; and measures undertaken by the host State that ‘impair’ an investment.

Arbitrary 8.9 Arbitrariness is generally not defined in investment treaties. Arbitral tribunals interpreting this standard often rely on common sense and dictionary meanings of [page 86] the term. As a general rule, a measure is arbitrary if it is ‘founded on prejudice or preference rather than on reason of fact’.5 The observations of the International Court of Justice in Elettronica Sicula SpA (ELSI) (United States v Italy) (Merits)6 are also helpful: Arbitrariness is not so much something opposed to a rule of law, as something opposed to the rule of law … It is a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety.7

8.10 Arbitrariness seems to require a manifest impropriety, such as the absence of a legitimate purpose, capriciousness, bad faith, or a serious lack of due process.8 Reasonable measures taken in pursuit of a rational policy aim are not arbitrary. The tribunal in El Paso Energy International Co v Argentine Republic9 determined that Argentina’s measures in response to a severe financial crisis were not ‘tainted by arbitrariness’ because they were part of ‘a reasoned scheme to answer a major crisis and effectively had the desired result’.10

Discriminatory 8.11 A discriminatory measure can normally be assessed in the same way as discriminatory treatment is assessed under the fair and equitable treatment, most-favoured nation and national treatment standards. These treatment standards are discussed further in Chapters 4, 6 and 7 respectively. 8.12 Protection from discriminatory measures generally requires a protected investment to be treated no less favourably by the host State than other investments (foreign or domestic) in similar circumstances, absent a reasonable justification for the distinction in treatment.11 However these treaty provisions are not normally limited to nationalitybased discrimination (unlike most-favoured nation and national treatment) but instead appear to prohibit any and all discriminatory measures that impair protected investments. Nationality-based discrimination is the [page 87] most common form of discrimination likely to affect foreign investments in practice but it is conceivable that other forms of discrimination breach this treatment standard.

Unreasonable 8.13 There is very little discussion in the case authorities of what is meant by an ‘unreasonable’ or ‘unjustified’ measure. These terms correspond closely to ‘arbitrary’ and may not be conceptually different in practice. 8.14 ‘Unreasonable and discriminatory’ measures were raised by the Malaysian investor in MTD Equity Sdn Bhd (Malaysia) and MTD Chile SA v Republic of Chile.12 In that case, MTD complained that Chile’s Foreign Investment Committee should not have given its unqualified approval of the investment where the proposed development was contrary to an existing urban planning policy. This conduct formed the

basis of a finding that Chile failed to accord fair and equitable treatment to the investment, but the tribunal also found that ‘[t]he approval of the investment against Government urban policy can be equally considered unreasonable’.13

Impairment 8.15 ‘Impair’ is generally understood in the ordinary sense of the word to mean detrimentally affect, damage or injure. It is a legally significant part of the analysis. At least one arbitral tribunal has rejected an investor’s claim with respect to arbitrary and discriminatory measures on the grounds that there was no impairment of the management or operation of the investment.14

Practical relevance of the treatment standard 8.16 Arbitral tribunals have consistently held that the obligation to refrain from unreasonable or discriminatory measures overlaps with the fair and equitable treatment standard.15 A separate standard protecting an investment from arbitrary or discriminatory measures would seem to be superfluous in many instances. [page 88] 8.17 A host State measure of a kind that would violate this guarantee would almost certainly breach the fair and equitable treatment standard. However, a few tribunals have found breaches of fair and equitable treatment without finding that the conduct was also arbitrary or discriminatory.16

[page 89]

Figure 8.1: Issues flowchart for identifying potential claims based on a breach of an arbitrary, discriminatory and/or unreasonable impairment provision

_____________________________ 1. 2. 3.

4. 5.

6. 7. 8. 9. 10. 11.

12. 13. 14.

15.

Thailand–Germany BIT, Art 2(4). Hong Kong–Republic of Korea, Art 2(2); Indonesia–Laos BIT, Art 3(2); Vietnam– Cambodia BIT, Art 3(1). Mongolia–Belgium BIT, Art 3(2) (‘unjustified or discriminatory’); Singapore–Netherlands BIT, Art 7(1) (‘unjustified or discriminatory’); Australia–Argentina BIT, Art 4(2) (‘unjustified or indiscriminate’). Australia–Papua New Guinea BIT, Art 3(4). Ronald S Lauder v Czech Republic (UNCITRAL) Award, 3 September 2001, at [221]. See also El Paso Energy International Co v Argentine Republic (ICSID Case No ARB/03/15) Award, 31 October 2011, at [319]. [1989] ICJ Reports 15. Elettronica Sicula SpA (ELSI) (United States v Italy) (Merits) [1989] ICJ Reports 15, 76 [128]. EDF (Services) Ltd v Romania (ICSID Case No ARB/05/13) Award, 8 October 2009, at [303]–[305]. (ICSID Case No ARB/03/15) Award, 31 October 2011. El Paso Energy International Co v Argentine Republic (ICSID Case No ARB/03/15) Award, 31 October 2011, at [325]. See, eg, Ulysseas Inc v Republic of Ecuador (UNCITRAL) Final Award, 12 June 2012, at [293]; and Plama Consortium Limited v Bulgaria (ICSID Case No ARB/03/24) Award, 27 August 2008, at [184]. For examples of the kinds of discriminatory conduct that will infringe the standard, see Lauder v Czech Republic (UNCITRAL) Final Award, 3 September 2002, at [230]–[232] (finding a discriminatory breach of the United States– Czech BIT where the Czech Media Council agreed to grant a licence to a Dutch company with an American CEO, but, following a public outcry, granted the licence to a local company instead) and Eureko BV v Republic of Poland (UNCITRAL) Partial Award, 19 August 2005, at [233] (finding a discriminatory breach of the fair and equitable treatment standard where Poland obstructed the claimant’s investment in a State-owned financial institution on account of political hostility to foreign control of a strategically important company). (ICSID Case No ARB/01/7) Award, 25 May 2004. MTD Equity Sdn Bhd (Malaysia) and MTD Chile SA v Republic of Chile (ICSID Case No ARB/01/7) Award, 25 May 2004, at [196]. CMS Gas Transmission Co v Argentina (ICSID Case No ARB/01/8) Award, 12 May 2005, at [292]. On the other hand, the same tribunal (at [273]–[281] and [295]) found that other forms of impairment were already covered by the claim of breach of fair and equitable treatment, which the tribunal upheld. See, eg, Saluka Investments BV v Czech Republic (UNCITRAL) Partial Award, 17 March 2006, at [460]. See also Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania (ICSID Case No ARB/05/22) Award, 24 July 2008, at [692]–[693]; Rumeli Telekom AS and Telsim Mobil Telekomunikasyon Hizmetleri AS v Republic of Kazakhstan (ICSID Case No ARB/05/16) Award, 29 July 2008, at [679] and Spyridon Roussalis v Romania (ICSID Case No ARB/06/1) Award, 1 December 2011, at [324]. See also C Schreuer, ‘Fair and Equitable Treatment (FET): Interactions with Other Standards’ (2007) 4(5) Transnational Dispute Management 1 at 4–9.

16. Compare the tribunal’s conclusions on arbitrary and discriminatory treatment ([319]– [325]) and on fair and equitable treatment ([510]–[519]) in El Paso Energy International Co v Argentine Republic (ICSID Case No ARB/03/15) Award, 31 October 2011.

[page 90]

Chapter 9

Umbrella Clauses 9.1 Many investment treaties, but not all, contain provisions by which the State parties agree to abide by obligations or commitments made to investors of the other State outside of the terms of the treaty. In this manner the obligations or commitments made to investors are brought under the ‘umbrella’ of the treaty. Close to a third of the AsiaPacific investment treaties surveyed in Appendix 1 contain an umbrella clause. 9.2 The protection afforded by an umbrella clause may become relevant for an investor if the host State breaches or reneges on a contract or other commitment entered into with the investor in relation to an investment. For example, a mining concession agreement entered into with the investor by one government may be cancelled or unilaterally amended by legislation by a successor government. A State may regret its decision to privatise a sector of its economy and later amend or cancel agreements it entered into with foreign investors who invested in that sector. In cases such as these, the host State’s failure to honour commitments with respect to the investment could significantly undermine or destroy the economic viability of the investment. Umbrella clauses are designed to protect the foreign investor in these types of situations. 9.3 Umbrella clauses raise a number of complex questions of treaty interpretation, including: whether the kind of obligation in issue is covered by the umbrella clause; whether the breach of the obligation in issue is covered by the umbrella clause;

whether the State is responsible for breach of the obligation in issue; and whether the investor can claim for breach of the obligation in issue. Each of these issues is discussed separately in 9.11–9.36. 9.4 It is difficult to predict the manner in which any given umbrella clause will be interpreted and applied. Although many treaties contain similar provisions, umbrella clauses are not uniform. Arbitral tribunals have taken divergent approaches to the interpretation and application of umbrella clauses. Consequently, umbrella clauses remain probably the most controversial and unsettled standard in practice in terms of meaning and scope. Arbitral tribunals dealing with investor claims based on umbrella clauses will often pay close attention to a proper interpretation of the particular treaty provision before them in each case. 9.5 The goal of this Chapter is to provide a general and accessible introduction to umbrella clauses. This Chapter introduces: [page 91] common features of umbrella clauses in investment treaties; the range of approaches to the interpretation and application of umbrella clauses; and a checklist of issues for umbrella clauses. The bibliography of further reading materials contains sources that provide more detailed analysis of this subject.

Common features of umbrella clauses 9.6 A typical umbrella clause requires the host State to ‘observe any obligation’ relating to the investment that it has ‘entered into’ with the foreign investor. For example, the Indonesia–Netherlands BIT provides:

Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals of the other Contracting Party.1

9.7 A number of other treaties refer to the host State’s ‘commitments’ to the foreign investor: Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the investors of the other contracting State.2

9.8 Despite the variation in language between the two examples above, the general object of these provisions appears similar. There is a treaty obligation to observe obligations entered into with regard to investments, in the case of the first example, or constantly guarantee the observance of commitments entered into with respect to investments, in the case of the second. 9.9 One might expect that tribunals interpreting provisions of this kind to reach substantially the same interpretation of clauses using essentially the same words. This has not been the case.

Approaches to interpretation and application of umbrella clauses 9.10 The approaches of arbitral tribunals that have considered umbrella clauses in investment treaties fall into two broad camps. In the first camp are tribunals that prefer a literal interpretation. In the second camp are tribunals that prefer a purposive interpretation. As will be explained further in the balance of this Chapter, the position taken on most questions about the nature, scope and operation of [page 92] umbrella clauses is normally determined by reference to the camp in which the arbitral tribunal considering the questions falls.

Nature of obligations covered

9.11 Contracts are the most common example of an ‘obligation’ that may be covered by umbrella clauses. Some arbitral tribunals have also accepted that non-contractual commitments, such as representations by government officials to attract investment3 and statements in laws and regulations,4 are obligations of a kind covered by umbrella clauses. For such non-contractual commitments to be protected by an umbrella clause in an investment treaty they must qualify as an obligation under the proper law of that commitment, which is often a domestic law.5 9.12 A number of the relevant cases that deal with non-contractual obligations in this context arose out of the Argentine economic crisis of the late 1990s. Before the economic crisis the Argentine Government undertook a privatisation program. That program included the privatisation of companies engaged in gas transportation and distribution. There was a public tender process with information memoranda. Under the Gas Law and regulatory framework established for the purpose of the privatisation, there was a regime by which gas tariffs were to be calculated in US dollars and periodically adjusted. The evident purpose of the regime was to encourage foreign investment in the infrastructure and ensure a long-term economic return on the investment. 9.13 A number of foreign investors invested in the Argentine companies, induced by the legitimate expectation that the regulatory regime would not be fundamentally altered. In 1999 the Argentine Government suspended the regulatory regime that permitted tariffs to be adjusted to US dollars. This measure had a significant effect on the value of the Argentine companies involved in gas transportation and distribution. [page 93] 9.14 In LG&E Energy Corp, LG&E Capital Corp and LG&E International Inc v Argentine Republic6 the tribunal considered that the Gas Law and regulations constituted ‘obligations’ for the purposes of the umbrella clause in that case.7 A similar conclusion was reached on

similar facts by a differently constituted tribunal in CMS Gas Transmission Co v Argentine Republic.8 9.15 The tribunal’s decision in CMS Gas Transmission Co v Argentine Republic was the subject of an annulment application.9 The ad hoc annulment committee took a more restrictive view of the umbrella clause than the arbitral tribunal that rendered the award in the case. It considered that ‘obligations’ in the umbrella clause meant legal obligations and, although legitimate expectations might arise by reason of a course of dealing between the investor and the host State, these were not, as such, legal obligations.10 9.16 Several more recent investment treaty tribunals have considered that the concept of a legal obligation does not necessarily confine umbrella clauses to contractual obligations. In Burlington Resources Inc v Republic of Ecuador11 the arbitral tribunal observed that the ordinary meaning of ‘obligation’ infers a bilateral relationship where the obligation of one party is correlative of the right of another. An obligation entails one party being bound by and another benefiting from it (an obligor and obligee). Accepting that an umbrella clause refers to a legal obligation, that obligation cannot exist in a vacuum. It is subject to a governing law. The governing law must define the existence, scope and content of the obligation. In BIVAC v Republic of Paraguay12 the arbitral tribunal considered that the words ‘any obligation’ in Art 3(4) of the Netherlands– Paraguay BIT were ‘all encompassing’ and ‘not limited to international obligations, or non-contractual obligations, so that they appear without apparent limitation with respect to commitments that impose legal obligations’.13 9.17 If under the law of the State (or international law) the circumstances give rise to a non-contractual but legal obligation there is no reason, in principle, for considering that an obligation of that kind could not be covered by an umbrella [page 94]

clause. Thus, if a State bound itself under its law or international law to fulfil a non-contractual promise not to dismantle the regulatory framework upon which an investor’s investment was based, then nonobservance of that obligation could found a claim for breach of an umbrella clause. 9.18 In sum, at least contractual obligations are normally covered by umbrella clauses. Other legal obligations arising under the proper law of that obligation are also probably covered. Non-legal commitments loosely described as ‘obligations’ may also be covered on a literal interpretation of obligation.

Nature of breaches covered 9.19 The demarcation between literal and purposive interpretation is at its most stark in the consideration of the nature of the breaches of obligations covered by umbrella clauses. At the literal end of the spectrum, every breach of contractual obligations is elevated to the level of breach of the umbrella clause (and the treaty). At the most confined purposive end, only acts of the State directed to the repudiation or frustration of contractual rights are properly the subject of umbrella clauses. 9.20 There is a distinction between conduct that results in a breach of contract and liability for that breach under a national law and conduct that results in a breach of treaty and liability for an international wrong. The same facts may result in liability for breaches of contract and for breaches of treaty, but the causes of action are distinct.14 9.21 In the case of umbrella clauses we are concerned with whether the conduct of the State amounts to breach of treaty — an international wrong. An umbrella clause requires a State to observe contractual obligations. If the contractual obligations are elevated to the treaty level then any simple breach of contract is transformed into a breach of treaty and an international wrong. 9.22 In the literal camp, tribunals have regard to the ordinary meaning of the language used in the umbrella clause. On this approach the conclusion naturally drawn is that the umbrella clause means what

it says — the State is to observe the obligations (contractual) it has entered into with regard to an investment. The consequences and implications of that interpretation are irrelevant.15 9.23 If simple breaches of contract may be breaches of umbrella clauses it would have the practical effect of conferring jurisdiction on an international tribunal to determine contractual claims based on national laws within an investor–State dispute. This has the obvious difficulty of creating multiplicity of proceedings and the potential for different tribunals to reach different conclusions on the same evidence and issues. [page 95] 9.24 In some cases, where the contract in question contained a forum selection or arbitration clause, investment treaty tribunals that have accepted jurisdiction to hear the contract claims as breaches of umbrella clauses have, nonetheless, declined to hear those claims until after the procedure mandated by the contract was completed.16 The majority of relevant cases involved the non-payment of a simple debt owed under the terms of the underlying contract. 9.25 The potential breadth of claims and possibility of supplanting all the other treaty standards with an overarching duty to observe all obligations (under any law, national or international) has driven other tribunals to search for an interpretation grounded in the purpose of the investment treaty. Some tribunals in this camp have reasoned that the obligations to which the umbrella clause is directed are not breaches of contract that are committed by the State as contractor, but acts in the exercise of sovereign power that result in the non-observance or total repudiation of the contractual obligations.17 Other tribunals have considered that non-observance requires some act calculated to frustrate the normal determination of contractual liability. For example, taking steps to prevent determination of the State’s liability at all or enforcement of awards against the State.18 9.26 There is merit in both the literal and purposive approach to interpretation. In short, the interpretation that will be placed on any

given umbrella clause will be dictated by the approach the tribunal takes to the task of treaty construction. That may lead to the conclusion that simple breaches of contract may be adjudicated by an investment treaty tribunal as breaches of the umbrella clause.

State responsibility for breach of obligations 9.27 As it is a State that is a party to the investment treaty, it must be the State that has breached its obligations under an umbrella clause in order for the State to be responsible for the consequences of that breach. As with other aspects of umbrella clauses, difficult questions arise as to the attribution of responsibility for acts that result in breaches of obligations. [page 96] 9.28 In the simple case of a contract between a State and an investor it is obvious that, if breach of that contract is captured by the umbrella clause, the State counterparty will be responsible under the treaty. A more difficult question arises if the State is not the counterparty to the contract and therefore not strictly the party that owes the investor the obligation under the contract. 9.29 In Azurix Corp v Argentina Republic19 the arbitral tribunal considered that, as Argentina was not a party to the concession agreement, it could not be responsible for breach of that agreement under the umbrella clause.20 Similarly, in Impreglio SpA v Islamic Republic of Pakistan21 under the proper law of the contract the counterparty to the contract was a distinct entity from Pakistan and, therefore, Pakistan could not be responsible for breach of the contract under the umbrella clause.22 9.30 In Eureko v Poland23 the arbitral tribunal considered that the question of attributing responsibility for breaches of contract had to be approached from the perspective of international law. If the conduct of the counterparty to the contract was to be attributed to the State under international law, then the State would be responsible under

international law (and the umbrella clause) for those breaches.24 There are a number of ways in which responsibility may be attributed to a State under international law.25 9.31 It follows that the mere fact that a State is not the counterparty to a contract with the investor does not mean that the State will not be responsible under an umbrella clause for non-observance of the obligations under the contract. It depends upon whether the breach of the contract by the host State entity is attributable to the State.

Standing to bring claims for breaches of obligations 9.32 Standing to claim is an issue that arises frequently in investment treaty claims. Foreign investors often invest in the host State through locally incorporated companies. The local company will often be the counterparty to any contracts entered into with the State or its instrumentalities or the local company will be the beneficiary of any legal framework established by the State to facilitate [page 97] the investment. The difficulty arises when a foreign investor that holds shares in a local company that owns the relevant contractual rights — a non-party to the contract — wishes to bring a claim for breach of an umbrella clause in an investment treaty. 9.33 If the obligations to which the umbrella clause refers are legal obligations, it stands to reason that it is the obligee to whom the obligation is owed that has the right to complain if the obligation is breached. Where the obligee is a local company this may result in the foreign investor being unable to access the benefit of an umbrella clause. The obligation is not owed to the foreign investor. Thus, the foreign investor has no right to complain if the obligation is not observed (whether under the umbrella clause or otherwise).26 9.34 In the case of a typical umbrella clause, which requires the State

to ‘observe any obligation it may have entered into with regard to investments’, there is scope for a literal interpretation to extend the operation of the clause. The investment to which the umbrella clause relates is the foreign investor’s shares in the local company to which the obligation is owed. In this sense the ‘obligation’ is ‘entered into with regard to investments’ of the foreign investor. 9.35 In the CMS Gas Transmission Co v Argentine Republic27 annulment proceedings CMS relied on a literal interpretation to support the tribunal’s conclusion that the umbrella clause covered obligations owed to CMS’s Argentine subsidiary.28 That interpretation of the umbrella clause appears to have been implicitly accepted by the arbitral tribunal in CMS Gas Transmission Co v Argentine Republic.29 Other tribunals have also accepted (without detailed reasoning) that umbrella clauses may be relied on by foreign parent companies in circumstances where the obligation breached was owed to a local subsidiary.30 9.36 In sum, if the investor is the beneficiary of the obligation owed by the State it undoubtedly has standing to bring a claim. The position is less clear where [page 98] the obligation is not owed directly to the foreign investor, but is owed to a local subsidiary. In those cases, the extent to which the foreign investor may make a claim will depend on the interpretation given to the umbrella clause in question.

Summary 9.37 The interpretation and application of umbrella clauses is complex and uncertain. It involves difficult issues of treaty interpretation to resolve the questions of: what obligations are covered by the clause; the duties of the State under the clause;

the responsibility of the State for breach of obligations covered by the clause; and who may complain of breach of the covered obligations. 9.38 The extent of protection afforded to foreign investors by umbrella clauses necessarily turns on the treaty provision in question and the nature of the primary obligation said to have been breached. The range of protection extends (at its widest) to breach by an agency for which the State is responsible of non-legal obligations owed to local subsidiaries, and (at its narrowest) to sovereign acts of the State frustrating resolution of contractual claims or enforcement of contractual awards against the State.

[page 99]

Figure 9.1:

Issues flowchart for umbrella clause claims

_____________________________ 1. 2. 3.

Indonesia–Netherlands BIT, Art 3(4). Switzerland–Pakistan BIT, Art 11. See Total SA v Argentine Republic (ICSID Case No ARB/04/1) Decision on Liability, 27

4.

5. 6. 7. 8.

9. 10. 11. 12. 13. 14. 15.

16.

December 2010, at [131]. See also C Miles, ‘Where’s My Umbrella? An “Ordinary Meaning” Approach to Answering Three Key Questions that Have Emerged from the “Umbrella Clause” Debate’, in T Weiler (ed), Investment Treaty Arbitration and International Law, Vol 1, Juris Publishing, New York, 2008, pp 14–20; and W Reisman and M Arsanjani, ‘The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes’ (2005) 19(2) ICSID Review Foreign Investment Law Journal 328 at 343 (‘Where statements are made either orally or distributed in writing in either hard copy or on-line, clearly promising certain conditions or treatment for foreign investors and such statements are made public and are made repeatedly and foreign investors relied on them, and governments do not retrieve or qualify those statements of commitment before the conclusion of contracts with foreign investors, they should … bind the state … Such a conclusion … reflects the fundamental policy of law, pacta sunt servanda’). See, eg, Enron Corp and Ponderosa Assets LP v Argentine Republic (ICSID Case No ARB/01/3) Award, 22 May 2007, at [274]. See also Eureko BV v Republic of Poland (UNCITRAL) Partial Award, 19 August 2005, at [246]; LG&E Energy Corp v Argentine Republic (ICSID Case No ARB/02/1) Decision on Liability, 3 October 2006, at [175]; Noble Energy Inc and MachalaPower Ci Ltd v Republic of Ecuador and Consejo Nacional de Electricidad (ICSID Case No ARB/05/12) Decision on Jurisdiction, 5 March 2008, at [157]. Micula v Romania (ICSID Case No ARB/05/20) Award, 11 December 2013, at [417]– [418]. (ICSID Case No ARB/02/1) Decision on Liability, 3 October 2006. LG&E Energy Corp, LG&E Capital Corp and LG&E International Inc v Argentine Republic (ICSID Case No ARB/02/1) Decision on Liability, 3 October 2006, at [169]–[175]. (ICSID Case No ARB/01/8) Award, 12 May 2005, at [296]–[303]. See also Noble Energy Inc and MacholaPower Cia Ltd v Ecuador and Consejo Nacional de Electricidad (ICSID Case No ARB/05/12) Decision on Jurisdiction, 5 March 2008, at [157]; Continental Casualty Co v Argentine Republic (ICSID Case No ARB/03/9) Award, 5 September 2008, at [286]– [303]. CMS Gas Transmission Co v Argentine Republic (ICSID Case No ARB/01/8) Decision on Annulment, 25 September 2007. CMS Gas Transmission Co v Argentine Republic (ICSID Case No ARB/01/8) Award 12 May 2005, at [89]–[95]. (ICSID Case No ARB/08/5) Decision on Jurisdiction, 2 June 2010. (ICSID Case No ARB/07/09) Decision of the Tribunal on Objections to Jurisdiction, 29 May 2009. BIVAC BV v Republic of Paraguay (ICSID Case No ARB/07/09) Decision of the Tribunal on Objections to Jurisdiction, 29 May 2009, at [141]. Compania de Angus del Aconquija SA and Vivendi Universal SA v Argentine Republic (ICSID Case No ARB/97/3) Decision on Annulment, 3 July 2002, at [95]–[101]. Eureko BV v Poland (Ad Hoc) Partial Award, 19 August 2005, at [244]–[260]; Noble Ventures Inc v Romania (ICSID Case No ARB/01/11) Award, 12 October 2005, at [46]– [62]; and SGS Société Genérale Surveillance SA v Republic of Paraguay (ICSID Case No ARB/07/29) Decision on Jurisdiction, 12 February 2010, at [168]–[171]. SGS Société Genérale Surveillance SA v Republic of Philippines (ICSID Case No ARB/02/6) Decision on Jurisdiction, 29 January 2004, at [113]–[129]; Bureau Veritas, Inspection,

17.

18.

19. 20. 21. 22. 23. 24.

25.

26.

27. 28. 29.

30.

Valuation, Assessment and Control, BIVAC BV v Republic of Paraguay (ICSID Case No ARB/07/09) Decision of the Tribunal on Objections to Jurisdiction, 29 May 2009, at [134]–[161], and Decision on Further Objections to Jurisdiction, 9 October 2012, at [269]. El Paso International Co v Argentine Republic (ICSID Case No ARB/03/15) Decision on Jurisdiction, 27 April 2006, at [70]–[82]; Pan American Energy LLC and BP Argentina Exploration Co v Argentine Republic (ICSID Case No ARB/03/3) Decision on Preliminary Objections, 22 July 2006, at [96]–[110]; Bayindir İnşaat Turizm Ticaret ve Sanayi AŞ v Islamic Republic of Pakistan (ICSID Case No ARB/03/29) Award, 27 August 2009, at [180]; and Tulip Real Estate Investment and Development Netherlands BV v Republic of Turkey (ICSID Case No ARB/11/28) Award, 10 March 2014, at [354]–[357]. Compare SGS Société Genérale Surveillance SA v Republic of Paraguay (ICSID Case No ARB/07/29) Decision on Jurisdiction, 12 February 2010, at [72]–[74]. SGS Société Genérale Surveillance SA v Islamic Republic of Pakistan (ICSID Case No ARB/01/13) Decision on Jurisdiction, 6 August 2003, at [163]–[173]; and Joy Mining Machinery Limited v Arab Republic of Egypt (ICSID Case No ARB/03/11) Award on Jurisdiction, 6 August 2004, at [81]. (ICSID Case No ARB/01/12) Award, 14 July 2006. Azurix Corp v Argentine Republic (ICSID Case No ARB/01/12) Award, 14 July 2006, at [52]. (ICSID Case No ARB/03/3) Decision on Jurisdiction, 22 April 2005. Impreglio SpA v Islamic Republic of Pakistan (ICSID Case No ARB/03/3) Decision on Jurisdiction, 22 April 2005, at [196]–[219]. (Ad Hoc) Partial Award, 19 August 2005. Eureko BV v Poland (Ad Hoc) Partial Award, 19 August 2005, at [127]–[134]. See also Noble Ventures Inc v Romania (ICSID Case No ARB/01/11) Award, 12 October 2005, at [68]–[86]. International Law Commission, ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts Adopted by the International Law Commission at its 53rd Session in 2001’, Art 4 (obligor is an organ of the State); Art 5 (obligor is a person or entity which is not an organ of the State but which is empowered by the law of that State to exercise elements of governmental authority and is acting in that capacity); Art 8 (obligor is a person or group of persons acting under the instruction of, or under the directional control of, the State); Art 11 (the State acknowledges and adopts the obligation as its own). Burlington Resources Inc v Republic of Ecuador (ICSID Case No ARB/08/05) Decision on Liability, 14 December 2012, at [211]–[234]; Azurix Corp v Argentine Republic (ICSID Case No ARB/01/12) Award, 14 July 2006, at [384]; Siemens AG v Argentine Republic (ICSID Case No ARB/02/8) Award, 17 January 2007, at [204]. (ICSID Case No ARB/01/8) Decision on Annulment, 25 September 2007. CMS Gas Transmission Co v Argentine Republic (ICSID Case No ARB/01/8) Decision on Annulment, 25 September 2007, at [92]–[93]. (ICSID Case No ARB/01/8) Decision on Annulment, 25 September 2007, at [92]–[93]; CMS Gas Transmission Co v Argentine Republic (ICSID Case No ARB/01/8) Award, 12 May 2005, at [303]. LG&E Energy Corp, LG&E Capital Corp and LG&E International Inc v Argentine Republic (ICSID Case No ARB/02/1) Decision on Liability, 3 October 2006, at [169]–[175]. In

Enron Corp and Ponderosa Assets LP v Argentine Republic (ICSID Case No ARB/01/3) Award, 22 May 2005, at [151]–[152], [211] and Sempra Energy International v Argentine Republic (ICSID Case No ARB/02/16) Award, 28 September 2008, at [241] the arbitral tribunals accepted that the claimants could bring a claim for ‘obligations’ owed to local companies. In both final awards the tribunals referred to their earlier decisions on jurisdictional issues, but none of the decisions clearly explain the manner in which the tribunals reached the conclusion that the umbrella clause applied to the relevant obligations.

[page 100]

Chapter 10

Free Transfer of Funds The concept of free transfer 10.1 Protection for international monetary transfers is fundamental to the success of any foreign investment. From the investor’s perspective, an investment can hardly be considered secure if the investor cannot freely make monetary payments out of (and into) the host State for any number of reasons related to its investment activities — for example, to purchase goods and materials, service debts, pay royalties or service fees, distribute profits to stakeholders or repatriate capital if an investment is sold. In many cases it is important for an investor to be free to make such payments as and when it sees fit, including in response to market and other external factors, without the need to secure host State approvals. Provisions in investment treaties guaranteeing this right are considered necessary to prevent the host State from being able to ‘effectively imprison’ the investor’s economic benefit from its investment.1 10.2 There are a number of legitimate reasons why host States are not always willing to allow unrestricted international monetary transfers. Influxes of capital can lead to inflation and cause unwanted currency appreciation. Large outflows of funds can affect foreign exchange reserves, currency value and the ability of the host State to meet its own financial commitments. In the event of a financial crisis, host States may need to take temporary measures that restrict transfers of funds in order to address balance of payment problems. 10.3 Almost every investment treaty from the Asia-Pacific region surveyed in Appendix 1 contains a provision guaranteeing the ability of a foreign investor to transfer money related to an investment both into

and out of a host State in a convertible currency and at the prevailing market exchange rate. Such provisions supplement a wider international regime regulating fund transfers and currency convertibility through various initiatives of the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD) and the [page 101] World Trade Organisation (WTO).2 Given the competing concerns of investors and host States, these provisions can vary considerably from treaty to treaty in terms of the scope of protection for monetary transfers. 10.4 This Chapter provides an introduction to the common features of free transfer provisions in investment treaties, including: their general scope; application to different types of payments; convertibility rights; timing issues; express exceptions; and an issues flowchart for identifying potential claims based on a breach of free transfer rights.

General scope of transfer rights 10.5 Almost all free transfer provisions in investment treaties refer to international monetary payments as ‘transfers’. This term is sometimes defined separately in the treaty. It is often made explicit that transfers (or ‘payments’) both into and out of the host State by an investor in relation to its investment are protected. For instance, the ASEAN– Australia–New Zealand Free Trade Agreement (FTA) provides: Each Party shall allow all transfers relating to a covered investment to be made freely into and out of its Area without delay.3

10.6 Other treaties contain a more limited right for the investor to ‘repatriate’ funds from the host State to its home State but do not protect transfers into the host State or from the host State to third States. This is common with Bilateral Investment Treaties (BITs) entered into by China and the United Kingdom.4 10.7 Some treaties limit the scope of this right by making international monetary transfers subject to domestic laws, which would appear to grant host State authorities discretion to regulate and possibly inhibit such transfers. For example, the Republic of Korea–Thailand BIT provides: Each Contracting Party shall guarantee to the nationals and companies of the other Contracting Party the free transfer of the capital of, and the returns from, their

[page 102] investments as well as the payment of compensation under Article 5, subject to the right of each Contracting Party to exercise equitably and in good faith powers conferred by its laws.5 (Emphasis added.)

10.8 The broadest examples of free transfer provisions appear to apply more generally to the investor’s ‘unrestricted’ ability to sell or dispose of its investment. For instance, the Hong Kong–Netherlands BIT provides: Each Contracting Party shall in respect of investments guarantee to investors of the other Contracting Party the unrestricted right to transfer their investments and returns abroad.6 (Emphasis added.)

10.9 As with all substantive rights provided in investment treaties, free transfer provisions can enjoy the benefit of most-favoured nation treatment, which can operate to ensure treatment equal to the most favourable free transfer provisions that the host State has agreed to with third States.7 Some free transfer provisions expressly envisage this possibility.8

Application to different types of payments 10.10

It is common for free transfer provisions to provide non-

exhaustive lists of transactions that are protected.9 These items generally fall into one of four categories: the principal amount of the investment; returns on the investment; payments necessary for investment activities; and compensation for expropriation or received as part of dispute settlement under the treaty. 10.11 For example, the Singapore–Indonesia BIT provides: Each Contracting Party shall ensure to investors of the other Contracting Party the free transfer, without delay, on a non discriminatory basis, the capital and the returns from any investments. Such transfers shall include, in particular, though not exclusively:

[page 103] a. b.

c. d. e. f. g. h. i. j.

profits, interests, dividends and other current income; funds necessary (i) for the acquisition of raw or auxiliary materials, semi fabricated or finished products, or (ii) to replace capital assets in order to safeguard the continuity of an investment; additional funds necessary for the development of an investment; funds in repayment of loans; royalties or fees; earnings of natural persons having the nationality of the other Contracting Party who work in connection with an investment; the proceeds of sale or liquidation of the investment; compensation for losses; compensation for expropriation; payments in respect of technical assistance, technical service and management fees, and payments in connection with contracting projects.10

Convertibility rights 10.12 Most investment treaties require transfers to be ‘free’ in the sense that the host State must allow transfers to be made in a ‘freely

convertible currency’.11 In some investment treaties the investor has the right to transfer funds in the same currency as the original investment.12 A few treaties refer to a ‘freely usable currency’.13 This phrase is defined by the International Monetary Fund (IMF) as those currencies that it deems to be widely traded in major exchange markets (currently, the US dollar, the euro, the British pound and the Japanese yen).14 10.13 The Australia–China BIT directly refers to the IMF in this respect: The transfers abroad of such funds and the earnings of personnel shall be permitted in freely convertible currencies as classified by the International Monetary Fund and shall be made at the exchange rate determined in accordance with the law of the Contracting Party which has admitted the investment on the date of transfer.15

10.14 In terms of the exchange rate to be used for protected transfers, investment treaties often provide for either the market16 or official17 rate. A few treaties refer [page 104] to the rate used for spot transactions. While some treaties clarify that the relevant exchange rate is that applicable on the date of transfer,18 it is presumably the same result where the treaty is silent on this issue. This follows from the general approach to the treatment of funds subject to conversion.

Timing of transfers 10.15 Most BITs provide that a ‘free’ transfer must take place ‘without delay’19 or without ‘undue’ or ‘unreasonable’ delay.20 Some treaties define ‘without delay’ to mean ‘such period as is normally required for the completion of the necessary formalities for the transfer of payment’.21 Arguably a reference to ‘free’ transfer without a further reference to the absence of delay is enough to require the transfer to be prompt. Some treaties provide for a more specific time period within which the host State must complete the transfer once requested by the

investor. Such periods are commonly 3022 or 60 days23 but can on occasion be up to six months.24

Express exceptions 10.16 Free transfer rights are often subject to express exceptions. The main exceptions found in Asia-Pacific investment treaties relate to compliance with domestic laws that are unrelated to foreign investment per se that impose ordinary restrictions on the free movement of capital to and from that State. 10.17 For example, Art 14.13(3) of the ASEAN–Australia–New Zealand FTA allows a host State to ‘delay or prevent such transfers through the equitable, non-discriminatory and good faith application’ of its laws and regulations on taxation, bankruptcy, securities, financial markets and the enforcement of court judgments. [page 105] 10.18 Another less common type of exception restricts transfers in the case of a balance of payments, currency or other external financial crisis.25 Some more recent Asia-Pacific BITs include provisions that explicitly allow for such restrictions, probably influenced by the experience of these States during the Asian financial crisis of the late 1990s. 10.19 For example, the Myanmar–Thailand BIT, which entered into force in June 2012, provides: Each Contracting Party shall guarantee to the investors of the other Contracting Party, after the fulfilment of fiscal obligations of the investors, and having taken in good faith such measures as necessary to safeguard the integrity and stability of its currency, external financial position and balance of payments, the free transfer, in a freely usable currency, of: …26

10.20 The Republic of Korea–Japan BIT provides more detailed guidance on permissible transfer restrictions that can be introduced by a host State in response to a financial crisis: 1.

A Contracting Party may adopt or maintain measures not conforming with its

2.

3.

obligations under paragraph 1 of Article 2 relating to cross-border capital transactions and Article 12 of this Agreement: (a) in the event of serious balance-of-payments and external financial difficulties or threat thereof; or (b) in cases where, in exceptional circumstances, movements of capital cause or threaten to cause serious difficulties for macroeconomic management, in particular, monetary and exchange rate policies. Measures referred to in paragraph 1 of this Article: (a) shall be consistent with the Articles of Agreement of the International Monetary Fund so long as the Contracting Party taking the measures is a party to the said Articles of Agreement; (b) shall not exceed those necessary to deal with the circumstances set out in paragraph 1 of this Article; (c) shall be temporary and shall be eliminated as soon as conditions permit; and (d) shall be promptly notified to the other Contracting Party. Nothing in this Agreement shall be regarded as altering the rights enjoyed and obligations undertaken by a Contracting Party as a party to the Articles of Agreement of the International Monetary Fund.27

[page 106]

Figure 10.1: Issues flowchart for identifying potential claims based on a breach of free transfer rights

_____________________________ 1. 2.

Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania (ICSID Case No ARB/05/22) Award, 24 July 2008, at [735]. It is beyond the scope of this text to consider the various other multilateral and bilateral agreements on international monetary transfers. For further general reading on this issue,

3.

4.

5. 6. 7. 8.

9.

10. 11.

12. 13. 14. 15. 16. 17.

18.

see M Waibel, ‘BIT by BIT — the Silent Liberalization of the Capital Account’, in C Binder, U Kriebaum, A Reinisch and S Wittich (eds), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer, Oxford University Press, New York, 2009, pp 497–518; and A Newcombe and L Paradell, Law and Practice of Investment Treaties, Kluwer Law International, The Netherlands, 2009, pp 400–4. ASEAN–Australia–New Zealand FTA, Art 14.13(1). See also, eg, Japan–Republic of Korea BIT, Art 12(1); Australia–Romania BIT, Art 7(1); and Japan–Vietnam BIT, Art 12. See, eg, China–Indonesia BIT, Art VII; China–Djibouti BIT, Art 3; and China–United Kingdom BIT, Art 6. See also India–Myanmar BIT, Art 7(1); India–Ghana BIT, Art 7(1). Republic of Korea–Thailand BIT, Art 6. See also China–Australia BIT, Art X(1); Thailand–United Kingdom BIT, Art 7(1); and Republic of Korea–Philippines BIT, Art 6. Hong Kong–Netherlands BIT, Art 6(1). See also, eg, India–United Kingdom BIT, Art 7; Hong Kong–Denmark BIT, Art 6(1). For a discussion of most-favoured nation provisions, see Chapter 7. Malaysia–Denmark BIT, Art 8(3) (‘The Contracting Parties undertake to accord to such transfer referred to in paragraph (1) of this Article a treatment as favourable as that accorded to transfer originating from investments made by its own nationals or companies or nationals or companies of any third State’). See also Singapore–Belgium–Luxembourg BIT, Art 6(2). See, eg, Indonesia–Laos Bit, Art 7; Mongolia–Netherlands BIT, Art 4. Although such lists are non-exhaustive, at least one arbitral tribunal seems to have placed strong reliance on such a list in finding that the host State had not breached the free transfer guarantee in the treaty because the relevant transfer that was impeded by the host State did not fall within the categories of protected transfers identified in the treaty: see Continental Casualty Co v Argentine Republic (ICSID Case No ARB/03/9) Award, 5 September 2008, at [237]–[245]. Singapore–Indonesia BIT, Art VI(1). Some treaties define this phrase. See, eg, Hong Kong–New Zealand BIT, Art 1(4) (‘Freely convertible currency’ means a ‘fully and freely convertible currency as identified by the International Monetary Fund or a currency that is widely traded in international foreign exchange markets’). Vietnam–United Kingdom BIT, Art 6. See, eg, Malaysia–Denmark BIT, Art 8; and Australia–Republic of Korea FTA, Art 11.28(2). See IMF Articles of Agreement, Art XXX(f); and IMF Decision No 11857-(98/130) on freely usable currencies, 17 December 1998, updated as of 31 December 2011. Australia–China Bit, Art X(2). See also Mongolia–United States BIT, Art IV(2). See, eg, Thailand–Argentina BIT, Art 7(2); Germany–Timor-Leste, Art 7(1); and Australia–Republic of Korea FTA, Art 11.28(2). See, eg, China–Uruguay BIT, Art 6(2); China–Vietnam BIT, Art 5(2). See also Malaysia– Netherlands BIT, Art 9(4) (providing for the official exchange rate of the host State on the date of transfer ‘in relation to the US dollar or to another freely convertible currency or to gold’ as a default mechanism for any failure to decide the applicable exchange rate as indicated by the IMF under Art 9(3)). See, eg, Philippines–Myanmar BIT, Art VI; Australia–China BIT, Art X(2); Hong Kong–

19.

20. 21. 22. 23. 24. 25.

26. 27.

New Zealand BIT, Art 7(2); China–Vietnam BIT, Art 5(2); Hong Kong–Denmark BIT, Art 6(1); China–Laos BIT, Art 5(2); and India–Indonesia BIT, Art 7(3). See, eg, Indonesia–Singapore BIT, Art VI; China–Canada BIT, Art 12(1); Mongolia– Republic of Korea BIT, Art 6(3); Netherlands–Indonesia BIT, Art 7; Republic of Korea– Mongolia, Art 6(3). See, eg, Australia–China BIT, Art X(1) (‘without undue delay’); Cambodia–Vietnam BIT, Art VI(1) (‘without unreasonable delay’). See, eg, Cambodia–Vietnam BIT, Art I(3). Chile–Indonesia BIT, Protocol. Germany–Timor-Leste BIT, Protocol, at [4]. Republic of Korea–China BIT, Protocol, Art 6. For examples of balance of payments provisions, see Australia–New Zealand Closer Economic Relations Trade Agreement, Protocol on Investment, Art 11; Australia– Singapore FTA, Ch 8, Art 14; China–Kuwait BIT, Art 6(4); China–Sri Lanka BIT, Art 8(3); China–Thailand BIT, Art 6(2); and Malaysia–United Kingdom BIT, Art 5. Myanmar–Thailand BIT, Art 7(1). Republic of Korea–Japan BIT, Art 17. See also Art 18(1) (‘Notwithstanding any other provisions of this Agreement, a Contracting Party may adopt or maintain prudential measures with respect to financial services, including measures for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by an enterprise providing financial services, to ensure the integrity and stability of its financial system’); and Japan–Vietnam BIT, Art 16(1).

[page 107]

PART III

Dispute Settlement Chapters 11 Disputes between the Contracting States to an Investment Treaty 12 Disputes between a Foreign Investor and the Host State 13 Compensation, Damages and other Remedies in Investor– State Disputes 14 Annulment, Set-Aside and Enforcement of Investor–State Arbitral Awards

[page 109]

Chapter 11

Disputes between the Contracting States to an Investment Treaty 11.1 Almost all the investment treaties surveyed in Appendix 1 contain provisions governing dispute settlement between the contracting States to the treaty. Unlike investor–State dispute settlement provisions, State–State dispute settlement provisions vary only slightly from treaty to treaty. 11.2 These provisions normally apply to any dispute as to the interpretation or application of the treaty itself. This accommodates a much narrower scope of possible disputes than for investor–State dispute settlement, which relates to alleged violations of substantive treatment guarantees afforded to protected ‘investments’. 11.3 The preferred dispute forum for State–State disputes is usually an arbitration proceeding before an ad hoc arbitral tribunal. This process is often preceded by a mandatory pre-arbitration negotiation period. 11.4 For example, the Mongolia–Republic of Korea BIT contains a typical formulation: (1)

(2)

(3)

Disputes between the Contracting Parties concerning the interpretation and application of this Agreement should, if possible, be settled through diplomatic channels. If a dispute between the Contracting Parties cannot be settled after six (6) months, it shall, upon request of either Contracting Party, be submitted to an arbitral tribunal. The arbitral tribunal shall be constituted for each individual case in the following way: …1

11.5 Other common features of State–State dispute settlement provisions include: appointment of a three-member arbitral tribunal, with each party appointing an arbitrator and the third arbitrator being of a different nationality to the two contracting States and appointed by agreement of the two party-appointed arbitrators; nomination of a default appointing authority for situations where the appointment process for the third arbitrator fails, most commonly the President of the International Court of Justice; [page 110] a direction that the arbitral tribunal is free to determine its own procedure (although this is the case as a matter of customary international law in any event); a direction that decisions of the arbitral tribunal shall be taken by majority vote; a direction that an arbitral award shall be final and binding; a direction as to allocation of costs, which is most commonly that each party shall bear its own costs and those of the arbitrator that it appoints, with all other costs of the arbitration to be borne equally by the parties. 11.6 Despite such provisions appearing in almost every investment treaty to date, State–State arbitrations have been exceedingly rare in practice. One of the main reasons for this is that investors now can arbitrate disputes directly with host States under modern investment treaties. This removes the need for an investor’s home State to espouse claims against a host State on the investor’s behalf, as was the case prior to modern investment treaties.2 11.7 The authors are only aware of four State–State arbitrations under investment treaties. Two of these cases involved treaty interpretation issues,3 one involved an application for declaratory relief4 and one involved a State espousing a direct claim against the other State on behalf of its own nationals.5

11.8 Given the relatively minor role for State–State dispute resolution in this field to date, the following Chapters will focus on the far more popular mechanism for dispute resolution under investment treaties: investor–State arbitration. _____________________________ 1. 2.

3.

4.

5.

Mongolia–Republic of Korea BIT, Art 10. For further reading on State–State dispute settlement under investment treaties, the authors recommend the following: K Vandevelde, Bilateral Investment Treaties: History, Policy and Interpretation, Oxford University Press, New York, 2010, pp 499–507; A Roberts, ‘State-to-State Investment Treaty Arbitration: A Hybrid Theory of Interdependent Rights and Shared Interpretive Authority’ (2014) 55(1) Harvard International Law Journal 1; J Wong, ‘The Subversion of State-to-State Investment Treaty Arbitration’ (2014) 53(1) Columbia Journal of Transnational Law 6; and C Trevino, ‘Stateto-State Investment Treaty Arbitration and Interplay with Investor–State Arbitration Under the Same Treaty’ (2013) 5(1) Journal of International Dispute Settlement 199. The first of these arbitrations concerning interpretation of an investment treaty was commenced by Peru against Chile under the Chile–Peru BIT, which is mentioned in the related investor–State arbitral award: Empresas Lucchetti, SA and Lucchetti Peru SA v Republic of Peru (ICSID Case No ARB/03/4) Award, 7 February 2005, at [7]. The other arbitration was brought by Ecuador against the United States under the Ecuador–United States BIT in the wake of an investor–State arbitral award under the same treaty in Chevron Corp and Texaco Petroleum Company v Republic of Ecuador (UNCITRAL, PCA Case No 34877) Partial Award on the Merits, 30 March 2010. While the arbitral tribunal’s decision in the State–State case has not been made public, Ecuador’s Request for Arbitration and the parties’ pleadings in the arbitration have been made public on the website of the Permanent Court of Arbitration ( accessed 24 March 2014). In the Matter of Cross-Border Trucking Services (Secretariat File No USA-MEX-98-200801) Final Report of the Panel, 6 February 2001, Mexico brought a successful State–State arbitration against the United States under the North American Free Trade Agreement (NAFTA) seeking a declaration that the United States had breached its national treatment and most-favoured nation treatment obligations under NAFTA by failing to phase out a moratorium on cross-border trucking and bus services provided by Mexican trucking firms. Republic of Italy v Republic of Cuba (Ad Hoc) Interim Award, 15 March 2005; Republic of Italy v Republic of Cuba (Ad Hoc) Final Award, 15 January 2008.

[page 111]

Chapter 12

Disputes between a Foreign Investor and the Host State 12.1 Investor–State dispute resolution provisions in investment treaties normally allow foreign investors with investments that qualify for protection under an applicable treaty to take to arbitration disputes with the host State arising out of their investments. This ability for private parties to hold host States directly to account for their actions (or actions of other entities for which they are responsible) before an international tribunal is an exceptional step for the protection of foreign investment under international law. 12.2 Before the advent of the standard terms in more recent investment treaties, the avenues available to aggrieved investors were limited to negotiations with the State, suing the State in its own domestic courts, or lobbying its home government to espouse a claim on its behalf against the host State in the International Court of Justice. One way that some investors tackled this issue was by entering into concession agreements directly with the host State that included arbitration provisions. Many modern investment treaties now contain a standing consent of the contracting States to arbitrate disputes directly with foreign investors. This is important and increases the effectiveness of protections afforded in the treaties. 12.3 This Chapter provides: a general overview of how investor–State dispute settlement takes place in practice; an introduction to the common features and procedural considerations related to investor–State dispute resolution under investment treaties; and a checklist of issues for considering investor–State dispute resolution options under an investment treaty.

What investor–State arbitration proceedings look like in practice Pre-arbitration phase 12.4 If an investor believes that the host State has taken, or has refrained from taking, measures towards its investment that breach a treatment obligation in [page 112] the applicable investment treaty, it will almost always have direct recourse to a mechanism for dispute resolution under the treaty. 12.5 If the investor elects to pursue a claim under the treaty, it will send formal written notice of its dispute to the host State. This ‘trigger letter’ usually marks the start of a pre-arbitration period for consultation and negotiation that allows the host State an opportunity to redress a treaty breach.

Arbitration proceedings 12.6 Should this pre-arbitration phase fail to resolve the dispute, the investor will normally be able to commence arbitration proceedings against the host State under the relevant dispute settlement provisions in the applicable investment treaty. 12.7 The procedure involved in investor–State arbitration closely resembles proceedings in international commercial arbitration. The investor will file a request for arbitration with an international arbitration institution or other ad hoc arbitral tribunal nominated in the treaty. An arbitral tribunal is then constituted in accordance with the relevant arbitration rules. Most arbitration rules provide for a threemember panel but a sole arbitrator is also possible in some instances. Once procedural ‘housekeeping’ matters concerning the conduct of the arbitration are settled by a procedural order from the tribunal, the

parties will then marshal evidence and submit written pleadings (normally in two rounds) according to an agreed timetable. 12.8 There are a number of common interlocutory procedural steps that might arise prior to a final hearing on the evidence depending on the circumstances of the case, such as requests to the tribunal for interim relief, extensions of time to submit pleadings, challenges to the impartiality of appointed arbitrators, bifurcation of jurisdiction and merits phases and the production of documents. A final hearing on the merits of the case takes place after all written submissions are filed. This hearing is conducted in a private venue, often a hotel, conference centre or hearing rooms offered by an arbitral institution. Fact witnesses and experts are able to be cross-examined in much the same way as in a national court. 12.9 After the final merits hearing and post-hearing submissions on the evidence (if requested or agreed with the tribunal), the arbitral tribunal will issue its final determination in the form of an award that binds the parties to the arbitration and can be enforced worldwide. The final award may then be supplemented by various post-award decisions of the tribunal, for example, to correct a mistake or further explain a point of confusion in the final award.

Duration and post-arbitration phase 12.10 The process from the registration of a request for arbitration to the rendering of a final award will normally take between three and four years according to the International Centre for Settlement of Investment Disputes (ICSID), which reports on its caseload in an annual report. 12.11 This does not account for possible post-award phases that normally add several years to the procedure, including annulment proceedings before an [page 113] annulment committee or enforcement proceedings in domestic courts.

Each of these post-award phases are considered in further detail in Chapter 14. 12.12 ICSID reported that as of 30 June 2014 it has registered a total of 420 ICSID Convention arbitrations, 189 of which resulted in a final award by an arbitral tribunal.1 The remaining concluded ICSID cases were either settled or discontinued before a final award, which suggests that some claimant investors may pursue investor–State arbitration for leverage in negotiations with the host State or other strategic reasons rather than the desire for an arbitral tribunal to finally decide their dispute.

Common features of investor–State dispute resolution provisions and related procedural considerations 12.13 Almost all of the treaties surveyed in Appendix 1 include provisions on investor–State dispute resolution. Each of these sets of provisions will be slightly different and should be considered on a caseby-case basis. 12.14 The balance of this Chapter addresses nine key questions that every investor with a potential claim against a host State under an investment treaty should appraise when deciding whether to commence arbitration proceedings against a host State under an investment treaty. We identify both procedural issues that are usually governed by the treaty language and applicable arbitration rules, and more practical issues concerning strategy and commercial decision-making.

What are the likely merits of the potential claim? 12.15 This issue should be tackled first and foremost. If the investor’s grievance with the host State does not give rise to reasonable prospects of success for a claim for breach of a substantive treatment

standard in an investment treaty, then it will not normally make sense to pursue a claim. 12.16 Specialist legal counsel are often engaged to evaluate a potential claimant’s prospects of success by way of a preliminary merits review or advice on evidence. This review will highlight the full spectrum of legal issues that are likely to be encountered in the proposed proceedings. It will expose the strengths and weaknesses of the evidence upon which the claim rests, at least at a preliminary stage. 12.17 This due diligence process will often include an early forecast of expected legal fees and arbitration costs, likely duration of proceedings, arbitration strategy and an initial assessment of potential remedies. These factors will underpin the global cost–benefit analysis of commencing arbitration, together with political sensitivities and the range of commercial factors that are unique to each investment [page 114] and investor. The greater the amount in dispute and capital expended in the lifetime of the investment, the more this review stage becomes an absolute necessity for potential claimants. In some cases, this due diligence exercise can take many months or even years before a formal claim is ever filed.

Are the conditions governing access to treaty benefits met? 12.18 An arbitral tribunal constituted under the dispute resolution provisions in an investment treaty is only competent to determine the rights as between disputants if it has jurisdiction to hear the dispute. Jurisdictional requirements are normally set out in the treaty and the applicable arbitration rules. 12.19 In general terms, there must be a legal dispute arising directly out of an ‘investment’ (subject-matter jurisdiction) between the host State and a protected ‘investor’ (personal jurisdiction) that arises when

the treaty is in effect and within any time limits imposed by the treaty (temporal jurisdiction). Each of these requirements is discussed in further detail in Chapter 2. 12.20 A potential claim brought by an investor can expect to be met with jurisdictional objections from the host State if even one of these prerequisites is not met. These issues are normally identified during the pre-arbitration due diligence exercise described above. Questions as to what constitutes an ‘investment’ under the treaty and who are the potential (and most appropriate) claimants that are protected ‘investors’ should be given careful consideration.

What is the nature and scope of consent of the host State’s consent to arbitration? 12.21 Consent to arbitration by the host State and the foreign investor is an indispensable requirement for any investment tribunal’s jurisdiction. As with any commercial arbitration, all parties must give their consent to the process. 12.22 A host State can give its consent to arbitrate disputes with a foreign investor through a number of different instruments including: an investment contract or a compromis directly with an individual investor; a domestic law on foreign investment; or an investment treaty. 12.23 The vast majority of investor–State arbitrations are commenced on the basis of host State consent that is made express in the dispute settlement provisions in investment treaties.

Unequivocal consent given through an investment treaty 12.24 The scope of consent envisaged by the wording of the arbitration clause needs to be considered carefully. On most occasions the consent to arbitrate will be stated in unequivocal terms. Most of the investment treaties surveyed in Appendix 1 contain broad and

inclusive consent clauses whereby ‘any dispute’ or ‘all disputes’ arising in connection with the investment can be submitted to arbitration. [page 115] 12.25 For example, the dispute resolution provisions in the Australia–Indonesia Bilateral Investment Treaty (BIT) apply to all disputes ‘between a Party and an investor of the other Party relating to an investment’.2 This covers disputes relating to alleged breaches of substantive protections in the treaty. Indeed an Australian investor has brought a dispute against Indonesia under this investment treaty that remains pending as at the time of publication.3 While the Australia– Indonesia BIT does not contain an umbrella clause, this type of broadly-worded provision in other treaties could potentially also extend to cover disputes under commercial or administrative contracts relating to the investment if the investment treaty contains an umbrella clause.4

Equivocal consent given through an investment treaty 12.26 Older investment treaties sometimes do not provide an unequivocal consent of the host State to arbitrate investment disputes. These treaties sometimes require the parties to enter a subsequent agreement to arbitrate the dispute. In such cases, an investor–State arbitration can only be commenced on an ad hoc basis if the parties agree to it when the dispute actually arises. For example, the Philippines–Netherlands BIT provides: The Contracting Party in the territory of which a national of the other Contracting Party makes or intends to make an investment shall assent to any request on the part of such national to submit, for conciliation or arbitration, to the Centre established by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States opened for signature at Washington on 18 March 1965 any dispute that may arise in connection with the investment.5 (Emphasis added.)

12.27 In that case, the host State is still presumably required to consent to arbitration if requested to do so by an investor.6 In other rare cases, the treaty wording suggests that consent is not required to be given. For example, the Malaysia–Sweden BIT provides: In the event of a dispute arising between a national or a company of one Contracting

party and the other Contracting party in connection with an investment in the territory of the other Contracting party, it shall upon the agreement by both parties to the dispute be submitted for arbitration to the International Centre for Settlement of Investment Disputes established under the Washington Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, dated March 18, 1965.7 (Emphasis added.)

[page 116]

Consent given through an investment treaty for specific types of claims 12.28 Other investment treaties limit the scope of the consent to arbitration by reference to specific subject matters. For example, the ASEAN–Australia–New Zealand Free Trade Agreement (FTA) limits the scope of consent to disputes involving specific treatment standards and requires that the investment has been damaged as a result of the alleged breaches.8 12.29 Many of China’s investment treaties are more restrictive, limiting the investor’s recourse to arbitration to ‘a dispute involving an amount of compensation resulting from expropriation’ of the investment.9 This wording might allow a tribunal to determine related issues of liability in respect of whether an investment was actually expropriated.10 All other disputes, however, are to be settled amicably or referred to domestic courts. Clauses such as this offer little comfort to aggrieved investors and highlight the importance of considering scope of consent clauses as part of the investor’s pre-arbitration (and pre-investment) due diligence.

Does the treaty impose any procedural or other prerequisites to arbitration? Pre-arbitration ‘cooling-off’ periods 12.30 Investment treaties commonly provide that the parties must make an attempt to settle a dispute amicably through negotiation,

conciliation or mediation before resorting to arbitration. Over 85 percent of the investment treaties surveyed in Appendix 1 contain such a provision, normally in the first few clauses of the investor–State dispute settlement provisions. The most common requirement is for the observance of a three- or six-month ‘cooling-off’ period between the investor’s first written notification to the host State of the dispute under the treaty (known as a ‘trigger letter’) and the commencement of arbitral proceedings. 12.31 For example, the Philippines–Republic of Korea BIT provides: (1)

(2)

Disputes between the Contracting Parties concerning the interpretation and application of this Agreement should, if possible, be settled through diplomatic channels or other amicable means. If a dispute between the Contracting Parties cannot thus be settled within a period of three (3) months, it shall upon the request of either Contracting Party be submitted to an arbitral tribunal.11

12.32 Such requirements are more than diplomatic nicety. The waiting periods in investment treaties would seem to be best understood as mandatory and jurisdictional [page 117] in nature.12 Arbitral tribunals have taken seriously jurisdictional objections based on insufficiency of written dispute notices.13 12.33 In some cases, arbitral tribunals have declined their own jurisdiction to decide a dispute on the basis that the claimant investor failed to observe a stipulated negotiation period before submitting initiating the arbitral proceedings.14 This view defers to the underlying rationale behind a ‘cooling-off’ period: to put the host State on notice of the alleged treaty claims and provide an opportunity for it to resolve a dispute before it reaches arbitration. The average time for ‘coolingoff’ periods in the investment treaties surveyed in Appendix 1 is just under six months.

Pursuit of local remedies 12.34

Aside from ‘cooling-off’ periods, an investor might also have to

abide by a requirement to exhaust local judicial and administrative avenues of redress in the host State before initiating arbitral proceedings under the treaty. This requirement is familiar to Stateespoused investment claims prior to the advent of modern investment treaties. The vast majority of recent investment treaties have dispensed with this requirement. Nonetheless, some investment treaties contain provisions that condition the host State’s consent to arbitrate on the investor first exhausting all the remedies available in local courts or administrative tribunals.15 12.35 For example, several of China’s investment treaties require the investor to pursue an administrative review procedure in Chinese courts for a specific time period, failing which it can arbitrate the dispute in accordance with the treaty.16 As discussed in Chapter 7, it is a matter of controversy whether an investor can circumvent this or other unfavourable procedural requirements in dispute settlement provisions through the application of most-favoured nation treatment. [page 118]

What dispute resolution forums are available and appropriate? 12.36 Investor–State dispute settlement provisions will almost always specify the forum or fora in which an investor can commence arbitration against the host State. Some treaties defer to a single forum.17 More commonly, several choices of fora are available. 12.37 For example, the Japan–Republic of Korea BIT provides: If the investment dispute cannot be settled within three months from the date on which the investor requested the consultation or negotiation in writing and if the investor concerned has not submitted the investment dispute for resolution under paragraph 2(a) of this Article or judicial or administrative settlement, the investor concerned may submit the investment dispute for settlement by binding arbitration: (a) to the Centre, if both Contracting Parties are parties to the ICSID Convention; (b) in accordance with the UNCITRAL Arbitration Rules; or (c) if agreed by both parties to the dispute, to any other arbitration institution

or in accordance with any other arbitration rules.18

Common arbitration forums 12.38 The most common forum listed in Asia-Pacific investment treaties is ICSID, a specialised World Bank institution established in 1965 by the ICSID Convention. Over 70 percent of the investment treaties surveyed in Appendix 1 provide for arbitration under the ICSID rules. Other common forums are the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL) and the ICSID Additional Facility (which was set up by ICSID in 1978 to facilitate arbitrations that do not meet all of the jurisdictional requirements imposed on access to ICSID through the ICSID Convention). 12.39 Each of these fora is subject to its own procedural rules that govern matters such as the constitution and powers of the arbitral tribunal, oral and written proceedings in the arbitration, the form and content of arbitral awards and procedures for annulment, revision, interpretation or supplementation of arbitral awards. These issues are dealt with from time to time in dispute settlement provisions of investment treaties.19 Each set of arbitration rules come with pros and cons depending on the circumstances of a given case. For example, arbitrations brought under the ICSID Convention will be subject to additional jurisdictional requirements imposed by Art 25 of the ICSID Convention. [page 119]

The investor’s choice between different arbitration forums 12.40 Most treaties that provide multiple possibilities for resolving investor–State disputes allow the investor to choose between them. Even where the investment treaty provides options for dispute settlement in local courts as an alternative to investor–State arbitration,

in most cases it is clear that the investor is free to choose its preferred option.20 12.41 In some cases, however, the election to proceed with one of the options under the treaty is deemed to be final and irrevocable under what are known as ‘fork-in-the-road’ provisions. The purpose of these clauses is to ensure the efficient disposition of disputes by preventing the same dispute from being brought either consecutively or simultaneously in multiple fora. 12.42 For example, the Japan–Republic of Korea BIT contains an example of a fork-in-the-road provision: Unless otherwise agreed by both parties to the investment dispute, once the investor concerned submits the investment dispute for resolution under paragraphs 2 and 3 of this Article, the investor concerned may not submit the investment dispute for settlement by any of the other alternatives set out in paragraphs 2 and 3 of this Article.21

12.43 Although such clauses might appear onerous on the investor, they do not always prevent multiple proceedings from arising in practice. This type of provision is usually understood to prevent an investor from resubmitting the same dispute to international arbitration if the investor has already elected to pursue proceedings in the local courts of the host State. The key issue is whether the claims brought in the later arbitration are on a ‘different road’ to the local court proceedings or whether those two sets of claims have the ‘same object, parties and cause of action’.22 In practice, it is only in very rare cases that the later arbitration has identical attributes such that it is barred by a fork-in-the-road clause.23

Do the applicable arbitration rules provide for the possibility of interim relief? 12.44 While investment treaties are normally silent on this issue, most arbitration rules expressly include a power for arbitral tribunals to grant interim relief (also known as provisional or interim measures) in certain circumstances. [page 120]

12.45 Under most arbitration rules, any party to a dispute may request an order from the arbitral tribunal for interim relief to compel performance of some kind from another party to the arbitration prior to a final award on the merits of the underlying claims. These orders are generally designed to secure the rights of a party, preserve property that is the subject matter of the dispute or to maintain the status quo as between the parties pending the final resolution of the dispute. 12.46 The main types of interim relief that investment treaty tribunals commonly grant include orders for: the preservation of evidence, whether documentary or testimonial, while the arbitration is pending;24 non-disclosure of information relating to the dispute to the public or media pending the outcome of the arbitration;25 suspension of related proceedings that are pending in other forums, such as proceedings in domestic courts regarding reorganisation or bankruptcy of the investor, criminal complaints against the investor or the enforcement of a debt or contract upon which a treaty claim is based; and security for costs, whereby a party is required to post security or an advance on costs in cases where there it is proven that they are unable or unwilling to meet the costs of an adverse final award.26 12.47 In general terms, interim relief will normally be granted where the requesting party can show urgency, a good prima facie case on the merits of the dispute and necessity of the requested relief in order to avoid irreparable harm. The precise criteria for the granting of interim relief vary under the different arbitration rules, which should be considered carefully on a case-by-case basis.27 [page 121]

What is the applicable law? 12.48 The applicable law governing the matters in dispute in an arbitration is an essential element of the agreement to arbitrate. It

provides the boundaries within which an arbitral tribunal can conduct itself. It is important to understand how the applicable law can impact the strength of potential claims.

Applicable law clauses in investment treaties 12.49 A minority of investment treaties include an express indication as to the law that will apply to the merits of disputes under the treaty. A typical applicable law clause in an investment treaty will refer to a combination of legal rules including: the treaty itself; general principles of international law; domestic law of the host State; and the provisions of an investment agreement between the investor and the host State, if any. 12.50 Arbitral tribunals will normally give effect to an express choice of law in an agreement or a treaty because to do otherwise would be a derogation from their designated function and could give rise to a ground for non-enforcement or annulment of their awards. Once an investor accepts the host State’s offer to arbitrate under the treaty by commencing arbitration it also accepts any provision on applicable law in the treaty. The rule on applicable law in the treaty becomes part of the arbitration agreement between the investor and the host State, leading to an agreed choice of law. 12.51 The China–Mongolia BIT provides an example of a typical applicable law clause: The tribunal shall adjudicate in accordance with the law of the Contracting State to the dispute accepting the investment including its rules on the conflict of laws, the provisions of this Agreement as well as the generally recognized principles of international law accepted by both Contracting States.28

12.52 Domestic law is almost never designated as applicable in isolation. It would undermine the effectiveness of a dispute resolution forum outside the sway of the host State if the latter could influence the domestic laws that would apply to the detriment of the foreign investor. Certain treaty provisions are sometimes expressly subject to domestic law, such as the admission of investments and free transfer provisions.

Law applicable to the merits of a dispute when the treaty is silent 12.53 In most cases investment treaties are silent as to the law that will govern disputes between investors and the host State. When faced with this situation in practice arbitral tribunals normally apply the provisions of the investment treaty itself and other sources of international law in deciding the merits of the dispute. [page 122] 12.54 The substantive provisions of the relevant investment treaty are the primary applicable law in investor–State disputes as they contain the primary obligations of investment protection that the investor will seek to enforce. International law is a part of the applicable law in these cases because investment treaties are international law instruments. The Vienna Convention on the Law of Treaties provides that treaties are ‘governed by international law’ and must be interpreted in light of ‘any relevant rules of international law applicable’.29 12.55 Applicable arbitration rules can also provide guidance on the law applicable to a dispute where the investment treaty is silent on this issue. For example, the ICSID Convention provides a default rule on applicable law for ICSID arbitrations: The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.30

12.56 The other main arbitral forum for investment treaty disputes — arbitration under the UNCITRAL Arbitration Rules — requires the arbitral tribunal to determine the applicable law by way of relevant conflict of law rules if the parties have not chosen an applicable law. The UNCITRAL Arbitration Rules provides: 1. The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate.31

The role of host State law 12.57 Domestic law will normally be relevant in determining the existence of an investment that qualifies for protection under the investment treaty. While the treaty itself will set out the particular assets that can comprise an ‘investment’, those assets must exist, and be validly held by the investor as a matter of the law of the host State.32 Domestic law also has a role to play in determining whether an investor in fact possesses the nationality of its home State. It is also relevant in determining whether there has [page 123] been a breach of a commercial or administrative contract governed by host State law where breach of that contract forms part of the investor’s claims in a treaty dispute.33 12.58 While domestic law will often play a role in establishing certain threshold jurisdictional and factual issues about the nature and scope of the investment, international law is undoubtedly the law applicable to the liability of the host State for alleged breaches of the investment treaty. This is a question of the host State’s international responsibility and is judged against the rules in the treaty and other sources of international law.34 International law also has a primary role to play in providing the rules by which arbitral tribunals must interpret the provisions of investment treaties. 12.59 There is some controversy as to the interplay between host State law and international law where the investment treaty or the applicable arbitration rules refer to both as part of the applicable law. In particular the proper interpretation of the role of international law under Art 42(1) of the ICSID Convention, which applies to ICSID arbitrations, has become a widely debated topic in arbitral awards and academic commentary. One view is that international law in this context is meant to complement host State law where there is a gap in the law, while another view suggests that international law plays a corrective role if the relevant host State law does not conform with

international law. A third view attributes equal weight to both international law and host State law.35 This controversy will likely play out in the coming years.

Role of prior decisions in other investment treaty disputes 12.60 Although it is well established that there is no doctrine of precedent in international law equivalent to stare decisis in common law systems, arbitral tribunals and legal counsel routinely take guidance from decisions in previous investment treaty disputes. Arbitral tribunals are convened on an ad hoc basis by consenting parties to resolve the dispute presented by those parties. Arbitrators are not judges bound by rules established by courts in a particular legal system. Nonetheless previous decisions are often referenced in investment treaty disputes as examples for how similar issues have been resolved in other cases and as points of comparison. 12.61 This means that disputing parties will often look to previous decisions as a means of supporting their legal arguments. Arbitral tribunals are often cautious to qualify that their reliance on earlier decisions is not to the detriment of their [page 124] independent exercise of judgment in the case before them. For example, the arbitral tribunal in the Saipem SpA v People’s Republic of Bangladesh dispute indicated: The Tribunal considers that it is not bound by previous decisions. At the same time, it is of the opinion that it must pay due consideration to earlier decisions of international tribunals. It believes that, subject to compelling contrary grounds, it has a duty to adopt solutions established in a series of consistent cases. It also believes that, subject to the specifics of a given treaty and of the circumstances of the actual case, it has a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law.36

Does the treaty impose a time limit on bringing

claims? 12.62 Some investment treaties in the Asia-Pacific region (most commonly, the investment chapters in FTAs and closer economic partnerships) impose time limits on when certain claims must be brought. These are akin to statutes of limitation in common law jurisdictions. Claims brought outside such time limits run the risk of being barred as outside the jurisdiction of an arbitral tribunal convened to hear the dispute under the treaty. 12.63 For example, the ASEAN–Australia–New Zealand FTA imposes a three-year time limit on claims starting from the date when the investor first has knowledge of a breach: The submission of a dispute as provided for in Article 20 (Claim by an Investor of a Party) to conciliation or arbitration under Article 21.1(b) to (e) (Submission of a Claim) in accordance with this Section, shall be conditional upon: (a) the submission of the investment dispute to such conciliation or arbitration taking place within three years of the time at which the disputing investor became aware, or should reasonably have become aware, of a breach of an obligation referred to in Article 20(a) (Claim by an Investor of a Party) causing loss or damage to the disputing investor or a covered investment; …37

Does the treaty limit the types of relief that an arbitral tribunal can grant? 12.64 Investment treaties occasionally circumscribe the types of remedies that can be granted to the parties to an investor–State dispute by an arbitral tribunal. The importance of such restrictions will depend on the relief sought in each case. 12.65 For example, the China–New Zealand FTA restricts the relief possible for a final arbitral award to ‘monetary damages and any applicable interest’, restitution of property and/or arbitration costs, while expressly prohibiting awards of punitive damages.38 [page 125]

Figure 12.1: Issues flowchart for considering the scope of investor–State dispute resolution provisions in an investment treaty

_____________________________ 1. 2.

ICSID, Annual Report (2014), p 26. Australia–Indonesia BIT, Art XI.

3.

4. 5. 6. 7. 8. 9. 10.

11. 12.

13.

14.

15.

16.

17. 18. 19.

20. 21. 22.

See Churchill Mining PLC and Planet Mining Pty Ltd v Republic of Indonesia (ICSID Case Nos ARB/12/14 and 12/40). Planet Mining, together with its United Kingdom-based parent company Churchill Mining PLC, commenced ICSID arbitration under the Australia–Indonesia BIT after Indonesia revoked certain mining licences related to a coalmining project in the East Kalimantan province of Indonesia. For a discussion of umbrella clauses, see Chapter 9. Philippines–Netherlands BIT, Art 9(1). See also, eg, Australia–Laos BIT, Art 12(3)(a). Malaysia–Sweden BIT, Art 6. ASEAN–Australia–New Zealand FTA, Ch 11, Art 20. See also Japan–Laos BIT, Art 17(1). See, eg, China–Indonesia BIT, Art 9(3); China–Japan BIT, Art 11(2); China–Vietnam BIT, Art 8(3). This was the position taken by an arbitral tribunal considering similar working in the China–Peru BIT, Art 8(3): Tza Yap Shum v Republic of Peru (ICSID Case No ARB/07/6), Decision on Jurisdiction, 19 June 2009, at [188]. Philippines–Republic of Korea BIT, Art 8. The contrary view has been adopted in other arbitral awards, namely that the negotiation and amicable settlement provisions are ‘procedural and directory in nature, rather than jurisdictional and mandatory’. See Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania (ICSID Case No ARB/05/22) Award, 24 July 2008, at [343] (and surrounding discussion in [338]–[350]). See, eg, Vladimir Berschader and Moise Berschader v Russia (SCC Case No 080/2004) Award, 21 April 2006, at [50]–[54], [98]–[103]; and ADF Group v United States (ICSID Case No ARB(AF)/00/1) Award, 9 January 2003, at [127]–[139]. Murphy Exploration and Production Co International v Republic of Ecuador (ICSID Case No ARB/08/4) Award on Jurisdiction, 15 December 2010, at [90]–[157]; Burlington Resources Inc v Republic of Ecuador (ICSID Case No ARB/08/5) Decision on Jurisdiction, 2 June 2010, at [310]–[318], [332]–[340]. See, eg, United Arab Emirates–Vietnam BIT, Art 10(2) (‘In connection with any matter regarding this Agreement, a party may request the exhaustion of local remedies, administrative or judicial remedies as the condition of its consent to arbitration’). China–Czech Republic BIT, Art 9(3) (three months); China–Germany BIT, Art 9(2) and Protocol 6 (three months); China–Columbia BIT, Annex C21 (three months; treaty not yet ratified). See, eg, Mongolia–Singapore BIT, Art 13(2) (which provides for arbitration pursuant to the rules of the ICSID). Japan–Republic of Korea BIT, Art 15(3). See, eg, ASEAN–Australia–New Zealand FTA, Ch 11, Art 23 (appointment of arbitrators), Art 24 (consolidation of multiple proceedings), Art 25 (conduct of the arbitration) and Art 28 (form and content of arbitral awards). See, eg, India–Indonesia BIT, Art 9(2); and Cambodia–Vietnam Bit, Art VIII(2). Japan–Republic of Korea BIT, Art 15(3). See, eg, Pantechniki SA Contractors & Engineers v Republic of Albania (ICSID Case No ARB/07/21) Award, 30 July 2009, at [60]–[61]; Toto Costruzioni Generali SpA v Lebanon

23.

24.

25.

26.

27.

28. 29.

30. 31.

32.

(ICSID Case No ARB/07/12) Decision on Jurisdiction, 11 September 200, at [211]; and Hulley Enterprises Ltd (Cyprus) v Russian Federation (UNCITRAL, PCA Case No AA 226) Interim Award on Jurisdiction and Admissibility, 30 November 2009, at [597]–[599]. See, eg, Alex Genin v Estonia (ICSID Case No ARB/99/2) Award, 25 June 2001, at [332]; and Pantechniki SA Contractors & Engineers v Republic of Albania (ICSID Case No ARB/07/21) Award, 30 July 2009, at [61]–[68]. This has been described as ‘one of the most common forms of interim relief’. See Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania (ICSID Case No ARB/05/22) Procedural Order No 1, 31 March 2006, at [84]. See also Chevron Corporation and Texaco Petroleum Corp v Republic of Ecuador (UNCITRAL, PCA Case No 2009-23), Order on Interim Measures, 14 May 2010, Point 1(vi). Compare Railroad Development Corp v Republic of Guatemala (ICSID Case No ARB/07/23) Decision on Provisional Measures, 15 October 2008, at [35]–[36]. Non-disclosure orders are usually designed to ensure non-aggravation of the dispute, maintenance of the status quo between the parties and protection of procedural integrity during the arbitration. See, eg, Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania (ICSID Case No ARB/05/22) Procedural Order No 3, 29 September 2006, at [112]– [165]; EDF (Services) Ltd v Romania (ICSID Case No ARB/05/13), Procedural Order No 2, 30 May 2008, at [34]–[54]; and Abaclat v Argentine Republic (formerly Giovanni Beccara v Argentine Republic) (ICSID Case No ARB/07/5) Procedural Order No 3 (Confidentiality Order), 27 January 2010, at [74]–[153]. An order for security for costs is an exceptional remedy. The authors are only aware of one publicly available decision of an arbitral tribunal in an investment treaty dispute granting such an order. See RSM Production Corp v Saint Lucia (ICSID Case No ARB/12/10) Decision on Saint Lucia’s Request for Security for Costs with Assenting and Dissenting Reasons, 13 August 2013, at [90]. For example, compare the requirements in ICSID Convention for ICSID disputes Art 47 and UNCITRAL Rules (2010 and 1976) Art 26 that will apply to UNCITRAL disputes. See generally, on interim measures in investment treaty disputes, C Mouawad and E Silbert, ‘A Guide to Interim Measures in Investor–State Arbitration’ (2013) 29(3) Arbitration International 381. China–Mongolia BIT, Art 8(7). See Vienna Convention on the Law of Treaties, opened for signature 23 May 1969, 1155 UNTS 331 (entered into force 27 January 1980), Arts 2(1)(a) and 31(3)(c). For further discussion on treaty interpretation, see generally, R Weeramantry, Treaty Interpretation in Investment Arbitration, Oxford University Press, New York, 2012; and A Newcombe and L Paradell, Law and Practice of Investment Treaties, Kluwer Law International, The Netherlands, 2009, pp 109–119. ICSID Convention, Art 42(1). UNCITRAL, Arbitration Rules (2010), Art 35(1). See also UNCITRAL Arbitration Rules, (1976); Permanent Court of Arbitration (PCA) Arbitration Rules (2012), Art 35; Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (2010), Art 24(1); and Singapore International Arbitration Centre Arbitration Rules (2013), Art 27. See, eg, the arbitral tribunal’s comments in Emmis International Holding, BV, Emmis Radio Operating BV, MEM Magyar Electronic Media Kereskedelmi és Szolgáltató Kft v Republic of Hungary (ICSID Case No ARB/12/2) Decision on Respondent’s Application for Bifurcation, 13 June 2013, at [44] (citing Z Douglas, The International Law of Investment

33. 34. 35.

36. 37.

38.

Claims, Cambridge University Press, New York, 2009, p 55). See also Tidewater Investment SRL and Tidewater Caribe CA v Bolivarian Republic of Venezuela (ICSID Case No ARB/10/5) Award, 13 March 2015, at [116]–[117]. See, eg, Micula v Romania (ICSID Case No ARB/05/20) Award, 11 December 2013, at [417]–[418] (in the context of an umbrella clause claim). See discussion in Z Douglas, n 32 above, at [141]–[161]. It is beyond the scope of this text to explore this controversy in greater detail. For further discussion, see Z Douglas, note 32 above, Ch 2 ‘Applicable Laws’, at [77]–[270]; A Newcombe and L Paradell, Law and Practice of Investment Treaties, Kluwer Law International, The Netherlands, 2009, pp 92–102; Y Banifatemi, ‘Law Applicable in Investment Treaty Arbitration’, in K Yannaca-Small (ed), Arbitration Under International Investment Agreements: A Guide to the Key Issues, Oxford University Press, New York, 2010, pp 191–210; and C Schreuer, ‘Jurisdiction and Applicable Law in Investment Treaty Arbitration’ (2014) 1(1) McGill Journal of Dispute Resolution 1. Saipem SpA v People’s Republic of Bangladesh (ICSID Case No ARB/05/7) Award, 30 June 2009, at [90]. ASEAN–Australia–New Zealand FTA, Art 22. See, eg, India–Republic of Korea Comprehensive Economic Cooperation Agreement, Art 10.21(5); and China–New Zealand FTA, Art 154(1). China–New Zealand FTA, Art 158.

[page 126]

Chapter 13

Compensation, Damages and other Remedies in Investor– State Disputes 13.1 The potential remedies available for a host State’s breach of an investment treaty are understandably of great significance to every investor considering whether to pursue a claim under an investment treaty. This Chapter introduces the legal standards and methods of valuation most commonly used in investment treaty disputes with the aim of canvassing the main concepts relevant to this subject. The bibliography of further reading materials contains sources that provide more detailed analysis of these concepts. 13.2 The main interest for most aggrieved investors is recovering monetary compensation. This will generally mean ‘fair market value’ or something similar in the case of lawful expropriation. For breaches of treaty standards (including expropriation), monetary compensation is not confined to market value or diminution in market value. As will be explained, in cases of international wrongs, the investor is entitled to full reparation and has available the full suite of international means by which reparation may be achieved. 13.3 This Chapter introduces: common rules in investment treaties for assessing compensation for lawful expropriation; the legal standard of ‘full reparation’ under international law for breaches of an investment treaty; the types of remedies that can comprise ‘full reparation’, including

monetary damages; limits on monetary damages awards; limits in investment treaties on the types of remedies available for breach; the treatment of legal fees and costs; common methods for valuing the monetary compensation and damages; and a checklist of issues for considering the availability of damages and other remedies in investment treaty disputes. [page 127]

Rules in the treaty governing compensation for lawful expropriation 13.4 As explained in Chapter 3, it is common for investment treaties to include provisions dealing with the compensation available to investors when the host State has lawfully expropriated or requisitioned part or all of their protected investment. Many treaties refer to ‘prompt, adequate and effective’ compensation for expropriated investments before then defining exactly what is meant by that phrase. Most treaties refer to ‘market value’ or ‘fair market value’ immediately before expropriation as being ‘prompt, adequate and effective’ compensation. 13.5 The ASEAN–Australian–New Zealand Free Trade Agreement (FTA) provides an example of a clearly drafted set of rules on prompt, adequate and effective compensation for expropriation: 2

The compensation referred to in paragraph 1(c) shall: (a) be paid without delay; (b) be equivalent to the fair market value of the expropriate investment at the time when or immediately before the expropriation was publicly announced, or when the expropriation occurred, whichever is applicable; (c) not reflect any change in value because the intended expropriation had become known earlier; and (d) be effectively realisable and freely transferrable between the territories of the Parties.1

13.6 The main approaches to valuing the fair market value of an investment are introduced below at 13.44–13.64. 13.7 As explained in Chapter 3, there are a number of ways in which an act amounting to expropriation may be unlawful. These include the failure to pay prompt, adequate and effective compensation. The failure to meet the treaty standard for compensation is a breach of the treaty — it is unlawful in international law. 13.8 The measure of compensation for lawful expropriation does not limit the compensation that an investor may recover for losses caused by unlawful expropriation. Compensation for unlawful expropriation is assessed in the same way as compensation for any other breach of the treaty standards. As explained in 13.44–13.50, this may have a significant affect on the amount of monetary compensation recoverable for expropriation. This is particularly so in cases of covert or regulatory expropriation because, in these cases, host States inevitably fail to provide compensation. Hence, by definition, these expropriations will be unlawful and require reparation, not payment of fair market value.2 [page 128]

Legal standard for assessing breaches of an investment treaty 13.9 Almost all investment treaties are silent on the issue of the legal standard for assessing remedies for breaches of the treaty by the host State. Arbitral tribunals that have found host States liable for breaches of substantive treatment guarantees in investment treaties have generally considered the issue of remedies by building on existing principles of international law. In doing so arbitral tribunals will often distinguish between breaches of an investment treaty that substantially or totally deprive the investor of its investment and those that diminish the value of the investment without leading to a total deprivation of property rights. 13.10 The starting point for the analysis must be the principle of

customary international law that a State must make ‘full reparation’ for its breaches of its international obligations that cause damage.3 The principle of ‘full reparation’ was described in a decision of the Permanent Court of International Justice (PCIJ) in the seminal Chorzów Factory case: The essential principle contained in the actual notion of an illegal act — a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals — is that reparation must, as far as possible, wipe-out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.4 (Emphasis added.)

13.11 This general principle from the Chorzów Factory case, that full reparation is the appropriate remedy for an internationally wrongful act by a State, has since been codified by the International Law Commission in its rules on State responsibility (the ILC Articles). The ILC Articles are now almost universally considered as a codification of customary international law on State responsibility. The ILC Articles describe the obligation of reparation for an internationally wrongful act by a State as follows: 1. 2.

The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act. Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.5

[page 129]

Remedies that can comprise full reparation for a treaty breach Monetary damages 13.12 Monetary damages is by far the most common form of relief sought by foreign investors who bring claims under investment treaties. 13.13 While the ILC Articles identify restitution of property as the primary way of ensuring full reparation, it is not always possible, in practice, to restore an ‘investment’ that has been taken or damaged.

Where restitution is not possible, full reparation consists of monetary compensation equal to the value of restitution in kind, being the difference between (i) the value of the investment had the measures complained of not been taken, and (ii) the value of the investment in light of the measures. 13.14 The ILC Articles specifically provide for this: 1.

2.

The State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution. The compensation shall cover any financially assessable damage including loss of profits insofar as it is established.6

13.15 This standard of compensation applies to all breaches of investment treaties (eg, fair and equitable treatment, full protection and security, etc), as well as unlawful expropriations. Accordingly, ‘compensation’ is used in two senses. First, it describes the obligation to pay compensation for lawful expropriations. That is, the fair market value of the investment on the date of the expropriation. Second, it describes the measure of compensation required to make restitution for an unlawful act of the State. The difference between the two measures of compensation is explained in 3.43–3.48, 13.7–13.8 and 13.47–13.50.

Non-pecuniary remedies: specific performance and injunctive relief 13.16 Some investment treaties expressly exclude the availability of non-pecuniary remedies. For example, the ASEAN–Australia–New Zealand FTA provides: 1.

Where a tribunal makes a final award against either of the disputing parties, the tribunal may award, separately or in combination, only: (a) monetary damages and any applicable interest; and (b) restitution of property, in which case the award shall provide that the disputing Party may pay monetary damages and any applicable interest in lieu of restitution.7

13.17 Most treaties, however, do not limit the power of an arbitral tribunal hearing a dispute under the treaty to award non-pecuniary remedies. These types of remedies are, in any event, less commonly sought by investors than monetary compensation.

[page 130]

Specific performance and injunctive relief 13.18 When not expressly excluded by the relevant treaty or applicable arbitration rules, non-pecuniary remedies such as specific performance and injunctive relief should be considered by investors as a possible form of ancillary relief to a primary claim for monetary damages. 13.19 Although specific performance has only rarely been granted by investment treaty tribunals, some tribunals have considered themselves empowered under international law to order specific performance of a host State’s obligations, especially where that obligation (eg, a contract) remains in force.8 Subject to the provisions of the applicable investment treaty, investment treaty tribunals almost certainly have the power to order specific performance. For example, it might be appropriate for a disputing party to request that the arbitral tribunal order the other party to respect existing obligations in a contract between the parties that remains on foot.9

Restitution 13.20 Restitution is another important remedy available in international law more generally. It is the default remedy to provide ‘full reparation’ for a State’s breach of its international obligation under the ILC Articles, which provides: A State responsible for an internationally wrongful act is under an obligation to make restitution, that is, to re-establish the situation which existed before the wrongful act was committed, provided and to the extent that restitution: (a) is not materially impossible; (b) does not involve a burden out of all proportion to the benefit deriving from restitution instead of compensation.10

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13.21 While in most cases there may be a legal basis upon which an arbitral tribunal could order restitution, there are very few examples where tribunals have done so. This is likely due in part to restitution being ‘materially impossible’ or disproportionately burdensome on the host State in certain cases as envisaged by Art 36 of the ILC Articles. 13.22 For example, requiring a host State to reverse a legislative program in order to allow restitution of an investment might be considered a ‘material impossibility’ given its impingement on the host State’s sovereign powers to legislate. In such cases arbitral tribunals are far more comfortable awarding compensation in lieu of restitution to restore the investor to the position it would have been but for the host State’s breach. 13.23 Material restitution may also lead to an unfair result for the aggrieved investor if the value of the property has depreciated significantly since the unlawful act by the host State. This is most likely in cases where the investment property is an income-generating business (such as a natural resources project) and the investor has stopped receiving income from the business after expropriation. In such cases restitution of the investment may not fully compensate the investor for lost income in the intervening period. 13.24 A difficulty of material restitution (and other non-monetary relief such as specific performance and injunctions) is that such relief is not easily enforceable, especially for ICSID arbitrations. Unlike an order for monetary compensation, non-pecuniary remedies appear to fall outside the framework of ICSID’s enforcement mechanism, which is limited to the enforcement of arbitral awards for ‘pecuniary obligations’.11 13.25 Arbitral tribunals tend to recognise the limitation on enforceability and the limit of their power to compel States to give effect to non-monetary awards. In Goetz v Republic of Burundi12 the tribunal, after finding that Burundi had expropriated Goetz’s investment by cancelling a free-zone certificate, made an award in which it gave Burundi the option of reinstating the certificate.13 13.26 In general monetary compensation will be preferred to nonpecuniary remedies. At the same time, it may be in the interests of the State to provide non-monetary remedies rather than pay a large award

of monetary compensation. Large monetary awards may have a significant impact on the financial reserves and/or political stability of smaller States. [page 132]

Interest 13.27 Arbitral tribunals will normally award pre- and post-award interest as an integral component of full compensation under customary international law.14 This is specifically envisaged in the ILC Articles: 1.

2.

Interest on any principal sum due under this chapter shall be payable when necessary in order to ensure full reparation. The interest rate and mode of calculation shall be set so as to achieve that result. Interest runs from the date when the principal sum should have been paid until the date the obligation to pay is fulfilled.15

13.28 Article 38 of the ILC Articles is not specific on the issue of interest rate and mode of calculation of interest. It is thus left to legal counsel and arbitral tribunals to consider these issues on a case-by-case basis in order to ‘ensure full reparation’ under the Chorzów Factory rule. 13.29 On the issue of compound interest, while the practice of arbitral tribunals has varied, there is a general trend in favour of compound interest over simple interest,16 in particular when requested by claimants.17

Moral damages 13.30 Moral damages is an award of monetary compensation for non-material loss. This is a well-established remedy in certain fields of international law, where it is generally recognised that non-material or ‘moral’ loss suffered by an individual as the result of an internationally wrongful act of a State can be compensable by a monetary award. There are many examples of moral damages awards in the diplomatic protection and human rights contexts that seek to compensate individuals for various affronts to personal integrity, including wrongful

imprisonment, personal injury or death.18 Article 31 of the ILC Articles also clearly contemplates that moral losses caused by a host State require reparation no less than material losses.19 [page 133] 13.31 Despite this long pedigree in international law, moral damages have very occasionally be sought in investment treaty disputes and remain the subject of some controversy in this context. Most investment treaties, however, do not expressly exclude the possibility of moral damages being awarded by an arbitral tribunal hearing a dispute under the treaty. 13.32 To date only one investment treaty tribunal has awarded an investor moral damages as part of the damages payable by the host State for breach of the investment treaty.20 In the case of Desert Line Projects LLC v Yemen21 the arbitral tribunal award an Omani investor US$1 million to compensate for ‘moral damage’ incurred by Yemen’s ‘malicious’ acts in harassing, detaining and exerting ‘physical duress’ on the investor’s executives in Yemen.22 According to the tribunal such conduct by the host State gave rise to liability to make ‘reparation for the injury suffered … whether it be bodily, moral or material in nature’.23 The tribunal considered more generally that although BITs ‘primarily aim at protecting property and economic values’, there was ‘no reason to exclude’ moral damages claims being raised in ‘exceptional circumstances’ in investment treaty disputes.24

Limitations on monetary damages Causation 13.33 Article 31 of the ILC Articles on ‘full reparation’ makes it clear that a host State will only be responsible for damage to the investment caused by its wrongful measures. 13.34 The claimant investor will bear the burden of proving both

factual causation (ie, that the unlawful act specifically caused the loss claimed) and legal causation (ie, [page 134] that the loss suffered is not too remote) in respect of its damaged investment. The relevant standard of proof is one of a ‘balance of probabilities’.25

Mitigation 13.35 A claimant investor will generally be considered as under a duty to mitigate its damage by taking reasonable steps to reduce its losses.26 It is normally for the party alleging a failure to mitigate damage to prove that there has been such a failure.27

Contributory negligence 13.36 An investor’s contribution to damage suffered by its own investment may be taken into account to limit the compensation to which it may otherwise be entitled. This is specifically envisaged in the ILC Articles: In the determination of reparation, account shall be taken of the contribution to the injury by wilful or negligent action or omission of the injured State or any person or entity in relation to whom reparation is sought.28

13.37 Several investment treaty tribunals have reduced the damages payable by the host State to a claimant investor on account of this principle (although some of those tribunals did not expressly use the words ‘contributory negligence’ or ‘contributory fault’ when doing so).29 [page 135]

Express limits in the treaty on the types of remedies available 13.38 As mentioned in Chapter 12, some more comprehensive investment treaties expressly limit the remedies that an arbitral tribunal may award to investors after a finding that the host State is liable for a breach of the treaty. 13.39 For example, the ASEAN–Australia–New Zealand FTA provides: 1.

2. 3.

Where a tribunal makes a final award against either of the disputing parties, the tribunal may award, separately or in combination, only: a. monetary damages and any applicable interest; and b. restitution of property, in which case the award shall provide that the disputing Party may pay monetary damages and any applicable interest in lieu of restitution. A tribunal may also award costs and attorney’s fees in accordance with this Section and the applicable arbitration rules. A tribunal may not award punitive damages.30

Legal fees and arbitration costs 13.40 It is becoming standard practice for arbitral tribunals to cast the burden to pay costs — totally or partially (in the case of somewhat divided success) — to the losing party or parties. The allocation of costs is normally left to the discretion of each arbitral tribunal in each case. This allows for arbitral tribunals to take into account a range of issues when apportioning costs as between the parties, including the outcome on the merits and the conduct of the parties during the proceedings. 13.41 The treatment of legal fees and arbitration is often dealt with expressly in applicable arbitration rules. For example, the ICSID Convention, which applies to ICSID arbitrations, provides: In the case of arbitration proceedings the Tribunal shall, except as the parties otherwise agree, assess the expenses incurred by the parties in connection with the proceedings, and shall decide how and by whom those expenses, the fees and expenses of the members of the Tribunal and the charges for the use of the facilities of the Centre shall be paid. Such decision shall form part of the award.31

13.42

In some cases the power for an arbitral tribunal to award legal

fees and costs is also signalled in the treaty itself. For example, the Australia–Republic of Korea FTA provides: 2.

A tribunal may also award costs and attorney’s fees in accordance with this Section and the applicable arbitration rules.32

[page 136] 13.43 Article 11.20 of the Australia–Republic of Korea FTA is typical of more comprehensive investment treaties that expressly record the arbitral tribunal’s discretion to take account of the parties’ conduct in apportioning costs: 8.

When it decides a respondent’s objection under paragraph 6 or 7, the tribunal may, if warranted, award to the prevailing disputing party reasonable costs and attorney’s fees incurred in submitting or opposing the objection. In determining whether such an award is warranted, the tribunal shall consider whether either the claimant’s claim or the respondent’s objection was frivolous, and shall provide the disputing parties a reasonable opportunity to comment.33

Common valuation methods 13.44 As noted above, the measure of compensation may be different depending upon whether one is assessing ‘prompt, adequate and effective compensation’ for the purposes of lawful expropriation or monetary compensation to ‘wipe-out all the consequences’ of an unlawful expropriation or other breach of a treaty standard. However, in practice, the assessment of both forms of compensation will involve consideration of the market value of the affected investment.

Market value 13.45 In the case of lawful expropriation, the compensation standard is usually ‘fair market value’ as at the date of expropriation. In the case of breaches of treaty, assessment of monetary compensation will usually involve considering the difference between the market value the that

investment would have had in the absence of the breach against the market value the investment actually has as a result of the breach.34 13.46 While ‘prompt, adequate and effective compensation’ and ‘full reparation’ are legal concepts, ‘fair market value’ and ‘market value’ are economic concepts with well-understood meanings in economics and corporate finance. In these fields there is no distinction between fair market value and market value. A standard economic definition of market value is as follows. Market Value is defined as the estimated amount for which property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion. Particularly for real estate valuations, a fundamental aspect of a market valuation is the principle of ‘highest and best use’, defined as the most probable use of a property that is physically possible, appropriately justified, legally permissible, financial feasible, and which results in the highest value of the property being valued.35

[page 137]

Date of assessment 13.47 In the case of lawful expropriation, fair market value is determined at the date of expropriation. Further, because the value is assessed on the basis of a transaction between a hypothetical willing buyer and seller the valuation is based only on information that was available in the market as at the valuation date. Subsequent events that, if known at the valuation date would have affected the value on that date, must be ignored. However, it is sometimes permissible to take into account post-valuation date information to the extent it is evidence of the market value on the valuation date (eg, a comparative market sale shortly after the assessment date in the same market conditions). 13.48 In the case of unlawful expropriation and other breaches of treaty standards, assessment of compensation is not confined to assessments based on market values as at the date of the breach (ie, being the date of the loss). A loss in market value on the date of breach is one means of measuring economic harm caused by the breach, but it is not the only means. Full reparation is intended to wipe out the

consequences of the breach. That may require compensation for consequential losses (not merely diminution in market value of the investment) as well as a need to assess diminution in market value based on events that took place after the date of the breach.36 The point may be illustrated with a simple example. 13.49 Company A is in the business of gold mining. It acquires all the assets of company B in a country called Expropria. These assets include both gold and copper producing mines. Company A intends to sell the copper mines when the copper price recovers. Before the copper price recovers Expropria passes a law banning copper mining by companies also engaged in gold mining. No compensation is paid to company A. Two years later there is an international shortage of copper and the copper price increases five-fold. 13.50 In this example, in the case of a lawful expropriation, company A would be paid fair market value on the date of expropriation. That valuation could not take into account the future increase in copper price since it was unknown to the market on the date of the expropriation. In the case of unlawful expropriation, company A lost the sale price for the mine it would have received during the booming copper market but for the expropriation. Thus, company A’s loss for the unlawful expropriation is the market value of the copper mine on the date it would have been sold, not at the date of expropriation.

Methods of market valuation 13.51 There are a number of ways to assess the market value of an investment at a particular point in time. In broad terms, the methodologies are based on assessing future cash flows of the investment (income-based), comparable sales (market-based), [page 138] or costs of or value of assets (asset-based). The appropriate methodology will often depend on the maturity of the investment and its profitability. Income-based methodologies are highly speculative

where the business has no track record or historical accounting information demonstrating revenues and costs. Market-based methodologies require a market for the investment in question and transparent information about prices in that market. Asset-based methodologies may not reflect the potential future profits of the investment. 13.52 In practice, a claimant investor will obtain expert advice regarding the valuation of the affected investment and quantification of loss. After consultation with expert witnesses and legal advisors the claimant will usually promote a preferred valuation methodology and also use others as cross-checks or as bases for alternative quantifications. 13.53 The expert evidence involved in investor–State treaty arbitrations is usually highly technical, very detailed, fact intensive and complex. These are factors to be taken into account when selecting the party-appointed arbitrator. The legal advisors also play an important role to communicate the substance of the evidence to the tribunal in a clear, concise and comprehensible form. 13.54 Three valuation methods are commonly used in investor–State arbitrations. These are described briefly below.

Income-based approaches 13.55 Income-based approaches value a business by calculating the present value of its anticipated future cash flows. One common way of calculating such value (in arbitrations as in other business valuation scenarios) is the discounted cash-flow method, which is an appropriate method to value an investment that remains a going concern with a proven track record and future profit-making potential. This approach functions by projecting the sum of future cash flows (revenues minus expenses) for a defined period and discounting them back to present value by application of a discount rate (discounted cash flow) DCF analysis. 13.56 There is a high degree of subjective judgment involved in DCF analysis. There is subjectivity in forming views about the future revenues and future costs that form the basis of the cash flows. There is

also subjectivity in forming views about the discount rate (the risk premium that an equity investor would require to acquire the investment). 13.57 Take the case of expropriation of a mine. The valuer must form a view about: the long-term commodity price of the mineral to be extracted; the extent of the deposit and the amount economically recoverable; the costs of construction of mine infrastructure (if not already in place); and operating costs. 13.58 While there are a number of variations to DCF analysis, at the core of all DCF analysis is an assessment of the required return on equity which underpins the discount rate. Return on equity is essentially a measure of the level of return over and above a risk-free return that an equity investor would require to invest in the asset under valuation. [page 139] 13.59 In simple terms, investing in business enterprises is a higher risk than investing in bonds. To justify the higher risk the investor requires higher expected returns. The effect that this has on the DCF analysis is that the higher the risk the higher the discount rate. The higher the discount rate the lower the net present value. The lower the net present value the lower the market valuation of the asset. 13.60 The return on equity component of the discount rate is comprised of: risk-free return (long-term government bond yield); systematic risk (a general equity risk premium based on companies with comparable businesses); and unsystematic risk (based on the specific risks of the investment). The selection of the applicable rate for each risk involves

increasing degrees of subjective judgment. 13.61 As DCF analysis involves considerable subjective judgment, the elements that comprise the cash flows and the elements that comprise the discount rate are prone to differing views and dispute. All these matters are fertile areas for disagreement between expert valuers and provide opportunity for speculation and manipulation of the valuation. 13.62 Even small differences in revenue and costs assumptions or the discount rate can have very large impacts on the overall value of an investment. As a consequence, tribunals tend to be faced with competing expert evidence with vastly different market values.

Market-based approaches 13.63 Market-based approaches determine the value of a business by comparing it to similar businesses, business ownership interests or securities that are sold on the open market. This valuation method is useful if the market is demonstrably liquid and (or) data can be obtained from a significant number of transactions involving identical or comparable assets. In spite of its popularity in other commercial valuation contexts, the market-based approach is more often used to benchmark DCF analysis rather than as a primary method of valuation.

Asset-based approaches 13.64 Asset-based approaches assess the tangible and intangible assets comprising a business and aggregate these separate figures to arrive at the value of the business. There are several asset-based methods (such as replacement value, book value and liquidation value) and the only difference between them lies in the indicators used to value the individual assets. The fundamental drawback of asset-based approaches is that they fail to account for the value of a business outside its assets such as goodwill, know-how and revenue-generating potential of the business. While an asset-based approach could be useful if the whole value of the business lies in its assets, it is more likely to be used to cross-check income- or market-based methodologies.

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Figure 13.1: Issues flowchart for considering compensation and other remedies in investor–State disputes

_____________________________ 1. 2. 3.

ASEAN–Australia–New Zealand FTA, Ch 11, Art 9(2). W M Reisman and R D Sloane, ‘Indirect Expropriation and its Valuation in the BIT Generation’ (2003) 74 The British Year Book of International Law 115 at 133–40. See, eg, British Caribbean Bank Limited (Turks & Caicos) v The Government of Belize

4. 5.

6. 7. 8.

9.

10. 11.

12. 13. 14.

(UNCITRAL, PCA Case No 2010-18) Award, 19 December 2014, at [288]; Hulley Enterprises Ltd (Cyprus) v Russian Federation (UNCITRAL, PCA Case No AA 226) Final Award, 14 July 2014, at [1586]–[1593]; Occidental Petroleum Corp and Occidental Exploration and Production Co v Republic of Ecuador (ICSID Case No ARB/06/11) Award, 5 October 2012, at [792]–[794]; White Industries Australia Ltd v Republic of India (UNCITRAL) Final Award, 30 November 2011, at [14.3.3]; and Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania (ICSID Case No ARB/05/22) Award, 24 July 2008, at [773]–[778]. Case Concerning Certain German Interests in Polish Upper Silesia (Germany v Poland) (Claim for Indemnity, Merits) PCIJ Series A No 17 (1928), p 47. ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts’, in ‘Report of the International Law Commission on the Work of Its Fifty-Third Session (23 April–1 June and 2 July–10 August 2001)’ [2001] II(2) Yearbook of the International Law Commission (ILC Articles), Art 31. ILC Articles, Art 36. ASEAN–Australia–New Zealand FTA, Ch 11, Art 28(1). See Burlington Resources Inc v Republic of Ecuador (ICSID Case No ARB/08/5) Procedural Order No 1, 29 June 2009, at [69]–[71]; Perenco Ecuador Ltd v Republic of Ecuador and Empresa Estatal Petroleos del Ecuador (ICSID Case No ARB/08/6) Decision on Provisional Measures, 8 May 2009, at [44]–[48]; and Nykomb Synergetics Technology Holding AB v Latvia (SCC Case No 118/2001) 16 December 2003, pp 39–41 and 44. See also Enron Corp and Ponderosa Assets, LP v Argentine Republic (ICSID Case No ARB/01/3) Decision on Jurisdiction, 14 January 2004, at [79]; and Ioan Micula, Viorel Micula, SC European Food SA, SC Starmill SRL and SC Multipack SRL v Romania (ICSID Case No ARB/05/20) Decision on Jurisdiction and Admissibility, 24 September 2008, at [166]. These cases can be contrasted with Occidental Petroleum Corp and Occidental Exploration and Production Co v Ecuador (ICSID Case No ARB/06/11) Decision on Provisional Measures, 17 August 2007, at [79]. For further reading on non-pecuniary remedies in this context, see G Stephens-Chu, ‘Is it All About The Money? The Appropriateness of Non-Pecuniary Remedies in Investment Treaty Arbitration’ (2014) 30(4) Arbitration International 661; C Malinvaud, ‘NonPecuniary Remedies in Investment Treaty and Commercial Arbitration’, in A van den Berg (ed), 50 Years of the New York Convention: ICCA International Arbitration Conference, (ICCA Congress Series No 14, Dublin, 2009), Kluwer Law International, The Netherlands, pp 209–230; A van Aaken, ‘Primary and Secondary Remedies in Investment Arbitration and State Liability: A Functional and Comparative View’, in S Schill (ed) International Investment Law and Comparative Public Law, Oxford University Press, New York, 2010, pp 721–54; and C Schreuer, ‘Non-Pecuniary Remedies in ICSID Arbitration’ (2004) 20 Arbitration International 325. ILC Articles, Art 35. ICSID Convention, Art 54(1): ‘Each Contracting State shall recognise an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State’. (ICSID Case No ARB/95/3) Award, 2 September 1998. Goetz v Republic of Burundi (ICSID Case No ARB/95/3) Award, 2 September 1998, at [135]. Recent investment arbitration cases granting pre-award interest include Antoine Abou

15. 16.

17.

18.

19.

20.

21. 22. 23. 24.

25.

26.

27.

Lahoud and Leila Bounafeh-Abou Lahoud v Democratic Republic of Congo (ICSID Case No ARB/10/04) Award, 7 February 2014, at [633]; Guaracachi America Inc and Rurelec plc v Plurinational State of Bolivia (UNCITRAL) Award, 31 January 2014, at [444]. ILC Articles, Art 38. This trend was confirmed by the tribunal in Occidental Petroleum Corp and Occidental Exploration and Production Co v Republic of Ecuador (ICSID Case No ARB/06/11) Award, 5 October 2012, at [834]–[839] after it comprehensively surveyed the interest awards by investment treaty tribunals between 2007–2012. See also, more recently, Hulley Enterprises Ltd (Cyprus) v Russian Federation (UNCITRAL, PCA Case No AA 226) Final Award, 14 July 2014, at [1689]. E Lauterpacht and P Nevill, ‘The Different Forms of Reparation: Interest’, in J Crawford et al (eds), The Law of International Responsibility, Oxford University Press, Oxford, 2010, p 620. See, eg, the Lusitania cases (United States v Germany) (1923) VII RIAA 32, 40; Kampffmeyer v Commission [1967] ECHR 245, pp 266–7; Loizidou v Turkey [1995] ECHR (Series A) No 310, p 38. ILC Articles, Art 31: ‘1. The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act. 2. Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.’ (Emphasis added.) Desert Line Projects LLC v Yemen (ICSID Case No ARB/05/17) Award, 6 February 2008. The authors also note the March 2013 decision of the Arab Investment Court to award a Kuwaiti investor US$30 million in moral damages. See Mohamed Abdulmohsen Al-Kharafi & Sons Co v Libya et al (ad hoc) Final Arbitral Award, 22 March 2013, pp 368–369. This award was rendered under the Unified Agreement for the Investment of Arab Capital in the Arab States, the Libyan Foreign Investment Law and a contract between the investor and the Libyan Tourism Development Authority. The applicable law was Libyan law. (ICSID Case No ARB/05/17) Award, 6 February 2008. Desert Line Projects LLC v Yemen (ICSID Case No ARB/05/17) Award, 6 February 2008, at [289]–[291]. Desert Line Projects LLC v Yemen (ICSID Case No ARB/05/17) Award, 6 February 2008, at [290]. Desert Line Projects LLC v Yemen (ICSID Case No ARB/05/17) Award, 6 February 2008, at [290]. See also discussion of moral damages in Joseph Charles Lemire v Ukraine (ICSID Case No ARB/06/16) Award, 28 March 2011, at [325]–[345]; and The Rompetrol Group NV v Romania (ICSID Case No ARB/06/3) Award, 6 May 2013, paras 289-293. See, eg, Kardassopoulos and Fuchs v Georgia (ICSID Case No ARB/05/18 and ARB/07/15) Award, 3 March 2010, at [229]; and Impregilo SpA v Argentine Republic (ICSID Case No ARB/07/17) Award, 21 June 2011, at [371]. Middle East Cement Shipping and Handling Co SA v Arab Republic of Egypt (ICSID Case No ARB/99/6) Award, 12 April 2002, at [167]; AIG Capital Partners Inc and CJSC Tema Real Estate Co v Kazakhstan (ICSID Case No ARB/01/6) Award, 7 October 2003, at [10.6.5]; National Grid PLC v Argentine Republic (UNCITRAL) Award, 3 November 2008, at [273]; and J Crawford, The International Law Commission’s Articles on State Responsibility, Cambridge University Press, Cambridge, 2002, p 205 (commentary to Art 31, [11]): ‘… a failure to mitigate by the injured party may preclude recovery to that extent’. See Middle East Cement Shipping and Handling Co SA v Arab Republic of Egypt (ICSID Case

28. 29.

30. 31. 32. 33. 34. 35. 36.

No ARB/99/6) Award, 12 April 2002, at [170]; and AIG Capital Partners Inc and CJSC Tema Real Estate Co v Kazakhstan (ICSID Case No ARB/01/6) Award, 7 October 2003, at [10.6.4(4)]. ILC Articles, Art 39. See, for the most detailed application of the principle of contributory negligence by an investment treaty tribunal, Hulley Enterprises Ltd v Russian Federation (PCA Case No AA 226) Final Award, 18 July 2014, at [1594]–[1637]. See also Occidental Petroleum Corp and Occidental Exploration and Production Co v Republic of Ecuador (ICSID Case No ARB/06/11) Award, 5 October 2012, at [659]–[687]; Azurix Corp v Argentine Republic (ICSID Case No ARB/01/12) Award, 14 July 2006, at [426]; Iurii Bogdanov, AgurdinoInvest Ltd and Agurdino-Chimia JSC v Republic of Moldova (SCC), Arbitral Award, 22 September 2005, p 19, [5.2]; MTD Equity Sdn Bhd and MTD Chile SA v Republic of Chile (ICSID Case No ARB/01/7) Award, 25 May 2004, at [242]–[246]. The decision by the arbitral tribunal in the MTD Equity case was challenged by Chile and upheld by an ad hoc ICSID annulment committee in subsequent annulment proceedings: MTD Equity Sdn Bhd and MTD Chile SA v Republic of Chile (ICSID Case No ARB/01/7) Decision on Annulment, 21 March 2007, at [93]–[101]. ASEAN–Australia–New Zealand FTA, Art 28. ICSID Convention, Art 61(2). Australia–Republic of Korea FTA, Art 11.26(2). Australia–Republic of Korea FTA, Art 11.20. See, eg, CMS Gas Transmission Co v The Argentine Republic (ICSID Case No ARB/01/8) Award, 12 May 2005, at [395]–[469]. M Kantor, Valuation for Arbitration Compensation Standards Valuation Methods and Expert Evidence, Kluwer Law International, The Netherlands, 2008, pp 30–1. See, eg, ADC Affiliate Ltd and ADC & ADMC Management Ltd v The Republic of Hungry (ICSID Case No ARB/03/16) Award, 2 October 2006, at [477]–[499]; Siemens AG v The Argentine Republic (ICSID Case No ARB/02/8) Award, 17 January 2007, at [386]–[389].

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Chapter 14

Annulment, Set-Aside and Enforcement of Investor–State Arbitral Awards 14.1 All of the main arbitration rules referred to in Asia-Pacific investment treaties indicate expressly that awards by an arbitral tribunal in an investor–State arbitration are binding on the parties.1 The finality of awards is considered to be a significant advantage of arbitration more generally. Unlike in a domestic court, there is no centralised appellate system that can review the factual findings of arbitral tribunals. Monetary obligations arising from a final award issued by an investment treaty tribunal are generally enforceable from the moment the award is rendered. 14.2 There are several different avenues, however, for challenging the finality of an arbitral award issued by an investment treaty tribunal depending on the arbitration rules that apply. 14.3 For arbitrations under the International Centre for Settlement of Investment Disputes (ICSID) Convention, a party may pursue one of the four post-award remedies offered in the self-contained regime under the ICSID Convention: rectification, interpretation, revision or annulment. ICSID awards are not subject to appeals before national courts. 14.4 For arbitrations under all other arbitration rules, a dissatisfied party will normally only be able to consider proceedings to set aside the award under the rules of the domestic arbitration law at the seat of the arbitration. Judicial review at the seat of the arbitration is normally

limited to specific, narrow grounds. A number of international treaties also prevent domestic courts in States outside the seat of the arbitration from re-opening issues that have already been decided by an investment treaty tribunal. 14.5 This Chapter introduces the main post-award procedures that are relevant to investor-State arbitration: post-award remedies under the ICSID Convention; set-aside proceedings in domestic courts; [page 142] recognition, enforcement and execution of investment treaty arbitral awards in domestic courts; and a checklist of issues for disputing parties considering their options after a final arbitral award has been rendered.

Post-award remedies under the ICSID Convention Overview 14.6 There are four post-award remedies available for arbitrations conducted in accordance with the ICSID Convention. Any party may request rectification of the award within 45 days of the date of the award to allow the arbitral tribunal to address omissions and correct any clerical, arithmetical or similar errors.2 Any party may request the arbitral tribunal to clarify the meaning or scope of an award by way of interpretation under Art 50 of the ICSID Convention. Any party may request the arbitral tribunal to revise its award under Art 51 of the ICSID Convention in light of new facts

discovered within three years of the date of the final award that may have a decisive impact on the final outcome of the case. Any party may apply for annulment of an award in whole or in part on the basis of one or more of the five grounds identified in Art 52 of the ICSID Convention, namely: – the tribunal was not properly constituted; – the tribunal manifestly exceeded its powers; – there was corruption on the part of a member of the tribunal; – there was a serious departure from a fundamental rule of procedure; or – the award failed to state the reasons on which it was based.

Annulment under the ICSID Convention 14.7 The possibility to annul an arbitral award rendered under the ICSID Convention deserves further comment. 14.8 Annulment is an exceptional remedy that is very rarely successful. Of the 420 cases registered under the ICSID Convention as of 30 June 2014, there have been 189 final awards rendered and 73 applications for annulment, of which only 13 have resulted in annulment of an arbitral award (six in full and seven in part).3 14.9 While the grounds for annulment in the ICSID Convention are relatively narrow, the effect of a successful application is significant. Annulment cancels the [page 143] binding effect of an award and prevents it from being enforced. An annulled award also cannot be revised or amended. In most cases a stay of enforcement of the award will be put in place for the duration of the annulment proceedings, which is sometimes accompanied by an order for the applicant to post a bank guarantee or offer a ‘comfort letter’ committing to pay the full amount of the award in the event it is not annulled. In the event of partial annulment, severable parts of the

award that are not annulled will stand. Annulment does not restrict the ability of the parties to re-arbitrate the same issues before a newlyconstituted tribunal should they choose to do so. 14.10 Annulment applications are heard by an ad hoc committee composed of three arbitrators who are chosen from the ICSID Panel of Arbitrators by the Chairman of the Administrative Board of ICSID, usually after consultation with the parties. Ad hoc committees are normally constituted within two months of the registration of an application for annulment. 14.11 Annulment proceedings before the ad hoc committee are similar to those before the arbitral tribunal. After its appointment by ICSID, the ad hoc committee holds its first procedural session within 60 days, following which it sets a procedural calendar for the remainder of the proceedings, including written submissions and hearings. As there is no new factual evidence to be presented, the parties’ written and oral submissions focus exclusively on the application of the relevant annulment grounds. 14.12 ICSID has reported that annulment proceedings take, on average, 16 months from start to finish.4

Set-aside proceedings for non-ICSID arbitral awards 14.13 By contrast to the self-contained procedures in the ICSID Convention, arbitral awards rendered under all other major arbitration rules, including the UNCITRAL Rules, are subject to review by the national courts at the seat of the arbitration. 14.14 National arbitration laws treat the review of international arbitral awards differently. In order to avoid unfavourable review powers in the courts of some States, most non-ICSID investor–State arbitrations (and indeed, many international commercial arbitrations) are agreed by the parties to be seated in ‘safe’ jurisdictions with predictable legal systems. Australia, Hong Kong and Singapore are among the usual candidates for this purpose in Asia-Pacific, while

Canada, Sweden, Switzerland, the United Kingdom and the United States are among the preferred jurisdictions worldwide. 14.15 Many of these jurisdictions have in common their enactment of a Model Law on International Commercial Arbitration published by the United Nations [page 144] Conference on Trade and Development (UNCTAD). These model provisions set out several grounds upon which domestic courts may set aside international arbitral awards with their seat in the same State. In general terms, these grounds allow set aside in cases where: there is an invalid arbitration agreement; the tribunal is improperly constituted; there has been a failure to respect certain procedural rules (such as absence of consent to arbitrate, failure to notify the appointment of an arbitrator or initiation of arbitral proceedings, or violations of due process); the arbitral tribunal has exceeded its powers; the dispute is a non-arbitrable dispute; or the award conflicts with public policy. 14.16 These grounds substantially reflect those in Art V of the New York Convention, discussed at 14.30. 14.17 Parties wishing to commence set aside proceedings in domestic courts should obtain legal advice from local counsel on the set aside procedure and standards of review that will apply in the relevant jurisdiction/s, especially where the State at the seat of the arbitration has not enacted the UNCITRAL Model Law or a lightly modified version thereof.

Recognition, enforcement and execution of arbitral awards rendered under investment

treaties 14.18 Enforcement of an arbitral award is often used in a broad sense to refer to any proactive attempt by an award creditor to confirm or collect on an arbitral award in a domestic court. In some legal systems, enforcement more specifically refers to the local courts issuing ‘exequatur’, or declaring that an arbitration award is in fact enforceable. In most cases, the first step in this process is recognition of the award, which is a formal certification that the award is final and binding. The final step in the process is execution, whereby the award creditor actually collects the sums owed by the award debtor or receives an order of attachment to assets owned by the award debtor. 14.19 Before this process, an award creditor will need to first identify assets held by the award debtor that may be enforced against. The location of valuable assets held by the award debtor may not always coincide with the seat of the arbitration. Once it is clear where those assets are held, the award creditor will normally seek to recognise, enforce and execute the arbitral award in the domestic courts of the relevant State or States by having the award entered as a judgment at the seat of the arbitration or a third State and seeking execution of that judgment. 14.20 The enforcement process is only prompted if an award debtor decides not to comply voluntarily with the final arbitral award. In most cases, losing parties in [page 145] investor–State arbitrations do voluntarily comply with final awards, either by way of full satisfaction of the award sum or by way of a postaward settlement. Where an award debtor refuses to comply, the enforcement process from recognition to execution can sometimes become a complicated and time-consuming process. Some award creditors wishing to avoid such risks, costs or time in the enforcement process opt to sell their rights in the award at a discount to a third party

such as a hedge fund or a venture capital firm that is willing to pursue enforcement of the full amount. 14.21 The procedures for enforcing investor–State arbitral awards will vary depending on whether the arbitration is conducted in accordance with the ICSID Convention or other arbitration rules, as discussed below.

Recognition and enforcement of ICSID arbitral awards 14.22 Awards rendered by ICSID arbitral tribunals are final and binding on the parties to the dispute. The ICSID Convention provides: The award shall be binding on the parties and shall not be subject to any appeal or any other remedy except those provided for in this Convention.5

14.23 To the extent that a final award has not been annulled and its enforcement has not been stayed, an award creditor in an ICSID arbitration can rely on the automatic recognition and enforcement obligation contained in the ICSID Convention, which provides: (1)

(2)

Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State. A Contracting State with a federal constitution may enforce such an award in or through its federal courts and may provide that such courts shall treat the award as if it were a final judgment of the courts of a constituent state. A party seeking recognition or enforcement in the territories of a Contracting State shall furnish to a competent court or other authority which such State shall have designated for this purpose a copy of the award certified by the Secretary-General. Each Contracting State shall notify the Secretary-General of the designation of the competent court or other authority for this purpose and of any subsequent change in such designation.6

14.24 ICSID awards are thus automatically confirmed by the 150 States that have signed and ratified the ICSID Convention to date as if they were judgments rendered in national courts of those States.7 On this basis, the vast majority of ICSID awards have been performed without the need for enforcement action. However, where enforcement action is necessary, award creditors can seek to enforce the award in the

competent domestic court or other authority of any contracting State to the ICSID Convention by presenting a certified copy of the final award. [page 146] 14.25 The obligations on contracting States under Art 54 of the ICSID Convention are implemented into domestic legislation in different ways. As an example, s 35 of the International Arbitration Act 1974 (Cth) in Australia provides for the recognition of ICSID Convention awards as follows: (1) (2)

(3) (4)

The Supreme Court of each State and Territory is designated for the purposes of Article 54. An award may be enforced in the Supreme Court of a State or Territory with the leave of that court as if the award were a judgment or order of that court. The Federal Court of Australia is designated for the purposes of Article 54. An award may be enforced in the Federal Court of Australia with the leave of that court as if the award were a judgment or order of that court.8

14.26 These innovations of the ICSID Convention streamline the recognition and enforcement process that applies to non-ICSID awards, as discussed below.

Recognition and enforcement of non-ICSID awards 14.27 Award creditors wishing to enforce a final award rendered in a non-ICSID investment treaty arbitration are often entitled to rely on the procedures for recognition and enforcement of awards in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. 14.28 The New York Convention allows investor–State and international commercial arbitral awards alike to be recognised and enforced as judgments in the domestic courts of the signatory States. This system for recognition and enforcement under the New York Convention is particularly effective: the authors are not aware of any

reported court decisions refusing to enforce an award rendered in a non-ICSID investment treaty arbitration. 14.29 As of April 2015 there are 154 contracting States to the New York Convention, which has become a remarkably successful international treaty. The Convention has been implemented into the domestic legislation of the vast majority of the contracting States. 14.30 The grounds upon which a domestic court can refuse to recognise an arbitral award under Art V of the New York Convention are similar, but slightly wider, than the corresponding grounds for annulment under Art 52 of the ICSID Convention. These include the improper constitution of a tribunal, failure to respect certain procedural rules or excess of powers on the part of the tribunal rendering the decision. A domestic court may also refuse to recognise and enforce an arbitral award under the New York Convention if the award has been set aside or suspended by the courts of the seat of the arbitration or if it would be contrary to public policy to do so. 14.31 National implementing legislation often provides further guidance on these issues. For example, s 8(7A) of the International Arbitration Act 1974 (Cth) in Australia provides that a foreign arbitral award will be considered contrary to public policy if it was induced or affected by fraud or corruption or if it involved a denial of justice. [page 147]

Execution of investor–State arbitral awards Execution in the ICSID and New York Conventions 14.32 While national courts in contracting States to the ICSID and New York Conventions are compelled to recognise and enforce investor–State arbitral awards, they may execute them in accordance with their national laws. Nothing in these two Conventions insulates award creditors from review procedures of national courts at the execution stage.

14.33 The ICSID Convention expressly indicates that rules for execution are left to domestic courts. The ICSID Convention provides: (3)

14.34

Execution of the award shall be governed by the laws concerning the execution of judgments in force in the State in whose territories such execution is sought.9

Article 55 of the ICSID Convention goes on to provide:

Nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any State from execution.10

Sovereign immunity 14.35 Another hurdle for executing any investor–State arbitration award, whether under the ICSID regime or otherwise, is the application of sovereign immunity laws on execution of arbitral awards in each State where enforcement is sought. This can be problematic for award creditors. 14.36 The execution of ICSID awards is expressly subject to national laws on sovereign immunity.11 Under the laws of the vast majority of States, a foreign State’s waiver of its immunity from suit does not imply a waiver of immunity from execution. As a general rule, however, most States allow awards or judgments against foreign sovereigns to be executed against the commercial assets of that State,12 or against the assets of that sovereign related to the underlying claim. Most national statutes dealing with sovereign immunity afford special protection to diplomatic property, embassy accounts, military property and central banking authority accounts. Some national laws are more restrictive and shield States with absolute immunity from execution. [page 148] 14.37 Given the possible complications that can arise at the execution stage, it is advisable for every investor to consider this even before making an investment in a host State. Jurisdictions in which the host State has attachable assets should be identified. Legal counsel should then be retained to advise on the local procedures for executing foreign arbitral awards in these different jurisdictions, including

identifying possible complications with restrictive sovereign immunity laws.13 [page 149]

Figure 14.1: Issues flowchart for options open to disputing parties after a final arbitral award is rendered in an investment treaty dispute

_____________________________ 1.

See ICSID Convention, Art 53; and ICSID Arbitration (Additional Facility) Rules, Art 52(4). See also UNCITRAL Rules (2010), Art 34(2): ‘All awards shall be made in writing and shall be final and binding on the parties. The parties shall carry out all awards without

2. 3. 4. 5. 6. 7.

8. 9. 10. 11.

12.

13.

delay’. ICSID Convention, Art 49(2). ICSID, Annual Report (2014), p 26. ICSID, Annual Report (2013), p 31. ICSID Convention, Art 53(1). ICSID Convention, Art 54. While this enforcement mechanism applies to awards for monetary amounts such as damages and costs (ie, ‘pecuniary obligations’ referred to in Art 54 of the ICSID Convention) it does not appear to apply to non-monetary remedies like specific performance or injunctive relief. International Arbitration Act 1974 (Cth), s 35. ICSID Convention, Art 54(3). ICSID Convention, Art 55. See ICSID Convention, Art 54(3): ‘Execution of the award shall be governed by the laws concerning the execution of judgments in force in the State in whose territories such execution is sought’. See also ICSID Convention, Art 55: ‘Nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or any foreign State from execution’. For example, the statutes governing sovereign immunity in the United States, the United Kingdom, Canada, Australia, France, Switzerland and Germany provide that sovereign property that is intended or used for commercial activity is not immune from execution. However, the definition of ‘sovereign’ and ‘commercial’ assets differs from State to State. For a recent discussion of sovereign immunity case law in several domestic jurisdictions, see N Brown and J Lewis, ‘Game of Thrones: A Narrowing Immunity’ (2013) 30(6) Journal of International Arbitration (Issue 6) 689–99; F Bachand, ‘Overcoming ImmunityBased Objections to the Recognition and Enforcement in Canada of Investor-State Awards’ (2009) 26(1) Journal of International Arbitration 59; and S Kantaria, ‘The Challenges of Enforcing an Arbitral Award Against a Foreign State in the United States’ (2010) 27(1) Journal of International Arbitration 75.

[page 150]

Chapter 15

Conclusion Explanatory notes to the appendices 15.1 The Appendices that follow are designed to supplement the preceding Chapters with reference materials that the authors hope will be helpful to the reader. 15.2 Appendix 1 provides a summary of the core provisions of more than 500 investment treaties (both bilateral and multilateral) entered into by States in the Asia-Pacific region. The intention is to provide an accessible ‘first port of call’ for the reader to identify investment treaties that may be relevant to it. For foreign investors and their legal counsel, the tables in Appendix 1 provide an overview of investment treaties that may afford protections to their prospective or existing investments in the region. For State representatives, Appendix 1 offers a snapshot of prevailing treaty practice in the region. The entries are grouped alphabetically by Asia-Pacific State name. 15.3 Appendices 2 and 3 record the known investor–State arbitration proceedings under Asia-Pacific investment treaties. These lists capture cases involving Asia-Pacific States as respondent States to investor claims but also situations where foreign investors from the region have brought claims under Asia-Pacific treaties (either against a State in the region or elsewhere in the world). 15.4 The case lists record the status of the case as at March 2015 and identify the relevant treaty under which the claim was brought. These case lists will allow the reader to quickly get a sense for the number of investment treaty claims with links to the region that have been litigated to date. It is also intended as a resource to identify useful further

reading in the form of decisions by arbitral tribunals interpreting a given Asia-Pacific treaty that may be relevant for the reader. 15.5 Appendix 4 contains five investment treaties from the AsiaPacific region that have been reproduced in full. We selected these treaties to provide a sample of the different styles and content in investment treaties in Asia-Pacific. For example, it is interesting to contrast the substantive protections and dispute resolution provisions offered in the relatively bare Malaysia–United Kingdom Bilateral Investment Treaty (BIT) of 1981 with the likes of the Australia–Japan Economic Partnership Agreement and the Korea–Australia Free Trade Agreement (FTA), which entered [page 151] into force on 15 January 2015 and 12 December 2014, respectively, and which are considerably more comprehensive. 15.6 Appendix 5 contains a selection of the key documents produced by parties and arbitral tribunals in investment treaty arbitrations. Some of these documents are reproduced in full or in extracted form, with the permission of the authors of those documents. All of these practice precedents are taken from current or concluded cases. Each document is publicly available online on the ITA Law () and NAFTA Claims () websites. For some documents in Appendix 5, permission was not obtained to reproduce documents in full in this text. In all cases, however, the reader is free to access and download these documents using the website details provided. 15.7 In reproducing these documents it was the authors’ intention to provide a sense of the style of procedure and written pleadings that are part of investment treaty arbitration proceedings. While this was once the domain of an experienced few legal counsel who operated, for the most part, behind closed doors, there is an increasing push for transparency. More and more investment treaty awards, procedural decisions and even written pleadings are being made publicly available.

This increasing transparency facilitates more informed academic and general interaction with this expanding field of international law.

The need for case-by-case assessment 15.8 Our final note is to record an important caveat. Every investor’s case must be considered in light of its own facts and in view of the proper interpretation of the applicable investment treaty. Each potential claim by an investor also requires legal counsel to make forensic judgment on the strengths of the evidence available to prove a given claim. It is not the intention of the authors by reproducing practice precedents (or indeed, through any other aspect of this book) to circumvent or subordinate the importance of independent and informed legal advice. 15.9 The preceding Chapters are also not intended to supplant the importance of more detailed academic literature on this subject, examples of which appear in the selected bibliography below. The discipline of international law surrounding investment treaty disputes has not fully matured. By contrast to the incremental development of principles underpinning established fields of practice in common and civil law systems, change in this field of legal practice is remarkably dynamic. The contours of the relevant legal principles must be reassessed when considering or bringing a claim under an investment treaty.

[page 153]

Appendix 1

Overview of selected investment treaties in Asia-Pacific

[page 154]

[page 155]

[page 156]

[page 157]

[page 158]

[page 159]

[page 160]

[page 161]

[page 162]

[page 163]

[page 164]

[page 165]

[page 166]

[page 167]

[page 168]

[page 169]

[page 170]

[page 171]

[page 172]

[page 173]

[page 174]

[page 175]

[page 176]

[page 177]

[page 178]

[page 179]

[page 180]

[page 181]

[page 182]

[page 183]

[page 184]

[page 185]

[page 186]

[page 187]

[page 188]

[page 189]

[page 191]

Appendix 2

Selected list of publicly-known investor–State disputes based on a treaty involving parties from the Asia-Pacific region as of March 2015 (alphabetical by treaty)

[page 192]

Case

Legal Basis for Jurisdiction

Status

Hesham TM Al Warraq v Republic of Indonesia (UNCITRAL)

Agreement for Promotion and Protection of Investments Among Member States of the Organisation of the Islamic Conference

Award on Respondent’s Preliminary Objections to Jurisdiction and Admissibility of the Claims of 21 June 2012 Final Award of 15 December 2014

Cemex Asia Holdings Ltd v Republic of Indonesia (ICSID Case No ARB/04/3)

ASEAN Agreement

Discontinued

Yaung Chi Oo Trading Pte Ltd v Myanmar (ASEAN ID Case No ARB/01/1)

ASEAN Agreement

Award of 31 March 2000

Philip Morris Asia Ltd v Commonwealth of Australia (UNCITRAL, PCA Case No 2012-12)

Australia–Hong Kong BIT

Pending Notice of Arbitration of 21 November 2011 Decision on Bifurcation of 14 April 2014

White Industries Australia Ltd v Republic of India (UNCITRAL)

Australia–India BIT

Award of 30 November 2011

Churchill Mining PLC and Planet Mining Pty Ltd v Republic of Indonesia (ICSID Case Nos ARB/12/14 and 12/40)

Australia–Indonesia BIT

Pending Request for Arbitration of 22 May 2012 Decision on Jurisdiction of 24 February 2014

Tethyan Copper Co Pty Ltd v Islamic Republic of Pakistan (ICSID Case No ARB/12/1)

Australia–Pakistan BIT

Pending (Decision on Provisional Measures of 13 December 2012)

Saipem SpA v People’s Republic of Bangladesh (ICSID Case No ARB/05/07)

Bangladesh–Italy BIT

Award of 30 June 2009

Ping An Life Insurance Co of China v Kingdom of Belgium (ICSID Case No

China–Belgium BIT

Pending

ARB/12/29)

[page 193]

Case

Legal Basis for Jurisdiction

Status

Sanum Investments Ltd v Lao People’s Democratic Republic (UNCITRAL, PCA Case No 2013-13)

China–Laos BIT

Jurisdictional Decision of 13 December 2013 Discontinued (Settlement Agreement of 15 June 2014)

Ekran Berhad v People’s Republic of China (ICSID Case No ARB/11/15)

China–Malaysia BIT

Discontinued

China Heilongjiang International & Technical Cooperative Corp, Qinhangdaoshi Qinlong International Industrial, and Beijing Shougang Mining Investment v Republic of Mongolia (UNCITRAL)

China–Mongolia BIT

Pending

Tza Yap Shum v Republic of Peru (ICSID Case No ARB/07/6)

China–Peru BIT

Award of 7 July 2007 Decision on Jurisdiction of 19 June 2009

Ansung Housing Co Ltd v People’s Republic of China (ICSID Case No ARB/14/25)

China–Republic of Korea BIT

Pending

Beijing Urban Construction Group Co Ltd v Republic of Yemen (ICSID Case No ARB/14/30)

China–Yemen BIT

Pending

Philip Morris Asia Ltd v Commonwealth of Australia (UNCITRAL, PCA Case No 2012-12)

Hong Kong–Australia BIT

Pending Notice of Arbitration of 21 November 2011 Decision on Bifurcation of 14 April 2014

Bycell (Maxim Naumchenko, Andrey Polouektov and

India–Cyprus BIT

Pending

Tenoch Holdings Ltd) v India (ad hoc) Nokia v India (ad hoc)

India–Finland BIT

Pending

Axiata Group v India (ad hoc)

India–Mauritius BIT

Pending

[page 194]

Case

Legal Basis for Jurisdiction

Status

Deutsche Telekom v India (ICSID)

India–Germany BIT

Pending

Capital Global and Kaif Investment v India (ad hoc)

India–Mauritius BIT

Pending

CC/Devas (Mauritius) Ltd, Devas Employees Mauritius Private Ltd and Telecom Devas Mauritius Ltd v India (UNCITRAL)

India–Mauritius BIT

Pending

Khaitan Holdings Mauritius Ltd v India (UNCITRAL)

India–Mauritius BIT

Pending

Vodafone International Holdings BV v India (UNCITRAL)

India–Netherlands BIT

Pending

Bycell (Maxim Naumchenko, Andrey Polouektov and Tenoch Holdings Ltd) v India (ad hoc)

India–Russia BIT

Pending

Ashok Sancheti v United Kingdom (UNCITRAL)

India–United Kingdom BIT

Unknown (Referred to in a decision of the English Court of Appeal in The Mayor and Commonalty & Citizens of the City of London v Ashok Sancheti [2008] EWCA Civ 1283)

Cairn Energy plc v India (UNCITRAL)

India–United Kingdom BIT

Notice of dispute of 10 March 2015

Churchill Mining PLC and

Indonesia–Australia BIT

Pending

Request for Arbitration of 22 May 2012 Decision on Jurisdiction of 24 February 2014

Planet Mining Pty Ltd v Republic of Indonesia (ICSID Case Nos ARB/12/14 and 12/40) Nusa Tenggara Partnership BV and PT Newmont Nusa Tenggara v Republic of Indonesia (ICSID Case No ARB/14/15)

Indonesia–Netherlands BIT

Discontinued (order taking note of the discontinuance of 29 August 2014)

[page 195]

Case

Legal Basis for Jurisdiction

Status

Churchill Mining PLC and Planet Mining Pty Ltd v Republic of Indonesia (ICSID Case Nos ARB/12/14 and 12/40)

Indonesia–United Kingdom BIT

Pending Request for Arbitration of 22 May 2012 Decision on Jurisdiction of 24 February 2014

Rafat Ali Rizvi v Republic of Indonesia (ICSID Case No ARB/11/13)

Indonesia–United Kingdom BIT

Award on Jurisdiction of 16 July 2013 Application for Annulment of the Award of 11 November 2013

Sanum Investments Ltd v Lao People’s Democratic Republic (UNCITRAL, PCA Case No 2013-13)

Laos–China BIT

Jurisdictional Decision of 13 December 2013 Discontinued (Settlement Agreement of 15 June 2014; Interim Ruling on Issues Arising under the Deed of Settlement of 19 December 2014) Decision of the High Court of Singapore of 20 January 2015 ([2015] SGHC 15)

Philippe Gruslin v Malaysia (ICSID Case No ARB/94/1).

Malaysia–Belgium-Luxembourg BIT

Award of 20 November 2000

MTD Equity Sdn Bhd and MTD Chile SA v Chile (ICSID Case No ARB/01/7)

Malaysia–Chile BIT

Award of 25 May 2004 Decision on Annulment of 21 March 2007

Ekran Berhad v People’s Republic of China (ICSID

Malaysia–China BIT

Discontinued

Case No ARB/11/15) Telekom Malaysia Berhad v Republic of Ghana (UNCITRAL)

Malaysia–Ghana BIT

Unknown (Referred to in a decision of the District Court of The Hague in Republic of Ghana v Telekom Malaysia Berhad [2004] Petition No HA/RK 2004.667, 18 October 2004)

Malaysian Historical Salvors Sdn Bhd v Malaysia (ICSID Case No ARB/05/10)

Malaysia–United Kingdom BIT

Award of Jurisdiction of 17 May 2007 Decision on the Application for Annulment of 16 April 2009

[page 196]

Case

Legal Basis for Jurisdiction

Status

China Heilongjiang International & Technical Cooperative Corp, Qinhangdaoshi Qinlong International Industrial, and Beijing Shougang Mining Investment v Republic of Mongolia (UNCITRAL)

Mongolia–China BIT

Pending

Alstom Power Italia SpA and Alstom SpA v Republic of Mongolia (ICSID Case No ARB/04/10)

Mongolia–Italy BIT

Discontinued

Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Co v The Government of Mongolia (UNCITRAL)

Mongolia–Russian Federation BIT

Order on Interim Measures of 2 September 2008 Award on Jurisdiction and Liability of 28 April 2011

Khan Resources Inc, Khan Resources BV, and Cauc Holding Company Ltd v The Government of Mongolia (UNCITRAL)

Mongolian Foreign Investment Law; Energy Charter Treaty

Decision on Jurisdiction of 25 July 2012 (not public) Award of March 2015 (not public)

Occidental of Pakistan Inc v

Unknown

Discontinued (order by Tribunal

taking note of discontinuance of 27 January 1989)

Islamic Republic of Pakistan (ICSID Case No ARB/87/4) Tethyan Copper Co Pty Ltd v Islamic Republic of Pakistan (ICSID Case No ARB/12/1)

Pakistan–Australia BIT

Pending (Decision on Provisional Measures of 13 December 2012)

Impregilo SpA v Islamic Republic of Pakistan (ICSID Case No ARB/03/3)

Pakistan–Italy BIT

Decision on Jurisdiction of 22 April 2005 Discontinued on 25 September 2005

Agility for Public Warehousing Co KSC v Islamic Republic of Pakistan (ICSID Case No ARB/11/8)

Pakistan–Kuwait BIT

Decision on Jurisdiction of 27 February 2013

[page 197]

Case

Legal Basis for Jurisdiction

Status

SGS Société Générale de Surveillance SA v Islamic Republic of Pakistan (ICSID Case No ARB/01/13)

Pakistan–Switzerland BIT

Decision on Objections to Jurisdiction of 6 August 2003

Bayindir Insaat Turizm Ticaret Ve Sanayi AS v Islamic Republic of Pakistan (ICSID Case No ARB/03/29)

Pakistan–Turkey BIT

Decision on Jurisdiction of 14 November 2005 Award of 27 August 2009

PNG Sustainable Development Program Ltd v Independent State of Papua New Guinea (ICSID Case No ARB/13/33)

Papua New Guinea’s 1992 Investment Promotion Act

Decision on Respondent’s Objections under Rule 41(5) of 28 October 2014 Decision on the Claimant’s Request for Provisional Measures of 21 January 2015

Fraport AG Frankfurt Airport Services Worldwide v Republic of the Philippines (ICSID Case No ARB/03/25)

Philippines–Germany BIT

Award of 16 August 2007 Decision on the Application for Annulment, 23 December 2010

Fraport AG Frankfurt Airport Services Worldwide v Republic of the Philippines (ICSID

Philippines–Germany BIT

Award of 10 December 2014

Case No ARB/11/12) (Resubmitted Case) SGS Société Générale de Surveillance SA v Republic of the Philippines (ICSID Case No ARB/02/6)

Philippines–Switzerland BIT

Decision of the Tribunal on Objections to Jurisdiction of 29 January 2004 Order of the Tribunal on Further Proceedings of 17 December 2007

LSF-KEB Holdings SCA v Republic of Korea (ICSID Case No ARB/12/37)

Republic of Korea–BelgiumLuxembourg BIT

Pending Notice of Arbitration of 10 December 2012

Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (ICSID Case No ARB/09/2)

Sri Lanka–Germany BIT

Award of 31 October 2012

[page 198]

Case

Legal Basis for Jurisdiction

Status

Asian Agricultural Products Ltd v Democratic Socialist Republic of Sri Lanka (ICSID Case No ARB/87/3)

Sri Lanka–United Kingdom BIT

Award of 27 June 1990

Mihaly International Corp v Democratic Socialist Republic of Sri Lanka (ICSID Case No ARB/00/2)

Sri Lanka–United States BIT

Award of 15 March 2002

Walter Bau Ag (In Liquidation) v Kingdom of Thailand (UNCITRAL)

Thailand–Germany BIT

Award of 1 July 2009 Decision of the German Supreme Court on Enforcement of 30 January 2013

RECOFI v Vietnam (UNCITRAL)

Vietnam–France BIT

Pending Notice of Arbitration in July 2013

Trinh Vinh Binh v Vietnam (UNCITRAL)

Vietnam–Netherlands BIT

Award and Settlement in March 2007

Michael McKenzie v Vietnam (UNCITRAL)

Vietnam–United States Trade Relations Treaty

Award of 11 December 2013 (not public)

[page 199]

Appendix 3

Selected list of publicly-known investor–State disputes based on a contract involving parties from the Asia-Pacific region as of March 2015 Case

Status

Amco Asia Corp v Republic of Indonesia (ICSID Case No ARB/81/1)

Award of 10 November 1984 Award in Re-Submitted Case of 31 May 1990

Colt Industries Operating Corp, Firearms Division v Republic of Korea (ICSID Case No ARB/84/2)

Discontinued (Settlement Agreement of 3 August 1990)

Scimitar Exploration Ltd v Bangladesh and Bangladesh Oil, Gas and Mineral Corp (ICSID Case No ARB/92/2)

Award of 5 April 1994

Niko Resources (Bangladesh) Ltd v People’s

Decision on

Republic of Bangladesh, Bangladesh Petroleum Exploration & Production Co Ltd (‘Bapex’), Bangladesh Oil Gas and Mineral Corporation (‘Petrobangla’) (ICSID Case No ARB/10/11 and ICSID Case No ARB/10/18)

Jurisdiction of 19 August 2013

Cambodia Power Co v Kingdom of Cambodia (ICSID Case No ARB/09/18)

Decision on Jurisdiction of 22 March 2011 Award of 22 April 2013 (not public)

[page 200]

Case

Status

Chevron Bangladesh Block Twelve, Ltd and Chevron Bangladesh Blocks Thirteen and Fourteen Ltd v People’s Republic of Bangladesh (ICSID Case No ARB/06/10)

Decision on Jurisdiction of 21 August 2007 Award of 18 May 2010 (not public)

Mobil Oil Corporation, Mobil Petroleum Co Inc, Mobil Oil New Zealand v New Zealand (ICSID Case No ARB/87/2)

Findings on Liability, Interpretation and Allied Issues of 4 May 1989

[page 201]

Appendix 4

Investment Treaties from the Asia-Pacific Region Appendix 4.1

Appendix 4.2

Appendix 4.3

Appendix 4.4

Appendix 4.5

Agreement Establishing the ASEAN–Australia–New Zealand Free Trade Area (ASEAN–Australia–New Zealand Free Trade Agreement) Agreement between Japan and Australia for an Economic Partnership (Japan–Australia Economic Partnership Agreement) Ch 14 and Annex 12 Free Trade Agreement between the Government of the Republic of Korea and the Government of Australia (Republic of Korea–Australia Free Trade Agreement) Ch 11 and Annex 11 Agreement between the Government of Canada and the Government of the People’s Republic of China for the Promotion and Reciprocal Protection of Investments (Canada–China Bilateral Investment Treaty) Agreement between the Government of Malaysia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Promotion and Protection of Investments (Malaysia– United Kingdom Bilateral Investment Treaty)

[page 202]

Appendix 4.1 ASEAN–Australia–New Zealand Free Trade Agreement

CHAPTER 11 INVESTMENT SECTION A Article 1 1.

2.

Scope

This Chapter shall apply to measures adopted or maintained by a Party relating to: (a) investors of any other Party; and (b) covered investments. This Chapter shall not apply to: (a) government procurement; (b) subsidies or grants provided by a Party; and (c) services supplied in the exercise of governmental authority by the relevant body or authority of a Party. For the purposes of this Chapter, a service supplied in the exercise of governmental authority means any service which is supplied neither on a commercial basis nor in competition with one or more service suppliers.

Article 2

Definitions

For the purposes of this Chapter: (a) covered investment means with respect to a Party, an investment in its territory of an investor of another Party, in existence as of the date of entry into force of this Agreement or established, acquired or expanded thereafter, and which, where applicable, has been admitted1 by the host Party, subject to its relevant laws, regulations and policies; (b) freely usable currency means a freely usable currency as determined by the International Monetary Fund in accordance with the IMF Articles of Agreement and any amendments thereto;

[page 203] (c) investment2 means every kind of asset owned or controlled by an investor, including but not limited to the following: (i) movable and immovable property and other property rights such as mortgages, liens or pledges; (ii) shares, stocks, bonds and debentures and any other forms of participation in a juridical person and rights derived therefrom; (iii) intellectual property rights which are recognised pursuant to the laws and regulations of each Party and goodwill; (iv) claims to money or to any contractual performance related to a business and having financial value3; (v) rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts; and (vi) business concessions required to conduct economic activity and having financial value conferred by law or under a contract, including any concession to search for, cultivate, extract or exploit natural resources. For the purpose of the definition of investment in this Article, returns that are invested shall be treated as investments and any alteration of the form in which assets are invested or reinvested shall not affect their character as investments; (d) investor of a Party means a natural person of a Party or a juridical person of a Party that seeks to make4, is making, or has made an investment in the territory of another Party; (e) juridical person means any entity duly constituted or otherwise organised under applicable law, whether for profit or otherwise, and whether privately-owned or governmentally-owned, including any corporation, trust, partnership, joint venture, sole proprietorship, association or similar organisation; (f) juridical person of a Party means a juridical person constituted or organised under the law of that Party;

(g) measure means any measure by a Party, whether in the form of a law, regulation, rule, procedure, decision, administrative action, or any other form; (h) measures by a Party includes measures taken by: (i) central, regional, or local governments and authorities; and (ii) non-governmental bodies in the exercise of powers delegated by central, regional, or local governments or authorities; [page 204] (i) natural person of a Party means any natural person possessing the nationality or citizenship of, or right of permanent residence in that Party in accordance with its laws and regulations; and (j) return means an amount yielded by or derived from an investment, including profits, dividends, interest, capital gains, royalties and all other lawful income.

Article 3 1.

2.

Relation to other Chapters

This Chapter does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter 8 (Trade in Services) or Chapter 9 (Movement of Natural Persons). Notwithstanding Paragraph 1, Article 6 (Treatment of Investment), Article 7 (Compensation for Losses), Article 8 (Transfers), Article 9 (Expropriation and Compensation), Article 10 (Subrogation) and Section B (Investment Disputes between a Party and an Investor) shall apply, mutatis mutandis, to any measure affecting the supply of service by a service supplier of a Party through commercial presence in the territory of any one of the other Parties pursuant to Chapter 8 (Trade in Services), but only to the extent that any such measures relate to a covered investment and an obligation under this Chapter, regardless of whether such a service sector is scheduled in a Party’s schedule of

specific services commitments in Annex 3 (Schedules of Specific Services Commitments).

Article 4

National Treatment5

Each Party shall accord to investors of another Party, and to covered investments, in relation to the establishment, acquisition, expansion, management, conduct, operation, liquidation, sale, transfer or other disposition of investments, treatment no less favourable than that it accords, in like circumstances, to its own investors and their investments.

Article 5

Prohibition of Performance Requirements

No Party shall apply in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment of an investor of a Party in its territory any measure which is inconsistent with the Agreement on Trade-Related Investment Measures in Annex 1A to the WTO Agreement.

Article 6 1.

Treatment of Investment

Each Party shall accord to covered investments fair and equitable treatment and full protection and security. [page 205]

2.

For greater certainty6: (a) fair and equitable treatment requires each Party not to deny justice in any legal or administrative proceedings; (b) full protection and security requires each Party to take such measures as may be reasonably necessary to ensure the protection and security of the covered investment; and

the concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required under customary international law, and do not create additional substantive rights. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article. (c)

3.

Article 7

Compensation for Losses

Each Party shall accord to investors of another Party, and to covered investments, with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict, civil strife or state of emergency, treatment no less favourable than that it accords, in like circumstances, to: (a) its own investors and their investments; and (b) investors of any other Party or non-Party and their investments.

Article 8 1.

Transfers

Each Party shall allow all transfers relating to a covered investment to be made freely and without delay into and out of its territory. Such transfers include: (a) contributions to capital, including the initial contribution; (b) profits, capital gains, dividends, royalties, licence fees, technical assistance and technical and management fees, interest and other current income accruing from any covered investment; (c) proceeds from the total or partial sale or liquidation of any covered investment; (d) payments made under a contract, including a loan agreement; (e) payments made pursuant to Article 7 (Compensation for

(f)

(g)

Losses) and Article 9 (Expropriation and Compensation); payments arising out of the settlement of a dispute by any means including adjudication, arbitration or the agreement of the parties to the dispute; and earnings and other remuneration of personnel engaged from abroad in connection with that investment. [page 206]

2.

3.

4.

Each Party shall allow such transfers relating to a covered investment to be made in a freely usable currency at the market rate of exchange prevailing at the time of transfer. Notwithstanding Paragraphs 1 and 2, a Party may prevent or delay a transfer through the equitable, non-discriminatory, and good faith application of its laws and regulations relating to: (a) bankruptcy, insolvency, or the protection of the rights of creditors; (b) issuing, trading, or dealing in securities, futures, options, or derivatives; (c) criminal or penal offences and the recovery of the proceeds of crime; (d) financial reporting or record keeping of transfers when necessary to assist law enforcement or financial regulatory authorities; (e) ensuring compliance with orders or judgments in judicial or administrative proceedings; (f) taxation; (g) social security, public retirement, or compulsory savings schemes; and (h) severance entitlements of employees. Nothing in this Chapter shall affect the rights and obligations of each Party as a member of the International Monetary Fund under

the IMF Articles of Agreement, including the use of exchange actions which are in conformity with the IMF Articles of Agreement, provided that a Party shall not impose restrictions on any capital transactions inconsistently with its specific commitments under this Chapter regarding such transactions, except under Article 4 (Measures to Safeguard the Balance of Payments) of Chapter 15 (General Provisions and Exceptions) or at the request of the International Monetary Fund.

Article 9 1.

2.

Expropriation and Compensation7

A Party shall not expropriate or nationalise a covered investment either directly or through measures equivalent to expropriation or nationalisation (expropriation), except: (a) for a public purpose8; (b) in a non-discriminatory manner; (c) on payment of prompt, adequate, and effective compensation; and (d) in accordance with due process of law. The compensation referred to in Paragraph 1(c) shall: (a) be paid without delay9; [page 207] (b)

3.

be equivalent to the fair market value of the expropriated investment at the time when or immediately before the expropriation was publicly announced10, or when the expropriation occurred, whichever is applicable; (c) not reflect any change in value because the intended expropriation had become known earlier; and (d) be effectively realisable and freely transferable between the territories of the Parties. The compensation referred to in Paragraph 1(c) shall include

4.

5.

6.

appropriate interest. The compensation, including any accrued interest, shall be payable either in the currency of the expropriating Party, or if requested by the investor, in a freely usable currency. If an investor requests payment in a freely useable currency, the compensation referred to in Paragraph 1(c), including any accrued interest, shall be converted into the currency of payment at the market rate of exchange prevailing on the date of payment. This Article does not apply to the issuance of compulsory licences granted in relation to intellectual property rights in accordance with the TRIPS Agreement. Notwithstanding Paragraphs 1 to 4, in the case where Singapore or Viet Nam is the expropriating Party, any measure of expropriation relating to land, which shall be as defined in the existing domestic legislation of the expropriating Party on the date of entry into force of this Agreement, shall be for a purpose and upon payment of compensation made in accordance with the aforesaid legislation. Such compensation shall be subject to any subsequent amendments to the aforesaid legislation relating to the amount of compensation where such amendments follow the general trends in the market value of the land.

Article 10 Subrogation 1.

2.

3.

If a Party or an agency of a Party makes a payment to an investor of that Party under a guarantee, a contract of insurance or other form of indemnity it has granted on noncommercial risk in respect of an investment, the other Party shall recognise the subrogation or transfer of any right or claim in respect of such investment. The subrogated or transferred right or claim shall not be greater than the original right or claim of the investor. Where a Party or an agency of a Party has made a payment to an investor of that Party and has taken over rights and claims of the investor, that investor shall not, unless authorised to act on behalf of the Party or the agency making the payment, pursue those rights and claims against the other Party. In any proceeding involving an investment dispute, a Party shall

not assert, as a defence, counter-claim, right of set-off or otherwise, that the investor or the covered investment has received or will receive, pursuant to an insurance or [page 208] guarantee contract, indemnification or other compensation for all or part of any alleged loss.

Article 11 Denial of Benefits 1.

2.

3.

Following notification, a Party may deny the benefits of this Chapter: (a) to an investor of another Party that is a juridical person of such other Party and to investments of that investor if an investor of a non-Party owns or controls the juridical person and the juridical person has no substantive business operations in the territory of the other Party; (b) to an investor of another Party that is a juridical person of such other Party and to investments of that investor if an investor of the denying Party owns or controls the juridical person and the juridical person has no substantive business operations in the territory of any Party, other than the denying Party. Notwithstanding Paragraph 1 and subject to prior notification to and consultation with the relevant Party, Thailand may, under its applicable laws and regulations, deny the benefits of this Chapter relating to the admission, establishment, acquisition and expansion of investments to an investor of another Party that is a juridical person of such Party and to investments of such an investor where Thailand establishes that the juridical person is owned or controlled by natural persons or juridical persons of a non-Party or the denying Party. In the case of Thailand, a juridical person is:

owned by natural persons or juridical persons of a Party or a non-Party if more than 50 per cent of the equity interest in it is beneficially owned by such persons; (b) controlled by natural persons or juridical persons of a Party or non-Party if such persons have the power to name a majority of its directors or otherwise to legally direct its actions. Following notification, and without prejudice to Paragraph 1, the Philippines may deny the benefits of this Chapter to an investor of another Party and to investments of that investor, where it establishes that such investor has made an investment in breach of the provisions of Commonwealth Act No. 108, entitled “An Act to Punish Acts of Evasion of Laws on the Nationalization of Certain Rights, Franchises or Privileges”, as amended by Presidential Decree No. 715, otherwise known as “The Anti-Dummy Law”, as may be amended. (a)

4.

Article 12 Reservations11 1.

Article 4 (National Treatment), and in the case of Lao PDR Article 5 (Prohibition of Performance Requirements), do not apply to: [page 209] (a)

(b)

any existing measure that does not conform to those Articles maintained by a Party at: (i) the central level of government, as set out by that Party in its Schedule to List I; (ii) a regional level of government, as set out by that Party in its Schedule to List I; or (iii) a local level of government; the continuation or prompt renewal of any measure referred to in Subparagraph (a); or

an amendment to any measure referred to in Subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure as it existed at the date of entry into force of the Party’s Schedule to List I, with Article 4 (National Treatment), and, in the case of Lao PDR Article 5 (Prohibition of Performance Requirements). Article 4 (National Treatment), and in the case of Lao PDR Article 5 (Prohibition of Performance Requirements), do not apply to any measure that a Party adopts or maintains with respect to sectors, sub-sectors, or activities, as set out in its Schedule to List II. Other than pursuant to any procedures for the modification of schedules of reservations, a Party may not, under any measure adopted after the date of entry into force of this Agreement and covered by its Schedule to List II, require an investor of another Party, by reason of its nationality, to sell or otherwise dispose of an investment existing at the time the measure becomes effective. (c)

2.

3.

Article 13 Transparency 1.

2.

3.

4.

Each Party shall publish promptly and, except in emergency situations, at the latest by the time of their entry into force, all relevant measures of general application covered by this Chapter. International agreements pertaining to or affecting investors or investment activities to which a Party is a signatory shall also be published. To the extent possible, each Party shall make the measures and international agreements of the kind referred to in Paragraph 1 available on the internet. Where publication referred to in Paragraphs 1 and 2 is not practicable, such information12 shall be made otherwise publicly available. To the extent provided for under its domestic legal framework, each Party shall endeavour to provide a reasonable opportunity for comments by interested persons on measures referred to in Paragraph 1 before adoption.

5.

Each Party shall designate a contact point to facilitate communications among the Parties on any matter covered by this Chapter. Upon the request of another Party, the contact point shall: (a) identify the office or official responsible for the relevant matter; and [page 210] (b)

6.

7.

8.

9.

assist as necessary in facilitating communications with the requesting Party with respect to that matter. Each Party shall respond within a reasonable period of time to all requests by any other Party for specific information on: (a) any measures or international agreements referred to in Paragraph 1; (b) any new, or any changes to existing, measures or administrative guidelines which significantly affect investors or covered investments, whether or not the other Party has been previously notified of the new or changed measure or administrative guideline. Any notification or communication under this Article shall be provided to the other Party through the relevant contact points in the English language. Nothing in this Article shall be construed as requiring a Party to provide confidential information, the disclosure of which would impede law enforcement, or otherwise be contrary to the public interest, or which would prejudice legitimate commercial interests of particular juridical persons, public or private. Each Party shall ensure that in its administrative proceedings relating to the application of measures referred to in Paragraph 1 to particular investors or investments of the other Party in specific cases that: (a) to the extent provided under its domestic legal framework and where possible, persons of another Party that are

directly affected by a proceeding are provided reasonable notice, when a proceeding is initiated; (b) to the extent provided under its domestic legal framework, that it endeavours to afford such persons with reasonable opportunity to present their positions prior to any final administrative action, when time, the nature of the proceeding, and the public interest permit; and (c) its procedures are in accordance with its laws. 10. Each Party shall maintain judicial or administrative tribunals or procedures for the purpose of the prompt review13 and, where warranted, correction of final administrative actions regarding matters covered by this Chapter. Where such procedures or tribunals are not independent of the agency entrusted with the administrative action concerned, each Party shall ensure that the tribunals or procedures provide for an objective and impartial review. 11. Each Party shall ensure that, in any such tribunals or procedures, the parties to the proceedings are provided with the right to: (a) a reasonable opportunity to support or defend their respective positions; and (b) a decision in accordance with the Party’s laws. 12. Each Party shall ensure, subject to appeal or further review as provided in its law, that any decision referred to in Paragraph 11(b) shall be implemented in accordance with its laws. [page 211]

Article 14 Special Formalities and Disclosure of Information 1.

Nothing in Article 4 (National Treatment) shall be construed to prevent a Party from adopting or maintaining a measure that prescribes special formalities in connection with covered

2.

investments, including a requirement that covered investments be legally constituted under the laws or regulations of the Party, provided that such formalities do not substantially impair the protections afforded by a Party to investors of another Party and covered investments pursuant to this Chapter. Notwithstanding Article 4 (National Treatment), a Party may require an investor of another Party, or a covered investment, to provide information concerning that investment solely for informational or statistical purposes. The Party shall protect to the extent possible any confidential information which has been provided from any disclosure that would prejudice legitimate commercial interests of the investor or the covered investment. Nothing in this Paragraph shall be construed to prevent a Party from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its law.

Article 15 Special and Differential Treatment for the Newer ASEAN Member States In order to increase the benefits of this Chapter for the newer ASEAN Member States, and in accordance with the objectives of and the Preamble to this Agreement and objectives of Chapter 12 (Economic Co-operation), the Parties recognise the importance of according special and differential treatment to the newer ASEAN Member States under this Chapter, through: (a) technical assistance to strengthen their capacity in relation to investment policies and promotion, including in areas such as human resource development; (b) access to information on the investment policies of other Parties, business information, relevant databases and contact points for investment promotion agencies; (c) commitments in areas of interest to the newer ASEAN Member States; and (d) recognising that commitments by each newer ASEAN

Member State may be made in accordance with its individual stage of development.

Article 16 Work Programme 1.

2.

The Parties shall enter into discussions on: (a) schedules of reservations to this Chapter; and (b) treatment of investment in services which does not qualify as commercial presence in Chapter 8 (Trade in Services). The Parties shall also enter into discussions with a view to agreeing on: (a) the application of most-favoured-nation treatment to this Chapter, including to those schedules of reservations; and [page 212]

3.

4. 5.

(b) procedures for the modification of schedules of reservations. The Parties shall conclude the discussions referred to in Paragraphs 1 and 2 within five years from the date of entry into force of this Agreement unless the Parties otherwise agree. These discussions shall be overseen by the Investment Committee established pursuant to Article 17 (Committee on Investment). Schedules of reservations to this Chapter referred to in Paragraph 1 shall enter into force on a date agreed to by the Parties. Notwithstanding anything to the contrary in this Chapter, Article 4 (National Treatment) and Article 12 (Reservations) shall not apply until the Parties’ schedules of reservations to this Chapter have entered into force in accordance with Paragraph 4.

Article 17 Committee on Investment 1.

The Parties hereby establish a Committee on Investment (Investment Committee) consisting of representatives of the

2.

3.

Parties. The Investment Committee shall meet within one year from the date of entry into force of this Agreement and thereafter as mutually determined by the Parties. Meetings may be conducted in person, or by any other means as mutually determined by the Parties. The Investment Committee’s functions shall be: (a) to oversee the discussions referred to in Article 16.1 and 16.2 (Work Programme); (b) to review the implementation of this Chapter; (c) to consider any other matters related to this Chapter identified by the Parties; and (d) to report to the FTA Joint Committee as required.

SECTION B Investment Disputes between a Party and an Investor Article 18 Scope and Definitions 1.

2. 3. 4.

This Section shall apply to disputes between a Party and an investor of another Party concerning an alleged breach of an obligation of the former under Section A which causes loss or damage to the covered investment of the investor. This Section shall not apply to investment disputes which have occurred prior to the entry into force of this Agreement. A natural person possessing the nationality or citizenship of a Party may not pursue a claim against that Party under this Section. For the purpose of this Section: (a) Appointing Authority means: [page 213]

(b) (c) (d) (e)

(f) (g)

(h)

(i) (j)

(k)

(i) in the case of arbitration under Article 21.1(b) or (c) (Submission of a Claim), the Secretary-General of ICSID; (ii) in the case of arbitration under Article 21.1(d) or (e) (Submission of a Claim), the Secretary-General of the Permanent Court of Arbitration; or (iii) any person as agreed between the disputing parties; disputing Party means a Party against which a claim is made under this Section; disputing Party means a disputing investor or a disputing Party; disputing parties means a disputing investor and a disputing Party; disputing investor means an investor of a Party that makes a claim against another Party on its own behalf under this Section, and where relevant includes an investor of a Party that makes a claim on behalf of a juridical person of the disputing Party that the investor owns or controls; ICSID means the International Centre for Settlement of Investment Disputes; ICSID Convention means the Convention on the Settlement of Investment Disputes between States and National of other States, done at Washington on 18 March 1965; ICSID Additional Facility Rules means the Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes; non-disputing Party means the Party of the disputing investor; New York Convention means the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done at New York on 10 June 1958; and UNCITRAL Arbitration Rules means the arbitration rules of the United Nations Commission on International

Trade Law, approved by the United Nations General Assembly on 15 December 1976.

Article 19 Consultations 1.

2.

In the event of an investment dispute referred to in Article 18.1 (Scope and Definitions), the disputing parties shall as far as possible resolve the dispute through consultation, with a view towards reaching an amicable settlement. Such consultations, which may include the use of non-binding, third party procedures, shall be initiated by a written request for consultations delivered by the disputing investor to the disputing Party. With the objective of resolving an investment dispute through consultations, a disputing investor shall provide the disputing Party, prior to the commencement of consultations, with information regarding the legal and factual basis for the investment dispute. [page 214]

Article 20 Claim by an Investor of a Party If an investment dispute has not been resolved within 180 days of the receipt by a disputing Party of a request for consultations, the disputing investor may, subject to this Article, submit to conciliation or arbitration a claim: (a) that the disputing Party has breached an obligation arising under Article 4 (National Treatment), Article 6 (Treatment of Investment), Article 7 (Compensation for Losses), Article 8 (Transfers), and Article 9 (Expropriation and Compensation) relating to the management, conduct, operation or sale or other disposition of a covered investment; and (b) that the disputing investor or the covered investment has incurred loss or damage by reason of, or arising out of, that

breach.

Article 21 Submission of a Claim 1.

2.

3.

4.

A disputing investor may submit a claim referred to in Article 20 (Claim by an Investor of a Party) at the choice of the disputing investor: (a) where the Philippines or Viet Nam is the disputing Party, to the courts or tribunals of that Party, provided that such courts or tribunals have jurisdiction over such claim; or (b) under the ICSID Convention and the ICSID Rules of Procedure for Arbitration Proceedings14, provided that both the disputing Party and the non-disputing Party are parties to the ICSID Convention; or (c) under the ICSID Additional Facility Rules, provided that either of the disputing Party or non-disputing Party are a party to the ICSID Convention; or (d) under the UNCITRAL Arbitration Rules; or (e) if the disputing parties agree, to any other arbitration institution or under any other arbitration rules, provided that resort to one of the fora under Subparagraphs (a) to (e) shall exclude resort to any other. A claim shall be deemed submitted to arbitration under this Article when the disputing investor’s notice of or request for arbitration made in accordance with this Section (notice of arbitration) is received under the applicable arbitration rules. The arbitration rules applicable under Paragraph 1(b) to (e) as in effect on the date the claim or claims were submitted to arbitration under this Article, shall govern the arbitration except to the extent modified by this Section. In relation to a specific investment dispute or class of disputes, the applicable arbitration rules may be waived, varied or modified by written agreement between the disputing parties. Such rules shall be binding on the relevant

[page 215]

5.

tribunal or tribunals established pursuant to this Section, and on individual arbitrators serving on such tribunals. The disputing investor shall provide with the notice of arbitration: (a) the name of the arbitrator that the disputing investor appoints; or (b) the disputing investor’s written consent for the Appointing Authority to appoint that arbitrator.

Article 22 Conditions and Limitations on Submission of a Claim 1.

The submission of a dispute as provided for in Article 20 (Claim by an Investor of a Party) to conciliation or arbitration under Article 21.1(b) to (e) (Submission of a Claim) in accordance with this Section, shall be conditional upon: (a) the submission of the investment dispute to such conciliation or arbitration taking place within three years of the time at which the disputing investor became aware, or should reasonably have become aware, of a breach of an obligation referred to in Article 20(a) (Claim by an Investor of a Party) causing loss or damage to the disputing investor or a covered investment; (b) the disputing investor providing written notice, which shall be submitted at least 90 days before the claim is submitted, to the disputing Party of its intent to submit the investment dispute to such conciliation or arbitration and which briefly summarises the alleged breach of the disputing Party (including the articles or provisions alleged to have been breached) and the loss or damage allegedly caused to the disputing investor or a covered investment; and (c) the notice of arbitration being accompanied by the disputing investor’s written waiver of its right to initiate or

2.

3.

4.

continue any proceedings before the courts or administrative tribunals of either Party, or other dispute settlement procedures, of any proceeding with respect to any measure alleged to constitute a breach referred to in Article 20 (Claim by an Investor of a Party). Notwithstanding Paragraph 1(c), no Party shall prevent the disputing investor from initiating or continuing an action that seeks interim measures of protection for the sole purpose of preserving its rights and interests and does not involve the payment of damages or resolution of the substance of the matter in dispute, before the courts or administrative tribunals of the disputing Party. No Party shall give diplomatic protection, or bring an international claim, in respect of a dispute which has been submitted to conciliation or arbitration under this Article, unless such other Party has failed to abide by and comply with the award rendered in such dispute. Diplomatic protection, for the purposes of this Paragraph, shall not include informal diplomatic exchanges for the sole purpose of facilitating a settlement of the dispute. A disputing Party shall not assert, as a defence, counter-claim, right of set-off or otherwise, that the disputing investor or the covered investment has received or will receive, pursuant to an insurance or guarantee contract, indemnification or other compensation for all or part of any alleged loss. [page 216]

Article 23 Selection of Arbitrators 1.

Unless the disputing parties otherwise agree, the tribunal shall comprise three arbitrators: (a) one arbitrator appointed by each of the disputing parties; and (b) the third arbitrator, who shall be the presiding arbitrator, appointed by agreement of the disputing parties, shall be a

2.

3. 4.

5. 6.

national of a non-Party which has diplomatic relations with the disputing Party and non-disputing Party, and shall not have permanent residence in either the disputing Party or non-disputing Party. Arbitrators shall have expertise or experience in public international law, international trade or international investment rules, and be independent of, and not be affiliated with or take instructions from the disputing Party, the non-disputing Party, or disputing investor. The Appointing Authority shall serve as appointing authority for arbitration under this Article. If a tribunal has not been constituted within 75 days from the date that a claim is submitted to arbitration under this Section, the Appointing Authority, on the request of a disputing party, shall appoint, in his or her discretion, the arbitrator or arbitrators not yet appointed. The disputing parties may establish rules relating to expenses incurred by the tribunal, including arbitrators’ remuneration. Where any arbitrator appointed as provided for in this Article resigns or becomes unable to act, a successor shall be appointed in the same manner as prescribed for the appointment of the original arbitrator and the successor shall have all the powers and duties of the original arbitrator.

Article 24 Consolidation Where two or more claims have been submitted separately to arbitration under Article 20 (Claim by an Investor of a Party) and the claims have a question of law or fact in common and arise out of the same or similar events or circumstances, all concerned disputing parties may agree to consolidate those claims in any manner they deem appropriate.

Article 25 Conduct of the Arbitration

1. 2.

3.

Where issues relating to jurisdiction or admissibility are raised as preliminary objections, a tribunal shall decide the matter before proceeding to the merits. A disputing Party may, no later than 30 days after the constitution of the tribunal, file an objection that a claim is manifestly without merit. A disputing Party may also file an objection that a claim is otherwise outside the jurisdiction or competence of the tribunal. The disputing Party shall specify as precisely as possible the basis for the objection. The tribunal shall address any such objection as a preliminary question apart from the merits of the claim. The disputing parties shall be given a reasonable [page 217]

4.

5.

6.

opportunity to present their views and observations to the tribunal. If the tribunal decides that the claim is manifestly without merit, or is otherwise not within the jurisdiction or competence of the tribunal, it shall render an award to that effect. The tribunal may, if warranted, award the prevailing party reasonable costs and fees incurred in submitting or opposing the objection. In determining whether such an award is warranted, the tribunal shall consider whether either the claim or the objection was frivolous or manifestly without merit, and shall provide the disputing parties a reasonable opportunity to comment. Unless the disputing parties otherwise agree, the tribunal shall determine the place of arbitration in accordance with the applicable arbitration rules, provided that the place shall be in the territory of a State that is a party to the New York Convention. Where an investor claims that the disputing Party has breached Article 9 (Expropriation and Compensation) by the adoption or enforcement of a taxation measure, the disputing Party and the non-disputing Party shall, upon request from the disputing Party, hold consultations with a view to determining whether the taxation

7.

measure in question has an effect equivalent to expropriation or nationalisation. Any tribunal that may be established pursuant to this Section shall accord serious consideration to the decision of both Parties under this Paragraph. If both Parties fail either to initiate consultations referred to in Paragraph 6, or to determine whether such taxation measure has an effect equivalent to expropriation or nationalisation within the period of 180 days from the date of the receipt of request for consultation referred to in Article 19 (Consultations), the disputing investor shall not be prevented from submitting its claim to arbitration in accordance with this Section.

Article 26 Transparency of Arbitral Proceedings 1.

2.

3.

4.

5.

Subject to Paragraphs 2 and 3, the disputing Party may make publicly available all awards and decisions produced by the tribunal. Any of the disputing parties that intend to use information designated as confidential information in a hearing shall so advise the tribunal. The tribunal shall make appropriate arrangements to protect the information from disclosure. Any information specifically designated as confidential that is submitted to the tribunal or the disputing parties shall be protected from disclosure to the public. A disputing party may disclose to persons directly connected with the arbitral proceedings such confidential information as it considers necessary for the preparation of its case, but it shall require that such confidential information is protected. The tribunal shall not require a Party to furnish or allow access to information the disclosure of which would impede law enforcement or would be contrary to the Party’s law protecting Cabinet confidences, personal privacy or the financial affairs and accounts of individual customers of financial institutions, or which it determines to be contrary to its essential security.

[page 218] 6.

The non-disputing Party shall be entitled, at its cost, to receive from the disputing Party a copy of the notice of arbitration, no later than 30 days after the date that such document has been delivered to the disputing Party. The disputing Party shall notify all other Parties of the receipt of the notice of arbitration within 30 days thereof.

Article 27 Governing Law 1.

2.

3.

Subject to Paragraphs 2 and 3, when a claim is submitted under Article 20 (Claim by an Investor of a Party), the tribunal shall decide the issues in dispute in accordance with this Agreement, any other applicable agreements between the Parties, any relevant rules of international law applicable in the relations between the Parties, and, where applicable, any relevant domestic law of the disputing Party. The tribunal shall, on its own account or at the request of a disputing party, request a joint interpretation of any provision of this Agreement that is in issue in a dispute. The Parties shall submit in writing any joint decision declaring their interpretation to the tribunal within 60 days of the delivery of the request. Without prejudice to Paragraph 3, if the Parties fail to issue such a decision within 60 days, any interpretation submitted by a Party shall be forwarded to the disputing parties and the tribunal, which shall decide the issue on its own account. A joint decision of the Parties, declaring their interpretation of a provision of this Agreement shall be binding on a tribunal, and any decision or award issued by a tribunal must be consistent with that joint decision.

Article 28 Awards 1.

Where a tribunal makes a final award against either of the

2. 3. 4.

5.

disputing parties, the tribunal may award, separately or in combination, only: (a) monetary damages and any applicable interest; and (b) restitution of property, in which case the award shall provide that the disputing Party may pay monetary damages and any applicable interest in lieu of restitution. A tribunal may also award costs and attorney’s fees in accordance with this Section and the applicable arbitration rules. A tribunal may not award punitive damages. An award made by a tribunal shall be final and binding upon the disputing parties. An award shall have no binding force except between the disputing parties and in respect of the particular case. Subject to Paragraph 6 and the applicable review procedure for an interim award, a disputing party shall abide by and comply with an award without delay.15 [page 219]

6.

A disputing party may not seek enforcement of a final award until: (a) in the case of a final award under the ICSID Convention: (i) 120 days has elapsed from the date the award was rendered and no disputing party has requested revision or annulment of the award; or (ii) revision or annulment proceedings have been completed; (b) in the case of a final award under the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules, or the rules selected pursuant to Article 21.1(e) (Submission of a Claim): (i) 90 days have elapsed from the date the award was rendered and no disputing party has commenced a proceeding to revise, set aside, or annul the award; or

(ii)

a court has dismissed or allowed an application to revise, set aside, or annul the award and there is no further appeal. Each Party shall provide for the enforcement of an award in its territory.

7.

_____________________________ 1.

2. 3.

4.

5. 6. 7. 8.

9. 10. 11. 12. 13. 14.

For greater certainty: (a) in the case of Thailand, protection under this Chapter shall be accorded to covered investments which have been specifically approved in writing for protection by the competent authorities; (b) in the case of Viet Nam, “has been admitted” means “has been specifically registered or approved in writing, as the case may be”. The term “investment” does not include an order or judgment entered in a judicial or administrative action. For greater certainty, investment does not mean claims to money that arise solely from: (a) commercial contracts for sale of goods or services; or (b) the extension of credit in connection with such commercial contracts. For greater certainty, the Parties understand that an investor that “seeks to make” an investment refers to an investor of another Party that has taken active steps to make an investment. Where a notification or approval process is required for making an investment, an investor that “seeks to make” an investment refers to an investor of another Party that has initiated such notification or approval process. The application of this Article is subject to Article 16 (Work Programme). In the case of Indonesia, only Paragraph 2(a) and (b) shall apply where Indonesia is the Party according treatment under this Article. This Article shall be interpreted in accordance with this Chapter’s Annex on Expropriation and Compensation. For the avoidance of doubt, where Malaysia is the expropriating Party, any measure of expropriation relating to land shall be for the purposes as set out in the domestic laws and regulations relating to land acquisition. The Parties understand that there may be legal and administrative processes that need to be observed before payment can be made. In the case of the Philippines, the time when or immediately before the expropriation was publicly announced refers to the date of filing of the Petition for Expropriation. The application of this Article is subject to Article 16 (Work Programme). For greater certainty, the Parties agree that such information may be published in each Party’s chosen language. For avoidance of doubt, the form of “review” shall be as provided for under the Party’s law. In the case of the Philippines, the submission of a claim under the ICSID Convention and the ICSID Rules of Procedure for Arbitration Proceedings shall be subject to a written agreement between the disputing parties in the event that an investment dispute arises.

15. The Parties understand that there may be domestic legal and administrative processes that need to be observed before an award can be complied with.

[page 220]

Annex on Expropriation and Compensation 1.

2.

3.

4.

An action or a series of related actions by a Party cannot constitute an expropriation unless it interferes with a tangible or intangible property right or property interest in a covered investment. Article 9.1 (Expropriation and Compensation) of Chapter 11 (Investment) addresses two situations: (a) the first situation is direct expropriation, where a covered investment is nationalised or otherwise directly expropriated through formal transfer of title or outright seizure; and (b) the second situation is where an action or series of related actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure. The determination of whether an action or series of related actions by a Party, in a specific fact situation, constitutes an expropriation of the type referred to in Paragraph 2(b) requires a case-by-case, fact-based inquiry that considers, among other factors: (a) the economic impact of the government action, although the fact that an action or series of related actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that such an expropriation has occurred; (b) whether the government action breaches the government’s prior binding written commitment to the investor whether by contract, licence or other legal document; and (c) the character of the government action, including, its objective and whether the action is disproportionate to the public purpose.1 Non-discriminatory regulatory actions by a Party that are designed

and applied to achieve legitimate public welfare objectives, such as the protection of public health, safety, and the environment do not constitute expropriation of the type referred to in Paragraph 2(b). _____________________________ 1.

“Public purpose” shall be read with reference to Article 9.1(a) and Article 9.6 (Expropriation and Compensation) of Chapter 11 (Investment).

[page 221]

Appendix 4.2 Japan–Australia Economic Partnership Agreement

CHAPTER 14 INVESTMENT Article 14.1 Scope 1.

2.

This Chapter shall apply to measures adopted or maintained by a Party relating to: (a) investors of the other Party; (b) covered investments; and (c) with respect to Article 14.9, all investments in the Area of the Party adopting or maintaining the measure. With the exception of Article 14.15, in the event of any inconsistency between this Chapter and another Chapter, the other Chapter shall prevail to the extent of inconsistency.

Article 14.2 Definitions For the purposes of this Chapter: (a) the term “covered investment” means, with respect to a Party, an investment in its Area of an investor of the other Party, in existence as of the date of entry into force of this Agreement or established, acquired or expanded thereafter; (b) the term “enterprise of a Party” means an enterprise constituted or organised under the law of a Party; (c) the term “freely usable currencies” means any currency designated as such by the International Monetary Fund under the Articles of Agreement of the International Monetary Fund, as amended; (d) the term “investment activities” means the establishment, acquisition, expansion, management, conduct, operation, maintenance, use, enjoyment and sale or other disposition of investments; (e) the term “investment agreement” means a written agreement between a national authority of a Party and a covered investment

or an investor of the other Party, on which the covered investment or the investor relies in establishing or acquiring a covered investment, that grants rights to the covered investment or investor: (i) with respect to natural resources that a national authority controls, such as for their exploration, extraction, refining, transportation, distribution or sale; [page 222] (ii)

(iii)

Note 1:

Note 2:

to supply services to the public on behalf of the Party, such as power generation or distribution, water treatment or distribution, or telecommunications; or to undertake infrastructure projects, such as the construction of roads, bridges, canals, dams, or pipelines, that are not for the exclusive or predominant use and benefit of the government; “Written agreement” means an agreement in writing, executed by both parties, whether in a single instrument or in multiple instruments, that creates an exchange of rights and obligations, binding on both parties. For greater certainty: (i) a unilateral act of an administrative or judicial authority, such as a permit, licence, or authorisation issued by a Party solely in its regulatory capacity, or a decree, order, or judgment, standing alone; and (ii) an administrative or judicial consent decree or order, shall not be considered a written agreement.

For the purposes of this definition, “national authority” means an authority at the central level of government. (f) the term “investment” means every kind of asset owned or controlled, directly or indirectly, by an investor, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of

gain or profit, or the assumption of risk. Forms that an investment may take include: (i) an enterprise and a branch of an enterprise; (ii) shares, stocks or other forms of equity participation in an enterprise; (iii) bonds, debentures, loans and other forms of debt; (iv) futures, options and other derivatives; (v) rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts; (vi) claims to money or to any contractual performance related to a business activity and having an economic value; (vii) intellectual property as defined in Article 16.2 (Intellectual Property - Definitions); (viii) rights conferred pursuant to laws and regulations or contracts such as concessions, licences, authorisations and permits; and (ix) any other tangible and intangible, movable and immovable property, and any related property rights, such as leases, mortgages, liens and pledges; and Note: Investments may also include amounts yielded by investments that are re-invested, in particular, profit, interest, capital gains, dividends, royalties and fees. A change in the form in which assets are invested does not affect their character as investments. (g) the term “investor of a Party” means a natural person or an enterprise of a Party, that seeks to make, is making, or has made, an investment in the Area of the other Party. [page 223]

Article 14.3 National Treatment Each Party shall accord to investors of the other Party and to covered investments treatment no less favourable than that it accords, in like

circumstances, to its own investors and to their investments with respect to investment activities in its Area.

Article 14.4 Most-Favoured-Nation Treatment Each Party shall accord to investors of the other Party and to covered investments treatment no less favourable than that it accords, in like circumstances, to investors of a non-Party and to their investments with respect to investment activities in its Area. Note: For greater certainty, this Article does not apply to dispute settlement procedures or mechanisms under any international agreement.

Article 14.5 Minimum Standard of Treatment Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. Note 1:

This Article prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded by a Party to covered investments. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.

Note 2:

A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article.

Article 14.6 Access to the Courts of Justice 1.

Each Party shall with respect to investment activities in its Area accord to investors of the other Party treatment no less favourable

2.

than that it accords in like circumstances to its own investors or investors of a non-Party, with respect to access to its courts of justice and administrative tribunals and agencies. Paragraph 1 does not apply to treatment provided to investors of a non-Party pursuant to an international agreement concerning access to courts of justice or administrative tribunals, or judicial cooperation agreements.

Article 14.7 Special Formalities and Information Requirements 1.

Nothing in Article 14.3 shall be construed to prevent a Party from adopting or maintaining a measure that prescribes special formalities in connection with investment activities of investors of the other Party and covered investments, such as compliance with registration requirements, or requirements that investors be residents of the Party or that covered investments be legally [page 224]

2.

constituted under the laws and regulations of the Party provided that such formalities do not materially impair the protections afforded by the Party to investors of the other Party and covered investments pursuant to this Chapter. Notwithstanding Articles 14.3 and 14.4, a Party may require an investor of the other Party, or a covered investment, to provide information concerning that covered investment solely for informational or statistical purposes. The Party shall protect such information that is confidential from any disclosure that would prejudice the competitive position of the investor or covered investment. Nothing in this paragraph shall be construed to prevent a Party from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its law.

Article 14.8 Senior Management and Boards of Directors 1.

2.

Neither Party shall require that an enterprise of that Party that is a covered investment appoint to senior management positions nationals of any particular nationality. A Party may require that a majority or less than a majority of the board of directors, or any committee thereof, of an enterprise of that Party that is a covered investment, be of a particular nationality, or resident in the Area of the Party, provided that the requirement does not materially impair the ability of the investor to exercise control over its investment.

Article 14.9 Prohibition of Performance Requirements 1.

2.

Neither Party shall apply in connection with investment activities of an investor of a Party in its Area any measure which is inconsistent with the Agreement on Trade-Related Investment Measures in Annex 1A to the WTO Agreement. Without prejudice to paragraph 1, neither Party shall impose or enforce any of the following requirements, in connection with investment activities of an investor of a Party or of a non-Party in its Area: (a) to export a given level or percentage of goods or services; (b) to achieve a given level or percentage of domestic content; (c) to purchase, use or accord a preference to goods produced in its Area, or to purchase goods from persons in its Area; (d) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with an investment of the investor; (e) to restrict sales of goods or services in its Area that an investment of the investor produces or provides by relating

(f)

such sales in any way to the volume or value of its exports or foreign exchange earnings; to transfer technology, a production process or other proprietary knowledge to a person in its Area, except when the requirement: (i) is imposed or enforced by a court of justice, administrative tribunal or competition authority to remedy a practice determined after judicial or administrative process to be anticompetitive under its competition laws and regulations; or [page 225]

3.

(ii) concerns the disclosure of proprietary information or the use of intellectual property rights which is undertaken in a manner not inconsistent with the TRIPS Agreement; or (g) to supply to a specific region or the world market exclusively from its Area, one or more of the goods that an investment of the investor produces or the services that an investment of the investor provides. Without prejudice to paragraph 1, neither Party shall condition the receipt or continued receipt of an advantage, in connection with investment activities of an investor of a Party or of a non-Party in its Area, on compliance with any of the following requirements: (a) to achieve a given level or percentage of domestic content; (b) to purchase, use or accord a preference to goods produced in its Area, or to purchase goods from persons in its Area; (c) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with an investment of the investor; or (d) to restrict sales of goods or services in its Area that an investment of the investor produces or provides by relating

such sales in any way to the volume or value of its exports or foreign exchange earnings. 4. Nothing in paragraph 3 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with investment activities of an investor of a Party or of a non-Party in its Area, on compliance with a requirement to locate production, supply a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its Area. 5. Subparagraphs 2(a), 2(b), 2(c), 3(a) and 3(b) shall not apply to qualification requirements for goods or services with respect to export promotion and foreign aid programs. 6. Subparagraphs 2(b), 2(c), 2(f), 2(g), 3(a) and 3(b) shall not apply to government procurement. 7. Subparagraphs 3(a) and 3(b) shall not apply to requirements imposed by an importing Party relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas. 8. Paragraphs 2 and 3 shall not apply to any requirement other than the requirements set out in those paragraphs. Note: For greater certainty, this Article does not preclude enforcement of any commitment, undertaking or requirement between private parties, where a Party did not impose or require the commitment, undertaking or requirement.

Article 14.10 1.

Non-Conforming Measures and Exceptions

Articles 14.3, 14.4, 14.8 and 14.9 shall not apply to: (a) any non-conforming measure that is maintained by the following on the date of entry into force of this Agreement, as set out in Schedules in Annex [page 226]

2.

3.

4.

6 (Non-Conforming Measures Relating to Paragraph 1 of Articles 9.7 and 14.10): (i) the central government of a Party; or (ii) a State or Territory of Australia or a prefecture of Japan; (b) any non-conforming measure that is maintained by a local government other than a State or Territory or a prefecture referred to in subparagraph (a)(ii) on the date of entry into force of this Agreement; (c) the continuation or prompt renewal of any non-conforming measure referred to in subparagraphs (a) and (b); or (d) an amendment or modification to any non-conforming measure referred to in subparagraphs (a) and (b), provided that the amendment or modification does not decrease the conformity of the measure, as it existed immediately before the amendment or modification, with Articles 14.3, 14.4, 14.8 and 14.9. Articles 14.3, 14.4, 14.8 and 14.9 shall not apply to any measure that a Party adopts or maintains with respect to sectors, subsectors and activities set out in its Schedule in Annex 7 (NonConforming Measures Relating to Paragraph 2 of Articles 9.7 and 14.10). Neither Party shall, under any measure adopted after the date of entry into force of this Agreement and covered by its Schedule in Annex 7 (Non-Conforming Measures Relating to Paragraph 2 of Articles 9.7 and 14.10), require an investor of the other Party, by reason of its nationality, to sell or otherwise dispose of an investment that exists at the time the measure becomes effective. In cases where a Party makes an amendment or a modification to any non-conforming measure set out in its Schedule in Annex 6 (Non-Conforming Measures Relating to Paragraph 1 of Articles 9.7 and 14.10) or where a Party adopts any new or more restrictive measure with respect to sectors, sub-sectors or activities set out in its Schedule in Annex 7 (Non-Conforming Measures Relating to Paragraph 2 of Articles 9.7 and 14.10) after the date of the entry

5.

into force of this Agreement, the Party shall, prior to the implementation of the amendment or modification or the new or more restrictive measure, or as soon as possible thereafter: (a) on request of the other Party, promptly provide information and respond to questions pertaining to any such proposed or actual amendment, modification or measure; (b) to the extent possible, provide a reasonable opportunity for comments by the other Party on any such proposed or actual amendment, modification or measure; and (c) to the maximum extent possible, notify the other Party of any such amendment, modification or measure that may substantially affect the other Party’s interests under this Agreement. Each Party shall endeavour, where appropriate, to reduce or eliminate the non-conforming measures set out in its Schedules in Annexes 6 (Non-Conforming Measures Relating to Paragraph 1 of Articles 9.7 and 14.10) and 7 (Non[page 227]

6.

7.

Conforming Measures Relating to Paragraph 2 of Articles 9.7 and 14.10) respectively. Articles 14.3 and 14.4 shall not apply to any measure covered by the exceptions to, or derogations from, obligations under Articles 3 and 4 of the TRIPS Agreement. Articles 14.3, 14.4 and 14.8 shall not apply to any measure that a Party adopts or maintains with respect to: (a) government procurement; or (b) subsidies or grants provided by a Party, including government-supported loans, guarantees and insurance.

Article 14.11

Expropriation and

Compensation 1.

2.

3.

4.

5.

Neither Party shall expropriate or nationalise a covered investment either directly or indirectly through measures equivalent to expropriation or nationalisation (hereinafter referred to in this Chapter as “expropriation”) except: (a) for a public purpose; (b) on a non-discriminatory basis; (c) in accordance with due process of law; and (d) upon payment of prompt, adequate and effective compensation in accordance with paragraphs 2 through 4. The compensation shall be equivalent to the fair market value of the expropriated investment at the time when the expropriation was publicly announced or when the expropriation occurred, whichever is the earlier. The fair market value shall not reflect any change in market value occurring because the expropriation had become publicly known earlier. The compensation shall be paid without delay and shall include interest at a commercially reasonable rate accrued from the date of expropriation to the date of payment and shall be effectively realisable and freely transferable in accordance with Article 14.13. If payment is made in a freely usable currency, the compensation paid shall include interest, at a commercially reasonable rate for that currency, accrued from the date of expropriation until the date of payment. If a Party elects to pay in a currency other than a freely usable currency, the compensation paid, converted into the currency of payment at the market rate of exchange prevailing on the date of payment, shall be no less than the sum of the following: (a) the fair market value on the date of expropriation, converted into a freely usable currency at the market rate of exchange prevailing on that date; and (b) interest, at a commercially reasonable rate for that freely usable currency, accrued from the date of expropriation until the date of payment.

6.

This Article does not apply to the issuance of compulsory licences granted in relation to intellectual property rights in accordance with the TRIPS Agreement, or to the revocation, limitation, or creation of intellectual property [page 228]

rights, to the extent that such issuance, revocation, limitation, or creation is consistent with Chapter 16 (Intellectual Property). Note: For greater certainty, the reference to the TRIPS Agreement in paragraph 6 includes any waiver in force between the Parties of any provision of that Agreement granted by WTO members in accordance with the WTO Agreement.

Article 14.12 1.

2.

3.

Treatment in Case of Strife

Each Party shall, with respect to restitution, indemnification, compensation or any other settlement, accord to investors of the other Party that have suffered loss or damage to their covered investments due to armed conflict or civil strife such as revolution, insurrection, civil disturbance or any other similar event in its Area, treatment that is no less favourable than that it would accord, in like circumstances, to its own investors or to investors of a non-Party. Any payments as a means of settlement referred to in paragraph 1 shall be effectively realisable, freely transferable and freely convertible at the market exchange rate into the currency of the Party of the investors concerned or freely usable currencies. Notwithstanding the provisions of Article 1.10 (General Provisions - Security Exceptions), neither Party shall be relieved of its obligation under paragraph 1 by reason of its measures taken pursuant to that Article.

Article 14.13

Transfers

1.

2.

3.

Each Party shall allow all transfers relating to a covered investment to be made freely into and out of its Area without delay. Such transfers shall include those of: (a) the initial capital and additional amounts to maintain or increase investments; (b) profits, capital gains, dividends, royalties, interest, fees and other current incomes accruing from investments; (c) proceeds from the total or partial sale or liquidation of investments; (d) payments made under a contract including loan payments in connection with investments; (e) earnings and remuneration of personnel from abroad who work in connection with investments in the Area of the Party; (f) payments made in accordance with Articles 14.11 and 14.12; and (g) payments arising out of a dispute. Each Party shall allow such transfers to be made in freely usable currencies at the market exchange rate prevailing at the time of each transfer. Notwithstanding paragraphs 1 and 2, a Party may delay or prevent such transfers through the equitable, non-discriminatory and goodfaith application of its laws relating to: (a) bankruptcy, insolvency or the protection of the rights of creditors; (b) issuing, trading or dealing in securities or derivatives; (c) criminal or penal offences; [page 229] (d)

reporting or record keeping of transfers of currency or other monetary instruments when necessary to assist law

(e)

enforcement or financial regulatory authorities; or ensuring compliance with orders or judgments in judicial or administrative proceedings.

Article 14.14

Subrogation

If a Party or its designated agency makes a payment to an investor of the Party pursuant to an indemnity, guarantee or insurance contract pertaining to an investment of that investor within the Area of the other Party, that other Party shall recognise: (a) the assignment, to the Party or its designated agency, of any right or claim of the investor in respect of such investment, that formed the basis of such payment; and (b) the right of the Party or its designated agency to exercise by virtue of subrogation such right or claim to the same extent as the original right or claim of the investor.

Article 14.15

General Exceptions

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between covered investments or investors of the other Party and other investments or investors, where like conditions prevail, or a disguised restriction on investment, nothing in Articles 14.3, 14.4, and 14.9 shall prevent the adoption or enforcement by either Party of measures: (a) necessary to protect public morals or to maintain public order; Note: The public order exception may be invoked only where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society. (b) necessary to protect human, animal or plant life or health; Note: This exception includes environmental measures necessary to protect human, animal or plant life or health. (c) necessary to secure compliance with laws or regulations

(d)

which are not inconsistent with the provisions of this Chapter, including those relating to: (i) the prevention of deceptive and fraudulent practices or to deal with the effects of a default on a contract; (ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts; or (iii) safety; imposed for the protection of national treasures of artistic, historic or archaeological value; or [page 230]

(e)

relating to the conservation of living or non-living exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.

Article 14.16 1.

2.

Temporary Safeguard Measures

A Party may adopt or maintain restrictive measures with regard to cross-border capital transactions as well as payments or transfers for transactions related to covered investments: (a) in the event of serious balance-of-payments and external financial difficulties or threat thereof; or (b) in exceptional cases where movements of capital cause or threaten to cause serious difficulties for macroeconomic management, in particular monetary and exchange rate policies. Restrictive measures referred to in paragraph 1 shall: (a) be applied such that the other Party is treated no less favourably than any non-Party;

be consistent with the Articles of Agreement of the International Monetary Fund; (c) not exceed those necessary to deal with the circumstances set out in paragraph 1; (d) be temporary and be phased out progressively as the situation specified in paragraph 1 improves; (e) be promptly notified to the other Party; and (f) avoid unnecessary damages to the commercial, economic and financial interests of the other Party. The Party which has adopted any measures under paragraph 1 shall, on request, commence consultations with the other Party in order to review the restrictions adopted by it. (b)

3.

Article 14.17 1.

2.

Denial of Benefits

A Party may deny the benefits of this Chapter to an investor of the other Party that is an enterprise of the other Party and to its investments, where the denying Party establishes that the enterprise is owned or controlled by an investor of a non-Party and the denying Party: (a) does not maintain diplomatic relations with the non-Party; or (b) adopts or maintains measures with respect to the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to its investments. A Party may deny the benefits of this Chapter to an investor of the other Party that is an enterprise of the other Party and to its investments, where the denying Party establishes that the enterprise is owned or controlled by an investor of a non-Party or of the denying Party and the enterprise has no substantial business activities in the Area of the other Party. [page 231]

Note: For the purposes of this Article, an enterprise is: (a) “owned” by an investor if more than 50 per cent of the equity interest in it is beneficially owned by the investor; and (b) “controlled” by an investor if the investor has the power to name a majority of its directors or otherwise to legally direct its actions.

Article 14.18 1.

2.

Subcommittee on Investment

For the purposes of the effective implementation and operation of this Chapter, the Parties hereby establish a subcommittee on Investment (hereinafter referred to in this Article as “the subcommittee”). The functions of the subcommittee shall be: (a) exchanging information on any matters related to this Chapter; (b) reviewing and monitoring the implementation and operation of this Chapter and the non-conforming measures set out in each Party’s Schedules in Annexes 6 (NonConforming Measures Relating to Paragraph 1 of Articles 9.7 and 14.10) and 7 (Non-Conforming Measures Relating to Paragraph 2 of Articles 9.7 and 14.10); (c) discussing any issues related to this Chapter; (d) considering any issues raised by either Party concerning the imposition or enforcement of performance requirements, including those specified in Article 14.9; (e) considering any issues raised by either Party concerning investment agreements between a Party and an investor of the other Party; (f) reporting the findings and outcome of discussions of the subcommittee to the Joint Committee; and (g) carrying out other functions as may be delegated by the Joint Committee.

3. 4.

5.

The subcommittee shall be composed of and co-chaired by representatives of the Governments of the Parties. The subcommittee may invite, by consensus, representatives of relevant entities other than the Governments of the Parties with the necessary expertise relevant to the issues to be discussed. The subcommittee shall meet at such venues and times and by such means as may be agreed by the Parties.

Article 14.19 1.

2.

Review

Unless the Parties otherwise agree, the Parties shall conduct a review of this Chapter with a view to the possible improvement of the investment environment through, for example, the establishment of a mechanism for the settlement of an investment dispute between a Party and an investor of the other Party. Such review shall commence in the fifth year following the date of entry into force of this Agreement or a year on which the Parties otherwise agree, whichever comes first. The Parties shall also conduct such a review if, following the entry into force of this Agreement, Australia enters into any multilateral or bilateral international [page 232]

3.

agreement providing for a mechanism for the settlement of an investment dispute between Australia and an investor of another or the other party to that agreement, with a view to establishing an equivalent mechanism under this Agreement. The Parties shall commence such review within three months following the date on which that international agreement entered into force and will conduct the review with the aim of concluding it within six months following the same date. At any time after the first year following the entry into force of this Agreement, either Party may request the other Party to agree to

commence the review provided for in paragraph 1.

[page 233]

Annex 12 Referred to in Chapter 14 (Investment) EXPROPRIATION 1.

2.

3.

4.

An action or a series of actions by a Party cannot constitute an expropriation unless it interferes with a tangible or intangible property right or property interest in an investment. Paragraph 1 of Article 14.11 (Investment - Expropriation and Compensation) addresses two situations: (a) direct expropriation, where an investment is nationalised or otherwise directly expropriated through formal transfer of title or outright seizure; and (b) indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure. The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors: (a) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred; (b) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (c) the character of the government action, including its objectives. Except in rare circumstances, such as when an action or a series of actions by a Party is so severe in light of its purpose that it cannot be reasonably viewed as having been applied in good faith, non-

discriminatory regulatory actions designed and applied by the Party for the purpose of legitimate public welfare objectives, such as the protection of public health, safety, and the environment, do not constitute indirect expropriation.

[page 235]

Appendix 4.3 Republic of KoreaAustralia Free Trade Agreement

CHAPTER 11 INVESTMENT Section A: Investment Article 11.1: 1.

2.

This Chapter shall apply to measures adopted or maintained by a Party relating to: (a) investors of the other Party; (b) covered investments; and (c) with respect to Article 11.9, all investments in the territory of the Party. For greater certainty, this Chapter shall not bind either Party in relation to any act or fact that took place or any situation that ceased to exist before the date of entry into force of this Agreement.

Article 11.2: 1.

2.

3.

Scope

Relation to Other Chapters

In the event of any inconsistency between this Chapter and another Chapter, the other Chapter shall prevail to the extent of the inconsistency. A requirement by a Party that a service supplier of the other Party post a bond or other form of financial security as a condition of the cross-border supply of a service does not of itself make this Chapter applicable to measures adopted or maintained by the Party relating to such cross-border supply of the service. This Chapter shall apply to measures adopted or maintained by the Party relating to the posted bond or financial security, to the extent that such bond or financial security is a covered investment. This Chapter shall not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter 8

(Financial Services).

Article 11.3: 1.

National Treatment

Each Party shall accord to investors of the other Party treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. [page 236]

2.

3.

Each Party shall accord to covered investments treatment no less favourable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. The treatment to be accorded by a Party under paragraphs 1 and 2 means, with respect to a regional level of government, treatment no less favourable than the most favourable treatment accorded in like circumstances, by that regional level of government to investors, and to investments of investors, of the Party of which it forms a part.

Article 11.4: 1.

2.

Most-Favoured-Nation Treatment35

Each Party shall accord to investors of the other Party treatment no less favourable than that it accords, in like circumstances, to investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. Each Party shall accord to covered investments treatment no less favourable than that it accords, in like circumstances, to

investments in its territory of investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments.

Article 11.5: 1.

2.

3.

Minimum Standard of Treatment36

Each Party shall accord to covered investments treatment in accordance with the customary international law minimum standard of treatment of aliens, including fair and equitable treatment and full protection and security. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of “fair and equitable treatment” and “full protection and security” shall not require treatment in addition to or beyond that which is required by that standard, and shall not create additional substantive rights. The obligation in paragraph 1 to provide: (a) “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and (b) “full protection and security” requires each Party to provide the level of police protection required under customary international law. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, shall not establish that there has been a breach of this Article. [page 237]

Article 11.6:

Losses and Compensation

1.

2.

3.

Notwithstanding Article 11.12.5(b), each Party shall accord to investors of the other Party, and to covered investments, with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife, treatment no less favourable than that it accords, in like circumstances, to: (a) its own investors and their investments; or (b) investors of any non-Party and their investments. Notwithstanding paragraph 1, if an investor of a Party, in the situations referred to in paragraph 1, suffers a loss in the territory of the other Party resulting from: (a) requisitioning of its covered investment or part thereof by the latter’s forces or authorities; or (b) destruction of its covered investment or part thereof by the latter’s forces or authorities, which was not required by the necessity of the situation, the latter Party shall provide the investor with restitution, compensation, or both as appropriate, for such loss. In the event of providing both restitution and compensation, their combined value shall not exceed the loss suffered. Any compensation shall be prompt, adequate, and effective, in accordance with Articles 11.7.2, 11.7.3 and 11.7.4, mutatis mutandis. Paragraph 1 shall not apply to existing measures relating to subsidies or grants that would be inconsistent with Article 11.3 but for Article 11.12.5(b).

Article 11.7: 1.

Expropriation and Compensation37

Neither Party shall expropriate or nationalise a covered investment either directly or indirectly through measures equivalent to expropriation or nationalisation (“expropriation”), except: (a) for a public purpose; (b) in a non-discriminatory manner;

on payment of prompt, adequate, and effective compensation; and (d) in accordance with the principle of due process of law as embodied in the principal legal systems of the world. The compensation referred to in paragraph 1(c) shall: (a) be paid without delay; (b) be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (hereinafter referred to as the “date of expropriation”); (c) not reflect any change in value occurring because the intended expropriation had become known earlier; and (d) be fully realisable and freely transferable. If the fair market value is denominated in a freely usable currency, the compensation referred to in paragraph 1(c) shall be no less than the fair market (c)

2.

3.

[page 238]

4.

5.

value on the date of expropriation, plus interest at a commercially reasonable rate for that currency, accrued from the date of expropriation until the date of payment. If the fair market value is denominated in a currency that is not freely usable, the compensation referred to in paragraph 1(c), converted into the currency of payment at the market rate of exchange prevailing on the date of payment, shall be no less than: (a) the fair market value on the date of expropriation, converted into a freely usable currency at the market rate of exchange prevailing on that date; plus (b) interest, at a commercially reasonable rate for that freely usable currency, accrued from the date of expropriation until the date of payment. This Article shall not apply to the issuance of compulsory licences granted in relation to intellectual property rights in accordance

with the TRIPS Agreement, or to the revocation, limitation, or creation of intellectual property rights, to the extent that such issuance, revocation, limitation or creation is consistent with Chapter 13 (Intellectual Property Rights).

Article 11.8: 1.

2.

3.

4.

Transfers38

Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory. Such transfers include: (a) contributions to capital, including the initial contribution; (b) profits, dividends, capital gains and proceeds from the sale of all or any part of the covered investment or from the partial or complete liquidation of the covered investment; (c) interest, royalty payments, management fees and technical assistance and other fees; (d) payments made under a contract, including a loan agreement; (e) payments made in accordance with Articles 11.6 and 11.7; and (f) payments arising out of a dispute. Each Party shall permit transfers relating to a covered investment to be made in a freely usable currency at the market rate of exchange prevailing at the time of transfer. Each Party shall permit returns in kind relating to a covered investment to be made as authorised or specified in a written agreement between the Party and a covered investment or an investor of the other Party. Notwithstanding paragraphs 1, 2 and 3, a Party may prevent or delay a transfer or a return in kind through the equitable, nondiscriminatory and good faith application of its laws and regulations relating to: (a) bankruptcy, insolvency or the protection of the rights of creditors;

(b) (c)

issuing, trading or dealing in securities, futures, options, or derivatives; criminal or penal offences; [page 239]

(d)

(e)

financial reporting or record keeping of transfers when necessary to assist law enforcement or financial regulatory authorities; or ensuring compliance with orders or judgments in judicial or administrative proceedings.

Article 11.9: 1.

Performance Requirements

Neither Party shall, in connection with the establishment, acquisition, expansion, management, conduct, operation or sale or other disposition of an investment in its territory of an investor of a Party or of a non-Party, impose or enforce any requirement or enforce any commitment or undertaking:39 (a) to export a given level or percentage of goods or services; (b) to achieve a given level or percentage of domestic content; (c) to purchase, use or accord a preference to goods produced in its territory or to purchase goods from persons in its territory; (d) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; (e) to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings; (f) to transfer a particular technology, a production process, or other proprietary knowledge to a person in its territory; or

to supply exclusively from the territory of the Party the goods that such investment produces or the services that it supplies to a specific regional market or to the world market. Neither Party shall condition the receipt or continued receipt of an advantage, in connection with the establishment, acquisition, expansion, management, conduct, operation or sale or other disposition of an investment in its territory of an investor of a Party or of a non-Party, on compliance with any requirement: (a) to achieve a given level or percentage of domestic content; (b) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; (c) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or (d) to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings. Nothing in paragraph 2 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, supply a service, train or (g)

2.

3.

[page 240]

4.

employ workers, construct or expand particular facilities, or carry out research and development, in its territory.40 Paragraph 1(f) shall not apply: (a) when a Party authorises use of an intellectual property right in accordance with Article 31 of the TRIPS Agreement, or to measures requiring the disclosure of proprietary

information that fall within the scope of, and are consistent with, Article 39 of the TRIPS Agreement; or (b) when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal, or competition authority to remedy a practice determined after judicial or administrative process to be anticompetitive under the Party’s competition laws.41 5. Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, paragraphs 1(b), 1(c) and 1(f), and 2(a) and 2(b), shall not be construed to prevent a Party from adopting or maintaining measures, including environmental measures: (a) necessary to secure compliance with laws and regulations that are not inconsistent with this Agreement; (b) necessary to protect human, animal or plant life or health; or (c) related to the conservation of living or non-living exhaustible natural resources. 6. Paragraphs 1(a), 1(b) and 1(c), and 2(a) and 2(b) shall not apply to qualification requirements for goods or services with respect to export promotion and foreign aid programs. 7. Paragraphs 1(b), 1(c), 1(f) and 1(g), and 2(a) and 2(b) shall not apply to government procurement. 8. Paragraphs 2(a) and 2(b) shall not apply to requirements imposed by an importing Party relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas. 9. For greater certainty, paragraphs 1 and 2 shall not apply to any commitment, undertaking, or requirement other than those set out in those paragraphs. 10. This Article shall not preclude enforcement of any commitment, undertaking, or requirement between private parties, where a Party did not impose or require the commitment, undertaking, or requirement. For the purposes of this Article, private parties

include designated monopolies or state enterprises, where such entities are not exercising delegated government authority. [page 241]

Article 11.10: Senior Management And Boards of Directors 1.

2.

Neither Party shall require that an enterprise of that Party that is a covered investment appoint to senior management positions natural persons of any particular nationality. A Party may require that a majority or less than a majority of the board of directors, or any committee thereof, of an enterprise of that Party that is a covered investment, be of a particular nationality, or resident in the territory of the Party, provided that the requirement does not materially impair the ability of the investor to exercise control over its investment.

Article 11.11: Denial of Benefits 1.

2.

A Party may deny the benefits of this Chapter to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if persons of a non-Party own or control the enterprise and the denying Party adopts or maintains measures with respect to the non-Party or a person of the nonParty that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to its investments. A Party may deny the benefits of this Chapter to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantive business operations in the territory of the other Party and persons of a non-Party, or of the denying Party, own or control the enterprise. If, before denying the benefits of this Chapter, the denying Party knows that the enterprise has no substantive

business operations in the territory of the other Party and that persons of a non-Party, or of the denying Party, own or control the enterprise, the denying Party shall, to the extent practicable, notify the other Party before denying the benefits. If the denying Party provides such notice, it shall consult with the other Party on request of the other Party.

Article 11.12: Non-Conforming Measures 1.

Articles 11.3, 11.4, 11.9 and 11.10 shall not apply to: (a) any existing non-conforming measure that is maintained by a Party at: (i) the central level of government, as set out by that Party in its Schedule to Annex I; (ii) a regional level of government, as set out by that Party in its Schedule to Annex I; or (iii) a local level of government; (b) the continuation or prompt renewal of any non-conforming measure referred to in subparagraph (a); or (c) an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with Articles 11.3, 11.4, 11.9 and 11.10. [page 242]

2.

3.

Articles 11.3, 11.4, 11.9 and 11.10 shall not apply to any measure that a Party adopts or maintains with respect to sectors, subsectors, or activities, as set out in its Schedule to Annex II. Neither Party shall, under any measure adopted after the date of entry into force of this Agreement and covered by its Schedule to Annex II, require an investor of the other Party, by reason of its nationality, to sell or otherwise dispose of an investment existing at

4.

5.

the time the measure becomes effective. Articles 11.3 and 11.4 shall not apply to any measure that is an exception to, or derogation from, the obligations under Article 13.1.6 as specifically provided in that Article. Articles 11.3, 11.4 and 11.10 shall not apply to: (a) government procurement; or (b) subsidies or grants provided by a Party, including government-supported loans, guarantees, and insurance.

Article 11.13: Special Formalities and Information Requirements42 1.

2.

Nothing in Article 11.3 shall be construed to prevent a Party from adopting or maintaining a measure that prescribes special formalities in connection with covered investments, such as a requirement that covered investments be legally constituted under its laws or regulations, provided that such formalities do not materially impair the protections afforded by the Party to investors of the other Party and covered investments in accordance with this Chapter. Notwithstanding Articles 11.3 and 11.4, a Party may require an investor of the other Party or its covered investment to provide information concerning that investment solely for informational or statistical purposes. The Party shall protect any information that is confidential from any disclosure that would prejudice the competitive position of the investor or the covered investment. Nothing in this paragraph shall be construed to prevent a Party from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its law.

Article 11.14: Subrogation 1.

Where a Party or an agency authorised by a Party has granted an indemnity, a guarantee or a contract of insurance against noncommercial risks with regard to an investment by one of its

investors in the territory of the other Party and when payment has been made under this indemnity, guarantee or contract of insurance by the former Party or the agency authorised by it, the latter [page 243]

2.

Party shall recognise the rights of the former Party or the agency authorised by the former Party by virtue of the principle of subrogation to the rights of the investor. Where a Party or an agency authorised by a Party has made a payment to its investor and has taken over rights and claims of the investor, that investor shall not, unless authorised to act on behalf of the Party or agency authorised by the Party making the payment, pursue those rights and claims against the other Party.

Section B Investor-State Dispute Settlement Article 11.15: Consultation and Negotiation In the event of an investment dispute, the claimant and the respondent should initially seek to resolve the dispute through consultation and negotiation, which may include the use of non-binding, third party procedures.

Article 11.16: Submission of a Claim to Arbitration 1.

In the event that a disputing party considers that an investment dispute cannot be settled by consultation and negotiation: (a) the claimant, on its own behalf, may submit to arbitration under this Section a claim:

(i) that the respondent has breached: (A) an obligation under Section A; (B) an investment authorisation; or (C) an investment agreement; and (ii) that the claimant has incurred loss or damage by reason of, or arising out of, that breach; and (b) the claimant, on behalf of an enterprise of the respondent that is a juridical person that the claimant owns or controls directly or indirectly, may submit to arbitration under this Section a claim: (i) that the respondent has breached: (A) an obligation under Section A; (B) an investment authorisation; or (C) an investment agreement; and (ii) that the enterprise has incurred loss or damage by reason of, or arising out of, that breach, provided that a claimant may submit pursuant to subparagraph (a) (i)(C) or (b)(i)(C) a claim for breach of an investment agreement only if the subject matter of the claim and the claimed damages directly relate to the covered investment that was established or acquired, or sought to be established or acquired, in reliance on the relevant investment agreement. [page 244] 2.

At least 90 days before submitting any claim to arbitration under this Section, a claimant shall deliver to the respondent a written notice of its intention to submit the claim to arbitration (notice of intent). The notice shall specify: (a) the name and address of the claimant and, where a claim is submitted on behalf of an enterprise, the name, address and place of incorporation of the enterprise;

(b)

3.

4.

for each claim, the provision of this Agreement, investment authorisation or investment agreement alleged to have been breached and any other relevant provisions; (c) the legal and factual basis for each claim; and (d) the relief sought and the approximate amount of damages claimed. Provided that six months have elapsed since the events giving rise to the claim, a claimant may submit a claim referred to in paragraph 1: (a) under the ICSID Convention and the ICSID Rules of Procedure for Arbitration Proceedings, provided that both the respondent and the non-disputing Party are parties to the ICSID Convention; (b) under the ICSID Additional Facility Rules, provided that either the respondent or the non-disputing Party is a party to the ICSID Convention; (c) under the UNCITRAL Arbitration Rules; or (d) if the claimant and respondent agree, to any other arbitration institution or under any other arbitration rules. A claim shall be deemed submitted to arbitration under this Section when the claimant’s notice of, or request for, arbitration (notice of arbitration): (a) referred to in paragraph 1 of Article 36 of the ICSID Convention is received by the Secretary-General; (b) referred to in Article 2 of Schedule C of the ICSID Additional Facility Rules is received by the SecretaryGeneral; (c) referred to in Article 3 of the UNCITRAL Arbitration Rules, together with the statement of claim referred to in Article 18 of the UNCITRAL Arbitration Rules, are received by the respondent; or (d) referred to under any arbitral institution or arbitral rules selected under paragraph 3(d) is received by the respondent.

A claim asserted by the claimant for the first time after such notice of arbitration is submitted shall be deemed submitted to arbitration under this Section on the date of its receipt under the applicable arbitral rules. 5. The arbitration rules applicable under paragraph 3, and in effect on the date the claim or claims were submitted to arbitration under this Section, shall govern the arbitration except to the extent modified by this Agreement. 6. The claimant shall provide with the notice of arbitration: (a) the name of the arbitrator that the claimant appoints; or (b) the claimant’s written consent for the Secretary-General to appoint that arbitrator.

Article 11.17: Consent of Each Party to Arbitration 1.

Each Party consents to the submission of a claim to arbitration under this Section in accordance with this Agreement. [page 245]

2.

The consent under paragraph 1 and the submission of a claim to arbitration under this Section shall satisfy the requirements of: (a) Chapter II (Jurisdiction of the Centre) of the ICSID Convention and the ICSID Additional Facility Rules for written consent of the parties to the dispute; and (b) Article II of the New York Convention for an “agreement in writing.”

Article 11.18: Conditions and Limitations on Consent of Each Party 1.

No claim may be submitted to arbitration under this Section if more than three years have elapsed from the date the claimant first

2.

3.

acquired, or should have first acquired, knowledge of the breach alleged under Article 11.16.1 and knowledge that the claimant (for claims brought under Article 11.16.1(a)) or the enterprise (for claims brought under Article 11.16.1(b)) has incurred loss or damage. No claim may be submitted to arbitration under this Section unless: (a) the claimant consents in writing to arbitration in accordance with the procedures set out in this Agreement; and (b) the notice of arbitration is accompanied: (i) for claims submitted to arbitration under Article 11.16.1(a), by the claimant’s written waiver; and (ii) for claims submitted to arbitration under Article 11.16.1(b), by the claimant’s and the enterprise’s written waivers, of any right to initiate or continue before any administrative tribunal or court under the law of either Party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 11.16. Notwithstanding paragraph 2(b), the claimant (for claims brought under Article 11.16.1(a)) and the claimant or the enterprise (for claims brought under Article 11.16.1(b)) may initiate or continue an action that seeks interim injunctive relief and does not involve the payment of monetary damages before a judicial or administrative tribunal of the respondent, provided that the action is brought for the sole purpose of preserving the claimant’s or the enterprise’s rights and interests during the pendency of the arbitration.

Article 11.19: Selection of Arbitrators 1.

Unless the disputing parties otherwise agree, the tribunal shall comprise three arbitrators, one arbitrator appointed by each of the disputing parties and the third, who shall be the presiding arbitrator, appointed by agreement of the disputing parties.

2. 3.

The Secretary-General shall serve as appointing authority for an arbitration under this Section. If a tribunal has not been constituted within 75 days of the date a claim is submitted to arbitration under this Section, the SecretaryGeneral, on request of a disputing party, shall appoint, in his or her discretion, the arbitrator or [page 246]

4.

arbitrators not yet appointed. The Secretary-General shall not appoint a national of either Party as the presiding arbitrator unless the disputing parties otherwise agree. For the purposes of Article 39 of the ICSID Convention and Article 7 of Schedule C to the ICSID Additional Facility Rules, and without prejudice to an objection to an arbitrator on a ground other than nationality: (a) the respondent agrees to the appointment of each individual member of a tribunal established under the ICSID Convention or the ICSID Additional Facility Rules; (b) a claimant referred to in Article 11.16.1(a) may submit a claim to arbitration under this Section, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the claimant agrees in writing to the appointment of each individual member of the tribunal; and (c) a claimant referred to in Article 11.16.1(b) may submit a claim to arbitration under this Section, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the claimant and the enterprise agree in writing to the appointment of each individual member of the tribunal.

Article 11.20: Conduct of the Arbitration

1.

2.

3.

4.

5.

The disputing parties may agree on the legal place of any arbitration under the arbitral rules applicable under Article 11.16.3. If the disputing parties fail to reach agreement, the tribunal shall determine the place in accordance with the applicable arbitral rules, provided that the place shall be in the territory of a State that is a party to the New York Convention. At the request of a disputing party, and unless the disputing parties otherwise agree, the tribunal may determine the place of meetings, including consultations and hearings, taking into consideration appropriate factors, including the convenience of the parties and the arbitrators, the location of the subject matter, and the proximity of evidence. The preceding sentence is without prejudice to any appropriate factors a tribunal may consider under paragraph 1. Unless the disputing parties otherwise agree, English and Korean shall be the official languages to be used in the entire arbitration proceedings, including all hearings, submissions, decisions, and awards. The non-disputing Party may make oral and written submissions to the tribunal regarding the interpretation of this Agreement. On request of a disputing party, the non-disputing Party should resubmit its oral submission in writing. After consulting the disputing parties, the tribunal may allow a party or entity that is not a disputing party to file a written amicus curiae submission with the tribunal regarding a matter within the scope of the dispute. In determining whether to allow such a filing, the tribunal shall consider, among other things, the extent to which: (a) the amicus curiae submission would assist the tribunal in the determination of a factual or legal issue related to the proceeding by bringing a perspective, [page 247]

particular knowledge, or insight that is different from that of the disputing parties; (b) the amicus curiae submission would address a matter within the scope of the dispute; and (c) the amicus curiae has a significant interest in the proceeding. The tribunal shall ensure that the amicus curiae submission does not disrupt the proceeding or unduly burden or unfairly prejudice either disputing party, and that the disputing parties are given an opportunity to present their observations on the amicus curiae submission. 6. Without prejudice to a tribunal’s authority to address other objections as a preliminary question, a tribunal shall address and decide as a preliminary question any objection by the respondent that, as a matter of law, a claim submitted is not a claim for which an award in favour of the claimant may be made under Article 11.26: (a) such objection shall be submitted to the tribunal as soon as possible after the tribunal is constituted, and in no event later than the date the tribunal fixes for the respondent to submit its counter-memorial or, in the case of an amendment to the notice of arbitration, the date the tribunal fixes for the respondent to submit its response to the amendment; (b) on receipt of an objection under this paragraph, the tribunal shall suspend any proceedings on the merits, establish a schedule for considering the objection consistent with any schedule it has established for considering any other preliminary question, and issue a decision or award on the objection, stating the grounds therefor; (c) in deciding an objection under this paragraph, the tribunal shall assume to be true the claimant’s factual allegations in support of any claim in the notice of arbitration (or any amendment thereof) and, in disputes brought under the UNCITRAL Arbitration Rules, the statement of claim referred to in Article 18 of the UNCITRAL Arbitration Rules. The tribunal may also consider any relevant facts not

7.

in dispute; (d) the respondent does not waive any objection as to competence or any argument on the merits merely because the respondent did or did not raise an objection under this paragraph or make use of the expedited procedure set out in paragraph 7. In the event that the respondent so requests within 45 days of the date the tribunal is constituted, the tribunal shall decide on an expedited basis an objection under paragraph 6 and any objection that the dispute is not within the tribunal’s competence. The tribunal shall suspend any proceedings on the merits and issue a decision or award on the objection(s), stating the grounds therefor, no later than 150 days after the date of the request. However, if a disputing party requests a hearing, the tribunal may take an additional 30 days to issue the decision or award. Regardless of whether a hearing is requested, a tribunal may, on a showing of extraordinary cause, delay issuing its decision or award by an additional brief period, which may not exceed 30 days. [page 248]

8.

9.

When it decides a respondent’s objection under paragraph 6 or 7, the tribunal may, if warranted, award to the prevailing disputing party reasonable costs and attorney’s fees incurred in submitting or opposing the objection. In determining whether such an award is warranted, the tribunal shall consider whether either the claimant’s claim or the respondent’s objection was frivolous, and shall provide the disputing parties a reasonable opportunity to comment. A respondent may not assert as a defence, counterclaim, or right of set-off, or for any other reason, that the claimant has received or will receive indemnification or other compensation for all or part of the alleged damages pursuant to an insurance or guarantee contract, except with respect to any subrogation as provided for in Article 11.14.

10. A tribunal may order an interim measure of protection to preserve the rights of a disputing party, or to ensure that the tribunal’s jurisdiction is made fully effective, including an order to preserve evidence in the possession or control of a disputing party or to protect the tribunal’s jurisdiction. A tribunal may not order attachment or enjoin the application of a measure alleged to constitute a breach referred to in Article 11.16. For the purposes of this paragraph, an order includes a recommendation. 11. In any arbitration conducted under this Section, on request of a disputing party, a tribunal shall, before issuing a decision or award on liability, transmit its proposed decision or award to the disputing parties and to the non-disputing Party. Within 60 days after the date the tribunal transmits its proposed decision or award, the disputing parties may submit written comments to the tribunal concerning any aspect of its proposed decision or award. The tribunal shall consider any such comments and issue its decision or award not later than 45 days after the date the 60 day comment period expires. 12. Paragraph 11 shall not apply in any arbitration conducted pursuant to this Section for which an appeal has been made available pursuant to paragraph 13 or Annex 11-E. 13. If a separate, multilateral agreement enters into force between the Parties that establishes an appellate body for the purposes of reviewing awards rendered by tribunals constituted pursuant to international trade or investment arrangements to hear investment disputes, the Parties shall strive to reach an agreement that would have such appellate body review awards rendered under Article 11.26 in arbitrations commenced after the multilateral agreement enters into force between the Parties.

Article 11.21: Transparency of Arbitral Proceedings 1.

Subject to paragraphs 2, 3 and 4, the respondent shall, after receiving the following documents, promptly transmit them to the non-disputing Party and make them available to the public:

(a) (b)

the notice of intent; the notice of arbitration; [page 249]

(c)

2.

3.

4.

pleadings, memorials and briefs submitted to the tribunal by a disputing party and any written submissions submitted pursuant to Article 11.20.4 and 11.20.5 and Article 11.25; (d) minutes or transcripts of hearings of the tribunal, where available; and (e) orders, awards, and decisions of the tribunal. The tribunal shall conduct hearings open to the public and shall determine, in consultation with the disputing parties, the appropriate logistical arrangements. However, any disputing party that intends to use information designated as protected information in a hearing shall so advise the tribunal. The tribunal shall make appropriate arrangements to protect the information from disclosure. Without prejudice to Article 22.2 (Essential Security) and Article 22.4 (Disclosure of Information), nothing in this Section requires a Party to furnish or allow access to information, the disclosure of which: (a) would impede law enforcement; (b) would be contrary to its law regarding treatment of official information or matters relating to personal privacy; or (c) it considers to be contrary to its essential security interests. Any protected information that is submitted to the tribunal shall be protected from disclosure in accordance with the following procedures: (a) subject to subparagraph (d), neither the disputing parties nor the tribunal shall disclose to the non-disputing Party or to the public any protected information where the disputing party that provided the information clearly designates it in

accordance with subparagraph (b); (b) any disputing party claiming that certain information constitutes protected information shall clearly designate the information at the time it is submitted to the tribunal; (c) a disputing party shall, at the time it submits a document containing information claimed to be protected information, submit a redacted version of the document that does not contain the information. Only the redacted version shall be provided to the non-disputing Party and made public in accordance with paragraph 1; (d) the tribunal shall decide any objection by a disputing party regarding the designation of information claimed to be protected information. If the tribunal determines that such information was not properly designated, the disputing party that submitted the information may: (i) withdraw all or part of its submission containing such information; or (ii) agree to resubmit complete and redacted documents with corrected designations in accordance with the tribunal’s determination and subparagraph (c), in either case, the other disputing party shall, whenever necessary, resubmit complete and redacted documents which either remove the information withdrawn under subparagraph (d)(i) by the disputing party that first submitted the information or redesignate the information consistent with the designation [page 250] under subparagraph (d)(ii) of the disputing party that first submitted the information; and (e) on request of a disputing Party, the Joint Committee shall consider issuing a decision in writing regarding a determination by the tribunal that information claimed to be protected was not properly designated. If the Joint

5.

Committee issues a decision within 60 days of such a request, it shall be binding on the tribunal, and any decision or award issued by the tribunal must be consistent with that decision. If the Joint Committee does not issue a decision within 60 days, the tribunal’s determination shall remain in effect only if the non-disputing Party submits a written statement to the Joint Committee within that period that it agrees with the tribunal’s determination. Nothing in this Section requires a respondent to withhold from the public information required to be disclosed by its laws.

Article 11.22: Governing Law 1.

2.

3.

Subject to paragraph 3, when a claim is submitted under Article 11.16.1(a)(i) (A) or Article 11.16.1(b)(i)(A), the tribunal shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law. Subject to paragraph 3 and the other terms of this Section, when a claim is submitted under Article 11.16.1(a)(i)(B) or 11.16.1(a)(i) (C), or Article 11.16.1(b)(i)(B) or 11.16.1(a)(i)(C), the tribunal shall apply: (a) the rules of law specified in the pertinent investment authorisation or investment agreement, or as the disputing parties may otherwise agree; or (b) if the rules of law have not been specified or otherwise agreed: (i) the law of the respondent, including its rules on the conflict of laws;43 and (ii) such rules of international law as may be applicable. A decision of the Joint Committee declaring its interpretation of a provision of this Agreement under Article 21.3.3(c) shall be binding on a tribunal, and any decision or award issued by a tribunal must be consistent with that decision.

Article 11.23: Interpretation of Annexes 1.

2.

Where a respondent asserts as a defence that the measure alleged to be a breach is within the scope of an entry set out in Annex I or Annex II, the tribunal shall, on request of the respondent, request the interpretation of the Joint Committee on the issue. The Joint Committee shall submit in writing any decision declaring its interpretation under Article 21.3.3(c) to the tribunal within 60 days of delivery of the request. A decision issued by the Joint Committee under paragraph 1 shall be binding on the tribunal, and any decision or award issued by the tribunal must be [page 251] consistent with that decision. If the Joint Committee fails to issue such a decision within 60 days, the tribunal shall decide the issue.

Article 11.24: Expert Reports Without prejudice to the appointment of other kinds of experts where authorized by the applicable arbitration rules, a tribunal, on request of a disputing party or, unless the disputing parties disapprove, on its own initiative, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety or other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree.

Article 11.25: Consolidation 1.

Where two or more claims have been submitted separately to arbitration under Article 11.16.1 and the claims have a question of law or fact in common and arise out of the same events or circumstances, any disputing party may seek a consolidation order in accordance with the agreement of all the disputing parties

2.

3.

4.

5.

6.

sought to be covered by the order or the terms of paragraphs 2 through 10. A disputing party that seeks a consolidation order under this Article shall deliver, in writing, a request to the Secretary-General and to all the disputing parties sought to be covered by the order and shall specify in the request: (a) the names and addresses of all the disputing parties sought to be covered by the order; (b) the nature of the order sought; and (c) the grounds on which the order is sought. Unless the Secretary-General finds within 30 days after receiving a request under paragraph 2 that the request is manifestly unfounded, a tribunal shall be established under this Article. Unless all the disputing parties sought to be covered by the order otherwise agree, a tribunal established under this Article shall comprise three arbitrators: (a) one arbitrator appointed by agreement of the claimants; (b) one arbitrator appointed by the respondent; and (c) the presiding arbitrator appointed by the Secretary-General, provided, however, that the presiding arbitrator shall not be a national of either Party. If, within 60 days after the Secretary-General receives a request made under paragraph 2, the respondent fails or the claimants fail to appoint an arbitrator in accordance with paragraph 4, the Secretary-General, on request of any disputing party sought to be covered by the order, shall appoint the arbitrator or arbitrators not yet appointed. If the respondent fails to appoint an arbitrator, the Secretary-General shall appoint a national of the disputing Party, and if the claimants fail to appoint an arbitrator, the SecretaryGeneral shall appoint a national of the non-disputing Party. Where a tribunal established under this Article is satisfied that two or more claims that have been submitted to arbitration under Article 11.16.1 have

[page 252]

7.

8.

a question of law or fact in common, and arise out of the same events or circumstances, the tribunal may, in the interest of fair and efficient resolution of the claims, and after hearing the disputing parties, by order: (a) assume jurisdiction over, and hear and determine together, all or part of the claims; (b) assume jurisdiction over, and hear and determine one or more of the claims, the determination of which it believes would assist in the resolution of the others; or (c) instruct a tribunal previously established under Article 11.19 to assume jurisdiction over, and hear and determine together, all or part of the claims, provided that: (i) that tribunal, on request of any claimant not previously a disputing party before that tribunal, shall be reconstituted with its original members, except that the arbitrator for the claimants shall be appointed pursuant to paragraphs 4(a) and 5; and (ii) that tribunal shall decide whether any prior hearing shall be repeated. Where a tribunal has been established under this Article, a claimant that has submitted a claim to arbitration under Article 11.16.1 and that has not been named in a request made under paragraph 2 may make a written request to the tribunal that it be included in any order made under paragraph 6, and shall specify in the request: (a) the name and address of the claimant; (b) the nature of the order sought; and (c) the grounds on which the order is sought. The claimant shall deliver a copy of its request to the SecretaryGeneral. A tribunal established under this Article shall conduct its

proceedings in accordance with the UNCITRAL Arbitration Rules, except as modified by this Section. 9. A tribunal established under Article 11.19 shall not have jurisdiction to decide a claim, or a part of a claim, over which a tribunal established or instructed under this Article has assumed jurisdiction. 10. On application of a disputing party, a tribunal established under this Article, pending its decision under paragraph 6, may order that the proceedings of a tribunal established under Article 11.19 be stayed, unless the latter tribunal has already adjourned its proceedings.

Article 11.26: Awards 1.

2.

Where a tribunal makes a final award against a respondent, the tribunal may award, separately or in combination, only: (a) monetary damages and any applicable interest; and (b) restitution of property, in which case the award shall provide that the respondent may pay monetary damages and any applicable interest in lieu of restitution. A tribunal may also award costs and attorney’s fees in accordance with this Section and the applicable arbitration rules. [page 253]

3.

Subject to paragraph 1, where a claim is submitted to arbitration under Article 11.16.1(b): (a) an award of restitution of property shall provide that restitution be made to the enterprise; (b) an award of monetary damages and any applicable interest shall provide that the sum be paid to the enterprise; and (c) the award shall provide that it is made without prejudice to any right that any person may have in the relief under

4. 5. 6.

7.

8. 9.

applicable domestic law. A tribunal may not award punitive damages. An award made by a tribunal shall have no binding force except between the disputing parties and in respect of the particular case. Subject to paragraph 7 and the applicable review procedure for an interim award, a disputing party shall abide by and comply with an award without delay. A disputing party may not seek enforcement of a final award until: (a) in the case of a final award made under the ICSID Convention: (i) 120 days have elapsed from the date the award was rendered and no disputing party has requested revision or annulment of the award; or (ii) revision or annulment proceedings have been completed; and (b) in the case of a final award under the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules, or the rules selected pursuant to Article 11.16.3(d): (i) 90 days have elapsed from the date the award was rendered and no disputing party has commenced a proceeding to revise, set aside, or annul the award; or (ii) a court has dismissed or allowed an application to revise, set aside, or annul the award and there is no further appeal. Each Party shall provide for the enforcement of an award in its territory. If the respondent fails to abide by or comply with a final award, on delivery of a request by the non-disputing Party, a panel shall be established under Article 20.8 (Establishment of Panel). The requesting Party may seek in such proceedings: (a) a determination that the failure to abide by or comply with the final award is inconsistent with the obligations of this Agreement; and

(b)

in accordance with Article 20.11 (Panel Report), a recommendation that the respondent abide by or comply with the final award. 10. A disputing party may seek enforcement of an arbitration award under the ICSID Convention or the New York Convention regardless of whether proceedings have been taken under paragraph 9. 11. A claim that is submitted to arbitration under this Section shall be considered to arise out of a commercial relationship or transaction for the purposes of Article I of the New York Convention. [page 254]

Article 11.27: Service of Documents Delivery of notice and other documents on a Party shall be made to the place named for that Party in Annex 11-H.

Section C Definitions Article 11.28: Definitions For the purposes of this Chapter: Centre means the International Centre for Settlement of Investment Disputes (ICSID) established by the ICSID Convention; claimant means an investor of a Party that is a party to an investment dispute with the other Party; disputing parties means the claimant and the respondent; disputing Party means a Party against which a claim is made under Section B (Investor-State Dispute Settlement); enterprise means an enterprise as defined in Article 1.4 (Definitions),

and a branch of an enterprise; enterprise of a Party means an enterprise constituted or organised under the law of a Party, and a branch of an enterprise of a Party located in the territory of a Party and carrying out business activities there; ICSID Additional Facility Rules means the Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes; ICSID Convention means the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, done at Washington, 18 March 1965; investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: (a) an enterprise; (b) shares, stock and other forms of equity participation in an enterprise; (c) bonds, debentures, other debt instruments and loans;44 (d) futures, options and other derivatives; [page 255] (e) (f) (g) (h)

turnkey, construction, management, production, concession, revenue-sharing and other similar contracts; intellectual property rights; licences, authorisations, permits and similar rights conferred pursuant to domestic law;45,46 and other tangible or intangible, movable or immovable property and related property rights, such as leases, mortgages, liens and pledges.47

For the purposes of this Agreement, a claim to payment that arises solely from the commercial sale of goods and services is not an investment, unless it is a loan that has the characteristics of an investment; investment agreement means a written agreement48 between a national authority49 of a Party and a covered investment or an investor of the other Party, on which the covered investment or the investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor: (a) with respect to natural resources that a national authority controls, such as for their exploration, extraction, refining, transportation, distribution or sale; (b) to supply services to the public on behalf of the Party, such as power generation or distribution, water treatment or distribution, or telecommunications; or (c) to undertake infrastructure projects, such as the construction of roads, bridges, canals, dams, or pipelines, that are not for the exclusive or predominant use and benefit of the government; [page 256] investment authorisation means an authorisation that the foreign investment authority of a Party grants to a covered investment or an investor of the other Party;50,51 investor of a non-Party means, with respect to a Party, an investor that attempts to make, is making, or has made an investment in the territory of that Party, that is not an investor of either Party; investor of a Party means a Party or state enterprise thereof, or a national or an enterprise of a Party, that attempts to make, is making or has made an investment in the territory of the other Party, provided, however, that a national who is a dual national shall be deemed to be

exclusively a national of the State of his or her dominant and effective nationality; New York Convention means the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done at New York, 10 June 1958; non-disputing Party means the Party that is not a party to an investment dispute; protected information means confidential business information or information that is privileged or otherwise protected from disclosure under a Party’s law; respondent means the Party that is a party to an investment dispute; Secretary-General means the Secretary-General of ICSID; and UNCITRAL Arbitration Rules means the arbitration rules of the United Nations Commission on International Trade Law.

[page 257]

Annex 11-A CUSTOMARY INTERNATIONAL LAW The Parties confirm their shared understanding that “customary international law” generally and as specifically referenced in Article 11.5 results from a general and consistent practice of States that they follow from a sense of legal obligation. With regard to Article 11.5, the customary international law minimum standard of treatment of aliens refers to all customary international law principles that protect the economic rights and interests of aliens.

[page 258]

Annex 11-B EXPROPRIATION The Parties confirm their shared understanding that: 1. An action or a series of actions by a Party cannot constitute an expropriation unless it interferes with a tangible or intangible property right in an investment. 2. Article 11.7.1 addresses two situations. The first is direct expropriation, where an investment is nationalised or otherwise directly expropriated through formal transfer of title or outright seizure. 3. The second situation addressed by Article 11.7.1 is indirect expropriation, where an action or a series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure. 4. The determination of whether an action or a series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers all relevant factors relating to the investment, including: (a) the economic impact of the government action, although the fact that an action or a series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred; (b) the extent to which the government action interferes with distinct, reasonable investment-backed expectations;52 and (c) the character of the government action, including its objectives and context.53 5. Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect

legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.54,55,56

[page 259]

Annex 11-C TRANSFERS 1.

2.

Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining temporary safeguard measures in accordance with the laws and regulations of the Party with regard to payments and capital movements: (a) in the event of serious balance-of-payments or external financial difficulties or threat thereof; or (b) where, in exceptional circumstances, payments and capital movements between the Parties cause or threaten to cause serious difficulties for the operation of monetary policy or exchange rate policy in the Party concerned. The measures referred to in paragraph 1: (a) shall not exceed a period of one year, however, if extremely exceptional circumstances arise such that a Party seeks to extend such measures, the Party will coordinate in advance with the other Party concerning the implementation of any proposed extension; (b) shall be consistent with the Articles of Agreement of the International Monetary Fund; (c) shall avoid unnecessary damage to the commercial, economic and financial interests of the other Party; (d) shall not exceed those necessary to deal with the circumstances described in paragraph 1; (e) shall be temporary and phased out progressively as the situation described in paragraph 1 improves; (f) shall not be confiscatory; (g) shall promptly be notified to the other Party;

(h) (i) (j) (k)

(l)

shall be applied on a national treatment basis; shall ensure that the other Party is treated as favourably as any non-Party; shall not constitute a dual or multiple exchange rate practice; shall not restrict payments or transfers for current transactions, unless the imposition of such measures complies with the procedures stipulated in the Articles of Agreement of the International Monetary Fund; and shall not restrict payments or transfers associated with foreign direct investment.

[page 260]

Annex 11-D ILLUSTRATIVE LIST OF AUSTRALIAN RESIDENCY REQUIREMENTS57 Sector

Requirement

All

At least two of the directors of a public company must be ordinarily resident in Australia.

Professional services: Accounting, At least one equity partner in a auditing and book-keeping services firm must be a permanent resident. Research and development services: R&D services on social sciences and humanities

Permanent residency requirement for psychologists (Western Australia).

Maritime transport services: Part X of the Competition and International transport (freight and Consumer Law 2010 requires that passengers) every ocean carrier who provides international liner cargo shipping services to or from Australia shall, at all times be represented by a person who is an individual resident in Australia (but not necessarily an Australian citizen) and has been appointed by the ocean carrier as the ocean carrier’s agent for the purposes of Part X.

[page 261]

Annex 11-E POSSIBILITY OF A BILATERAL APPELLATE MECHANISM Within three years after the date of entry into force of this Agreement, the Parties shall consider whether to establish a bilateral appellate body or similar mechanism to review awards rendered under Article 11.26 in arbitrations commenced after they establish the appellate body or similar mechanism.

[page 262]

Annex 11-F SUBMISSION OF A CLAIM TO ARBITRATION Korea 1.

2.

Notwithstanding Article 11.18.2, an investor of Australia may not submit to arbitration under Section B a claim that Korea has breached an obligation under Section A either: (a) on its own behalf, under Article 11.16.1(a); or (b) on behalf of an enterprise of Korea that is a juridical person that the investor owns or controls directly or indirectly, under Article 11.16.1 (b), if the investor or the enterprise, respectively, has alleged that breach of an obligation under Section A in any proceedings before a court or administrative tribunal of Korea. For greater certainty, where an investor of Australia or an enterprise of Korea that is a juridical person that the investor owns or controls directly or indirectly makes an allegation that Korea has breached an obligation under Section A before a court or administrative tribunal of Korea, that election shall be final, and the investor may not thereafter allege that breach, on its own behalf or on behalf of the enterprise, in an arbitration under Section B.

[page 263]

Annex 11-G FOREIGN INVESTMENT POLICY A decision by Australia with respect to whether or not to refuse, or impose orders or conditions on, an investment that is subject to review under Australia’s foreign investment policy shall not be subject to the dispute settlement provisions of Section B.

[page 264]

Annex 11-H SERVICE OF DOCUMENTS ON A PARTY UNDER SECTION B Australia Notices and other documents in disputes under Section B shall be served on Australia by delivery to: Department of Foreign Affairs and Trade RG Casey Building John McEwen Crescent Barton ACT 0221 Australia

Korea Notices and other documents in disputes under Section B shall be served on Korea by delivery to: Office of International Legal Affairs Ministry of Justice of the Republic of Korea Government Complex, Gwacheon Korea

[page 265]

Annex 11.I TAXATION AND EXPROPRIATION The determination of whether a taxation measure, in a specific fact situation, constitutes an expropriation requires a case-by-case, factbased inquiry that considers all relevant factors relating to the investment, including the factors listed in Annex 11-B and the following considerations: (a) the imposition of taxes does not generally constitute an expropriation. The mere introduction of a new taxation measure, or the imposition of a taxation measure by more than one jurisdiction within a Party in respect of an investment, generally does not in and of itself constitute an expropriation; (b) a taxation measure that is consistent with internationally recognised tax policies, principles, and practices should not constitute an expropriation. In particular, a taxation measure aimed at preventing the avoidance or evasion of taxation measures generally does not constitute an expropriation; (c) a taxation measure that is applied on a non-discriminatory basis, as opposed to a taxation measure that is targeted at investors of a particular nationality or at specific taxpayers, is less likely to constitute an expropriation; and (d) a taxation measure generally does not constitute an expropriation if it was already in force when the investment was made and information about the measure was publicly available. _____________________________

For greater certainty, the treatment referred to in this Article does not encompass Investor35. State Dispute Settlement procedures or mechanisms such as those included in Section B. 36. Article 11.5 shall be interpreted in accordance with Annex 11-A. 37. This Article shall be interpreted in accordance with Annexes 11-A and 11-B. 38. For greater certainty, Annex 11-C shall apply to this Article. 39. For greater certainty, a condition for the receipt or continued receipt of an advantage referred to in paragraph 2 does not constitute a “commitment or undertaking” for the purposes of paragraph 1. 40. For greater certainty, nothing in paragraph 1 shall be construed to prevent a Party, in connection with the establishment, acquisition, expansion, management, conduct, operation or sale or other disposition of an investment of an investor of a Party or of a nonParty in its territory, from imposing or enforcing a requirement or enforcing a commitment or undertaking to locate production, supply a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory, provided that such activity is consistent with paragraph 1(f). 41. The Parties recognise that a patent does not necessarily confer market power. 42. For transparency purposes only, Annex 11-D sets out an illustrative list of Australian residency requirements. If Korea considers that any residency requirement applied by Australia, regardless of whether or not listed in Annex 11-D, is likely to materially impair the protections afforded by Australia to investors or covered investments of Korea, the Parties, upon request of Korea, shall promptly enter into consultations and endeavour to arrive at a mutually satisfactory resolution of the matter. 43. For the purposes of this subparagraph, the “law of the respondent” means the law that a domestic court or tribunal of proper jurisdiction would apply in the same case. 44. Some forms of debt, such as bonds, debentures, and long-term notes, are more likely to have the characteristics of an investment, while other forms of debt are less likely to have such characteristics. 45. Whether a particular type of licence, authorisation, permit or similar instrument (including a concession, to the extent that it has the nature of such an instrument) has the characteristics of an investment depends on such factors as the nature and extent of the rights that the holder has under the law of the Party. Among the licences, authorisations, permits and similar instruments that do not have the characteristics of an investment are those that do not create any rights protected under domestic law. For greater certainty, the foregoing is without prejudice to whether any asset associated with the licence, authorisation, permit or similar instrument has the characteristics of an investment. 46. The term “investment” does not include an order or judgment entered in a judicial or administrative action. 47. For greater certainty, market share, market access, expected gains and opportunities for profit-making are not, by themselves, investments. 48. “Written agreement” means an agreement in writing, executed by both parties, whether in a single instrument or in multiple instruments, that creates an exchange of rights and obligations, binding on both parties. For greater certainty: (a) a unilateral act of an administrative or judicial authority, such as a permit, licence, or authorisation issued by a Party solely in its regulatory capacity, or a decree, order, or judgment, standing alone; and (b) an administrative or judicial consent decree or order, shall not be considered a

49. 50. 51.

52.

53.

54. 55.

56. 57.

written agreement. For the purposes of this definition, “national authority” means an authority at the central level of government. For greater certainty, actions taken by a Party to enforce laws of general application, such as competition laws, are not encompassed within this definition. For greater certainty, decisions made by the Treasurer under Australia’s foreign investment policy, including the Foreign Acquisitions and Takeovers Act 1975, are not encompassed within this definition. For Korea, the Parties recognise that, as of the date of signature of this Agreement, Korea has no foreign investment authority that grants investment authorisation. For greater certainty, whether an investor’s investment-backed expectations are reasonable may include consideration of the nature and extent of governmental regulation in the relevant sector. For Korea, a relevant consideration could include whether the investor bears a disproportionate burden such as a special sacrifice that exceeds what the investor or investment should be expected to endure for the public interest. For greater certainty, the list of “legitimate public welfare objectives” in paragraph 5 is not exhaustive. For greater certainty and without limiting the scope of paragraph 5, such regulatory actions to protect public health include regulation, supply and reimbursement with respect to pharmaceuticals, diagnostics, vaccines, medical devices, health-related aids and appliances and blood and blood products. For Korea, real estate price stabilisation (through, for example, measures to improve the housing conditions for low-income households), does not constitute indirect expropriation. This table is provided for transparency purposes only. The information contained in this table is drawn from Australian commitments under the General Agreement on Trade in Services and Australia’s May 2005 Revised Services Offer under the WTO Doha Development Agenda negotiations.

[page 267]

AGREEMENT BETWEEN THE GOVERNMENT OF CANADA AND THE GOVERNMENT OF THE PEOPLE’S REPUBLIC OF CHINA FOR THE PROMOTION AND RECIPROCAL PROTECTION OF INVESTMENTS

ACCORD ENTRE LE GOUVERNEMENT DU CANADA ET LE GOUVERNEMENT DE LA RÉPUBLIQUE POPULAIRE DE CHINE CONCERNANT LA PROMOTION ET LA PROTECTION

RÉCIPROQUE DES INVESTISSEMENTS Done at Vladivostok on 9 September 2012 Fait à Vladivostok le 9 Septembre 2012 Tabled before the House of Commons Parliament of Canada Déposé à la Chambre des communes Parlement du Canada [page 268]

THE GOVERNMENT OF CANADA AND THE GOVERNMENT OF THE PEOPLE’S REPUBLIC OF CHINA (the “Contracting Parties”), RECOGNIZING the need to promote investment based on the principles of sustainable development; DESIRING to intensify the economic cooperation of both States, based on equality and mutual benefit;

HAVE AGREED as follows:

[page 269]

PART A ARTICLE 1

Definitions

For the purpose of this Agreement, 1. “investment” means: (a) an enterprise; (b) shares, stocks and other forms of equity participation in an enterprise; (c) bonds, debentures, and other debt instruments of an enterprise; (d) a loan to an enterprise (i) where the enterprise is an affiliate of the investor, or (ii) where the original maturity of the loan is at least three years; (e) notwithstanding subparagraphs (c) and (d) above, a loan to or debt security issued by a financial institution is an investment only where the loan or debt security is treated as regulatory capital by the Contracting Party in whose territory the financial institution is located; (f) an interest in an enterprise that entitles the owner to share in the income or profits of the enterprise; (g) an interest in an enterprise that entitles the owner to share in the assets of that enterprise on dissolution; (h) interests arising from the commitment of capital or other resources in the territory of a Contracting Party to economic activity in such territory, such as under (i) contracts involving the presence of an investor’s property in the territory of the Contracting Party,

2.

including turnkey or construction contracts, or concessions to search for and extract oil and other natural resources, or (ii) contracts where remuneration depends substantially on the production, revenue or profits of an enterprise; (i) intellectual property rights; and (j) any other tangible or intangible, moveable or immovable, property and related property rights acquired or used for business purposes; but “investment” does not mean: (k) claims to money that arise solely from (i) commercial contracts for the sale of goods or services, or (ii) the extension of credit in connection with a commercial transaction, such as trade financing, other than a loan covered by subparagraph (d); or (l) any other claims to money, that do not involve the kinds of interests set out in subparagraphs (a) to (j); “investor” means with regard to either Contracting Party: (a) any natural person who has the citizenship or status of permanent resident of that Contracting Party in accordance with its laws and who does not possess the citizenship of the other Contracting Party; [page 270] (b)

3.

any enterprise as defined in paragraph 10(a) of this Article; that seeks to make, is making or has made a covered investment1; “investment of an investor of a Contracting Party” means an investment owned or controlled directly or indirectly by an

investor of such Contracting Party; 4. “covered investment” means, with respect to a Contracting Party, an investment in its territory of an investor of the other Contracting Party existing on the date of entry into force of this Agreement or an investment of an investor admitted in accordance with its laws and regulations thereafter, and which involves the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk; 5. “returns” means the amounts yielded by investments, and in particular, though not limited to, profits, capital gains, dividends, interest, royalties, returns-in-kind or other income; 6. “measure” includes any law, regulation, rule, procedure, decision, requirement, administrative action, or practice; 7. “existing measure” means a measure existing at the time this Agreement enters into force; 8. “financial service” has the same meaning as in subparagraph 5(a) of the Annex on Financial Services of the GATS; 9. “financial institution” means any financial intermediary or other enterprise that is authorized to do business and is regulated or supervised as a financial institution under the law of the Contracting Party in whose territory it is located; 10. “enterprise” means: (a) any entity constituted or organized in accordance with the laws of a Contracting Party, such as public institutions, corporations, foundations, agencies, cooperatives, trust, societies, associations and similar entities and private companies, firms, partnerships, establishments, joint ventures and organizations, whether or not for profit, and irrespective of whether their liabilities are limited or otherwise; and (b) a branch of any such entity; 11. “intellectual property rights” means copyright and related rights, trademark rights, patent rights, rights in layout designs of semiconductor integrated circuits, trade secret rights, plant

12.

13. 14. 15.

breeders’ rights, rights in geographical indications and industrial design rights; “confidential information” means business confidential information and information that is privileged or otherwise protected from disclosure; “disputing investor” means an investor that makes a claim under Article 20; “disputing Contracting Party” means a Contracting Party against which a claim is made under Article 20; “disputing party” means the disputing investor or the disputing Contracting Party; [page 271]

16. “ICSID” means the International Centre for Settlement of Investment Disputes; 17. “ICSID Convention” means the Convention on the Settlement of Investment Disputes between States and Nationals of other States, done at Washington on 18 March 1965; 18. “Additional Facility Rules of ICSID” means the Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes and Schedule C (Arbitration) thereto, approved by the Administrative Council on 29 September 2002, as amended from time to time; 19. “Tribunal” means an arbitration tribunal established under Part C; 20. “UNCITRAL Arbitration Rules” means the Arbitration Rules of the United Nations Commission on International Trade Law, approved by the United Nations General Assembly on 15 December 1976, as amended from time to time; 21. “WTO Agreement” means the Agreement Establishing the World Trade Organization done at Marrakesh on 15 April 1994; 22. “territory” means:

In respect of Canada: (a) the land territory, air space, internal waters and territorial sea over which Canada exercises sovereignty; (b) the exclusive economic zone of Canada, as determined by its domestic law pursuant to Part V of the United Nations Convention on the Law of the Sea (UNCLOS); and (c) the continental shelf of Canada, as determined by its domestic law pursuant to Part VI of UNCLOS. In respect of China: the territory of China, including land territory, internal waters, territorial sea, territorial air space, and any maritime areas beyond the territorial sea over which, in accordance with international law and its domestic law, China exercises sovereign rights or jurisdiction with respect to the waters, seabed and subsoil and natural resources thereof.

[page 272]

PART B ARTICLE 2 1.

2.

3.

Scope and Application

This Agreement shall apply to measures adopted or maintained by a Contracting Party relating to investors of the other Contracting Party and covered investments. A Contracting Party’s obligations under this Agreement shall apply to any entity whenever that entity exercises any regulatory, administrative or other governmental authority delegated to it by that Contracting Party, such as the power to expropriate, grant licenses, approve commercial transactions or impose quotas, fees or other charges. Each Contracting Party shall take all necessary measures in order to ensure observance of the provisions of this Agreement by provincial governments.2

ARTICLE 3

Promotion and Admission of Investment

Each Contracting Party shall encourage investors of the other Contracting Party to make investments in its territory and admit such investments in accordance with its laws, regulations and rules.

ARTICLE 4 1.

2.

Minimum Standard of Treatment

Each Contracting Party shall accord to covered investments fair and equitable treatment and full protection and security, in accordance with international law. The concepts of “fair and equitable treatment” and “full

3.

protection and security” in paragraph 1 do not require treatment in addition to or beyond that which is required by the international law minimum standard of treatment of aliens as evidenced by general State practice accepted as law. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article.

ARTICLE 53 1.

2.

Most-Favoured-Nation Treatment

Each Contracting Party shall accord to investors of the other Contracting Party treatment no less favourable than that it accords, in like circumstances, to investors of a non-Contracting Party with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. Each Contracting Party shall accord to covered investments treatment no less favourable than that it accords, in like circumstances, to investments of investors [page 273]

3.

of a non-Contracting Party with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. For greater certainty, the “treatment” referred to in paragraphs 1 and 2 of this Article does not encompass the dispute resolution mechanisms, such as those in Part C, in other international investment treaties and other trade agreements.

ARTICLE 64 1.

National Treatment

Each Contracting Party shall accord to investors of the other

2.

3.

Contracting Party treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the expansion, management, conduct, operation and sale or other disposition of investments in its territory. Each Contracting Party shall accord to covered investments treatment no less favourable than that it accords, in like circumstances, to investments of its own investors with respect to the expansion, management, conduct, operation and sale or other disposition of investments in its territory. The concept of “expansion” in this Article applies only with respect to sectors not subject to a prior approval process under the relevant sectoral guidelines and applicable laws, regulations and rules in force at the time of expansion. The expansion may be subject to prescribed formalities and other information requirements.

ARTICLE 7

1.

2.

3.

Senior Management, Boards of Directors and Entry of Personnel

A Contracting Party may not require that an enterprise of that Party, that is a covered investment, appoint individuals of any particular nationality to senior management positions. A Contracting Party may require that a majority of the board of directors, or any committee thereof, of an enterprise of that Contracting Party that is a covered investment be of a particular nationality or resident in the territory of the Contracting Party, provided that the requirement does not materially impair the ability of the investor to exercise control over its investment. Subject to its laws, regulations and policies relating to the entry and sojourn of non-citizens, a Contracting Party shall permit natural persons who have the citizenship or status of permanent resident of the other Contracting Party and are employed by any enterprise that is a covered investment of an investor, or a subsidiary or affiliate thereof, to enter and remain temporarily in its

territory in a capacity that is managerial, executive or that requires specialized knowledge. [page 274]

ARTICLE 8 1.

2.

Exceptions

Article 5 does not apply to: (a) treatment by a Contracting Party pursuant to any existing or future bilateral or multilateral agreement: (i) establishing, strengthening or expanding a free trade area or customs union; or (ii) relating to aviation, fisheries, or maritime matters including salvage; (b) treatment accorded under any bilateral or multilateral international agreement in force prior to 1 January 1994. Articles 5, 6 and 7 do not apply to5: (a) (i) any existing non-conforming measures maintained within the territory of a Contracting Party; and (ii) any measure maintained or adopted after the date of entry into force of this Agreement that, at the time of sale or other disposition of a government’s equity interests in, or the assets of, an existing state enterprise or an existing governmental entity, prohibits or imposes limitations on the ownership or control of equity interests or assets or imposes nationality requirements relating to senior management or members of the board of directors; (b) the continuation or prompt renewal of any non-conforming measure referred to in sub-paragraph (a); or (c) an amendment to any non-conforming measure referred to in subparagraph (a), to the extent that the amendment does not decrease the conformity of the measure, as it existed

3.

4.

5.

immediately before the amendment, with Articles 5, 6 and 7. Articles 5, 6 and 7 do not apply to any measure that a Contracting Party has reserved the right to adopt or maintain pursuant to Annex B.8. In respect of intellectual property rights, a Contracting Party may derogate from Articles 3, 5 and 6 in a manner that is consistent with international agreements regarding intellectual property rights to which both Contracting Parties are parties. Articles 5, 6 and 7, do not apply to: (a) procurement by a Contracting Party; (b) subsidies or grants provided by a Contracting Party, including government-supported loans, guarantees and insurance.

ARTICLE 9

Performance Requirements

The Contracting Parties reaffirm their obligations under the WTO Agreement on Trade-Related Investment Measures (TRIMs), as amended from time to time. Article 2 and the Annex of the TRIMs are incorporated into and made part of this Agreement. [page 275]

ARTICLE 10 1.

Expropriation

Covered investments or returns of investors of either Contracting Party shall not be expropriated, nationalized or subjected to measures having an effect equivalent to expropriation or nationalization in the territory of the other Contracting Party (hereinafter referred to as “expropriation”), except for a public purpose, under domestic due procedures of law, in a nondiscriminatory manner and against compensation.6 Such compensation shall amount to the fair market value of the

2.

investment expropriated immediately before the expropriation, or before the impending expropriation became public knowledge, whichever is earlier, shall include interest at a normal commercial rate until the date of payment, and shall be effectively realizable, freely transferable, and made without delay. The investor affected shall have a right, under the law of the Contracting Party making the expropriation, to prompt review, by a judicial or other independent authority of that Contracting Party, of his or its case and of the valuation of his or its investment in accordance with the principles set out in this paragraph. This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, or to other measures in respect of intellectual property rights, to the extent that such measures are consistent with international agreements regarding intellectual property rights to which both Contracting Parties are parties.

ARTICLE 11

Compensation for Losses

Investors of one Contracting Party who suffer losses in respect of covered investments owing to war, a state of national emergency, insurrection, riot or other similar events, shall be accorded treatment by the other Contracting Party, in respect of restitution, indemnification, compensation or other settlement, no less favourable than it accords in like circumstances, to its own investors or to investors of any third State.

ARTICLE 12 1.

Transfers7

A Contracting Party shall permit all transfers relating to a covered investment to be made freely and without delay. Such transfers include: (a) contributions to capital; (b) profits, capital gains, dividends, interest, royalties including payments in relation to intellectual and industrial property rights, fees, returns-in-kind or other income derived from

(c)

(d)

the investment; proceeds obtained from the total or partial sale of the covered investment, or from the partial or complete liquidation of the investment; payments made under a contract entered into by an investor, or its covered investments, including those pursuant to a loan agreement; [page 276]

(e)

2.

3.

payments made pursuant to Articles 10 and 11 and arising under Part C; and (f) earnings of nationals of a Contracting Party who work in connection with an investment in the territory of the other Contracting Party. Each Contracting Party shall permit transfers relating to a covered investment to be made in a freely convertible currency at the market rate of exchange prevailing on the date of transfer. In the event that the market rate of exchange does not exist, the rate of exchange shall correspond to the cross rate obtained from those rates which would be applied by the International Monetary Fund on the date of payment for conversions of currencies concerned into Special Drawing Rights. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, a Contracting Party may prevent a transfer through the equitable, non-discriminatory and good faith application of its laws relating to: (a) bankruptcy, insolvency or the protection of the rights of creditors; (b) issuing, trading or dealing in securities; (c) criminal or penal offenses; (d) reports of transfers of currency or other monetary instruments; or

(e) 4.

(a)

(b)

ensuring the satisfaction of judgments in adjudicatory proceedings. Nothing in the Agreement shall be construed to prevent a Contracting Party from adopting or maintaining measures that restrict transfers when the Contracting Party experiences serious balance of payment difficulties, or the threat thereof, provided that such measures: (i) are of limited duration, applied on a good-faith basis, and should be phased out as the situation calling for imposition of such measures improves; (ii) do not constitute a dual or multiple exchange rate practice; (iii) do not otherwise interfere with an investor’s ability to invest, in the territory of the Contracting Party, in the form chosen by the investor and, as relevant, in local currency, in any assets that are restricted from being transferred out of the territory of the Contracting Party; (iv) are applied on an equitable and non-discriminatory basis; (v) are promptly published by the government authorities responsible for financial services or central bank of the Contracting Party; (vi) are consistent with the Articles of Agreement of the International Monetary Fund done at Bretton Woods on 22 July 1944; and (vii) avoid unnecessary damage to the commercial, economic and financial interests of the other Contracting Party. Sub-paragraph (a) does not apply to measures that restrict payments or transfers for current transactions8, unless the imposition of such measures [page 277]

5.

complies with the procedures set out in the Articles of Agreement of the International Monetary Fund. Notwithstanding paragraph 1, a Contracting Party may restrict transfers of returns-in-kind in circumstances where it could otherwise restrict such transfers under the WTO Agreement.

ARTICLE 13 1.

2.

If a Contracting Party or its Agency makes a payment to one of its investors under a guarantee or contract of insurance it has granted to a covered investment of that investor, the other Contracting Party shall recognize the transfer of any right or claim of that investor to the first mentioned Contracting Party or its Agency. The subrogated right or claim shall not be greater than the original right or claim of the said investor. Such right may be exercised by the Contracting Party or any agent thereof so authorized. In an arbitration under Part C, a disputing Contracting Party shall not assert, as a defence, counterclaim, right of setoff or otherwise, that the disputing investor has received or will receive, pursuant to an insurance or guarantee contract, indemnification or other compensation for all or part of its alleged damages.

ARTICLE 14 1. 2.

3.

Subrogation

Taxation

Except as provided in this Article nothing in this Agreement shall apply to taxation measures. Nothing in this Agreement shall affect the rights and obligations of the Contracting Parties under any tax convention. In the event of any inconsistency between the provisions of this Agreement and any such convention, the provisions of that convention shall apply to the extent of the inconsistency. Nothing in this Agreement shall be construed to require a Contracting Party to furnish or allow access to information the disclosure of which would be contrary to the Contracting Party’s law protecting information concerning the taxation affairs of a taxpayer.

4. 5.

6.

The provisions of Article 10 shall apply to taxation measures. No claim may be made by an investor pursuant to paragraph 4 unless: (a) the investor provides a copy of the notice of claim to the taxation authorities of the Contracting Parties; and (b) six months after receiving notification of the claim by the investor, the taxation authorities of the Contracting Parties fail to reach a joint determination that the measure in question is not an expropriation. The taxation authorities referred to in this Article shall be the following until otherwise notified by a Contracting Party: (a) for Canada: the Assistant Deputy Minister, Tax Policy, of the Department of Finance Canada; (b) for China: the Ministry of Finance and State Administration of Taxation or an authorized representative of the Ministry of Finance and State Administration of Taxation. [page 278]

7.

The Contracting Parties shall notify each other promptly by diplomatic note of the successors to the tax authorities identified in sub-paragraphs 6(a) and (b).

ARTICLE 15 1.

2.

Disputes between the Contracting Parties

Any dispute between the Contracting Parties concerning the interpretation or application of this Agreement shall, as far as possible, be settled by consultation through diplomatic channels. If a dispute cannot thus be settled within six months, it shall, upon the request of either Contracting Party, be submitted to an ad hoc arbitral tribunal.

3.

4.

5. 6.

7.

8.

Such tribunal shall be comprised of three arbitrators. Within two months from the date on which either Contracting Party receives the written notice requesting arbitration from the other Contracting Party, each Contracting Party shall appoint one arbitrator. Those two arbitrators shall jointly select a third arbitrator, who shall be a national of a third State which has diplomatic relations with both Contracting Parties. The third arbitrator shall be appointed by the two Contracting Parties as Chairman of the arbitral tribunal within two months from the date of appointment of the other two arbitrators. If within the periods specified in paragraph 3 of this Article the necessary appointments have not been made, either Contracting Party may, in the absence of any other agreement, invite the President of the International Court of Justice to appoint any arbitrator who has or have not yet been appointed. If the President is a national of either Contracting Party or is otherwise prevented from discharging this function, the next most senior member of the International Court of Justice who is not a national of either Contracting Party shall be invited to make the necessary appointments. The arbitral tribunal shall determine its own procedure. The arbitral tribunal shall reach its decision by a majority of votes. The arbitral tribunal shall, upon the request of either Contracting Party, explain the reasons for its decision. Unless otherwise agreed, the arbitral tribunal shall make best efforts to render its decision within six months of the appointment of the Chairman in accordance with paragraphs 3 and 4 of this Article. Each Contracting Party shall bear the cost of its appointed arbitrator and of its representation in the arbitral proceedings. The relevant costs of the Chairman and the arbitral tribunal shall be borne in equal parts by the Contracting Parties. The decision of the arbitral tribunal shall be final and binding on both Contracting Parties. The Contracting Parties shall, if necessary, within 60 days of the decision of an arbitral tribunal, meet and decide on the manner in which to resolve their dispute. That decision shall normally implement the decision of the arbitral

tribunal. If the Contracting Parties fail to reach a decision, the Contacting Party bringing the dispute shall be entitled to receive compensation of equivalent value to the arbitral tribunal’s award. [page 279]

ARTICLE 16 1.

2.

3.

Denial of Benefits

A Contracting Party may, at any time including after the institution of arbitration proceedings in accordance with Part C, deny the benefits of this Agreement to an investor of the other Contracting Party that is an enterprise of that other Contracting Party and to covered investments of that investor: (a) if investors of a non-Contracting Party own or control the enterprise; and (b) the denying Contracting Party adopts or maintains measures with respect to the non-Contracting Party: (i) that prohibit transactions with the enterprise; or (ii) that would be violated or circumvented if the benefits of this Agreement were accorded to the enterprise or to its covered investments. A Contracting Party may, at any time including after the institution of arbitration proceedings in accordance with Part C, deny the benefits of this Agreement to an investor of the other Contracting Party that is an enterprise of that other Contracting Party and to covered investments of that investor if investors of a non-Contracting Party or of the denying Contracting Party own or control the enterprise and the enterprise has no substantial business activities in the territory of the other Contracting Party under whose law it is constituted or organized. For greater certainty, a Contracting Party may deny the benefits of this Agreement pursuant to paragraphs 1 and 2 at any time, including after the initiation of arbitration proceedings in accordance with Part C.

ARTICLE 17 1.

2.

3.

Transparency of Laws, Regulations and Policies

Each Contracting Party shall, with a view to promoting the understanding of its laws and policies that pertain to or affect a covered investment: (a) make such laws and policies public and readily accessible; (b) if requested, provide copies of specified laws and policies to the other Contracting Party; and (c) if requested, consult with the other Contracting Party with a view to explaining specified laws and policies. Each Contracting Party shall ensure that its laws, regulations and policies pertaining to the conditions of admission of investments, including procedures for application and registration, criteria used for assessment and approval, timelines for processing an application and rendering a decision, and review or appeal procedures of a decision, are administered in a manner that enables investors of the other Contracting Party to become acquainted with them. Each Contracting Party is encouraged to: (a) publish in advance any measure that it proposes to adopt; and (b) provide interested persons and the other Contracting Party a reasonable opportunity to comment on the proposed measure. [page 280]

ARTICLE 18 1.

Consultations

The representatives of the Contracting Parties may hold meetings for the purpose of: (a) reviewing the implementation of this Agreement;

reviewing the interpretation or application of this Agreement; (c) exchanging legal information; (d) addressing disputes arising out of investments; (e) studying other issues in connection with the facilitation or encouragement of investment, including measures referred to in paragraph 3. Further to consultations under this Article, the Contracting Parties may take any action as they may jointly decide, including making and adopting rules supplementing the applicable arbitral rules under Part C of this Agreement and issuing binding interpretations of this Agreement. The Contracting Parties recognize that it is inappropriate to encourage investment by waiving, relaxing, or otherwise derogating from domestic health, safety or environmental measures. (b)

2.

3.

[page 281]

PART C ARTICLE 19

Purpose

Without prejudice to the rights and obligations of the Contracting Parties under Article 15, this Part establishes a mechanism for the settlement of investment disputes.

ARTICLE 20 1.

2.

Claim by an Investor of a Contracting Party

An investor of a Contracting Party may submit to arbitration under this Part a claim that the other Contracting Party has breached an obligation: (a) under Articles 2 to 7(2), 9, 10 to 13, 14(4) or 16, if the breach is with respect to investors or covered investments of investors to which subparagraph (b) does not apply, or (b) under Article 10 or 12 if the breach is with respect to investors of a Contracting Party in financial institutions in the other Contracting Party’s territory or covered investments of such investors in financial institutions in the other Contracting Party’s territory, and that the investor or a covered investment of the investor has incurred loss or damage by reason of, or arising out of, that breach. (a) Where an investor submits a claim to arbitration under this Article, and the disputing Contracting Party invokes Article 33(3), the investor-State tribunal established pursuant to this Part may not decide whether and to what extent Article 33(3) is a valid defence to the claim of the investor. It shall seek a report in writing from the Contracting Parties on this issue. The investor-State tribunal may not proceed pending

(b)

(c)

receipt of such a report or of a decision of a State-State arbitral tribunal, should such a State-State arbitral tribunal be established. Pursuant to a request for a report received in accordance with subparagraph (a), the financial services authorities of the Contracting Parties shall engage in consultations. If the financial services authorities of the Contracting Parties reach a joint decision on the issue of whether and to what extent Article 33(3) is a valid defence to the claim of the investor, they shall prepare a written report describing their joint decision. The report shall be transmitted to the investor-State tribunal, and shall be binding on the investorState tribunal. If, after 60 days, the financial services authorities of the Contracting Parties are unable to reach a joint decision on the issue of whether and to what extent Article 33(3) is a valid defence to the claim of the investor, the issue shall, within 30 days, be referred by either of the Contracting Parties to a State-State arbitral tribunal established pursuant to Article 15. In such a case, the provisions requiring consultations between the Contracting Parties in Article 15(1) and (2) shall not apply. The decision of the State-State arbitral tribunal shall be transmitted to the investor-State tribunal, and shall be binding on the investorState tribunal. All of the members of [page 282] any such State-State arbitral tribunal shall have expertise or experience in financial services law or practice, which may include the regulation of financial institutions.

ARTICLE 21

Conditions Precedent to Submission of a Claim to

Arbitration 1.

2.

Before a disputing investor may submit a claim to arbitration, the disputing parties shall first hold consultations in an attempt to settle a claim amicably. Consultations shall be held within 30 days of the submission of the notice of intent to submit a claim to arbitration, unless the disputing parties otherwise agree. The place of consultation shall be the capital of the disputing Contracting Party, unless the disputing parties otherwise agree. Subject to the Party-specific requirements set out in Annex C.21, a disputing investor may submit a claim to arbitration under Article 20 only if: (a) the investor consents to arbitration in accordance with the procedures set out in this Agreement and delivers notice of such consent to the disputing Contracting Party together with the submission of a claim to arbitration; (b) at least six months have elapsed since the events giving rise to the claim; (c) the investor has delivered to the disputing Contracting Party written notice of its intent to submit a claim to arbitration at least four months prior to submitting the claim; (d) the investor has delivered, with its notice of intent to submit a claim to arbitration under sub-paragraph (c), evidence establishing that it is an investor of the other Contracting Party; (e) the investor has waived its right to initiate or continue dispute settlement proceedings under any agreement between a third State and the disputing Contracting Party in relation to the measure alleged to be a breach of an obligation under Part B of this Agreement; and (f) not more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor or a covered investment of the investor has

incurred loss or damage thereby.

ARTICLE 22 1.

Submission of a Claim to Arbitration

A disputing investor who meets the conditions precedent provided for in Article 21 may submit the claim to arbitration under: (a) the ICSID Convention, provided that both Contracting Parties are parties to that Convention; (b) the Additional Facility Rules of ICSID, provided that one Contracting Party, but not both, is a party to the ICSID Convention; or (c) the UNCITRAL Arbitration Rules, as supplemented or modified by the rules set out in this Agreement or adopted by the Contracting Parties. [page 283]

2.

3.

A claim is submitted to arbitration under this Part when: (a) the request for arbitration under Article 36(1) of the ICSID Convention is received by the Secretary General; (b) the notice of arbitration under Article 2 of Schedule C of the ICSID Additional Facility Rules is received by the Secretary General; or (c) the notice of arbitration given under the UNCITRAL Arbitration Rules is received by the disputing Contracting Party. Delivery of notice and other documents to a Contracting Party shall be made to the place named for that Contracting Party below: (a) for Canada: Office of the Deputy Attorney General of Canada, Justice Building, 239 Wellington Street, Ottawa, Ontario, K1A 0H8;

4.

for China: Department of Treaty and Law, Ministry of (b) Commerce of the People’s Republic of China. The Contracting Parties shall notify each other promptly by diplomatic note of any change in the place for delivery.

ARTICLE 23

Consent to Arbitration

Each Contracting Party consents to the submission of a claim to arbitration in accordance with the procedures set out in this Agreement. Failure to meet any of the conditions precedent provided for in Article 21 shall nullify that consent.

ARTICLE 24 1.

2.

3.

Arbitrators

Except in respect of a Tribunal established under Article 26, and unless the disputing parties agree otherwise, the Tribunal shall comprise three arbitrators, one arbitrator appointed by each of the disputing parties and the third, who shall be the presiding arbitrator, appointed by agreement of the disputing parties. Arbitrators shall: (a) have expertise or experience in public international law, international trade or international investment rules, or the resolution of disputes arising under international trade or international investment agreements; (b) be independent of, and not be affiliated with, or take instructions from, either Contracting Party or disputing party; and (c) comply with any additional rules where such rules are agreed to by the Contracting Parties. Where the claimant claims that a dispute involves measures adopted or maintained by the disputing Contracting Party relating to financial institutions of the other Contracting Party, or investors of the other Contracting Party and covered investments of such investors in financial institutions in the disputing Contracting Party’s territory, then:

(a)

where the disputing parties are in agreement, the arbitrators shall, in addition to the criteria set out in paragraph 2, have expertise or experience in financial services law or practice, which may include the regulation of financial institutions; or [page 284]

(b)

4.

5.

where the disputing parties are not in agreement, (i) each disputing party may select arbitrators who meet the qualifications set out in subparagraph (a), and (ii) if the disputing Contracting Party invokes Article 33(4), the presiding arbitrator shall meet the qualifications set out in subparagraph (a). If the disputing parties do not agree on the remuneration of the arbitrators before the constitution of the Tribunal, the prevailing ICSID rate for arbitrators shall apply. If a Tribunal, other than a Tribunal established under Article 26, has not been constituted within 90 days from the date that a claim is submitted to arbitration, the Secretary General of ICSID, on the request of either disputing party, shall appoint, in his or her discretion, the arbitrator or arbitrators not yet appointed, except that the presiding arbitrator shall not be a national of either Contracting Party.

ARTICLE 25

Agreement to Appointment of Arbitrators

For the purposes of Article 39 of the ICSID Convention and Article 7 of Schedule C to the Additional Facility Rules of ICSID, and without prejudice to an objection to an arbitrator based on a ground other than citizenship or permanent residence: (a) the disputing Contracting Party agrees to the appointment of each individual member of a Tribunal established under the ICSID Convention or the Additional Facility Rules of

(b)

ICSID; a disputing investor may submit a claim to arbitration, or continue a claim, under the ICSID Convention or the Additional Facility Rules of ICSID, only on condition that the disputing investor agrees in writing to the appointment of each individual member of the Tribunal.

ARTICLE 26 1.

2.

3.

Consolidation

Where two or more claims have been submitted separately to arbitration under Article 20 and the claims have a question of law or fact in common and arise out of the same events or circumstances, any disputing party may seek a consolidation order in accordance with either the agreement of all the disputing parties sought to be covered by the order, or the terms of paragraphs 2 through 9. A disputing party that seeks a consolidation order under this Article shall deliver, in writing, a request to the Secretary-General of ICSID and to all the disputing parties sought to be covered by the order and shall specify in the request: the names and addresses of all the disputing parties sought to be covered by the order; the nature of the order sought; and the grounds on which the order is sought. Unless the Secretary-General of ICSID finds within 30 days after receiving a request under paragraph 2 that the request is manifestly unfounded, a tribunal shall be established under this Article. [page 285]

4.

Unless all the disputing parties sought to be covered by the order otherwise agree, a tribunal established under this Article shall comprise three arbitrators: one arbitrator appointed by agreement of the claimants; one arbitrator appointed by the respondent; and the presiding arbitrator appointed by the Secretary-General of ICSID, provided, however, that the presiding arbitrator shall not

5.

6.

7.

8.

9.

be a national of either Contracting Party. If, within 60 days after the Secretary-General of ICSID receives a request made under paragraph 2, the disputing Contracting Party fails or the claimants fail to appoint an arbitrator in accordance with paragraph 4, the Secretary-General of ICSID, at the request of any disputing party sought to be covered by the order, shall appoint the arbitrator or arbitrators not yet appointed. Where a tribunal established under this Article is satisfied that two or more claims that have been submitted to arbitration under Article 20 have a question of law or fact in common, and arise out of the same events or circumstances, the tribunal may, in the interest of fair and efficient resolution of the claims, and after hearing the disputing parties, by order: assume jurisdiction over, and hear and determine together, all or part of the claims; or assume jurisdiction over, and hear and determine one or more of the claims, the determination of which it believes would assist in the resolution of the others. A tribunal established under this Article shall conduct its proceedings in accordance with the UNCITRAL Arbitration Rules, except as modified by this Section. A tribunal established under Articles 22 through 25 shall not have jurisdiction to decide a claim, or a part of a claim, over which a tribunal established under this Article has assumed jurisdiction. On application of a disputing party, a tribunal established under this Article may, pending its decision under paragraph 6, order that the proceedings of a tribunal established under Article 22 through 25 be stayed, unless the latter tribunal has already adjourned its proceedings.

ARTICLE 27

1.

The Non-Disputing Contracting Party: Documents and Participation

A disputing Contracting Party shall deliver to the other Contracting Party a copy of the notice of intent to submit a claim

2.

to arbitration, and the relevant document submitted pursuant to Article 22(2) no later than 30 days after the date that such documents have been delivered to the disputing Contracting Party. The non-disputing Contracting Party shall be entitled, at its cost, to receive from the disputing Contracting Party a copy of the evidence that has been tendered to the Tribunal, copies of all pleadings filed in the arbitration, and the written argument of the disputing parties. The Contracting Party receiving such information shall treat the information as if it were a disputing Contracting Party. The non-disputing Contracting Party shall have the right to attend any hearings held under this Part of this Agreement. Upon written notice to the [page 286] disputing parties, the non-disputing Contracting Party may make submissions to a Tribunal on a question of interpretation of this Agreement.

ARTICLE 28 1.

2.

Public Access to Hearings and Documents

Any Tribunal award under this Part shall be publicly available, subject to the redaction of confidential information. Where a disputing Contracting Party determines that it is in the public interest to do so and notifies the Tribunal of that determination, all other documents submitted to, or issued by, the Tribunal shall also be publicly available, subject to the redaction of confidential information. Where, after consulting with a disputing investor, a disputing Contracting Party determines that it is in the public interest to do so and notifies the Tribunal of that determination, hearings held under this Part shall be open to the public. To the extent necessary

3.

4.

5.

to ensure the protection of confidential information, including business confidential information, the Tribunal may hold portions of hearings in camera. A disputing party may disclose to other persons in connection with the arbitral proceedings such unredacted documents as it considers necessary for the preparation of its case, but it shall ensure that those persons protect the confidential information in such documents. The Contracting Parties may share with officials of their respective federal and sub-national governments all relevant unredacted documents in the course of dispute settlement under this Agreement, but they shall ensure that those persons protect any confidential information in such documents. To the extent that a Tribunal’s confidentiality order designates information as confidential and a Contracting Party’s law on access to information requires public access to that information, the Contracting Party’s law on access to information shall prevail. However, a Contracting Party should endeavour to apply its law on access to information so as to protect information designated confidential by the Tribunal.

ARTICLE 29 1.

2.

Submissions by a Non-Disputing Party

A Tribunal, after consultation with the disputing parties, may accept written submissions from a person or entity that is not a disputing party if that non-disputing party has a significant interest in the arbitration. The Tribunal shall ensure that any nondisputing party submission does not disrupt the proceedings and that neither disputing party is unduly burdened or unfairly prejudiced by it. An application to the Tribunal for leave to file a non-disputing party submission, and the filing of a submission, if allowed by the Tribunal, shall be made in accordance with Annex C.29.

ARTICLE 30 1.

Governing Law

A Tribunal established under this Part shall decide the issues in dispute in accordance with this Agreement, and applicable rules of international law, and [page 287]

2.

where relevant and as appropriate, take into consideration the law of the host Contracting Party. An interpretation by the Contracting Parties of a provision of this Agreement shall be binding on a Tribunal established under this Part, and any award under this Part shall be consistent with such interpretation. Where a disputing Contracting Party asserts as a defence that the measure alleged to be a breach is within the scope of the reservations and exceptions set out in Article 8(1), (2) and (3), on request of the disputing Contracting Party, the Tribunal shall request the interpretation of the Contracting Parties on the issue. The Contracting Parties, within 60 days of delivery of the request, shall submit in writing their joint interpretation to the Tribunal. The interpretation shall be binding on the Tribunal. If the Contracting Parties fail to submit an interpretation within 60 days, the Tribunal shall decide the issue.

ARTICLE 31 1.

Interim Measures of Protection and Final Award

A Tribunal may recommend an interim measure of protection to preserve the rights of a disputing party, or to ensure that the Tribunal’s jurisdiction is made fully effective, including a recommendation to preserve evidence in the possession or control of a disputing party or to protect the Tribunal’s jurisdiction. A Tribunal shall not recommend attachment or enjoin the application of the measure alleged to constitute a breach referred to in Article 20.

Where a Tribunal makes a final award against the disputing Contracting Party, the Tribunal may award, separately or in combination, and subject to the requirements in paragraph 3, only: (a) monetary damages and any applicable interest; (b) restitution of property, in which case the award shall provide that the disputing Contracting Party may pay monetary damages and any applicable interest in lieu of restitution. The Tribunal may also award costs in accordance with the applicable arbitration rules. 3. Where a claim is made for damages to a covered investment that is a juridical person that the investor owns or controls: (a) an award of monetary damages and any applicable interest shall provide that the sum be paid to that covered investment; (b) an award of restitution of property shall provide that restitution be made to that covered investment; and (c) the award shall provide that it is made without prejudice to any right that any person may have in the relief under applicable domestic law. 4. A Tribunal shall not order a disputing Contracting Party to pay punitive damages. 2.

ARTICLE 32 1.

Finality and Enforcement of an Award

An award made by a Tribunal shall have no binding force except between the disputing parties and in respect of that particular case. [page 288]

2.

Subject to paragraph 3 and the applicable review procedure for an interim award, a disputing party shall abide by and comply with an

3.

4.

award without delay. A disputing party may not seek enforcement of a final award until: (a) in the case of a final award made under the ICSID Convention: (i) 120 days have elapsed from the date the award was rendered, provided that a disputing party has not requested the award be revised or annulled, or (ii) revision or annulment proceedings have been completed; and (b) in the case of a final award under the ICSID Additional Facility Rules or the UNCITRAL Arbitration Rules: (i) 90 days have elapsed from the date the award was rendered and no disputing party has commenced a proceeding to revise, set aside or annul the award, or (ii) a court has dismissed or allowed an application to revise, set aside or annul the award and there is no further appeal. Each Contracting Party shall provide for the enforcement of an award in its territory.

[page 289]

PART D ARTICLE 33 1.

2.

General Exceptions

Nothing in this Agreement shall apply to measures in respect of cultural industries. “Cultural industries” means natural persons or enterprises engaged in any of the following activities: (a) the publication, distribution, or sale of books, magazines, periodicals or newspapers in print or machine readable form but does not include the sole activity of printing or typesetting any of the foregoing; (b) the production, distribution, sale or exhibition of film or video recordings; (c) the production, distribution, sale or exhibition of audio or video music recordings; (d) the publication, distribution, sale or exhibition of music in print or machine readable form; or (e) radio communications in which the transmissions are intended for direct reception by the general public, and all radio, television or cable broadcasting undertakings and all satellite programming and broadcast network services. Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Contracting Party from adopting or maintaining measures, including environmental measures: (a) necessary to ensure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; (b) necessary to protect human, animal or plant life or health;

3.

4.

or (c) relating to the conservation of living or non-living exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption. Nothing in this Agreement shall be construed to prevent a Contracting Party from adopting or maintaining reasonable measures for prudential reasons, such as: (a) the protection of depositors, financial market participants and investors9, policy-holders, policy-claimants, or persons to whom a fiduciary duty is owed by a financial institution; (b) the maintenance of the safety, soundness, integrity or financial responsibility of financial institutions; and (c) ensuring the integrity and stability of a Contracting Party’s financial system. Nothing in this Agreement shall apply to non-discriminatory measures of general application taken by any public entity10 in pursuit of monetary and [page 290]

5.

related credit policies or exchange rate policies. This paragraph shall not affect a Contracting Party’s obligations under Article 12. Nothing in this Agreement shall be construed: (a) to require a Contracting Party to furnish or allow access to any information if the Contracting Party determines that the disclosure of that information is contrary to its essential security interests; (b) to prevent a Contracting Party from taking any actions that it considers necessary for the protection of its essential security interests: (i) relating to the traffic in arms, ammunition and implements of war and to such traffic and transactions

(c)

6.

(a)

(b)

(c)

in other goods, materials, services and technology undertaken directly or indirectly for the purpose of supplying a military or other security establishment, (ii) in time of war or other emergency in international relations, or (iii) relating to the implementation of national policies or international agreements respecting the nonproliferation of nuclear weapons or other nuclear explosive devices; or to prevent a Contracting Party from taking action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security. Nothing in this Agreement shall be construed to require a Contracting Party to furnish or allow access to information the disclosure of which would impede law enforcement or would be contrary to the Contracting Party’s law protecting Cabinet confidences, personal privacy or the confidentiality of the financial affairs and accounts of individual customers of financial institutions. Nothing in this Agreement shall be construed to require, during the course of any dispute settlement procedure under this Agreement, a Contracting Party to furnish or allow access to information protected under its competition laws, or a competition authority of a Contracting Party to furnish or allow access to any other information that is privileged or otherwise protected from disclosure. In subparagraph (b), “competition authority” means the following until otherwise notified by a Contracting Party: (i) for Canada, the Commissioner of Competition; and (ii) for China, the authority for enforcement of antimonopoly law under the State Council. The Contracting Parties shall notify each other promptly by

diplomatic note of the successors to the competition authorities identified in sub-paragraphs (i) and (ii). “information protected under its competition laws” means: (i) for Canada, information within the scope of section 29 of the Competition Act, R.S. 1985, c.34, or any successor provision; and [page 291]

7.

(ii) for China, information protected from disclosure under the relevant provisions of the Anti-Monopoly Law, the Pricing Law and the Law Against Unfair Competition, or any successor provisions. Any measure adopted by a Contracting Party in conformity with a decision adopted by the World Trade Organization pursuant to Article IX: 3 of the WTO Agreement shall be deemed to be also in conformity with this Agreement. An investor purporting to act pursuant to Article 20 of this Agreement may not claim that such a conforming measure is in breach of this Agreement.

ARTICLE 34

Exclusions

Article 15 and Part C of this Agreement do not apply to the decisions set out in Annex D.34.

ARTICLE 35 1.

Entry into Force and Termination

The Contracting Parties shall notify each other through diplomatic channels that they have completed the internal legal procedures for the entry into force of this Agreement. This Agreement shall enter into force on the first day of the following month after the second notification is received, and shall remain in force for a period of at least fifteen years.

2.

3.

4.

After the expiration of the initial fifteen-year period, this Agreement shall continue to be in force. Either Contracting Party may at any time thereafter terminate this Agreement. The termination will be effective one year after notice of termination has been received by the other Contracting Party. With respect to investments made prior to the date of termination of this Agreement, Articles 1 to 34, as well as paragraph 4 of this Article, shall continue to be effective for an additional fifteen-year period from the date of termination. The Annexes and footnotes to this Agreement constitute integral parts of this Agreement.

IN WITNESS WHEREOF, the duly authorized representatives of their respective Governments have signed this Agreement. DONE in duplicate at Vladivastok, this 9th day of September 2012, in the English, French and Chinese languages, all texts being equally authentic. FOR THE GOVERNMENT OF CANADA

FOR THE GOVERNMENT OF THE PEOPLE’S REPUBLIC OF CHINA

[page 292]

ANNEX B.8 Exceptions 1.

2.

Canada reserves the right to adopt or maintain any measure that does not conform to the obligations in Articles 5, 6 or 7, provided that in the Schedule of Canada, including its headnote, in Annex II to the Free Trade Agreement between Canada and the Republic of Peru, as done at Lima on 29 May 2008, Canada reserved the right to adopt or maintain that measure in respect of investors or investments of investors of Peru. For greater certainty, this right is reserved even if the Canada-Peru Free Trade Agreement is no longer in force. China reserves the right to adopt or maintain any measure that does not conform to the obligations in Articles 5, 6 or 7, provided that in Chapter 10 of the Free Trade Agreement between China and the Republic of Peru, as done at Beijing on 28 April 2008, China reserved the right to adopt or maintain that measure in respect of investors or investments of investors of Peru. For greater certainty, this right is reserved even if the China-Peru Free Trade Agreement is no longer in force.

[page 293]

ANNEX B.10 Expropriation The Contracting Parties confirm their shared understanding that; 1. Indirect expropriation results from a measure or series of measures of a Contracting Party that has an effect equivalent to direct expropriation without formal transfer of title or outright seizure. 2. The determination of whether a measure or series of measures of a Contracting Party constitutes an indirect expropriation requires a case-by-case, fact-based inquiry that considers, among other factors: (a) the economic impact of the measure or series of measures, although the sole fact that a measure or series of measures of a Contracting Party has an adverse effect on the economic value of an investment does not establish that an indirect expropriation has occurred; (b) the extent to which the measure or series of measures interferes with distinct, reasonable, investment-backed expectations; and (c) the character of the measure or series of measures. 3. Except in rare circumstances, such as if a measure or series of measures is so severe in light of its purpose that it cannot be reasonably viewed as having been adopted and applied in good faith, a non-discriminatory measure or series of measures of a Contracting Party that is designed and applied to protect the legitimate public objectives for the well-being of citizens, such as health, safety and the environment, does not constitute indirect expropriation.

[page 294]

ANNEX B.12 Transfers and Exchange Formalities With regards to China: 1. The obligations in Article 12(1) shall apply provided that the transfer complies with the relevant formalities stipulated by the present laws and regulations of China relating to exchange control. These formalities: (a) shall not be used as a means of avoiding China’s commitments or obligations under this Agreement; and (b) shall not be made more restrictive than the formalities required at the time when original investment was made. 2. With respect to these formalities, China shall accord to investors of Canada or covered investments of Canadian investors treatment no less favourable than the treatment that China accords to third country investors or investments of such investors. To the extent that these formalities are no longer required according to the relevant laws of China, Article 12(1) shall apply without restrictions. 3. A transfer shall be deemed to have been made ‘without delay’ within the meaning of Article 12(1) if effected within such period as is normally required for the completion of transfer formalities. The said period shall commence on the day on which the relevant request has been submitted to the relevant foreign exchange administration with full and authentic documentation and information and may not exceed two months.

[page 295]

ANNEX C.21 Conditions Precedent to Submission of a Claim to Arbitration: Party-Specific Requirements Where the claim concerns a measure of China: 1. Upon receipt of the Notice of Intent or at any time prior, China shall require that an investor make use of the domestic administrative reconsideration procedure. If the investor considers that the dispute still exists four months11 after the investor has applied for the administrative reconsideration, or where no such remedies are available, the investor may submit its claim to arbitration. 2. An investor who has initiated proceedings before any court of China with respect to the measure of China alleged to be a breach of an obligation under Part B may only submit a claim to arbitration under Article 20 if the investor has withdrawn the case from the national court before judgment has been made on the dispute. This requirement does not apply to the domestic administrative reconsideration procedure referred to in paragraph 1. Where the claim concerns a measure of Canada: 3. The investor and, where the claim is for loss or damage to an interest in an enterprise of Canada that is a juridical person that the investor owns or controls directly or indirectly, the enterprise shall waive their right to initiate or continue before any administrative tribunal or court under the law of any Contracting Party, or other dispute settlement procedures, any proceedings with respect to the measure of Canada that is alleged to be a breach referred to in Article 20, except for proceedings for

4.

injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of Canada. The waiver required under paragraph 3 shall be delivered to Canada and shall be included in the submission of a claim to arbitration. A waiver from the enterprise shall not be required if Canada has deprived a disputing investor of control of an enterprise.

[page 296]

ANNEX C.29 Submissions by Non-Disputing Parties 1.

The application for leave to file a non-disputing party submission shall: (a) be made in writing, dated and signed by the person filing the application, and include the address and other contact details of the applicant; (b) be no longer than 5 typed pages; (c) describe the applicant, including, where relevant, its membership and legal status (eg, company, trade association or other non-governmental organization), its general objectives, the nature of its activities, and any parent organization (including any organization that directly or indirectly controls the applicant); (d) disclose whether the applicant has any affiliation, direct or indirect, with any disputing party; (e) identify any government, person or organization that has provided any financial or other assistance in preparing the submission; (f) specify the nature of the interest that the applicant has in the arbitration, including an explanation of how the submission would assist the Tribunal in the determination of a factual or legal issue related to the proceedings by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties; (g) identify the specific issues of fact or law in the arbitration that the applicant has addressed in its written submission; and (h) be made in a language of the arbitration.

2.

The submission filed by a non-disputing party shall: (a) be dated and signed by the person filing the submission; (b) be concise, and in no case longer than 20 typed pages, including any appendices; (c) set out a precise statement supporting the applicant’s position on the issues; and (d) only address matters within the scope of the dispute.

[page 297]

ANNEX D.34 Exclusions 1.

2.

A decision by Canada following a review under the Investment Canada Act, an Act respecting investment in Canada, with respect to whether or not to: (a) initially approve an investment12 that is subject to review; or (b) permit an investment that is subject to national security review; shall not be subject to the dispute settlement provisions under Article 15 and Part C of this Agreement. A decision by China following a review under the Laws, Regulations and Rules relating to the regulation of foreign investment, with respect to whether or not to: (a) initially approve an investment that is subject to review; or (b) permit an investment that is subject to national security review13; shall not be subject to the dispute settlement provisions under Article 15 and Part C of this Agreement. _____________________________

1

2. 3.

4.

For greater certainty, the elements “seeks to make” and “is making” in the definition of an investor are only applicable with respect to Article 5. For Canada, “provincial government” includes a territorial government. For greater certainty, the treatment accorded by a Contracting Party under this Article means, with respect to a provincial government, treatment accorded, in like circumstances, by that provincial government to investors, and to investments of investors, of a nonContracting Party. For greater certainty, the treatment accorded by a Contracting Party under this Article means, with respect to a provincial government, treatment accorded, in like circumstances, by that provincial government to investors, and to investments of investors, of the

5. 6. 7. 8. 9. 10. 11.

12.

13.

Contracting Party of which it forms a part. The exception described in this paragraph applies without prejudice to the rights reserved by Canada and China in paragraph 3. Annex B.10 shall apply to this paragraph. Annex B.12 shall apply to this Article. “Current transactions” has the meaning set out in Article XXX(d) of the Articles of Agreement of the International Monetary Fund. It is understood that the term “investors” in this provision means investors in the financial markets of a Contracting Party. “Public entity” means a central bank or monetary authority of a Contracting Party, or any financial institution owned or controlled by a Contracting Party. The time limit of “four months” in this paragraph is based on the relevant provisions of the Law of the People’s Republic of China on Administrative Reconsideration (adopted at the 9th Meeting of the Standing Committee of the Ninth National People’s Congress on April 29, 1999) on the date of the entry into force of this Agreement. In the event that China revises the relevant provisions on the time limit for the administrative reconsideration stipulated in the Law of the People’s Republic of China on Administrative Reconsideration in the future, China shall, in a timely manner, provide Canada with relevant information and may request consultations with Canada pursuant to Article 18 of this Agreement. For Canada, the concept of “initially approve an investment” in paragraph 1 means all decisions made with respect to whether or not to permit an investment under the Investment Canada Act. For China, “national security review” may include a review of various forms of investments for national security purposes. At the time of the entry into force of this Agreement, the specific legal document on China’s national security review is the Circular of the General Office of the State Council on the Establishment of the Security Review System For The Merger and Acquisition of Domestic Enterprises by Foreign Investors, focusing on the review of mergers and acquisitions of domestic enterprises by foreign investors.

[page 299]

Appendix 4.5

AGREEMENT BETWEEN THE GOVERNMENT OF MALAYSIA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE PROMOTION AND PROTECTION OF INVESTMENTS The Government of Malaysia and the Government of the United Kingdom of Great Britain and Northern Ireland; Desiring to create favourable conditions for greater investment by nationals and companies of one State in the territory of the other State; Recognising that the encouragement and reciprocal protection under international agreement of such investments will be conducive to the

stimulation of individual business initiative and will increase prosperity in both States; Have agreed as follows:

Article 1 Definitions For the purposes of this Agreement 1. (a) “investment” means every kind of asset and in particular, though not exclusively, includes: (i) movable and immovable property and any other property rights such as mortgages, liens or pledges; (ii) shares, stock and debentures of companies or interests in the property of such companies; (iii) claims to money or to any performance under contract having a financial value; (iv) intellectual property rights and goodwill; (v) business concessions conferred by law or under contract, including concessions to search for, cultivate, extract or exploit natural resources. (b) The said term shall refer: (i) in respect of investments in the territory of the United Kingdom of Great Britain and Northern Ireland, to all investments made in accordance with its legislation, and (ii) in respect of investments in the territory of Malaysia, to all investments made in projects classified by the appropriate Ministry of Malaysia in accordance with its legislation and administrative practice as an “approved project”. [page 300]

Any alteration of the form in which assets are invested shall not affect their classification as investment, provided that such alteration is not contrary to the approval, if any, granted in respect of the assets originally invested. “returns” means the amounts yielded by an investment and in particular, though not exclusively, includes profit, interest, capital gains, dividends, royalties or fees. “nationals” means: (a) in respect of the United Kingdom: any physical person who is a citizen of the United Kingdom and Colonies, and any British subject not possessing that citizenship or the citizenship of any other Commonwealth country or territory, provided in either case he has the right of abode in the United Kingdom; (b) in respect of Malaysia: any person who is a citizen of Malaysia according to its constitution, or any person who is permanently resident in Malaysia. “companies” means: (a) in respect of the United Kingdom: corporations, firms or associations incorporated or constituted under the law in force in any part of the United Kingdom; (b) in respect of Malaysia: any company with a limited liability incorporated in the territory of Malaysia or any juridical person or any association of persons or partnership or sole proprietorship lawfully constituted in accordance with the law in force in any part of the territory of Malaysia. “territory” means: (a) in respect of the United Kingdom: Great Britain and Northern Ireland; (b) in respect of Malaysia: all the States in Malaysia, (c)

2.

3.

4.

5.

Article 2 Promotion and Protection of Investment

1.

2.

Each Contracting Party shall encourage and create favourable conditions for nationals or companies of the other Contracting Party to invest capital in its territory, and, subject to its right to exercise powers conferred by its laws, shall admit such capital. Investments of nationals or companies of either Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. Neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its territory of nationals or companies of the other Contracting Party. Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals or companies of the other Contracting Party.

Article 3 Most-favoured-nation Provisions 1.

Neither Contracting Party shall in its territory subject investments or returns of nationals or companies of the other Contracting Party to treatment less favourable than that which it accords to investments or returns of its own nationals or [page 301]

companies or to investments or returns of nationals or companies of any third State. 2. Neither Contracting Party shall in its territory subject nationals or companies of the other Contracting Party, as regards their management, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to its own nationals or companies or to nationals or companies of any third State. (3) Nationals or companies of one Contracting Party whose investments in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, revolution, a state of

national emergency, revolt, insurrection or riot in the territory of the latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favourable than that which the latter Contracting Party accords to nationals or companies of any third State.

Article 4 Expropriation 1.

2.

Investments of nationals or companies of either Contracting Party shall not be nationalised, expropriated for subjected to measures having effect equivalent to nationalisation or expropriation in the territory of the other Contracting Party except for a public purpose related to the internal needs of the expropriating Party and against prompt, adequate and effective compensation. Such compensation shall amount to the value of the investment expropriated immediately before the expropriation or impending expropriation became public knowledge and shall be freely transferable. The legality of any such expropriation and the amount of compensation shall be determined by due process of law in the territory of the Contracting Party in which the investment has been expropriated. Where a Contracting Party expropriates the assets of a company which is incorporated or constituted under the law in force in any part of its own territory, and in which nationals or companies of the other Contracting Party own shares, it shall ensure that the provisions of paragraph (1) of this Article are applied to the extent necessary in respect of the shareholders of such a company.

Article 5 Repatriation of Investment Each Contracting Party shall, in respect of investments, allow nationals or companies of the other Contracting Party free transfer of their capital and of the returns from it. Nevertheless, each Contracting Party shall have the right to restrict in exceptional circumstances for balance of payments needs the transfer of such proceeds in a manner consistent

with its rights and obligations as a member of the International Monetary Fund.

Article 6 Exceptions The provisions in this Agreement relative to the grant of treatment not less favourable than that accorded to the nationals or companies of either Contracting Party or of any third State shall not be construed so as to oblige one Contracting Party to extend [page 302] to the nationals or companies of the other the benefit of any treatment, preference or privilege which may be extended by the former Contracting Party by virtue of: (a) the formation or extension of a customs union or a free trade area or a common external tariff area or a monetary union; or (b) the adoption of an agreement designed to lead to the formation or extension of such a union or area within a reasonable length of time; or (c) any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation relating wholly or mainly to taxation.

Article 7 Reference to International Centre for Settlement of Investment Disputes 1.

Each Contracting Party hereby consents to submit to the International Centre for the Settlement of Investment Disputes (hereinafter referred to as “the Centre”) for settlement by conciliation or arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States opened for signature at Washington on 18 March 1965 any

2.

legal dispute arising between that Contracting Party and a national or company of the other Contracting Party concerning an investment of the latter in the territory of the former. A company which is incorporated or constituted under the law in force in the territory of one Contracting Party and in which before such a dispute arises the majority of shares are owned by nationals or companies of the other Contracting Party shall in accordance with Article 25 (2) (b) of the Convention be treated for the purpose of the Convention as a company of the other Contracting Party. If any such dispute should arise and agreement cannot be reached within three months between the parties to this dispute through pursuit of local remedies or otherwise, then, if the national or company affected also consents in writing to submit the dispute to the Centre for settlement by conciliation or arbitration under the Convention, either party may institute proceedings by addressing a request to that effect to the Secretary-General of the Centre as provided in Articles 28 and 36 of the Convention. In the event of disagreement as to whether conciliation or arbitration is the more appropriate procedure the national or company affected shall have the right to choose. The Contracting Party which is a party to the dispute shall not raise as an objection at any stage of the proceedings or enforcement of an award the fact that the national or company which is the other party to the dispute has received in pursuance of an insurance contract an indemnity in respect of some or all of his or its losses. Neither Contracting Party shall pursue through diplomatic channels any dispute referred to the Centre unless (a) the Secretary-General of the Centre, or a conciliation commission or an arbitral tribunal constituted by it, decides that the dispute is not within the jurisdiction of the Centre, or (b) the other Contracting Party should fail to abide by or to comply with any award rendered by an arbitral tribunal. [page 303]

Article 8 Disputes between the Contracting Parties 1.

2.

3.

4.

5.

Disputes between the Contracting Parties concerning the interpretation or application of this Agreement should, if possible, be settled through diplomatic channels. If a dispute between the Contracting Parties cannot thus be settled, it shall upon the request of either Contracting Party be submitted to an arbitral tribunal. Such an arbitral tribunal shall be constituted for each individual case in the following way. Within two months of the receipt of the request for arbitration, each Contracting Party shall appoint one member of the tribunal. Those two members shall then select a national of a third State who on approval by the two Contracting Parties shall be appointed Chairman of the tribunal. The Chairman shall be appointed within two months from the date of appointment of the other two members. If within the periods specified in paragraph (3) of this Article the necessary appointments have not been made, either Contracting Party may, in the absence of any other agreement, invite the President of the International Court of Justice to make any necessary appointments. If the President is a national of either Contracting Party or if he is otherwise prevented from discharging the said function, the Vice-President shall be invited to make the necessary appointments. If the Vice-President is a national of either Contracting Party or if he too is prevented from discharging the said function, the Member of the International Court of Justice next in seniority who is not a national of either Contracting Party shall be invited to make the necessary appointments. The arbitral tribunal shall reach its decision by a majority of votes. Such decision shall be binding on both Contracting Parties. Each Contracting Party shall bear the cost of its own member of the tribunal and of its representation in the arbitral proceedings; the cost of the Chairman and the remaining costs shall be borne in equal parts by the Contracting Parties. The tribunal may, however, in its decision direct that a higher proportion of costs shall be

borne by one of the two Contracting Parties, and this award shall be binding on both Contracting Parties. The tribunal shall determine its own procedure.

Article 9 Subrogation If either Contracting Party makes payment under an indemnity it has given in respect of an investment or any part thereof in the territory of the other Contracting Party, the latter Contracting Party shall recognise (a) the assignment, whether under law or pursuant to a legal transaction, of any right or claim from the party indemnified to the former Contracting Party (or its designated Agency), and (b) that the former Contracting Party (or its designated Agency) is entitled by virtue of subrogation to exercise the rights and enforce the claims of such a party. The former Contracting Party (or its designated Agency) shall accordingly if it so desires be entitled to assert any such right or claim to the same extent as its [page 304] predecessor in title either before a Court or tribunal in the territory of the latter Contracting Party or in any other circumstances. If the former Contracting Party acquires amounts in the lawful currency of the other Contracting Party or credits thereof by assignment under the terms of an indemnity the former Contracting Party shall be accorded in respect thereof treatment not less favourable than that accorded to the funds of companies or nationals of the latter Contracting Party or of any third State deriving from investment activities similar to those in which the party indemnified was engaged. Such amounts and credits shall be freely available to the former Contracting Party concerned for the purpose of meeting its expenditure in the territory of the other Contracting Party.

Article 10 Application to Investment This Agreement shall apply to investments made in the territory of either Contracting Party in accordance with its legislation or rules or regulations by nationals or companies of the other Contracting Party prior to as well as after the entry into force of this Agreement.

Article 11 Entry into Force, Duration and Termination 1.

This Agreement shall enter into force on the exchange of instruments of ratification. 2. This Agreement shall remain in force for a period of ten years and shall continue in force thereafter unless, after the expiry of the initial period of ten years either Contracting Party notifies in writing the other Contracting Party of its intention to terminate this Agreement. The notice of termination shall become effective one year after it has been received by the other Contracting Party. 3. In respect of investments made prior to the date when the notice of termination of this Agreement becomes effective, the provisions of Articles 1 to 9 shall remain in force for a further period of ten years after the date of termination and without prejudice to the application thereafter of the rules of general international law. In witness whereof the undersigned, duly authorised thereto by their respective Governments, have signed this Agreement. Done in duplicate at London this May day of 21st 1981 in the Bahasa Malaysia and English languages, both texts being equally authoritative. In the case of divergence between the texts of this Agreement the English text shall prevail. For the Government of Malaysia: For the Government of the United Kingdom of Great Britain and Northern Ireland:

[page 305]

Appendix 5

Selected practice precedents Appendix 5.1 Appendix 5.2 Appendix 5.3

Appendix 5.4 Appendix 5.5 Appendix 5.6

Notice to State of Claim (Philip Morris Asia Limited v Commonwealth of Australia) Notice of Arbitration (Philip Morris Asia Limited v Commonwealth of Australia) Australia’s Response to the Notice of Arbitration (Philip Morris Asia Limited v Commonwealth of Australia) Request for Bifurcation (Mesa Power Group LLC v Government of Canada) Claimant’s Memorial (extracts) (redacted) (Mercer International Inc v Government of Canada) List of further selected practice precedents

[page 306]

Allens Arthur Robinson 15 July 2011 The Hon Robert McClelland MP Attorney-General for Australia c/- Australian Government Solicitor Lionel Murphy Building 50 Blackall Street BARTON ACT 2600 Fax: +61 2 6253 7333

10/F Jardine House 1 Connaught Place Central Hong Kong T +852 2840 1202 F +852 2840 0686 www.aar.com.au

By Fax and By Mail Dear Attorney-General Notice of Claim under the Australia / Hong Kong Agreement for the Promotion and Protection of Investments We refer to Philip Morris Asia Limited’s Notice of Claim (Notice) under the Agreement between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of Investments (Agreement), which was served on you on 27 June 2011. As set out in paragraph 2 of the Notice, and pursuant to Art 10 of the Agreement, Philip Morris Asia Limited would like to confer with representatives of the Commonwealth of Australia with a view to negotiating an amicable settlement. Please let us know when you would like to meet for that purpose. If an amicable settlement cannot be reached within three months of

service of the Notice, the parties are, absent other agreement, bound to submit the dispute to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law 2010. Yours faithfully Allens Arthur Robinson

Our Ref: 306171502 Partners Simon McConnell Mum Yeow David Wanger ajmm A03038360710v1 306171502 15.7.2011

Bangkok Beijing Beijing 1P Brisbane Hanoi Ho Chi Minh City Hong Kong Jakarta Melbourne Perth Phnom Penh Port Moresby Shanghai Singapore Sydney

[page 307]

Allens Arthur Robinson 27 June 2011 The Hon Julia Gillard MP Prime Minister of Australia Parliament House CANBERRA ACT 2600 Fax: +61 2 6273 4100 The Hon Robert McClelland MP Attorney-General for Australia c/- Australian Government Solicitor Lionel Murphy Building

60 Blackall Street BARTON ACT 2600 Fax: +61 2 6253 7333 The Hon Nicola Roxon MP Minister for Health and Ageing Parliament House CANBERRA ACT 2600 Fax: +61 2 6273 4146 By Courier/By Fax 10/F Jardine House 1 Connaught Place Central Hong Kong T +852 2840 1202 F +852 2840 0686 www.aar.com.au

Dear Prime Minister, Attorney-General and Minister Written Notification of Claim Australia / Hong Kong Agreement for the Promotion and Protection of Investments We act for Philip Morris Asia Limited. There follows written notification of Philip Morris Asia Limited’s claim pursuant to Article 10 of the Agreement between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of investments, dated 15 September 1993. Bangkok Yours faithfully Allens Arthur Robinson Encl

Partners Simon McConnell Mum Yeow

Beijing Beijing 1P Brisbane Hanoi Ho Chi Minh City Hong Kong Jakarta Melbourne Perth Port Moresby Shanghai Singapore Sydney

SJMM A0308332343v1

[page 308] WRITTEN NOTIFICATION OF CLAIM by PHILIP MORRIS ASIA LIMITED to THE COMMONWEALTH OF AUSTRALIA pursuant to AGREEMENT BETWEEN THE GOVERNMENT OF HONG KONG AND THE GOVERNMENT OF AUSTRALIA FOR THE PROMOTION AND PROTECTION OF INVESTMENTS 1.

2.

Philip Morris Asia Limited (“PM Asia”) hereby gives notice of a claim (the “Claim”) pursuant to Article 10 of the Agreement between the Government of Hong Kong and the Government of Australia, for the Promotion and Protection of Investments (“Hong Kong-Australia BIT”). If the Claim is not admitted, PM Asia advises, pursuant to Article 10, that it is willing to meet and confer with representatives of the Commonwealth of Australia (the “Government” or “Australia”) with a view to negotiating an amicable settlement or, if an amicable settlement is not concluded, to endeavour to agree on procedures

3.

4.

5.

for settlement. If an amicable settlement has not been achieved, nor procedures for settlement agreed, the parties are bound to submit the dispute between them to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law 2010. If the dispute is submitted to arbitration, PM Asia proposes Singapore as the seat of the arbitration and the place of hearing, since Singapore is the nearest neutral State with legal and logistical resources appropriate to support the arbitration. PM Asia further proposes that the number of arbitrators be three and proposes the Permanent Court of Arbitration at the Hague as the appointing authority. PM Asia requests Australia to advise whether it agrees with these proposals if the Claim proceeds to arbitration. Service of any correspondence may be effected through PM Asia’s solicitors, Allens Arthur Robinson, 10/F Jardine House, 1 Connaught Place, Central, Hong Kong, per Simon McConnell, Partner, telephone +852 2840 1202, facsimile +852 2840 0686, email [email protected]. PM Asia’s Claim is detailed below. [page 309]

Introduction and summary of Claim 6. On 7 April 2011, the Government released an Exposure Draft of the Tobacco Plain Packaging Bill 2011 (“the TPP Bill”) together with a Consultation Paper. The Consultation Paper makes it clear that the TPP Bill, once it is formally introduced by the Government and passed by Parliament, will be used to introduce regulations prescribing every aspect of the appearance, size and shape of tobacco products and packaging. In particular, prohibiting the use of intellectual property on or in relation to tobacco products and packaging other than the product brand name and line extension on the top, front and base of the pack in standard font and size (defined more fully in paragraph 18 below, “plain packaging legislation”). According to the Government,

the TPP Bill is to be formally introduced in the winter session of Parliament with the legislation scheduled to be in place by 1 January 2012.1 7. By separate regulation, the size of graphic health warnings on the front of cigarette packs is to increase from 30% to 75% (“GHW regulation”). Graphic health warnings are already mandated to cover 90% of the back of cigarette packs.2 8. PM Asia is an investor protected by the Hong Kong-Australia BIT. PM Asia owns 100% of the available shares in Philip Morris (Australia) Limited (“PM Australia”), which owns 100% of the available shares in Philip Morris Limited (“PML”). 9. PM Asia and PM Australia, through PML (together “Philip Morris”) manufacture, import, market and distribute for sale in Australia and elsewhere, tobacco products, principally cigarettes. PML has, whether as owner or licensee, rights to use registered and unregistered trade marks; copyright works; registered and unregistered designs; know-how; trade secrets; and overall get up of the product packaging (“Intellectual property”) on and in relation to Philip Morris’ tobacco products and packaging. Philip Morris has generated substantial goodwill from the use of the intellectual property on or in relation to Philip Morris’ products and packaging (“goodwill”). 10. PM Asia’s investments in Australia — PM Australia, PML, the intellectual property, and goodwill — are all investments Australia has undertaken to protect by the Hong Kong-Australia BIT. Plain packaging legislation and the GHW regulation contravene these investor protections. In particular: (a) Plain packaging legislation will result in the expropriation of PM Asia’s investments due to the substantial deprivation of the intellectual property and goodwill, the consequent undermining of the economic rationale of [page 310]

(b)

(c)

its investments and substantial destruction of the value of PM Australia and PML. Plain packaging legislation will effectively prohibit Philip Morris from using the intellectual property on or in relation to its tobacco products and packaging. Without the use of the intellectual property, Philip Morris’ products will not be readily distinguishable to the consumer from the products of its competitors; consequently, competition will be based primarily on price. PML will be reduced to a manufacturer of an effectively undifferentiated commodity, an entirety different enterprise and business model to that currently pursued by PML. Direct and indirect expropriation of investments without payment of adequate compensation is contrary to Article 6 of the Hong Kong-Australia BIT. Plain packaging legislation will not be fair and equitable, as is required by the Hong Kong-Australia BIT, given the substantial impairment of PM Asia’s investments, the lack of credible evidence that the measure will contribute to achievement of the legislation’s stated objectives, the availability of effective alternative means of reducing smoking prevalence, and the contravention of Australia’s international obligations under the Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”), the Paris Convention for the Protection of Industrial Property (“Paris Convention”) and the Agreement on Technical Barriers to Trade (“TBT”). These contraventions include a breach of Article 20 of TRIPS, as plain packaging legislation will be an unjustifiable encumbrance on the use of tobacco trade marks (many of which cannot be used at all), and a breach Article 2.2 of TBT, because it will be a technical regulation more trade restrictive than necessary. A failure to afford fair and equitable treatment will contravene Article 2(2) of the Hong Kong-Australia BIT. Plain packaging legislation will also constitute an

unreasonable impairment to the investments, a failure to afford full protection and security to the investments and a failure to observe obligations in respect of the investments, all in contravention of Article 2(2) of the Hong KongAustralia BIT. 11. As a result of these contraventions, PM Asia will be entitled to orders from an arbitral tribunal for the cessation and discontinuance of plain packaging legislation and the GHW regulation, and/or an award of damages, which may potentially amount to billions of dollars, and interest. [page 311] Plain packaging legislation 12. On 7 April 2011, the Government released an Exposure Draft of the TPP Bill which it intends to introduce to Federal Parliament during the 2011 winter legislative session, with the legislation to be in place by 1 January 2012. 13. The TPP Bill permits the promulgation and enforcement of regulations regarding tobacco products and packaging that:3 (a) prohibit (or specify conditions of) the use of trade marks, logos, brands, business or company names, or other identifying mark on tobacco packaging or products; (b) prohibit (or specify conditions of) the use of any design of packaging or any design of a tobacco product; (c) otherwise relate to the appearance, size or shape of tobacco packaging or tobacco products; (d) relate to the opening and contents of tobacco packaging; (e) relate to the appearance of any words, signs or symbols on tobacco packaging; (f) relate to the content of any information (including prohibition of information of a specified kind) to be included on tobacco packaging; and

(g)

relate to the materials that may be used in or on tobacco packaging. 14. The TPP Bill defines packaging of tobacco products in a broad way which includes any container for which tobacco products are packaged for retail sale and anything inside, attached to, or forming part of the packaging of tobacco products. A “tobacco product” means processed tobacco or any product that contains tobacco.4 15. The Exposure Draft of the TPP Bill was accompanied by a Consultation Paper that details anticipated regulations to prescribe the appearance, size and shape of tobacco packaging and products as follows:5 (a) Except as prescribed below, no trade mark, design, branding, colour, logo, or other aspect of livery or get-up is permitted on tobacco products or packaging; (b) The brand name, line extension and quantity of cigarettes are to appear on the top, front and base of the pack. The brand name is permitted to [page 312]

(c)

(d)

(e)

appear in Lucida sans 14 point font below the health warning on the front of the pack. The line extension and quantity is to appear below the brand name, in a font and size yet to be determined; Packages (including foils on the inside of a cigarette pack) will be a prescribed shade of dark olive brown in a matt finish; Cigarette packs will be rectangular rigid cardboard flip-top boxes of a prescribed size and shape and with an opening of a prescribed size. Cigarette packs will contain mandated numbers of cigarettes between a minimum of 20 and maximum of 50; The manufacturer’s details will appear on one side of the

pack, in a font, size and position to be determined; and (f) Cigarette sticks are to be either all white, or white with an imitation cork filter. No branding, other colours or design features are permitted. 16. By the GHW regulation, the size of graphic health warnings on the front of cigarette packs is to increase from 30% to 75%. Graphic health warnings are already mandated to cover 90% of the pack of cigarette packs. The new regulation is tantamount to plain packaging. 17. Power to make regulations pursuant to the TPP Bill (then Act) will commence on 1 January 2012. Offences for importing, packaging and manufacturing non-compliant products and packaging will come into force on 20 May 2012 and offences related to selling and purchasing non-compliant product will come into force from 1 July 2012.6 18. In this Notice of Claim, the TPP Bill and any regulations promulgated pursuant to it at any time,7 including but not limited to the anticipated regulations summarised above in paragraph 15, shall be collectively referred to as “plain packaging legislation”. The Hong Kong-Australia BIT 19. The Hong Kong-Australia BIT was executed by the respective Contracting States on 15 September 1993 and remains in force. According to its preamble, the Hong Kong-Australia BIT seeks, inter alia, to create favourable conditions for greater investment by investors of one Contracting State in the area of the other and promote economic cooperation by providing reciprocal protection for investments by investors from one State in the area of the other State. 20. PM Asia (a Hong Kong domicile limited liability company) and its Investments in Australia are entitled to the protections of the Hong Kong-Australia BIT. These reciprocal protections include obligations on each Contracting State in respect of investors from the other State:

[page 313] (a)

not to deprive investors of their investments, nor subject them to measures equivalent to deprivation (Article 6); (b) to accord investments and returns of investors fair and equitable treatment (Article 2(2)); (c) to provide investments and returns of investors full protection and security (Article 2(2)); (d) not to impair in any way the management, maintenance, use, enjoyment or disposal of investments and returns of investors by unreasonable or discriminatory measures (Article 2(2)); and (e) to observe any obligation it may have entered into with regard to investments of investors (Article 2(2)). 21. The benefit of these substantive provisions is available to “investors” as defined in Article 1(f) of the Hong Kong-Australia BIT. Relevantly, “investors” includes corporations incorporated under the law of Hong Kong who own or control investments in Australia. PM Asia, as it is now known, was incorporated under the Hong Kong Companies Ordinance on 8 November 1994 and since that time has marketed and distributed tobacco products in certain countries in Asia and provided management services to Philip Morris’ affiliates in Asian and Australasian countries including Australia. Accordingly, it is entitled to the protection of the Hong Kong-Australia BIT in respect of any investments it owns or controls in Australia. 22. PM Asia owns 100% of the shares of PM Australia, a company incorporated in Victoria, Australia on 17 March 1954. PM Australia is a holding company that owns 100% of the shares of PML, a company incorporated in Victoria, Australia on 24 May 1967. PML is a trading company that employs approximately 740 staff in Australia engaged in the manufacture, marketing and distribution for sale of tobacco products. 23. PML is the owner or licensee of the intellectual property. The intellectual property includes trade marks that relate to a number

of brand “families” — that is the core brands and line extensions within those brands, The principal core brands are Marlboro, Alpine, Longbeach, Peter Jackson, Choice, and GT (together the “Brands”). Philip Morris’ business relies on the Brands to compete with other tobacco manufacturers. PML’s use of the intellectual property for the development, improvement, manufacture and sale of tobacco products has generated substantial goodwill in PML. 24. The Hong Kong-Australia BIT encompasses a broad range of investments. Article 1(e) prescribes relevant investments to mean “every kind of asset owned or controlled by investors” and, more particularly, expressly includes: (a) shares in a company and any other form of participation in a company; (b) intellectual property rights including rights with respect to copyright, patents, trade marks, trade names, industrial designs, trade secrets, know how and goodwill; and [page 314] (c)

licences and other rights conferred by law or under contract including concessions to manufacture, use or sell products. 25. Accordingly, by virtue of its shareholding in PM Australia, PM Asia owns and/or controls a number of investments in Australia that qualify for protection of the substantive provisions of the Hong Kong-Australia BIT, specifically: (a) shares in PM Australia; (b) shares in PML; and (c) the intellectual property and goodwill (together, the “Investments”). 26. Article 10 of the Hong Kong-Australia BIT concerns settlement of disputes between an investor of one Contracting Party (such as PM Asia) and the other Contracting Party (here, Australia). Article 10 provides:

A dispute between an investor of one Contacting Party and the other Contracting Party concerning an investment of the former in the area of the latter which has not been settled amicably, shall, after a period of three months from written notification of the claim, be submitted to such procedures for settlement as may be agreed between the parties to the dispute. If no such procedures have been agreed within that three month period, the parties to the dispute shall be bound to submit it to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law as then in force. The arbitral tribunal shall have power to award interest. The parties may agree in writing to modify those Rules.

27. As stated above, this Notice of Claim is “written notification” of PM Asia’s Claim pursuant to Article 10. Contraventions of the Hong Kong-Australia BIT 28. Plain packaging legislation and the GHW regulation jointly and severally contravene the substantive protections in the Hong KongAustralia BIT in that they expropriate the Investments, are unfair and inequitable, unreasonably impair the use of the investments, amount to a failure to afford full protection and security for the Investments and contravene obligations Australia has entered into with regard to investments of investors, specifically international trade treaty obligations. These contraventions derive from the degree to which plain packaging legislation and the GHW relation interfere with the Investments, the lack of credible evidence that plain packaging legislation will achieve its stated goals, and violation of international trade treaties by plain packaging legislation. These factors are addressed below, followed by an explanation of the specific contraventions of the Hong KongAustralia BIT. 29. While PM Asia does not deny Australia its sovereign right to legislate, its treaty obligations (such as pursuant to the Hong Kong-Australia BIT) fetter its discretion; it cannot breach the Hong Kong-Australia BIT without consequences. (a) General factors; interference with PM Asia’s Investments, lack of credible evidence and violation of international law [page 315]

30. Philip Morris uses the intellectual property and goodwill to manufacture, market and distribute for sale tobacco products, principally cigarettes, in Australia and elsewhere in accordance with all applicable laws and regulations. 31. The manufacture, marketing and sale of tobacco products in Australia is already subject to extensive regulation at the Commonwealth, State and Territory levels; most pertinently, the Tobacco Advertising Prohibition Act 1982 (“TAP Act”). The practical effect of the TAP Act is that tobacco packaging is the principal remaining means by which Philip Morris can utilise the intellectual property. Plain packaging legislation and the GHW regulation will, jointly and severally, effectively prohibit the use of the intellectual property on or in relation to tobacco products and packaging with the exception of the brand name in governmentmandated font and type size thereby stripped of virtually all recognition. Philip Morris’ business in Australia will be severely affected as a result. 32. The intellectual property plays a critical part in distinguishing Philip Morris’ products from competitors’ products and illicit products. Over time, the use of intellectual property on or in relation to Philip Morris’ products has contributed to the generation of substantial goodwill in respect of those products. Philip Morris’ business in Australia and elsewhere is built on the recognition of its brands and the consequent commercial advantage that recognition brings, PML’s Brands have a history spanning more than 50 years. Some of the Brands, for example, Marlboro and Peter Jackson, have reached iconic status among consumer brands. Philip Morris and its affiliates in Australia and worldwide make every effort to protect its intellectual property and goodwill. 33. Plain packaging legislation (and, jointly and severally, the GHW regulation) manifestly deprives PML of the intellectual property and the commercial utility of its Brands: this is the central purpose of the legislation. Irrespective of whether legal title to the intellectual property is affected by plain packaging legislation, PML’s brands will effectively be eliminated. The commercial value

of the intellectual property and the goodwill generated by the intellectual property is substantially destroyed. This in turn affects the value of PM Australia and PML in a devastating manner. 34. Without branding, PML’s products are not readily distinguishable to the consumer from the products of its competitors; consequently, competition will be based primarily on price. PML is reduced from a manufacturer of branded products to that of a manufacturer of an effectively undifferentiated commodity. This is an entirely different enterprise and business model to that currently pursued by PML; the enterprise will be significantly impaired given the expected loss in value of the business. 35. The stated purpose of plain packaging legislation is, essentially, to reduce smoking prevalence.8 However, there is no credible evidence that plain [page 316] packaging will reduce smoking prevalence. Moreover, the likely reduction of price and likely increase in availability and relative desirability of cheap illicit tobacco products mean the measure may be counter-productive. The connection between plain packaging and reduced smoking prevalence is speculative at best; the Government is legislating without regard to credible evidence. 36. The Government has chosen to pursue this course regardless of the existence of other means of reducing smoking prevalence, as the Government itself highlighted in the 2009 National Preventative Health Taskforce report9, that do not curtail the property rights of tobacco manufacturers. Coupling plain packaging to other anti-smoking initiatives does not remedy the fact that there is a lack of credible evidence that plain packaging will reduce smoking prevalence. 37. Plain packaging legislation contravenes Australia’s obligations under international trade treaties, in particular TRIPS (to which Australia has been a party since 1 January 1996) which explicitly incorporates the minimum standards of protection provided for

trade marks by the Paris Convention (to which Australia has been a party since 10 October 1925) and also provides further protections; and the TBT (to which Australia has been a party since 1 January 1995). 38. Most pertinently, Article 20 of TRIPS provides that: “The use of a trademark in the course of trade shall not be unjustifiably encumbered by special requirements, such as use with another trademark, use in a special form or use in a manner detrimental to its capability to distinguish the goods or services of one undertaking from those of other undertakings.”

39. Plain packaging legislation encumbers PML’s trade marks in an unjustifiable way in that the legislation requires use in a special form, and it is clearly detrimental — significantly so — to the capability of PML’s trade marks to distinguish Philip Morris’ products from the products of other tobacco manufacturers: a matter that goes to the heart of the purpose of a trade mark. There is no exception or carve out for tobacco trade marks. 40. Article 2(2) of TBT prohibits technical regulations that create obstacles to international trade that are more trade-restrictive than necessary to achieve a legitimate objective such as human health. Plain packaging legislation is a technical regulation that is not necessary to fulfill the objective of protection of human health; there is no credible evidence that it will reduce smoking prevalence, and there is evidence to suggest that it may have an adverse effect on that objective. Neither is plain packaging legislation a “necessary” obstacle in the sense that other, less restrictive, measures are available to Australia to achieve its public health objectives in an effective manner. [page 317] 41. Article 7 of the Paris Convention and Article 15(4) of TRIPS provide that the nature of the goods or services to which a trade mark is to be applied shall not form an obstacle to the registration of a mark. Plain packaging legislation dictates that the nature of the good forms an obstacle to the use of the mark, “use” being a

notion inextricably linked to registration; there is no purpose to registration without a corresponding right to use. Similarly, Article 6 quinquies (B) of the Paris Convention provides that trade marks registered in any States which are Contracting Parties to the Paris Convention cannot be denied registration or invalidated except for one or more of three very narrowly defined reasons, none of which are applicable in the context of tobacco trade marks. 42. Accordingly, in all the above ways, plain packaging legislation contravenes Australia’s obligations pursuant to international trade treaties. Neither the Framework Convention on Tobacco Control nor its Guidelines mandate measures that contravene these fundamental international trade treaty obligations. 43. Plain packaging legislation therefore severely adversely affects PM Asia’s Investments and extinguishes the practical utility of intellectual property rights in breach of international trade treaties. There is no credible evidence illustrating any link between plain packaging and reducing smoking prevalence. Yet Australia unreasonably persists with the introduction of plain packaging legislation. (b) Specific contraventions of the Hong Kong-Australia BIT 44. The effect of plain packaging legislation, and for the same reasons the GHW regulation, is plainly equivalent to deprivation of title to the intellectual property and goodwill. Moreover, the effect of plain packaging legislation will be substantially to deprive PM Asia of the commercial value of its Investments in Australia. In all these senses, plain packaging legislation breaches Article 6 of the Hong Kong-Australia BIT. Article 6 protects investments from measures by a host State that have an effect equivalent to deprivation, except under due process of law, for a public purpose related to the internal needs of the host State, on a non-discriminatory basis and against compensation. While it is not yet clear if the Government will follow due process in passing plain packaging legislation, it is clear that there is no credible evidence that plain packaging legislation will have the claimed effect of enhanced public health (indeed there is evidence to suggest that it may have the opposite

effect) and no compensation has been paid. The effective extinguishment of the intellectual property by way of legislation also manifests a failure by Australia to afford full protection and security to PM Asia’s Investments as required by Article 2(2) of the Hong Kong-Australia BIT. 45. Neither is plain packaging legislation (and for the same reasons the GHW regulation) fair and equitable as required by Article 2(2) of the Hong Kong-Australia BIT. Plain packaging legislation will severely curtail the commercial [page 318] utility of the intellectual property and goodwill and has a severe negative impact on the value of PM Asia’s Investments in Australia. It contravenes Australia’s international obligations under TRIPS, the Paris Convention, and the TBT. There is no credible evidence that it will reduce smoking prevalence, while other measures that do affect prevalence and do not severely curtail the intellectual property or goodwill are available to the Government. Its contribution to public health is purely speculative and there is, in fact, evidence that it will have a negative effect in this regard. Its promotion and imminent enactment appear to be motivated by political concerns rather than a genuine desire for fair and equitable regulation. In short, the benefits of the legislation (if any) are entirely disproportionate to the harm it will cause to PM Asia’s Investments; accordingly, the legislation is not lair and equitable in any sense. 46. For the same reasons, plain packaging legislation and the GHW regulation each constitutes an unreasonable impairment to the management, maintenance, use, enjoyment or disposal of PM Asia’s Investments in Australia in breach of Article 2(2) of the BIT. Finally, and also pursuant to Article 2(2) of the BIT, contravention of Australia’s international trade treaty obligations results in a failure by Australia to observe obligations it entered into with regard to investments of investors in its territory.

47. For the avoidance of doubt, PM Asia’s Claim encompasses the GHW regulation (or any other extension of current regulations concerning graphic health warnings) and the TPP Bill and any regulations promulgated and enforced under it, whether pursuant to section 14, section 11(2) or section 94 and whether in the terms advised in the Consultation Paper or otherwise. PM Asia claims that the erosion of the status quo regarding the use of its intellectual property on or in relation to tobacco products and packaging as a result of the passage of the TPP Bill including promulgation and enforcement of regulations (including the GHW regulation) will severely and adversely affect its Investments and amount to a breach of the Hong Kong-Australia BIT. Loss and relief 48. Enactment of plain packaging legislation and the GHW regulation will cause PM Asia significant financial loss, potentially amounting to billions of dollars. 49. PM Asia requests that the Government cease and discontinue all steps toward enacting plain packaging legislation and issuing the GHW regulation. Failing this, PM Asia will have no option but to initiate arbitration under the Hong Kong-Australia BIT and seek orders from an arbitral tribunal for the cessation and discontinuance of the plain packaging legislation and the GHW regulation and/or for an award of damages and interest. Philip Morris Asia Limited Date: _____________________________ 1. 2.

3.

Consultation Paper, p. 2. The winter legislative session runs between May and July 2011. Trade Practices (Consumer Product Information Standards) (Tobacco) Regulations 2004 (Cth). Another warning will continue to be required on one of the side panels of the pack. The Consultation Paper, p. 14, states that the GHW Regulation is to coincide with plain packaging legislation. Sections 14 and 94 of the TPP Bill. Regulations may also be promulgated pursuant to section 11(2) governing the use of a trade mark in circumstances where the TPP Bill

4. 5. 6. 7. 8. 9.

results in an acquisition of property within the meaning of section 51(xxxi) of the Constitution of the Commonwealth of Australia because it would prevent the use of a trade mark on tobacco products or packaging. These definitions are found in Section 4. Consultation Paper, pages 11–15. Section 2. Whether under sections 14, 11(2) or 94 of the TPP Bill. Sections 3(1) and 3(2). Australian Government Preventative Health Taskforce “Australia — The Healthiest County by 2020” 30 June 2009.

[page 319]

Allens Arthur Robinson 21 November 2011 The Hon Robert McClelland MP Attorney-General for Australia c/- Australian Government Solicitor Lionel Murphy Building 50 Blackall Street BARTON ACT 2600 Fax: +61 2 6253 7333 By fax and courier Simon Daley Chief Solicitor, Dispute Resolution Australian Government Solicitor Level 42 MLC Centre 19 Martin Place SYDNEY NSW 2000 Fax: +61 2 9581 7778 Email: [email protected] By email, fax and courier

10/F Jardine House 1 Connaught Place Central Hong Kong T +852 2840 1202 F +852 2840 0686 www.aar.com.au

Dear Attorney-General and Mr Daley, Notice of Arbitration Australia / Hong Kong Agreement for the Promotion and Protection of Investments Investor: Philip Morris Asia Limited We refer to Philip Morris Asia Limited’s written notice of claim dated 22 June 2011. Pursuant to Article 10 of the Agreement between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of Investments, and Article 3 of the UNCITRAL Arbitration Rules 2010, enclosed by way of service is a notice of arbitration dated 21 November 2011. Bangkok Yours faithfully Encl

Beijing Beijing 1P Brisbane Hanoi Ho Chi Minh City Hong Kong Jakarta Melbourne Perth Port Moresby Shanghai Singapore Sydney

[page 320] IN THE MATTER

AND

of the agreement between the Government of Hong Kong and the Government of Australia for the promotion and protection of investments

IN THE MATTER

of arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law 2010

BETWEEN

PHILIP MORRIS ASIA LIMITED

AND

THE COMMONWEALTH OF AUSTRALIA

NOTICE OF ARBITRATION 21 November 2011

[page 321]

1.

INTRODUCTION

1.1

This document is a Notice of Arbitration (“Notice”) pursuant to Article 10 of the Agreement between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of Investments (the “BIT”) and Article 3 of the Arbitration Rules of the United Nations Commission on International Trade Law 2010 (the “UNCITRAL Arbitration Rules”) concerning claims made by Philip Morris Asia Limited (“PM Asia”) (a Hong Kong domiciled limited liability company) against the Commonwealth of Australia (“Australia”). PM Asia’s claims arise from the enactment and enforcement of the Tobacco Plain Packaging Act 2011 (Cth) (“TPP Act”) and its effect on investments in Australia owned or controlled by PM Asia. These claims were summarised in a Notice of Claim dated 22 June 2011, which PM Asia served on Australia on 27 June 2011 (attached to this Notice as Schedule 1). PM Asia owns 100% of the shares of Philip Morris (Australia) Limited (“PM Australia”), which owns 100% of the shares of Philip Morris Limited (“PML”). PM Asia and its wholly owned subsidiaries in Australia (together “Philip Morris”) manufacture, import, market and distribute for sale tobacco products, principally cigarettes. PML has rights with respect to certain intellectual property in Australia, including registered and unregistered trade marks; copyright works; registered and unregistered designs; and overall get up of the product packaging (“intellectual property”). Use of that intellectual property on and in relation to Philip Morris’ tobacco products and packaging has generated substantial and valuable goodwill. Intellectual property is the core of Philip Morris’ entire business because it underpins Philip Morris’ branded products. Philip

1.2

1.3

1.4

1.5

Morris’ business in Australia (and elsewhere) is built on the recognition of its brands and the consequent commercial advantage that recognition brings, such as denoting the origin of its products, differentiating between its own products, and differentiating its products from those of its competitors and from illicit products. Brands such as Marlboro, Longbeach and Peter Jackson have reached iconic status among consumer brands. As detailed below, Australia’s plain packaging legislation virtually eliminates Philip Morris’ branded business by expropriating its valuable intellectual property. The plain packaging legislation bars the use of intellectual property on tobacco products and packaging, transforming PML from a manufacturer of branded products to a manufacturer of commoditized products with the consequential effect of substantially diminishing the value of PM Asia’s investments in Australia — in circumstances where plain packaging will undermine rather than support the purported public health rationale of the legislation. [page 322]

1.6

1.7

Through plain packaging legislation, Australia violates the BIT by (i) substantially depriving Philip Morris of the real value of its investments in Australia; (ii) treating PM Asia’s investments unfairly and inequitably; (iii) unreasonably impairing the full use and enjoyment of the investments; (iv) failing to provide full protection and security for the investments; and (v) breaching its obligations under other international agreements. For these reasons, PM Asia gives notice of reference of its claims to arbitration pursuant to the dispute resolution provisions of the BIT. PM Asia seeks orders from the arbitral tribunal requiring Australia to (i) take appropriate steps to suspend enforcement of plain packaging legislation and to compensate PM Asia for loss suffered through compliance with plain packaging legislation; or

(ii) compensate PM Asia for loss suffered as a result of the enactment and continued application of plain packaging legislation.

2.

PARTIES AND COUNSEL

2.1

PM Asia was incorporated under the Hong Kong Companies Ordinance on 8 November 1994 and has its registered office at Level 28, Three Pacific Place, 1 Queen’s Road East, Hong Kong. PM Asia has taken all necessary internal actions to authorise the preparation and service of this Notice. PM Asia is represented by solicitors and counsel as follows:

2.2

Solicitors: Allens Arthur Robinson 10/F Jardine House 1 Connaught Place Central Hong Kong

Counsel: Joe Smouha QC Essex Court Chambers 24 Lincoln’s Inn Fields London WC2A 3EG United Kingdom

Per: Simon McConnell, Partner Tel: +852 2840 1202 Fax: +852 2840 0686 Email: [email protected]

Tel:+44 20 7813 8000 Fax: +44 20 7813 8080 Email: [email protected]

Counsel: David A R Williams QC Bankside Chambers Level 22, Lumley Centre 88 Shortland Street Auckland 1140 New Zealand Tel: +64 9 367 6896 Fax: +64 9 367 6895 Email: [email protected]

Counsel: Simon W B Foote Bankside Chambers Level 22, Lumley Centre 88 Shortland Street Auckland 1140 New Zealand Tel: +64 9 307 8784 Fax: +64 9 367 6895 Email: [email protected]

[page 323] 2.3

Australia is represented by the Australian Government Solicitor. Australia’s address on which this Notice has been served is:

Australian Government Solicitor Level 42, MLC Centre 19 Martin Place Sydney, NSW, 2000 Australia Per: Simon Daley, Chief Solicitor Dispute Resolution Tel: +61 2 9581 7490 Fax: +61 2 9581 7732

3.

ARBITRATION AGREEMENT AND DEMAND FOR ARBITRATION

3.1

The BIT was signed by Hong Kong and Australia on 15 September 1993 and the BIT remains in force. Article 10 of the BIT provides:

3.2

“A dispute between an investor of one Contracting Party and the other Contracting Party concerning an investment of the former in the area of the latter which has not been settled amicably, shall, after a period of three months from written notification of the claim, be submitted to such procedures for settlement as may be agreed between the parties to this dispute. If no such procedures have been agreed within that three month period, the parties to the dispute shall be bound to submit it to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law as then in force. The Arbitration Tribunal shall have power to award interest. The parties may agree in writing to modify those Rules.”

3.3

3.4 3.5

Accordingly, by the terms of Article 10, Australia expresses in advance its generic and unilateral offer to submit disputes concerning investments in its territory by Hong Kong investors to arbitration pursuant to the UNCITRAL Arbitration Rules. PM Asia gave written notification of the claim to Australia in the Notice of Claim on 27 June 2011. PM Asia engaged with Australia with a view to reaching an amicable settlement or agreeing on procedures for settlement of the claim. A meeting between representatives of PM Asia and Australia took place for this purpose on 12 September 2011 at Canberra, ACT, Australia. However, the claim has not been settled. Australia proceeded to enact plain packaging legislation.

3.6

Certain procedural matters were agreed as recorded at paragraph 9.1 of this Notice. More than three months have passed since service of the Notice of Claim. Pursuant to Article 10 of the BIT, the parties are bound to submit the dispute to arbitration under the UNCITRAL Arbitration Rules 2010. [page 324]

3.7

PM Asia hereby gives notice that the dispute that has arisen between it and Australia in connection with PM Asia’s investments under the BIT, as summarised above and more particularly set out below in this Notice of Arbitration, be referred to arbitration pursuant to Article 10 of the BIT and the UNCITRAL Arbitration Rules. This Notice of Arbitration complies with and is served in reliance on Article 3 of the UNCITRAL Arbitration Rules.

4.

FACTUAL BACKGROUND

4.1

4.2

4.3

Philip Morris’ brands in Australia PM Asia is a limited liability company domiciled in Hong Kong Special Administrative Region. As noted above, PM Asia owns 100% of the shares of PM Australia, a company incorporated in Victoria, Australia on 17 March 1954. PM Australia is a holding company which owns 100% of the shares of PML, a company incorporated in Victoria, Australia on 24 May 1967. PML is a trading company engaged in the manufacture, importing, marketing and distribution for sale of tobacco products within Australia and for export to New Zealand and the Pacific Islands. Those tobacco products are principally factory made cigarettes, with other products including roll your own tobacco and, more recently, cigars. PML’s tobacco products are sold in eight principal “brand

4.4

4.5

families” (together the “Brands”): (a) Marlboro; (b) Longbeach; (c) Peter Jackson; (d) Alpine; (e) Choice; (f) GT; (g) Bond Street; and (h) Wee Willem. There are a number of product lines in each brand family. For example, Marlboro currently has 11 product lines. Peter Jackson has 16 product lines. Longbeach has 24 product lines. In respect of each of these brands, PML currently has, whether as owner or licensee, rights to use certain intellectual property on and in relation to tobacco products and packaging: (a) Pursuant to a licence agreement, PML is licensed to use registered trade marks and other industrial and intellectual property rights (including unregistered trade marks, copyright, patents, know-how, confidential [page 325] information, trade secrets and designs) owned by Philip Morris Products SA in respect of the Choice, Wee Willem and GT brands. (b) Pursuant to a licence agreement, PML is licensed to use registered trade marks and other industrial and intellectual property rights (including unregistered trade marks, copyright, patents, know-how, confidential information, trade secrets and designs) owned by Philip Morris Brands Sarl in respect of the Alpine, Longbeach, Bond Street and Marlboro brands.

4.6

(c) PML is the owner and exclusive user in Australia of registered trade marks and other industrial and intellectual property rights in respect of the Peter Jackson brand. PML has generated substantial goodwill from the use of the intellectual property on or in relation to Philip Morris’ tobacco products and packaging (“goodwill”). That intellectual property underpins Philip Morris’ entire brand portfolio and is at the core of PM Asia’s investments in Australia.

Plain packaging and related legislation 4.7 The TPP Act was introduced to Australia’s Federal Parliament on 6 July 2011, was passed by the House of Representatives on 24 August 2011, by the Senate with proposed amendments on 10 November 2011, and again by the House of Representatives on 21 November 2011. 4.8 The TPP Act is slated to come into force together with the associated Trade Marks Amendment (Tobacco Plain Packaging) Act 2011 (Cth) (“TMA Act”). Australia also proposes to promulgate the following regulations under the TPP Act: (a) Tobacco Plain Packaging Regulations relating to cigarettes;1 (b) Tobacco Plain Packaging Regulations relating to noncigarette tobacco products,2 (together, “TPP Regulations”). In this Notice, the TPP Act, TMA Act and TPP Regulations shall be collectively referred to as “plain packaging legislation”. 4.9 In addition to plain packaging legislation, the manufacture, marketing and sale of tobacco products in Australia are subject to extensive regulation at the Commonwealth. State and Territory levels; most pertinently, the Tobacco Advertising Prohibition Act 1992 (“TAP Act”). 4.10 The practical effect of the TAP Act is that tobacco product packaging is the principal remaining means by which PML could use the intellectual property to denote the origin of PML’s tobacco products, to differentiate between its

[page 326] own products, and to differentiate its products from competitors’ products and illicit products. 4.11 Regulations made under section 65D of the Trade Practices Act 1974 (Cth)3 have required since 1 March 2006 that cigarette packaging bear prescribed graphic and text health warnings covering 90% of the back and 30% of the front of the package. A new regulation will increase the size of the graphic health warnings on the front of cigarette packaging from 30% to 75% (“GHW Regulation”).4 The GHW regulation itself is tantamount to plain packaging. 4.12 As its name makes clear, the purpose of plain packaging legislation is to eliminate branding. Plain packaging legislation applies to all tobacco products and packaging of tobacco products. It prescribes every aspect of the appearance, size and shape of tobacco packaging, and in particular prohibits the use of trade marks, symbols, graphics or images on or in relation to tobacco products and packaging other than the brand, business or company name and variant name5 in standard font and size in certain positions on tobacco packaging.6 Plain packaging legislation also prescribes the appearance of cigarette sticks, mandating a specific colour of the wrapping paper and tip, and precluding the use of brand and variant names on individual cigarette sticks.7 4.13. Compliance with plain packaging legislation’s provisions concerning civil penalties and criminal offences for importing, packaging and manufacturing non-compliant products and packaging is required from 1 October 2012, while compliance with those provisions concerning penalties and offences related to selling and purchasing non-compliant products is required from 1 December 2012.8

5.

PM ASIA IS A HONG KONG INVESTOR

WITH QUALIFIED INVESTMENTS IN AUSTRALIA 5.1

PM Asia is an “Investor” Article 1(f) of the BIT defines “investors” in respect of Hong Kong as, inter alia, “companies as defined in [Article 1(b)(i)].” [page 327]

5.2

Article 1(b)(i) defines “companies” in respect of Hong Kong as, inter alia: “… corporations incorporated or constituted or otherwise duly organised under the law in force in its area, regardless of whether or not the entities referred to in this subparagraph are organised for pecuniary gain, privately or otherwise owned, or organised with limited or unlimited liability”.

5.3

5.4

5.5

PM Asia was incorporated in Hong Kong pursuant to the Hong Kong Companies Ordinance on 8 November 1994. It therefore satisfies the BIT’s definition of an “investor”, and is entitled to the protection of the BIT in respect of any investments it owns or controls in Australia. PM Asia owns qualifying “Investments” in Australia Article 1(e) of the BIT defines “investment” as “every kind of asset, owned or controlled by [an investor]” and expressly includes: (a) shares in a company and any other formal participation in a company — Article 1(e)(ii); (a) intellectual property rights including rights with respect to copyright, trade marks, trade names, industrial designs and goodwill — Article 1(e) (iv); and (b) licences and other rights conferred by law or under contract including concessions to manufacture, use and sell products — Article 1(e)(v). Article 1(e) provides that a company shall be regarded as controlling a company or an investment if the company has a substantial interest in the company or the investment.

5.6

PM Asia owns or controls a number of assets in Australia that are plainly “investments” for the purposes of the BIT (together the “Investments”): (a) shares in PM Australia; (b) shares in PML; and (c) the intellectual property and goodwill.

6.

GENERAL FACTORS RELEVANT TO THE BREACHES OF THE BIT

6.1

The interference caused by plain packaging legislation is certain and profound As noted, plain packaging legislation prescribes every aspect of the appearance, size and shape of tobacco packaging and the appearance of cigarette sticks. The effect of plain packaging legislation on PM Asia’s Investments in Australia is therefore extraordinary and severe: (a) PML’s intellectual property and associated goodwill are effectively eliminated, fundamentally altering PML’s business in Australia from that of a branded to a commoditized business; [page 328] (b) PML’s ability to compete with other tobacco product manufacturers is limited almost entirely to differentiation on price; (c) the legitimate tobacco market will face increasing competition from illicit tobacco products; and (a) the value of PM Asia’s Investments in Australia will be substantially diminished. The rationale for plain packaging legislation is contradicted by the facts

6.2

6.3

6.4

6.5

6.6

6.7

The objects of the TPP Act are set out in section 3 of that Act. It proposes to improve public health and to give effect to “certain obligations that Australia has as a Party to the Convention on Tobacco Control” by regulating the packaging and appearance of tobacco products. Plain packaging eliminates branding. Without brands, competition will be based primarily on price and, as the relative price of cigarettes decline, consumption will increase. In addition, due to the lack of branding, the market likely will be penetrated by even cheaper illicit tobacco products. Consequently, plain packaging legislation will increase smoking prevalence — the complete opposite of what Australia claims it will do. Even the evidence cited by Australia fails to support the claimed public health benefits. There is no credible evidence that plain packaging will reduce smoking prevalence. Nor is there credible evidence that plain packaging will increase the effectiveness of health warnings or improve consumers’ understanding of the health effects of smoking. Moreover, other effective and proven means of reducing smoking prevalence are available to Australia which do not interfere with PM Asia’s Investments. PM Asia made its Investments with the legitimate expectation that Australia would comply with its international trade treaty obligations World Trade Organisation Member States, including Australia, are subject to international obligations under the Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”) (to which Australia has been a party since 1 January 1995); the Agreement on Technical Barriers to Trade (“TBT”) (to which Australia has been a party since 1 January 1995); and the Paris Convention for the Protection of Industrial Property (“Paris Convention”) (to which Australia has been a party since 10 October 1925). Plain packaging legislation contravenes Australia’s obligations under these treaties. Most pertinently, Article 20 of TRIPS provides that:

“The use of a trademark in the course of trade shall not be unjustifiably encumbered by special requirements, such as use with another trademark, use in a special form or use in a manner detrimental to its capability to distinguish the goods or services of one undertaking from those of other undertakings.”

[page 329] 6.8

6.9

6.10

6.11

Plain packaging legislation encumbers PML’s trade marks in an unjustifiable way in that the legislation requires use in a special form, and it is dearly detrimental — significantly so — to the capability of PML’s trade marks to distinguish PML’s tobacco products from the products of other tobacco manufacturers: a matter that goes to the heart of the purpose of a trade mark. There is no exception or carve out in TRIPS for tobacco trade marks. Article 2(2) of TBT prohibits technical regulations that create obstacles to international trade that are more trade-restrictive than necessary to achieve a legitimate objective such as public health. Plain packaging legislation is a technical regulation that is not necessary to fulfill the objective of protection of public health: there is no credible evidence that it will reduce smoking prevalence, and there is evidence suggesting that it will have an adverse effect on that objective. Neither is plain packaging legislation “necessary” as less restrictive measures are available to Australia to reduce smoking prevalence. Article 10bis of the Paris Convention obliges Australia to take effective action to prevent “unfair competition” and, inter alia, act to prohibit “acts of such a nature as to create confusion by any means whatever” with the goods of a competitor. Plain packaging legislation by its very nature makes it difficult for consumers to distinguish between different brands and thereby compels acts that will create confusion amounting to unfair competition, so contravening the Paris Convention. Article 7 of the Paris Convention and Article 15(4) of TRIPS provide that the nature of the goods or services to which a trade mark is to be applied shall not form an obstacle to the

6.12

registration of a mark. Use is inextricably linked to registration: there is no purpose to registration without a corresponding right to use. Plain packaging legislation dictates that the nature of the good forms an obstacle to the use of the mark, so contravening the Paris Convention and TRIPS. Similarly. Article 6 quinquies (B) of the Paris Convention provides that trade marks registered in any States which are Contracting Parties to the Paris Convention cannot be denied registration or invalidated except for one or more of three very narrowly defined reasons, none of which is applicable in the context of tobacco trade marks. Again, there is no purpose to registration without a corresponding right to use. and so plain packaging legislation also contravenes this Article of the Paris Convention. Accordingly, in all the above ways, plain packaging legislation breaches Australia’s obligations pursuant to international trade treaties. Neither the Framework Convention on Tobacco Control nor its Guidelines mandate measures that contravene these fundamental international trade treaty obligations.

7.

AUSTRALIA’S BREACHES OF THE BIT

7.1

According to its preamble, the BIT seeks, inter alia, to create favourable conditions for greater investment by investors of one Contracting Party in the [page 330]

7.2

area of the other and promote economic cooperation by providing reciprocal protection for investments by investors from one Party in the area of the other Party. Plain packaging legislation fundamentally contradicts these aims. Specifically, Australia has breached its obligations to: (a) refrain from depriving PM Asia of its Investments or subjecting those Investments to measures having effect equivalent to such deprivation, except under due process of

7.3

law, for a public purpose related to the internal needs of the host state, on a non-discriminatory basis and against compensation (Article 6(1) of the BIT — Expropriation); (b) provide fair and equitable treatment to PM Asia’s Investments in Australia (Article 2(2) of the BIT — Fair and Equitable Treatment); (c) refrain from impairing by unreasonable measures the management, maintenance, use, enjoyment or disposal of PM Asia’s Investments in Australia (Article 2(2) of the BIT — Unreasonable Impairment); (d) provide full protection and security for PM Asia’s Investments in Australia (Article 2(2) of the BIT — Full Protection and Security); and (e) observe any obligation Australia may have entered into with regard to investments of Hong Kong investors such as PM Asia (Article 2(2) — “Umbrella” clause). Expropriation Plain packaging legislation is plainly equivalent to deprivation of PM Asia’s Investments in Australia in that it substantially deprives PM Asia of the following: (a) The value of its shares in PM Australia and consequently PML, which is heavily dependent upon the ability to use the intellectual property on or in relation to tobacco products and packaging. Australia has effectively undermined the economic rationale of the Investments and the impact of plain packaging legislation on PML is such that its enterprise will be significantly impaired. (b) The intellectual property and the goodwill derived from the use of that intellectual property. Loss of commercial use of the intellectual property substantially interferes with PML’s ability to denote the origin of its tobacco products, to differentiate between its own products, and to differentiate its products from those of its competitors and from illicit products. Plain packaging legislation destroys the commercial value of the intellectual property and goodwill.

7.4

Moreover, plain packaging legislation: (a) has patently been implemented in the absence of compensation; and [page 331]

7.5

7.6

7.7

(b) is not for a proven public purpose related to the internal needs of Australia. In these circumstances, plain packaging legislation amounts to an unlawful expropriation. Even if the expropriation were in fact lawful, Australia’s adoption and implementation of plain packaging nevertheless requires payment of compensation to PM Asia in terms discussed in Section 8 of this Notice below. Fair and Equitable Treatment The obligation to accord investments fair and equitable treatment pursuant to Article 2(2) of the BIT involves a balancing of the investor’s legitimate and reasonable expectations on the one hand and the host State’s legitimate regulatory interests on the other.9 Plain packaging legislation frustrates PM Asia’s legitimate interests and expectations given the fundamental and adverse impact on the value and profitability of its Investments in circumstances where plain packaging will actually undermine rather than support the purported public health rationale of the legislation and where the measures violate international law. As detailed above, plain packaging legislation deprives PML of the intellectual property and its goodwill, effectively reducing it to a manufacturer of an undifferentiated commodity and undermining the economics of its business model. Balanced against that is Australia’s sovereign right to regulate, but where a regulation has no demonstrable utility to improve public health, violates international law, and effective alternative measures are available (all of which is the case here), then the State cannot justify the imposition of the regulation on the investor.

7.8

7.9

In these circumstances, the balance between the interference with PM Asia’s rights as an investor and Australia’s right to regulate is weighted heavily in the favour of PM Asia. The claimed public health benefits of plain packaging legislation (which are contradicted by the facts) are entirely disproportionate to its harm and accordingly not fair and equitable in any sense. Unreasonable Impairment Article 2(2) of the BIT provides that neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its area of investors of the other Contracting Party. This provision of the BIT restricts the host State’s discretion to regulate to those measures which are demonstrably reasonable. [page 332]

7.10

7.11

7.12

PM Asia’s Investments, in particular the use and enjoyment of the intellectual property and PML’s goodwill, and the profitability, management and disposal of the shares it holds in PM Australia and by virtue of that holding, PML, are impaired by the plain packaging legislation. For the reasons detailed above — the rationale for plain packaging is contradicted by the facts, the existence of effective alternatives, and violation of international law — plain packaging legislation is an unreasonable impairment of PM Asia’s Investments in Australia. This is particularly so given the availability of alternative measures that are proven to reduce smoking prevalence while not interfering with PM Asia’s Investments. Full Protection and Security Article 2(2) also provides that the investments of qualifying investors shall enjoy full protection and security in the host

7.13

7.14

7.15

7.16

7.17

State. Australia’s actions in enacting plain packaging legislation have deprived PM Asia of its Investments. The concept of full protection and security encompasses an obligation to exercise due diligence to prevent damage to qualifying investments. The reasons detailed above — the rationale for plain packaging is contradicted by the facts, the existence of effective alternatives, and violation of international law — evidence Australia’s failure to conduct due diligence prior to inflicting damage on PM Asia’s Investments in Australia. “Umbrella” Clause Article 2(2) of the BIT further requires each Contracting Party to observe any obligation it may have entered into with regard to investments of investors of the other Contracting Party. This obligation is broader than specific obligations or representations made by the host State to investors from the other Contracting State. It also encompasses other international obligations binding on the host State that affect the way in which property is treated in Australia, regardless of the nationality of the owners of that property. Here, the relevant obligations are those enshrined in TRIPS, the Paris Convention and TBT. PM Asia as an owner of the Investments is entitled to expect Australia to comply with its obligations pursuant to these treaties. By adopting and implementing plain packaging legislation, Australia has failed to observe and abide by those obligations.

8.

RELIEF SOUGHT

8.1

Plain packaging legislation has caused, and will continue to cause, significant financial loss to PM Asia. [page 333]

8.2

8.3

8.4

8.5

9.

PM Asia seeks an order for the suspension of enforcement of plain packaging legislation and compensation for loss as a result of enactment of the legislation including: (a) loss of revenue and profit in the period between the date plain packaging legislation came into force and the suspension or revocation of plain packaging legislation; (b) costs incurred in complying with plain packaging legislation while it is in force; and (c) loss of the value of the intellectual property and PML’s goodwill as a result of PML’s inability to use that intellectual property in the marketplace. In the alternative, should the Tribunal decline to order suspension of enforcement or revocation of plain packaging legislation, PM Asia seeks compensatory damages for the loss suffered by means of damage to its Investments as a result of the enactment and enforcement of the plain packaging legislation in an amount to be quantified but of the order of billions of Australian dollars. In addition, PM Asia respectfully requests the arbitral tribunal to order: (a) Australia to pay all costs of, and all costs incurred in connection with, this arbitration; (b) Australia to pay interest as damages and at a rate to be established on the amount of the Award; and (c) such other and further relief as the arbitrators shall deem just and proper in the circumstances. PM Asia reserves the right to amend or supplement the present Notice, and to request such additional or different relief as may be appropriate including conservatory, injunctive or other interim relief.

PM ASIA’S PROPOSALS CONCERNING ARBITRATION

9.1

The parties have agreed (without prejudice to any arguments as to jurisdiction or other preliminary objections that Australia may make) that: (a) this arbitration shall be governed by the UNCITRAL Arbitration Rules 2010; (b) the Appointing Authority under the UNCITRAL Arbitration Rules 2010 shall be the Secretary-General of the Permanent Court of Arbitration at The Hague; (c) the number of arbitrators be three; and (d) the language of the arbitration be English. [page 334]

9.2

9.3

In accordance with Article 3 of the UNCITRAL Arbitration Rules, PM Asia proposes that the seat of the arbitration be Singapore. PM Asia notifies Australia that in accordance with Article 9 of the UNCITRAL Arbitration Rules, it appoints Professor Gabrielle Kaufmann-Kohler as an arbitrator.

Central, Hong Kong. 21 November 2011 Philip Morris Asia Limited

_____________________________ 1. 2. 3.

See Draft Tobacco Plain Packaging Regulations 2011 published on 22 September 2011. See Department of Health and Ageing Consultation Paper “Tobacco Plain Packaging Proposed Approach to non-cigarette tobacco products” dated 30 September 2011. In 2010 the Trade practices Act 1974 (Cth) was replaced by the Competition and Consumer Act 2010 (Cth) and the Australian Consumer Law. The regulations described here remain in force.

4. 5. 6. 7. 8. 9.

The Hon Nicola Roxon, TPP Bill Second Reading Speech, p 4; Draft Competition and Consumer (Tobacco) Information Standard 2011. in particular Part 9 Division 4, published 14 November 2011. As these terms are defined in the TPP Act. The relevant provisions are contained in Part 2, Divisions 1 and 2 (sections 18-26 inclusive) of the TPP Act and in the TPP Regulations. Tobacco Plain Packaging Bill 2011. s26 and Draft Tobacco Plain Packaging Regulations, Regs. 3.1 and 3.3. Section 2, TPP Act. Saluka Investments BV v Czech Republic (Partial Award) (UNCITRAL. 2006, Watts C, Fortier and Behrens) at 306.

[page 335]

SCHEDULE 1 WRITTEN NOTIFICATION OF CLAIM by PHILIP MORRIS ASIA LIMITED to THE COMMONWEALTH OF AUSTRALIA pursuant to AGREEMENT BETWEEN THE GOVERNMENT OF HONG KONG AND THE GOVERNMENT OF AUSTRALIA FOR THE PROMOTION AND PROTECTION OF INVESTMENTS 1.

2.

3.

Philip Morris Asia Limited (“PM Asia”) hereby gives notice of a claim (the “Claim”) pursuant to Article 10 of the Agreement between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of Investments (“Hong Kong-Australia BIT”). If the Claim is not admitted, PM Asia advises, pursuant to Article 10, that it is willing to meet and confer with representatives of the Commonwealth of Australia (the “Government’ or “Australia”) with a view to negotiating an amicable settlement or, if an amicable settlement is not concluded, to endeavour to agree on procedures for settlement. If an amicable settlement has not been achieved, nor procedures for settlement agreed, the parties are bound to submit the dispute between them to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law 2010. If

4.

the dispute is submitted to arbitration, PM Asia proposes Singapore as the seat of the arbitration and the place of hearing, since Singapore is the nearest neutral State with legal and logistical resources appropriate to support the arbitration. PM Asia further proposes that the number of arbitrators be three and proposes the Permanent Court of Arbitration at the Hague as the appointing authority. PM Asia requests Australia to advise whether it agrees with these proposals if the Claim proceeds to arbitration. Service of any correspondence may be effected through PM Asia’s solicitors, Allens Arthur Robinson, 10/F Jardine House, 1 Connaught Place, Central, Hong Kong, per Simon McConnell, Partner, telephone +852 2840 1202, facsimile +852 2840 0686, email [email protected]. [page 336]

5.

PM Asia’s Claim is detailed below.

Introduction and summary of Claim 6. On 7 April 2011, the Government released an Exposure Draft of the Tobacco Plain Packaging Bill 2011 (“the TPP Bll”) together with a Consultation Paper. The Consultation Paper makes it clear that the TPP Bill, once it is formally introduced by the Government and passed by Parliament, will be used to introduce regulations prescribing every aspect of the appearance, size and shape of tobacco products and packaging, in particular, prohibiting the use of intellectual property on or in relation to tobacco products and packaging other than the product brand name and line extension on the top, front and base of the pack in standard font and size (defined more fuily in paragraph 18 below, “plain packaging legislation”). According to the Government, the TPP Bill is to be formally introduced in the winter session of Parliament with the legislation scheduled to be in place by 1 January 2012.1 7. By separate regulation, the size of graphic health warnings on the

front of cigarette packs is to increase from 30% to 75% (“GHW regulation”). Graphic health warnings are already mandated to cover 90% of the back of cigarette packs.2 8. PM Asia is an investor protected by the Hong Kong-Australia BIT. PM Asia owns 100% of the available shares in Philip (Australia) Limited (“PM Australia”), which owns 100% of the available shares in Philip Morris Limited (“PML”). 9. PM Asia and PM Australia, through PML (together “Philip Morris”) manufacture, import, market and distribute for sale in Australia and elsewhere, tobacco products, principally cigarettes. PML has, whether as owner or licensee, rights to use registered and unregistered trade marks; copyright works; registered and unregistered designs; know-how; trade secrets; and overall get up of the product packaging (“intellectual property”) on and in relation to Philip Morris’ tobacco products and packaging. Philip Morris has generated substantial goodwill from the use of the intellectual property on or in relation to Philip Morris’ products and packaging (“goodwill”). 10. PM Asia’s investments in Australia — PM Australia, PML, the intellectual property, and goodwill — are all investments Australia has undertaken to protect by the Hong Kong-Australia BIT. Plain packaging legislation and the GHW regulation contravene these investor protections, In particular: [page 337] (a)

Plain packaging legislation will result in the expropriation of PM Asia’s investments due to the substantial deprivation of the intellectual property and goodwill, the consequent undermining of the economic rationale of its investments and substantial destruction of the value of PM Australia and PML. Plain packaging legislation will effectively prohibit Philip Morris from using the intellectual property on or in relation to its tobacco products and packaging. Without the use of

(b)

(c)

the intellectual property, Philip Morris’ products will not be readily distinguishable to the consumer from the products of its competitors; consequently, competition will be based primarily on price. PML will be reduced to a manufacturer of an effectively undifferentiated commodity, an entirely different enterprise and business model to that currently pursued by PML. Direct and indirect expropriation of investments without payment of adequate compensation is contrary to Article 6 of the Hong Kong-Australia BIT. Plain packaging legislation will not be fair and equitable, as is required by the Hong Kong-Australia BIT, given the substantial impairment of PM Asia’s investments, the lack of credible evidence that the measure will contribute to achievement of the legislation’s stated objectives, the availability of effective alternative means of reducing smoking prevalence, and the contravention of Australia’s international obligations under the Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”), the Paris Convention for the Protection of Industrial Property (“Paris Convention”) and the Agreement on Technical Barriers to Trade (“TBT”). These contraventions include a breach of Article 20 of TRIPS, as plain packaging legislation will be an unjustifiable encumbrance on the use of tobacco trade marks (many of which cannot be used at all), and a breach Article 2.2 of TBT, because it will be a technical regulation more trade restrictive than necessary. A failure to afford fair and equitable treatment will contravene Article 2(2) of the Hong Kong-Australia BIT. Plain packaging legislation will also constitute an unreasonable impairment to the investments, a failure to afford full protection and security to the investments and a failure to observe obligations in respect of the investments, all in contravention of Article 2(2) of the Hong KongAustralia BIT.

11. As a result of these contraventions, PM Asia will be entitled to orders from an arbitral tribunal for the cessation and discontinuance of plain packaging legislation and the GHW regulation, and/or an award of damages, which may potentially amount to billions of dollars, and interest. [page 338] Plain packaging legislation 12. On 7 April 2011, the Government released an Exposure Draft of the TPP Bill which it intends to introduce to Federal Parliament during the 2011 winter legislative session, with the legislation to be in place by 1 January 2012. 13. The TPP Bill permits the promulgation and enforcement of regulations regarding tobacco products and packaging that:3 (a) prohibit (or specify conditions of) the use of trade marks, logos, brands, business or company names, or other identifying mark on tobacco packaging or products; (b) prohibit (or specify conditions of) the use of any design of packaging or any design of a tobacco product; (c) otherwise relate to the appearance, size or shape of tobacco packaging or tobacco products; (d) relate to the opening and contents of tobacco packaging; (e) relate to the appearance of any words, signs or symbols on tobacco packaging; (f) relate to the content of any information (including prohibition of information of a specified kind) to be included on tobacco packaging; and (g) relate to the materials that may be used in or on tobacco packaging. 14. The TPP Bill defines packaging of tobacco products in a broad way which includes any container for which tobacco products are packaged for retail sale and anything inside, attached to, or

forming part of the packaging of tobacco products. A “tobacco product” means processed tobacco or any product that contains tobacco.4 15. The Exposure Draft of the TPP Bill was accompanied by a Consultation Paper that details anticipated regulations to prescribe the appearance, size and shape of tobacco packaging and products as follows:5 (a) Except as prescribed below, no trade mark, design, branding, colour, logo, or other aspect of livery or get-up is permitted on tobacco products or packaging; [page 339] (b)

The brand name, line extension and quantity of cigarettes are to appear on the top, front and base of the pack. The brand name is permitted to appear in Lucida sans 14 point font below the health warning on the front of the pack. The line extension and quantity is to appear below the brand name, in a font and size yet to be determined; (c) Packages (including foils on the inside of a cigarette pack) will be a prescribed shade of dark olive brown in a matt finish; (d) Cigarette packs will be rectangular rigid cardboard flip-top boxes of a prescribed size and shape and with an opening of a prescribed size. Cigarette packs will contain mandated numbers of cigarettes between a minimum of 20 and maximum of 50; (e) The manufacturer’s details will appear on one side of the pack, in a font, size and position to be determined; and (f) Cigarette sticks are to be either all white, or white with an imitation cork filter. No branding, other colours or design features are permitted. 16. By the GHW regulation, the size of graphic health warnings on the front of cigarette packs is to increase from 30% to 75%. Graphic

health warnings are already mandated to cover 90% of the back of cigarette packs. The new regulation is tantamount to plain packaging. 17. Power to make regulations pursuant to the TPP Bill (then Act) will commence on 1 January 2012. Offences for importing, packaging and manufacturing non-compliant products and packaging will come into force on 20 May 2012 and offences related to selling and purchasing non-compliant product will come into force from 1 July 2012.6 18. In this Notice of Claim, the TPP Bill and any regulations promulgated pursuant to it at any time,7 including but not limited to the anticipated regulations summarised above in paragraph 15, shall be collectively referred to as “plain packaging legislation”. The Hong Kong-Australia BIT 19. The Hong Kong-Australia BIT was executed by the respective Contracting States on 15 September 1993 and remains in force. According to its preamble, the Hong Kong-Australia BIT seeks, inter alia, to create favourable conditions for greater investment by investors of one Contracting State in the area of the other and promote economic cooperation by providing reciprocal protection for investments by investors from one State in the area of the other State. 20. PM Asia (a Hong Kong domicile limited liability company) and its Investments in Australia are entitled to the protections of the Hong Kong-Australia BIT. [page 340] These reciprocal protections include obligations on each Contracting State in respect of investors from the other State: (a) not to deprive investors of their investments, nor subject them to measures equivalent to deprivation (Article 6);

(b)

to accord investments and returns of investors fair and equitable treatment (Article 2(2)); (c) to provide investments and returns of investors full protection and security (Article 2(2)); (d) not to impair in any way the management, maintenance, use, enjoyment or disposal of investments and returns of investors by unreasonable or discriminatory measures (Article 2(2)); and (e) to observe any obligation it may have entered into with regard to investments of investors (Article 2(2)). 21. The benefit of these substantive provisions is available to “investors” as defined in Article 1(f) of the Hong Kong-Australia BIT. Relevantly, “investors” includes corporations incorporated under the law of Hong Kong who own or control investments in Australia. PM Asia, as it is now known, was incorporated under the Hong Kong Companies Ordinance on 8 November 1994 and since that time has marketed and distributed tobacco products in certain countries in Asia and provided management services to Philip Morris’ affiliates in Asian and Australasian countries including Australia. Accordingly, it is entitled to the protection of the Hong Kong-Australia BIT in respect of any investments it owns or controls in Australia. 22. PM Asia owns 100% of the shares of PM Australia, a company incorporated in Victoria, Australia on 17 March 1954. PM Australia is a holding company that owns 100% of the shares of PML, a company incorporated in Victoria, Australia on 24 May 1967. PML is a trading company that employs approximately 740 staff in Australia engaged in the manufacture, marketing and distribution for sale of tobacco products. 23. PML is the owner or licensee of the intellectual property. The intellectual property includes trade marks that relate to a number of brand “families” — that is the core brands and line extensions within those brands. The principal core brands are Marlboro, Alpine, Longbeach, Peter Jackson, Choice, and GT (together the “Brands”). Philip Morris’ business relies on the Brands to compete with other tobacco manufacturers. PML’s use of the

intellectual property for the development, improvement, manufacture and sale of tobacco products has generated substantial goodwill in PML. 24. The Hong Kong-Australia BIT encompasses a broad range of investments. Article 1(e) prescribes relevant investments to mean “every kind of asset owned or controlled by investors” and, more particularly, expressly includes: [page 341] (a)

shares in a company and any other form of participation in a company; (b) intellectual property rights including rights with respect to copyright, patents, trade marks, trade names, industrial designs, trade secrets, know how and goodwill; and (c) licences and other rights conferred by law or under contract including concessions to manufacture, use or sell products. 25. Accordingly, by virtue of its shareholding in PM Australia, PM Asia owns and/or controls a number of Investments in Australia that qualify for protection of the substantive provisions of the Hong Kong-Australia BIT, specifically: (a) shares in PM Australia; (b) shares in PML; and (c) the intellectual property and goodwill (together, the “Investments”). 26. Article 10 of the Hong Kong-Australia BIT concerns settlement of disputes between an investor of one Contracting Party (such as PM Asia) and the other Contracting Party (here, Australia). Article 10 provides: A dispute between an investor of one Contracting Party and the other Contracting Party concerning an investment of the former in the area of the latter which has not been settled amicably, shall, after a period of three months from written notification of the claim, be submitted to such procedures for settlement as may be agreed between the parties to the dispute. If no such procedures have been agreed within that three month period, the parties to the dispute shall be bound to submit it to arbitration under the Arbitration

Rules of the United Nations Commission on International Trade Law as then in force. The arbitral tribunal shall have power to award interest. The parties may agree in writing to modify those Rules.

27. As stated above, this Notice of Claim is “written notification” of PM Asia’s Claim pursuant to Article 10. Contraventions of the Hong Kong-Australia BIT 28. Plain packaging legislation and the GHW regulation jointly and severally contravene the substantive protections in the Hong KongAustralia BIT in that they expropriate the Investments, are unfair and inequitable, unreasonably impair the use of the Investments, amount to a failure to afford full protection and security for the Investments and contravene obligations Australia has entered into with regard to investments of investors, specifically international trade treaty obligations. These contraventions derive from the degree to which plain packaging legislation and the GHW regulation interfere with the Investments, the lack of credible evidence that plain packaging legislation will achieve its stated goals, and violation of international trade treaties by plain packaging legislation. These factors are addressed below, followed by an explanation of the specific contraventions of the Hong Kong-Australia BIT. [page 342] 29. While PM Asia does not deny Australia its sovereign right to legislate, its treaty obligations (such as pursuant to the Hong Kong-Australia BIT) fetter its discretion; it cannot breach the Hong Kong-Australia BIT without consequences. (a) General factors: interference with PM Asia’s Investments, lack of credible evidence and violation of international law 30. Philip Morris uses the intellectual property and goodwill to manufacture, market and distribute for sale tobacco products, principally cigarettes, in Australia and elsewhere in accordance

with all applicable laws and regulations. 31. The manufacture, marketing and sale of tobacco products in Australia is already subject to extensive regulation at the Commonwealth. State and Territory levels: most pertinently, the Tobacco Advertising Prohibition Act 1992 (“TAP Act”). The practical effect of the TAP Act is that tobacco packaging is the principal remaining means by which Philip Morris can utilise the intellectual property. Plain packaging legislation and the GHW regulation will, jointly and severally, effectively prohibit the use of the intellectual property on or in relation to tobacco products and packaging with the exception of the brand name in governmentmandated font and type size thereby stripped of virtually all recognition. Philip Morris’ business in Australia will be severely affected as a result. 32. The intellectual property plays a critical part in distinguishing Philip Morris’ products from competitors’ products and illicit products. Over time, the use of intellectual property on or in relation to Philip Morris’ products has contributed to the generation of substantial goodwill in respect of those products. Philip Morris’ business in Australia and elsewhere is built on the recognition of its brands and the consequent commercial advantage that recognition brings. PML’s Brands have a history spanning more than 50 years. Some of the Brands, for example, Marlboro and Peter Jackson, have reached iconic status among consumer brands. Philip Morris and its affiliates in Australia and worldwide make every effort to protect its intellectual property and goodwill. 33. Plain packaging legislation (and, jointly and severally, the GHW regulation) manifestly deprives PML of the intellectual property and the commercial utility of its Brands: this is the central purpose of the legislation. Irrespective of whether legal title to the intellectual property is affected by plain packaging legislation, PML’s brands will effectively be eliminated. The commercial value of the intellectual property and the goodwill generated by the intellectual property is substantially destroyed. This in turn affects the value of PM Australia and PML in a devastating manner.

34. Without branding, PML’s products are not readily distinguishable to the consumer from the products of its competitors; consequently, competition will be based primarily on price. PML is reduced from a manufacturer of [page 343] branded products to that of a manufacturer of an effectively undifferentiated commodity. This is an entirely different enterprise and business model to that currently pursued by PML; the enterprise will be significantly impaired given the expected loss in value of the business. 35. The stated purpose of plain packaging legislation is, essentially, to reduce smoking prevalence.8 However, there is no credible evidence that plain packaging will reduce smoking prevalence. Moreover, the likely reduction of price and likely increase in availability and relative desirability of cheap illicit tobacco products mean the measure may be counter-productive. The connection between plain packaging and reduced smoking prevalence is speculative at best; the Government is legislating without regard to credible evidence. 36. The Government has chosen to pursue this course regardless of the existence of other means of reducing smoking prevalence, as the Government itself highlighted in the 2009 National Preventative Health Taskforce report9, that do not curtail the property rights of tobacco manufacturers. Coupling plain packaging to other anti-smoking initiatives does not remedy the fact that there is a lack of credible evidence that plain packaging will reduce smoking prevalence. 37. Plain packaging legislation contravenes Australia’s obligations under international trade treaties, in particular TRIPS (to which Australia has been a party since 1 January 1996) which explicitly incorporates the minimum standards of protection provided for trade marks by the Paris Convention (to which Australia has been a party since 10 October 1925) and also provides further

protections; and the TBT (to which Australia has been a party since 1 January 1995). 38. Most pertinently, Article 20 of TRIPS provides that: “The use of a trademark in the course of trade shall not be unjustifiably encumbered by special requirements, such as use with another trademark, use in a special form or use in a manner detrimental to its capability to distinguish the goods or services of one undertaking from those of other undertakings.”

39. Plain packaging legislation encumbers PML’s trade marks in an unjustifiable way in that the legislation requires use in a special form, and it is clearly detrimental — significantly so — to the capability of PML’s trade marks to distinguish Philip Morris’ products from the products of other tobacco manufacturers: a matter that goes to the heart of the purpose of a trade mark. There is no exception or carve out for tobacco trade marks. [page 344] 40. Article 2(2) of TBT prohibits technical regulations that create obstacles to international trade that are more trade-restrictive than necessary to achieve a legitimate objective such as human health. Plain packaging legislation is a technical regulation that is not necessary to fulfill the objective of protection of human health: there is no credible evidence that it will reduce smoking prevalence, and there is evidence to suggest that it may have an adverse effect on that objective. Neither is plain packaging legislation a “necessary” obstacle in the sense that other, less restrictive, measures are available to Australia to achieve its public health objectives in an effective manner. 41. Article 7 of the Paris Convention and Article 15(4) of TRIPS provide that the nature of the goods or services to which a trade mark is to be applied shall not form an obstacle to the registration of a mark. Plain packaging legislation dictates that the nature of the good forms an obstacle to the use of the mark, “use” being a notion inextricably linked to registration: there is no purpose to registration without a corresponding right to use. Similarly, Article

6 quinquies (B) of the Paris Convention provides that trade marks registered in any States which are Contracting Parties to the Paris Convention cannot be denied registration or invalidated except for one or more of three very narrowly defined reasons, none of which are applicable in the context of tobacco trade marks. 42. Accordingly, in all the above ways, plain packaging legislation contravenes Australia’s obligations pursuant to international trade treaties. Neither the Framework Convention on Tobacco Control nor its Guidelines mandate measures that contravene these fundamental international trade treaty obligations. 43. Plain packaging legislation therefore severely adversely affects PM Asia’s Investments and extinguishes the practical utility of intellectual property rights in breach of international trade treaties. There is no credible evidence illustrating any link between plain packaging and reducing smoking prevalence. Yet Australia unreasonably persists with the introduction of plain packaging legislation. (b) Specific contraventions of the Hong Kong-Australia BIT 44. The effect of plain packaging legislation, and for the same reasons the GHW regulation, is plainly equivalent to deprivation of title to the intellectual property and goodwill. Moreover, the effect of plain packaging legislation will be substantially to deprive PM Asia of the commercial value of its Investments in Australia. In all these senses, plain packaging legislation breaches Article 6 of the Hong Kong-Australia BIT. Article 6 protects investments from measures by a host State that have an effect equivalent to deprivation, except under due process of law, for a public purpose related to the internal needs of the host State, on a non-discriminatory basis and against compensation. While it is not yet clear if the Government will follow due process in passing plain packaging legislation, it is clear that there is no credible evidence that [page 345]

plain packaging legislation will have the claimed effect of enhanced public heatth (indeed there is evidence to suggest that it may have the opposite effect) and no compensation has been paid. The effective extinguishment of the intellectual property by way of legislation also manifests a failure by Australia to afford full protection and security to PM Asia’s Investments as required by Article 2(2) of the Hong Kong-Australia BIT. 45. Neither is plain packaging legislation (and for the same reasons the GHW regulation) fair and equitable as required by Article 2(2) of the Hong Kong-Australia BIT. Plain packaging legislation will severely curtail the commercial utility of the intellectual property and goodwill and has a severe negative impact on the value of PM Asia’s Investments in Australia. It contravenes Australia’s international obligations under TRIPS, the Paris Convention, and the TBT. There is no credible evidence that it will reduce smoking prevalence, while other measures that do affect prevalence and do not severely curtail the intellectual property or goodwill are available to the Government. Its contribution to public health is purely speculative and there is, in fact, evidence that it will have a negative effect in this regard. Its promotion and imminent enactment appear to be motivated by political concerns rather than a genuine desire for fair and equitable regulation. In short, the benefits of the legislation (if any) are entirely disproportionate to the harm it will cause to PM Asia’s Investments; accordingly, the legislation is not fair and equitable in any sense. 46. For the same reasons, plain packaging legislation and the GHW regulation each constitutes an unreasonable impairment to the management, maintenance, use, enjoyment or disposal of PM Asia’s Investments in Australia in breach of Article 2(2) of the BIT. Finally, and also pursuant to Article 2(2) of the BIT, contravention of Australia’s international trade treaty obligations results in a failure by Australia to observe obligations it entered into with regard to investments of investors in its territory. 47. For the avoidance of doubt, PM Asia’s Claim encompasses the GHW regulation (or any other extension of current regulations concerning graphic health warnings) and the TPP Bill and any

regulations promulgated and enforced under it, whether pursuant to section 14, section 11(2) or section 94 and whether in the terms advised in the Consultation Paper or otherwise. PM Asia claims that the erosion of the status quo regarding the use of its intellectual property on or in relation to tobacco products and packaging as a result of the passage of the TPP Bill including promulgation and enforcement of regulations (including the GHW regulation) will severely and adversely affect its Investments and amount to a breach of the Hong Kong-Australia BIT. [page 346] Loss and relief 48. Enactment of plain packaging legislation and the GHW regulation will cause PM Asia significant financial loss, potentially amounting to billions of dollars. 49. PM Asia requests that the Government cease and discontinue all steps toward enacting plain packaging legislation and issuing the GHW regulation. Failing this, PM Asia will have no option but to initiate arbitration under the Hong Kong-Australia BIT and seek orders from an arbitral tribunal for the cessation and discontinuance of the plain packaging legislation and the GHW regulation and/or for an award of damages and interest. Philip Morris Asia Limited Date: _____________________________ 1. 2.

3.

Consultation Paper, p. 2. The winter legislative session runs between May and July 2011. Trade Practices (Consumer Product Information Standards) (Tobacco) Regulations 2004 (Cth). Another warning will continue to be required on one of the side panels of the pack. The Consultation Paper, p. 14, states (that the GHW Regulation is to coincide with plain packaging legislation. Sections 14 and 94 of the TPP Bill. Regulations may also be promulgated pursuant to section 11(2) governing the use of a trade mark in circumstances where the TPP Bill

4. 5. 6. 7. 8. 9.

results in an acquisition of property within the meaning of section 51(xxxi) of the Constitution of the Commonwealth of Australia because it would prevent the use of a trade mark on tobacco products or packaging. These definitions are found in Section 4. Consultation Paper, pages 11-15. Section 2. Whether under sections 14,11(2) or 94 of the TPP Bill. Sections 3(1) and 3(2). Australian Government Preventative Health Taskforce “Australia — The Healthiest Country by 2020” 30 June 2009.

[page 347] UNDER THE 2010 ARBITRATION RULES OF THE UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW PHILIP MORRIS ASIA LIMITED Claimant and THE COMMONWEALTH OF AUSTRALIA Respondent AUSTRALIA’S RESPONSE TO THE NOTICE OF ARBITRATION

Simon Daley Chief Solicitor, Dispute Resolution Australian Government Solicitor GPO Box 2727 Sydney NSW 2001 Australia

Tel: +61 2 9581 7490 Fax: +61 2 9581 7732 21 December 2011 [page 348]

Section 1: Introduction 1.

2.

3.

4.

The Commonwealth of Australia (“Australian Government”) provides this Response to the Notice of Arbitration received from Philip Morris Asia Limited (“PM Asia”) on 21 November 2011, pursuant to Article 4 of the 2010 Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL Arbitration Rules”). PM Asia seeks to challenge Australia’s enactment and enforcement of legislation to require all tobacco products to be manufactured and sold in Australia in plain packaging (“plain packaging legislation”) pursuant to the Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments of 1993 (“BIT”). The plain packaging legislation forms part of a comprehensive government strategy to reduce smoking rates in Australia. This strategy is designed to address one of the leading causes of preventable death and disease in Australia, which kills around 15,000 Australians each year, causes chronic disease for many others and is a significant burden both on productivity and on Australia’s health care system. The implementation of these measures is a legitimate exercise of the Australian Government’s regulatory powers to protect the health of its citizens. PM Asia is incorporated in Hong Kong and asserts that the plain packaging measure impacts on investments that PM Asia owns or controls in Australia, namely its shares in Philip Morris Australia Limited (“PM Australia”), the shares that are held by PM Australia in Philip Morris Limited (“PML”), and the intellectual

5.

property and goodwill of PML. PM Asia acquired its shareholding in PM Australia (and hence a purported indirect interest in the shares and assets of PML) only on 23 February 2011. This recent acquisition was made by PM Asia against the backdrop of: a) the Australian Government’s long-standing regulation and control of the manufacture and sale of tobacco in Australia, and its ratification of the World Health Organization (“WHO”) Framework Convention on Tobacco Control (“FCTC”); b) the Australian Government’s establishment of a National Preventative Health Taskforce (“Taskforce”) in April 2008 to consider how to reduce harm from tobacco usage, which led to the Taskforce considering the impacts of packaging on tobacco usage, engaging in a consultation exercise in which PML participated and, ultimately, recommending in June 2009 that the Australian Government mandate the sale of cigarettes in plain packaging and increase the required size of graphic health warnings; c) the Australian Government’s announcement, on 29 April 2010, of its decision to implement plain packaging and to mandate updated and larger graphic health warnings for all tobacco products; and [page 349] d)

6.

continuing objections or public complaints on the part of PM Australia, PML and also Philip Morris International Inc. (the ultimate holding company for the Philip Morris group) – in the course of the remainder of 2010 and early 2011 – to the effect that the plain packaging legislation would breach Australia’s international trade and treaty obligations. Thus, PM Asia acquired its shares in PM Australia on 23 February

7.

8.

2011, both in full knowledge that the decision had been announced by the Australian Government to introduce plain packaging, and also in circumstances where various other members of the Philip Morris group had repeatedly made clear their objections to the plain packaging legislation, whereas such objections had not been accepted by the Australian Government. Against this backdrop, PM Asia’s claims under the BIT inevitably fail, both as to jurisdiction and the merits: a) Article 10 of the BIT does not confer jurisdiction on an arbitral tribunal to determine pre-existing disputes that have been re-packaged as BIT claims many months after the relevant governmental measure has been announced. b) The plain packaging legislation cannot be regarded as a breach of any of the substantive protections under the BIT. PM Asia made a decision to acquire shares in PM Australia in full knowledge that the decision had been announced by the Australian Government to introduce plain packaging. An investor cannot make out a claim for breach of (say) the fair and equitable treatment standard or of expropriation in circumstances where (i) a host State has announced that it is going to take certain regulatory measures in protection of public health, (ii) the prospective investor – fully advised of the relevant facts – then acquires some form of an interest in the object of the regulatory measures, and (iii) the host State then acts in the way it has said it is going to act. The Australian Government returns to the issues of application of the BIT in Sections 3 and 4 below. Before doing so, it is useful to outline in further detail the factual background relevant to the current claim.

Section 2: Factual Background A. AUSTRALIA’S LONG-STANDING ENGAGEMENT IN THE REGULATION OF TOBACCO 9. The WHO has stated that tobacco “is the only legal consumer product that kills when used exactly as intended by the

manufacturer.”1 The health risks of tobacco smoking are well documented. The risks from tobacco increase [page 350]

10.

11.

12.

13.

with the level of use, but even light smoking or passive smoking is dangerous. Tobacco products are, of course, highly addictive. From 1950 (when initial reports identifying smoking as a cause of lung cancer were published) to 2008, smoking is estimated to have killed 900,000 Australians.2 According to the latest available estimates, smoking is responsible for about 15,000 deaths annually in Australia,3 causing significant harm to families and individuals, to communities and to the national economy. Since at least the early 1970s, the Australian Government, in conjunction with the Governments of the States and Territories of Australia, have progressively implemented a series of measures designed to reduce smoking.4 Foremost among these measures are progressively tightened restrictions on tobacco advertising and promotion: the advertising of cigarettes on television and radio has been banned in Australia since 1976, and the advertising of tobacco products in all newspapers and magazines has been prohibited from December 1990. In 1992, Australia enacted the Tobacco Advertising Prohibition Act 1992 (Cth) (“TAP Act”), which imposes wide-ranging restrictions on the broadcasting and publishing of tobacco advertisements across different media and other means and advertising on tickets, billboards and public transport. Under successive Australian, State and Territory Governments, Australia has progressively tightened tobacco advertising restrictions under the TAP Act, including the phasing out of tobacco company sponsorship of sporting and cultural events. Alongside these increasingly stringent controls on tobacco advertising, the first mandatory health warning requirements for tobacco products were implemented from 1973. The Australian Government, in conjunction with the Governments of the States

and Territories, has successively strengthened health warning requirements since this time. In particular, the Australian Government has increased the required coverage of graphic health warnings on tobacco packaging and has, since 2006, required companies to include pictorial images displaying, in graphic terms, the real and distressing health effects of smoking. 14. Other measures introduced since the 1970s to help reduce smoking rates and better inform consumers about the health effects of smoking include: minimum age restrictions on the purchase of tobacco products, price increases through excise measures, minimum pack sizes to make cigarettes less affordable [page 351] (particularly to young people), public and school-based education programs, bans on smoking in workplaces and public spaces, provision of “Quitlines” and other smoking cessation support services, provision of public subsidies for nicotine replacement therapies and other smoking cessation medications, support for indigenous communities to reduce smoking rates, retailer licensing in some jurisdictions, and prohibitions on certain flavoured cigarettes. 15. Australia’s anti-smoking measures have helped reduce smoking rates in Australia from some 36 per cent of the adult population in 1977 to around 15 per cent in 2010.5 This has resulted in a fall in the number of daily smokers in Australia by more than half a million in the last decade alone.6 Nonetheless, some three million Australians (aged 14 or over) continue to smoke daily or weekly.7 16. Australia’s history of progressively more comprehensive and stringent tobacco regulation is consistent with trends in countries around the world, and also international steps to combat the global health epidemic posed by tobacco smoking through the FCTC. The FCTC was adopted by the 56th World Health Assembly in May 2003, was opened for signature on 16 June 2003, and entered into force on 27 February 2005. There are 174 States Parties to

this treaty, including Australia and China, making it one of the most widely ratified treaties. 17. The FCTC imposes a comprehensive set of obligations for Parties to implement and manage tobacco control programmes. Article 11 of the FCTC requires Parties to adopt and implement effective measures in respect of the packaging and labelling of tobacco products, including health warnings and other appropriate messages. Further, Article 13(2) obliges each Party “in accordance with its constitution or constitutional principles, [to] undertake a comprehensive ban of all tobacco advertising, promotion and sponsorship.” The Guidelines for the implementation of Articles 11 and 13, adopted by the Conference of the Parties to the FCTC in November 2008, recommend that Parties should consider adopting a suite of measures, including plain packaging, to give effect to the FCTC.8 [page 352] B. AUSTRALIA’S RECENT DEVELOPMENT OF FURTHER TOBACCO CONTROLS 18. In 2008, the Australian Government and the Governments of the States and Territories signed the Council of Australian Governments National Healthcare Agreement which set the goal of reducing the national (adult) smoking rate to 10 per cent of the population by 2018. 19. Also in 2008, the Australian Government established the Taskforce, an independent advisory group comprised primarily of leading Australian and international public health experts to develop strategies to tackle the health challenges caused by tobacco, alcohol and obesity. The Taskforce conducted extensive research and reviews of available evidence and undertook widespread consultation with stakeholders (including PML, which made a submission to the Taskforce on 2 January 2009, in which it contended that mandating plain packaging would “violate international treaty obligations”, including obligations relating to

the expropriation of trademarks).9 20. In its June 2009 report, Australia: The Healthiest Country by 2020, the Taskforce provided a comprehensive set of recommendations to target obesity, tobacco and excessive alcohol use as the key preventable health risks. In particular, the introduction of plain packaging was recommended.10 21. On 29 April 2010, having considered the recommendations of the Taskforce, the Australian Government announced its decision to adopt a new series of tobacco control measures as part of a comprehensive strategy to promote public health and awareness of the risks of smoking. This decision was also recorded in Taking Preventative Action – A Response to Australia: The Healthiest Country by 2020, the May 2010 Australian Government response to the Taskforce.11 These reforms, which include the measures that are at the heart of the current claims by PM Asia, include: a) an increase in tobacco excise by 25 per cent, from 30 April 2010; b) legislation to bring restrictions on tobacco advertising on the internet into line with restrictions in other media and at retail points of sale; c) increased anti-smoking public health campaigns; d) through working with State and Territory Governments, the prevention of tobacco advertising and promotion at the point of retail sale, as well as bans on smoking in further public places and in cars with children; e) continuing enforcement efforts to combat illicit tobacco trade; and f) the introduction of plain packaging and updated and expanded graphic health warnings. [page 353] 22. The introduction of plain packaging has now been implemented through legislation enacted by the Australian Parliament, namely

the Tobacco Plain Packaging Act 2011 (Cth) (“TPP Act”), which received Royal Assent on 1 December 2011. 23. The TPP Act prohibits the display on tobacco products and their packaging of all tobacco company logos, symbols, and other images that may have the effect of advertising or promoting tobacco products. The Act requires that all tobacco packaging be in a particular shade of drab dark brown, chosen through consumer research as the optimal colour for achieving the objectives of the plain packaging legislation. It also imposes restrictions on the dimensions and make-up of tobacco packaging, preventing unique or “novelty” cigarette packets, including socalled “soft packs”. However, brand names and variant names can continue to appear on tobacco packaging in specified locations, and in a standard colour, position, font style and size, enabling tobacco companies to continue to distinguish their products. 24. The manufacture and packaging in Australia of non-compliant tobacco products will be prohibited from 1 October 2012, and the retail sale of such products will be prohibited from 1 December 2012. 25. The WHO and the Secretariat of the FCTC have each made submissions to the Australian Government strongly supporting the legislation, in its submission, the WHO stated its view that:12 [I]mplementing the proposed legislation aiming to prevent tobacco advertising and/or promotion on tobacco product packaging will achieve its stated goals of: reducing the attractiveness and appeal of tobacco products to consumers, particularly young people; increasing the noticeability and effectiveness of mandated health warnings; and reducing the ability of the tobacco product packaging to mislead consumers about the harms of smoking.

26. Together with the plain packaging legislation, the Australian Government is also amending the graphic health warnings requirements for tobacco products. In particular, graphic health warnings will be expanded to cover 75 per cent of the front of cigarette packets (graphic health warnings will remain at 90 per cent of the back of cigarette packs), with commensurate measures for other tobacco products. The new graphic health warnings are intended to be made as an Information Standard under the

Australian Consumer Law. 27. Both before and since the Australian Government announced its decision to introduce plain packaging on 29 April 2010, the Philip Morris group has consistently expressed its opposition to plain packaging. In addition to the written submission made by PML to the Taskforce on 2 January 2009 (noted [page 354] in paragraph 19 above), such opposition is demonstrated by the following examples, being only two of many: a) On 17 November 2010, the Chairman and Chief Executive Officer of Philip Morris International Inc. publicly stated (at a Morgan Stanley Global Consumer and Retail conference in New York) that the plain packaging measure announced by Australia would constitute an expropriation of the company’s trademarks, and it foreshadowed litigation against the decision. b) On 26 November 2010, the Australian Government held individual consultations with each of the three major tobacco companies in Australia, including PML, and the PML representative stated that Philip Morris would defend its right to use its intellectual property, which was protected “under a range of international trade and treaty obligations”. 28. At this time, being prior to 23 February 2011, PM Asia had no interest in PM Australia or PML. It was a Swiss company, Philip Morris Brands Sarl, which owned the shares in PM Australia, and PM Australia in turn owned the shares in PML.

Section 3: Jurisdictional Issues 29. The Australian Government objects to the jurisdiction of the arbitral tribunal (by way of a preliminary objection). This objection

follows inevitably from PM Asia’s acquisition of shares in PM Australia subsequent to the announcement of the decision to introduce plain packaging legislation and PM Asia’s artificial invocation of a dispute by reference to the BIT. 30. PM Asia had no interest in PM Australia prior to 23 February 2011. It follows that PM Asia did not have an “investment” in PM Australia (and, it would inevitably follow, PML or assets held by PML) at the time that the introduction of the plain packaging measures was announced on 29 April 2010, and nor did it have an “investment” in the ensuing months when a dispute developed over plain packaging. PM Asia only acquired its interest in PM Australia on 23 February 2011, some 10 months after the governmental announcement in relation to plain packaging and after a dispute had already arisen in relation to plain packaging. 31. In such circumstances, there could be no “investment” for the purposes of Article 10 of the BIT and any reliance on Article 10 of the BIT would constitute an abuse of right. It follows that the arbitral tribunal lacks jurisdiction or that the claims that PM Asia now seeks to bring under the BIT are inadmissible. 32. As a separate matter, the Australian Government notes that, under Article 1(e) of the BIT, “investments” are only protected inter alia to the extent that they are “admitted” by the relevant Contracting Party “subject to its law and [page 355] investment policies applicable from time to time”. It will be for PM Asia to seek to establish that each of the investments on which it relies (i) is “owned or controlled” by PM Asia within the meaning of Article 1(e) of the BIT, and (ii) has been admitted in accordance with Article 1(e) of the BIT. 33. A further separate matter is that PM Asia’s claim is heavily dependent on, and seeks to invoke breaches of, a series of treaties over which an arbitral tribunal established under Article 10 of the BIT could have no jurisdiction. Thus, PM Asia asserts that the

plain packaging legislation is in breach of Australia’s obligations under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS Agreement”), the WTO Agreement on Technical Barriers to Trade (“TBT Agreement”), and the Paris Convention for the Protection of Industrial Property (“Paris Convention”). It is said that breach of such obligations in turn amounts to a breach of Article 2(2) of the BIT. 34. Such claims are plainly outside the scope of protection of the BIT, whether as a matter of the fair and equitable treatment standard established under Article 2(2) or the “umbrella clause” in Article 2(2), which provides that each Contracting Party to the BIT has an obligation to “observe any obligation it may have entered into with regard to investments of investors of the other Contracting Party”. 35. Even if it were correct (which it is not) that Article 2(2) could somehow be understood as extending an arbitral tribunal’s jurisdiction to obligations owed by Australia to other States under various multilateral treaties, the treaties that PM Asia seeks to invoke all contain their own dispute settlement mechanisms. It is not the function of a dispute settlement provision such as that contained at Article 10 of the BIT to establish a roving jurisdiction that would enable a BIT tribunal to make a broad series of determinations that would potentially conflict with the determinations of the agreed dispute settlement bodies under the nominated multilateral treaties. This is all the more so in circumstances where such bodies enjoy exclusive jurisdiction. 36. The Australian Government will request that jurisdictional objections be heard in a preliminary phase of the proceedings, subsequent to service of a Statement of Claim by PM Asia and in advance of any merits phase. The jurisdictional objections outlined above are not intended to be exhaustive, and the Australian Government reserves its rights to develop and formulate objections as it sees fit once it has seen PM Asia’s Statement of Claim.

Section 4: Response to PM Asia’s Claims

A. PRELIMINARY 37. Before responding in brief terms to PM Asia’s individual claims of breach of the BIT, Australia makes a number of preliminary observations. [page 356] 38. First, the Australian Government is implementing plain packaging to protect the public health of Australia’s population from an addictive and dangerous substance that causes widespread death and disease in Australia (and around the world). The protection of public health is an objective of fundamental importance to all Governments, and the WHO and the FCTC Secretariat have indicated their strong support for plain packaging as an effective public health measure. 39. Secondly, the Australian Government’s plain packaging initiatives are based on a broad range of studies and reports, and supported by leading Australian and international public health experts. The evidence demonstrates that use of logos, symbols, designs, colours and other forms of advertising on tobacco packaging increases attractiveness to consumers, can mislead consumers into thinking some tobacco products are safer than others, and also decreases the prominence and effectiveness of health warnings. Tobacco advertising can be particularly effective on young people, the age group most likely to become addicted to smoking. 40. Thirdly, in so far as PM Asia contends that plain packaging measures will lead to a decline in cigarette prices (and hence increased consumption) and to an increase of market participation in illicit tobacco products (cf Notice of Arbitration, para. 6.3), those contentions are not accepted. Further, even if correct, the Australian Government has power to implement a range of measures, including further increases to the rate of excise, to ensure that cigarette prices do not fall to a level which would lead to an increase in consumption. In addition, the Australian Government will continue to vigorously enforce its laws against

illicit trade in tobacco. 41. Fourthly, plain packaging is not an alternative to other tobacco control measures but is an integral part of the comprehensive suite of measures adopted by Australia to respond to the public health problems caused by tobacco. These measures, as set out at paragraph 21 above, are based on the comprehensive tobacco control strategy recommended by the Taskforce in 2009. The implementation of this wide-ranging set of measures will be critical to achieving significant reductions in smoking rates in Australia. 42. Fifthly, PM Asia claims at various junctures in its Notice of Arbitration that plain packaging eliminates branding. PML will however retain the ability to place brand names, including any variant, on tobacco packaging. Plain packaging does not prevent product differentiation or identification of a product’s place of origin on its packaging (cf. Notice of Arbitration, para. 1.4). 43. What the plain packaging measure in fact restricts is the ability of tobacco companies to advertise their products by packaging them with attractive branding and other designs. This is the real substance of PM Asia’s concern. By preventing such advertising on retail tobacco packaging, as one of the principal remaining means for PML and other tobacco companies to advertise tobacco, the Australian Government intends that plain packaging will contribute to efforts to reduce smoking rates in Australia. [page 357] B. RESPONSE TO PM ASIA’S INDIVIDUAL CLAIMS Expropriation (cf. Notice of Arbitration, paras. 7.3-7.5) 44. The Australian Government rejects PM Asia’s claim that it has breached the obligation under Article 6 not to deprive investors of their investments or subject investors to measures having effect equivalent to such deprivation. 45. PM Asia has not in fact been deprived of the purported investments it made on 23 February 2011; nor has PM Asia been

46.

47.

48.

49.

subjected to measures having equivalent effect. Further, plain packaging measures are non-discriminatory regulatory actions of general application designed and adopted by the Australian Government to achieve the most fundamental public welfare objective – the protection of public health. Such measures do not amount to expropriation, are not equivalent to expropriation, and do not give rise to a duty of compensation. Fair and equitable treatment (cf. Notice of Arbitration, paras. 7.6-7.8) The Australian Government rejects PM Asia’s claim that it has breached its obligation under Article 2(2) of the BIT to accord fair and equitable treatment to investments of PM Asia. When PM Asia acquired its interest in PM Australia on 23 February 2011, it did so in full knowledge and with the expectation that the Australian Government would implement the plain packaging measure announced on 29 April 2010. The Australian Government has now done what it had said it was going to do. PM Asia’s marked emphasis on its “legitimate expectations” (cf. Notice of Arbitration, paras. 6.6-6.12 and 7.3-7.5) is thus wholly misconceived. PM Asia could have no expectation other than that the Australian Government would act in accordance with its announcement. It is difficult to conceive of governmental action further removed from the unfair or inequitable treatment of an investor. It is noted also that PM Asia contends for a notably low threshold so far as concerns the fair and equitable treatment standard, and that nowhere does PM Asia assert that the plain packaging measure is arbitrary. In fact, the plain packaging measure is based on a broad range of studies and reports on which the Australian Government has relied in good faith, and is supported by leading Australian and international public health experts. It was adopted following a transparent process which included consultations with PML. Its adoption, as part of a comprehensive suite of tobacco control measures, is a reasonable regulatory response which has been adopted by the Australian Government in good faith to address a severe, pervasive and long-standing threat to public health.

50. PM Asia’s allegations of breach of various multilateral treaties are not a matter for an arbitral tribunal constituted under Article 10 of the BIT. Were those allegations to be made in an appropriate forum, they would certainly be contested by Australia. [page 358] Impairment by unreasonable and discriminatory measures (cf. Notice of Arbitration, paras. 7.9-7.11) 51. The Australian Government likewise rejects PM Asia’s claim that it has breached the obligation under Article 2(2) not to impair, by unreasonable or discriminatory measures, the management, maintenance, use, enjoyment or disposal of PM Asia’s investments. 52. PM Asia both mis-states and mis-characterises the provision on which it relies. a) PM Asia fails to refer to the fact that the non-impairment obligation in the BIT is expressly qualified as being “without prejudice to [the Government’s] laws”. As to this key qualification, the plain packaging legislation was passed in accordance with Australian law and received Royal Assent on 1 December 2011, and is therefore a valid law of the Commonwealth of Australia. b) Even were there no such qualification, the non-impairment obligation is not correctly characterised as restricting “the host State’s discretion to regulate to those measures which are demonstrably reasonable” (cf. Notice of Arbitration, para. 7.9). 53. Further, even assuming PM Asia could show relevant impairment, the plain packaging legislation is neither unreasonable nor discriminatory. It is a measure of general application, and it is based on a considerable body of sound evidence and has been adopted in good faith following extensive consultations to pursue a fundamental public welfare objective – the protection of public

54.

55.

56.

57.

health. Full protection and security (cf. Notice of Arbitration, paras. 7.12-7.14) The Australian Government rejects PM Asia’s claim that it has breached the obligation to ensure that investments of PM Asia enjoy full protection and security under Article 2(2) of the BIT. PM Asia similarly mis-characterises the scope of the full protection and security provision under the BIT. The provision is not a due diligence obligation “to prevent damage”, and does not extend beyond an obligation to take reasonable steps to provide physical protection for investments covered under the BIT. The Australian Government has not failed to comply with this obligation. Umbrella clause (cf. Notice of Arbitration, paras. 7.15-7.17) The Australian Government rejects PM Asia’s claim that it has breached its obligations under other international treaties, the two WTO Agreements (TRIPS and TBT) and the Paris Convention, and that this amounts to a breach of the “umbrella clause” in Article 2(2) of the BIT. The “umbrella clause” in Article 2(2) of the BIT requires that each Contracting Party “observe any obligation it may have entered into with regard [page 359]

to investments of investors of the other Contracting Party”. The meaning and scope of such provisions is a matter of great controversy. However, it is clear in the instant case that, whether as a matter of jurisdiction (as the Australian Government has explained above) or on the substance, the “umbrella clause” in Article 2(2) cannot be understood as encompassing general obligations in multilateral treaties. 58. Rather, consistent with the wording of Article 2(2), the established origins of the “umbrella clause”, and also relevant jurisprudence, the “umbrella clause” in Article 2(2) only covers commitments that a host State has entered into with respect to specific

investments. In this regard, the obligations under the multilateral treaties invoked by PM Asia are not “obligations” which have been “entered into with regard to investments of investors” of Hong Kong, but are rather obligations that operate on the inter-State level, with their own particular inter-State dispute resolution procedures. General 59. This Response (pursuant to Article 4(1)(b) of the UNCITRAL Arbitration Rules) is not of course intended to be exhaustive and the Australian Government reserves its rights to develop and formulate its defence on the merits (if they are reached) as it sees fit (including with respect to the alleged losses of PM Asia, which are said somehow to be “of the order of billions of Australian dollars”).

Section 5: Response to Relief Sought 60. The Australian Government notes the relief sought by PM Asia at Section 8 of its Notice of Arbitration. As follows from the Response as set out above, the arbitral tribunal should decline to grant the relief sought. The Australian Government respectfully requests the arbitral tribunal: a) to declare that it has no jurisdiction over PM Asia’s claims, or that they are inadmissible; b) alternatively, to dismiss PM Asia’s claims in their entirety; and c) to order that PM Asia bear the costs of the arbitration, including Australia’s costs of legal representation and assistance, pursuant to Article 42 of the UNCITRAL Arbitration Rules. [page 360]

Section 6: Procedural Matters

61. The Australian Government is represented and assisted as follows: Solicitors Australian Government Solicitor GPO Box 2727 Sydney NSW 2001 Australia Per: Simon Daley, Chief Solicitor Tel: +61 2 9581 7490 Fax: +61 2 9581 7732 Email: [email protected] Counsel Anthony Payne SC Sixth Floor Selborne Wentworth Chambers 6/174 Phillip Street Sydney NSW 2000 Australia Tel: +61 2 9221 3609 Fax: +61 2 9233 3902 Email: [email protected] Samuel Wordsworth Essex Court Chambers 24 Lincoln’s Inn Fields London WC2A 3EG United Kingdom Tel: +44 20 7813 8000 Fax: +44 20 7813 8080 Email: [email protected] James Hutton Eleven Wentworth Chambers 11/174 Phillip St Sydney NSW 2000

Australia Tel: +61 2 8001 0225 Fax: + 61 2 9232 7626 Email: [email protected] Counsel Stephen Gageler SC Solicitor-General of Australia Attorney-General’s Department 3-5 National Circuit Barton ACT 2600 Australia Tel: +61 2 6141 4145 Fax: +61 2 6141 4099 Email: [email protected] Jeremy Kirk SC Eleven Wentworth Chambers 11/174 Phillip Street Sydney NSW 2000 Australia Tel: +61 2 9223 9477 Fax: +61 2 8028 6060 Email: [email protected] Dr Chester Brown 7 Selborne Chambers 7/174 Phillip St Sydney NSW 2000 Australia Tel: + 6 1 2 9351 0466 Fax: + 61 2 9351 0200 Email: [email protected] [page 361]

Government Counsel Mark Jennings Senior Counsel Office of International Law Attorney-General’s Department 3-5 National Circuit Barton ACT 2600, Australia Tel: +61 2 6141 3368 Fax: +61 2 6141 3486 Email: [email protected] 62. Service of correspondence in this matter may be effected through the Australian Government Solicitor. 63. Australia confirms that the parties have agreed on the procedural matters set out in paragraph 9.1 of PM Asia’s Notice of Arbitration. 64. Pursuant to Article 9 of the UNCITRAL Arbitration Rules, Australia notifies PM Asia that it appoints Professor Don McRae of the University of Ottawa as an arbitrator in this case.

Simon Daley A solicitor employed by Australian Government Solicitor Solicitor for the Respondent, Commonwealth of Australia Date: 21 December 2011 _____________________________ 1.

2.

World Health Organisation, “Call for Pictorial Warnings on Tobacco Packs” (29 May 2009), http://www.who.int/mediacentre/news/releases/2009/no_tobacco_day_20090529/en/index.html (accessed 2 December 2011). National Preventative Health Taskforce, Australia: The Healthiest Country By 2020: A

Discussion Paper Prepared by the National Preventative Health Taskforce (2008), p 19. 3. Australian Government, Taking Preventative Action – A Response to Australia: The Healthiest Country by 2020 (2010), p 22. 4. Further information on these measures can be found in MM Scollo and MH Winstanley (eds), Tobacco in Australia: Facts and Issues (Melbourne: Cancer Council Victoria, 3rd ed, 2008). 5. MM Scollo and MH Winstanley (eds), Tobacco in Australia: Facts and Issues (Melbourne: Cancer Council Victoria, 3rd ed, 2008) and Australian Institute of Health and Welfare 2011 National Drug Strategy Household Survey report pp 22. Drug statistics series no.25. Cat. No. PHE 145. Canberra: Australian Institute of Health and Welfare. 6. Australian Institute of Health and Welfare 2011 National Drug Strategy Household Survey report pp 22-23. Drug statistics series no.25. Cat. No. PHE 145. Canberra: Australian Institute of Health and Welfare. 7. Australian Institute of Health and Welfare 2011 National Drug Strategy Household Survey report pp 22-23. Drug statistics series no.25. Cat. No. PHE 145. Canberra: Australian Institute of Health and Welfare. 8. WHO Framework Convention on Tobacco Control: Guidelines for Implementation (May 2011), p 59 and 95-96, available at: http://www.who.int/fctc/protocol/guidelines/adopted/quidel_2011/en/index.html (last accessed 2 December 2011). 9. PML, Philip Morris Limited’s Submission to the National Preventative Health Taskforce Consultation (2 January 2009), pp 26-28. 10. National Preventative Health Taskforce, Australia: The Healthiest Country by 2020 (30 June 2009), p 18; and Technical Report 2 – Tobacco Control in Australia: Making Smoking History, pp 20-21. 11. Australian Government, Taking Preventative Action – A Response to Australia: The Healthiest Country by 2020 (May 2010), pp 65, 68-71. 12. Submission of the WHO Re:Australia Plain Packaging Legislation http://www.yourhealth.gov.au/internet/yourhealth/publishing.nsf/Content/8EA505E09FEA1631CA2579540005F686/$File/World%20Health%20Organization.pdf (last accessed 21 December 2011).

[page 363] IN THE MATTER OF AN ARBITRATION UNDER CHAPTER ELEVEN OF THE NORTH AMERICAN FREE TRADE AGREEMENT AND THE UNCITRAL ARBITRATION RULES BETWEEN: MESA POWER GROUP, LLC Claimant AND: GOVERNMENT OF CANADA Respondent

GOVERNMENT OF CANADA Request for Bifurcation 3 December 2012

Department of Foreign Affairs and International Trade Trade Law Bureau Lester B. Pearson Building 125 Sussex Drive Ottawa, Ontario

K1A 0G2 CANADA [page 364] 1. In accordance with Article 21(4) of the UNCITRAL Arbitration Rules, 1976, (the “UNCITRAL Rules”) Canada requests that the Tribunal bifurcate these proceedings and hear its objection to the Tribunal’s jurisdiction as a preliminary question. The Claimant has failed to meet the conditions precedent for submission of a claim to arbitration pursuant to Chapter 11 of NAFTA. As such, Canada has not consented to the arbitration of this claim and objects to the jurisdiction of the Tribunal on these grounds. Bifurcation of this jurisdictional objection is appropriate, as it will increase the efficiency of these proceedings. I. A JURISDICTIONAL OBJECTION SHOULD BE CONSIDERED AS A PRELIMINARY MATTER IF DOING SO WILL INCREASE THE EFFICIENCY OF THE PROCEEDINGS 2. Article 21(4) of the UNCITRAL Rules provides, in relevant part, that “[i]n general, the arbitral tribunal should rule on a plea concerning its jurisdiction as a preliminary question.”1 Commentators have explained that doing so can result in the parties “avoiding the expense of presenting the case on the merits.”2 According to Redfern and Hunter, bifurcation of an objection to jurisdiction “enables the parties to know where they stand at an early stage; and it will save them spending time and money on arbitral proceedings that prove to be invalid.”3 3. In practice, international arbitral tribunals frequently decide questions of jurisdiction as a preliminary matter separate from the merits.4 For example, the NAFTA Chapter 11 tribunal in Glamis Gold found that an objection to jurisdiction [page 365]

should be considered as a preliminary matter unless, taking the claim as it is alleged by the Claimant, bifurcation is unlikely to bring about increased efficiency in the proceedings.5 The Tribunal further explained that bifurcation brings about increased efficiency where: (1) the jurisdictional challenge to the tribunal’s authority is substantive and not frivolous; (2) the challenge, if successful, would materially reduce the proceedings at the next phase; and (3) the jurisdictional issues are not so intertwined with the merits that an early determination on the matter is likely to save time.6 II. BIFURCATION OF CANADA’S JURISDICTIONAL OBJECTION IS THE MOST EFFICIENT METHOD OF PROCEEDING 4. A consideration of the factors outlined in Glamis demonstrates that bifurcation of Canada’s jurisdictional objection will increase the efficiency of this arbitration. 5. First, Canada’s jurisdictional objection is substantial and not frivolous. As is explained further in Canada’s Objection to Jurisdiction, which has been submitted alongside this Request for Bifurcation, the Claimant did not submit this claim to arbitration in accordance with the procedures and requirements of Chapter 11. In particular, the Claimant did not respect the requirement in Article 1120(1) that it wait six months after the events giving rise to its claim before submitting that claim to arbitration. As several investment treaty arbitral tribunals considering similar objections have found, the failure to abide by such a waiting period means that there is no consent to arbitration and thus, no jurisdiction for a tribunal to hear the claim.7 6. Second, if Canada’s objection to jurisdiction is successful, it will result in the dismissal of the entire claim, or at the least, will materially reduce the number of measures that must be considered in the merits phase. In either case, significant savings will be achieved with respect to the costs associated with the tribunal, the fact and expert witnesses and the briefing and argument of the case. Indeed, in a case where the disputing parties agree that, should it proceed beyond jurisdiction, the merits and damages phases should be heard together, millions of dollars in tribunal and expert fees could be saved if Canada’s objection is successful. The Government of Canada is in the process of

implementing a deficit reduction action program which imposes serious fiscal constraints on its operations. In these circumstances, [page 366] the potential for cost reductions in expenditures of public funds should be given considerable weight. 7. Third, the jurisdictional issues here are not intertwined with the merits of the dispute. While Canada disputes that any of the measures challenged by the Claimant violated Canada’s obligations under Chapter 11 of NAFTA, the only facts relevant to this objection concern the dates on which certain measures occurred and the date on which the Claimant’s purported Notice of Arbitration was filed. There appears to be little, if any, dispute between the parties concerning the timing of the relevant events. The sole question that appears to be in dispute is a legal one concerning the interpretation of Article 1120 of NAFTA. 8. Accordingly, if Canada’s objection is successful, hearing it as a preliminary matter will reduce or eliminate the costs and time necessary to resolve this dispute, and as a consequence, increase the efficiency of this arbitration. No efficiencies will be gained by hearing this particular jurisdictional objection alongside the merits as the facts related to it are distinct from those that will be relevant in determining whether the complained of measures are consistent with Canada’s obligations under NAFTA. III. BIFURCATION OF OTHER POTENTIAL JURISDICTIONAL OBJECTIONS WOULD NOT BE EFFICIENT AT THIS TIME 9. In its purported Notice of Arbitration, the Claimant alleges that it is a U.S. investor that owns and controls certain investments in Canada. The Claimant has provided no proof of its alleged nationality and no proof of its alleged ownership of investments in Canada. Canada has no reason, at this time, to doubt the veracity of the Claimant’s allegations, and as such, no reason to request that this be dealt with as a preliminary matter. To the extent that the Claimant fails

to adduce sufficient proof to support these allegations, Canada will raise jurisdictional objections as soon as possible. 10. The Claimant also appears to intend to proceed with a claim that certain actions of the Ontario Power Authority (the “OPA”) are directly in breach of Canada’s obligations under NAFTA Chapter 11. Canada does not dispute that in certain instances the OPA exercises governmental authority or acts directly upon the instructions of Ontario, such that its actions are attributable to Canada. However, as noted in Canada’s Outline of Potential Issues, the OPA is an “independent, non-profit corporation”8 which according to the Electricity Act has a separate legal personality,9 is not an agent of the Crown,10 and has a Board of Directors who, while appointed by the Minister of Energy, are independent11 and obligated to act [page 367] in the best interests of the OPA.12 As such, certain actions of the OPA are not attributable to the Government of Canada. The Claimant’s purported Notice of Arbitration is imprecise as to the specific actions of the OPA, if any, that intends to claim are inconsistent with Canada’s NAFTA obligations. To the extent that the Claimant does make such claims, the facts that would be relevant to a determination of whether the acts of the OPA are attributable to Canada are closely intertwined with the facts relevant to the merits of this dispute.13 11. As it would not increase the efficiency of these proceedings, Canada does not request that a jurisdictional objection on either of these grounds, should one be necessary, be treated as a preliminary question.14 IV. CONCLUSION 12. Canada respectfully requests that the Tribunal bifurcate these proceedings and hear Canada’s objection to the jurisdiction of this Tribunal based on the Claimant’s failure to respect the conditions precedent for submitting a claim to arbitration as a preliminary matter. December 3, 2012

Respectfully submitted on behalf of

Canada,

Shane Spellisey Michael Owen Heather Squires Jennifer Hopkins

Department of Foreign Affairs and International Trade Trade Law Bureau 125 Sussex Drive Ottawa, Ontario CANADA K1A 0G2 Tel: 613-943-2803

1. 2. 3. 4.

UNCITRAL Arbitration Rules, 1976, Article 21(4). Available at: http://www.uncitral.org/pdf/english/texts/arbitration/arb-rules/arb-rules.pdf. RL-001, Gary B. Born, International Commercial Arbitration (New York: WoltersKluwer, 2009), p. 994. RL-012, Alan Redfern and Martin Hunter, Law and Practice of International Commercial Arbitration, 4th ed. (London: Thomson, Sweet & Maxwell, 2004), pp. 257–258. See for e.g., RL-003, Canfor Corp. v. United States of America (UNCITRAL) Decision on the Place of Arbitration, Filing of a Statement of Defence and Bifurcation of the Proceedings, 23 January 2004, ¶55 (NAFTA Chapter Eleven tribunal deciding to treat the respondent’s jurisdictional objection as a preliminary question); RL-007, GAMI Investments, Inc. v. United Mexican States (UNCITRAL) Procedural Order No. 2, 22 May 2003, ¶ 1 (NAFTA Chapter Eleven tribunal deciding to address preliminary issues separate from proceeding on the merits); RL-014, United Parcel Service of America v. Government of Canada (UNCITRAL) Decision of the Tribunal on the Filing of a Statement of Defence, 17 October 2001, ¶ 16: (“[Jurisdictional issues] are … frequently, as the UNCITRAL rules indicate they should be, dealt with as a preliminary matter.”); RL010, Loewen Group, Inc. v. United States of America (ICSID Case No. ARB(AF)/98/3), Decision on Competence and Jurisdiction, 5 January 2001 (NAFTA Chapter Eleven tribunal addressing the respondent’s objections to competence and jurisdiction as a question separate from the merits); RL-006, Ethyl v. Government of Canada (UNCITRAL) Award on Jurisdiction, 24 June 1998 (NAFTA Chapter Eleven tribunal directing parties to brief and argue preliminary issues separate from proceeding on the merits); RL-013,

5. 6. 7.

8. 9. 10. 11. 12. 13.

14.

Southern Pacific Properties (Middle East) Ltd. v. Arab Republic of Egypt, 106 I.L.R. 531, Decision on Jurisdiction, 14 April 1988, ¶ 63 (in bifurcating, the tribunal confirmed “there is no presumption of jurisdiction – particularly where a sovereign State is involved – and the tribunal must examine [a sovereign’s] objections to the jurisdiction of the Centre with meticulous care, bearing in mind that jurisdiction in the present case exists only insofar as consent thereto has been given by the Parties”). RL-008, Glamis Gold, Ltd. v. The United States of America (UNCITRAL) Procedural Order No. 2 (Revised), 31 May 2005, ¶ 12 (“Glamis”). Ibid, ¶ 13(c). RL-011, Murphy Exploration and Production Company International v. Republic of Ecuador (ICSID Case No. ARB/08/4) Award on Jurisdiction, 15 December 2010, ¶ 149 and more generally ¶¶ 90-157; RL-002, Burlington Resources Inc. v. Republic of Ecuador (ICSID Case No. ARB/08/5) Award on Jurisdiction, 2 June 2010, ¶¶ 315-318; See also RL-005, Enron Corporation and Ponderosa Assets, L.P. v. The Argentine Republic (ICSID Case No. ARB/01/3) Decision on Jurisdiction, 14 January 2004, ¶ 88. Canada’s Outline of Potential Issues dated July 31, 2012, ¶ 3. RL-004, Electricity Act, S.O. 1998, c. 15, Sch. A, s. 25.2(4). Ibid, s. 25.2(3). Ibid, s. 25.4(3). Ibid, s. 25.5. It is for this reason that tribunals often consider questions of attribution to be more appropriately heard along with the merits, rather than as a preliminary question. See for example, RL-009, Gustav F W Homester GmbH & Co. KG v. Republic of Ghana (ICSID Case No. ARB/07/24) Award, 18 June 2010, ¶¶ 143–145. In this regard, Canada notes that at the October 12 procedural meeting, it similarly represented that it would not seek to have jurisdictional objections, other than its objection based on lack of consent, heard as a preliminary matter (Procedural Hearing Tr: pp. 23319 to 235-3).

[page 369] [In accordance with the copyright permission granted by law firm Arnold & Porter LLP the document is reproduced in its original form.] Public Version Confidential and Restricted Access Information Redacted Before the Additional Facility of the INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES (ICSID) MERCER INTERNATIONAL INC., Claimant, v. GOVERNMENT OF CANADA, Respondent. ICSID CASE NO. ARB(AF)/12/(3) CLAIMANT’S MEMORIAL

31 March 2014 Michael T. Shor Gaela K. Gehring Flores

Kim Moller

Andrew M. Treaster Amy V. Endicott Pedro G. Soto

[page 370]

I. 1.

2.

3.

INTRODUCTION AND SUMMARY

Through its Canadian affiliates, Zellstoff Celgar Limited and Zellstoff Celgar Limited Partnership (collectively “Celgar”), Mercer owns and operates an industrial plant in Castlegar, British Columbia (the “Celgar Mill” or the “Mill”) that utilizes an integrated, joint production process to produce Northern Bleached Softwood Kraft (“NBSK”) market pulp and to generate biomassbased, “green” electricity. The regulatory issue in dispute concerns the extent and conditions under which the British Columbia Province permits the Celgar Mill to purchase electricity to meet the needs of its pulp operations from its local electric utility, at normal rates based on the actual “embedded costs” of service,1 while the Mill is selling its selfgenerated electricity.2 This industry practice is referred to as “arbitrage.”3 Arbitrage in the form of simultaneous sales and purchases of electricity by self-generators occurs because the market price for biomass-based green electricity has at times been significantly higher than the embedded cost rates that electric utilities in British Columbia charge their industrial customers, as these utilities benefit from relatively low-cost hydroelectric generating stations installed many decades ago. Through actions taken in 2009 by the British Columbia Utilities Commission (“BCUC” or the “Commission”), with the involvement of the BC Hydro and Power Authority (a British Columbia state-owned electric utility and state enterprise) (“BC Hydro”), the Province has denied Celgar all access to electricity

from its local utility, Fortis BC, at embedded cost rates when Celgar is selling electricity. In January 2009, the BCUC issued Order G-48-09, which effectively prohibited FortisBC from providing embedded cost electricity to self-generators in its service territory, while they are selling electricity, except on a “net-ofload” basis. Under such Order, Celgar must first use its selfgenerated electricity to meet its own electricity needs, commonly referred to as “load,” prior to selling electricity, a requirement that has been termed “net-of-load.” [page 371] 4.

5.

6.

Consistent with this net-of-load standard, as part of its process for entering into an electricity purchase agreement (“EPA”) with Celgar in January 2009, BC Hydro determined and fixed what it terms Celgar’s “generator baseline,” at the level of Celgar’s 2007 load. The BCUC then approved and made effective the EPA containing this generator baseline in June 2009. A “generator baseline” or “GBL” is a term used by BC Hydro in its electricity purchase contracts with self-generators, at the express direction of the BCUC, to delineate the level of self-generated electricity a customer must use to self-supply its own load and below which it cannot sell to any person or entity. The GBL also defines the level of access the customer will have to embedded cost energy from its utility to meet its load. This level is equal to its load minus its GBL. With its GBL set by BC Hydro and the BCUC at the level of its 2007 load, Celgar, since 2009, has been afforded no access to embedded cost electricity from its utility while selling electricity. The practical effect of these two direct regulatory restrictions on access to embedded cost utility power — the BCUC’s Order G48-09 and the BC Hydro-set GBL — together and separately, is to prohibit Celgar from selling its biomass-based green energy, and realizing revenues from commercial sales of this valuable, premium energy service, unless it is “net-of-load” electricity — electricity it

7.

8.

9.

generates over and above its 2007 load. This “net-of-load” standard to which the Province and BC Hydro have held Celgar constitutes treatment less favorable than that which the Province affords Canadian-owned and third-country owned pulp mills with self-generation capacity that also are selling electricity. Within the same political jurisdiction, and under the province-wide authority and jurisdiction of the BCUC, the Province permits these comparable mills to maintain access to embedded cost utility electricity while they sell a significant portion of their self-generated “below-load” electricity. In other words, these other mills are permitted to engage in arbitrage by purchasing some amount of utility electricity at low, embedded cost rates for their pulp manufacturing operations, while simultaneously selling some of their self-generated, “below-load” electricity at the higher, market-based rates obtainable for biomassbased green energy. These comparable pulp mills profit from such arbitrage. No BC pulp mill other than Celgar that is selling its self-generated electricity is held to a net-of-load standard, and denied all access to embedded cost utility power while selling self-generated electricity. Instead, under a distinct BCUC Order issued in 2001, Order G38-01, the Province applies a “historical usage” standard to these other mills, directing BC Hydro to define each mill’s GBL based on the amount of self-generated electricity that the respective mill historically used to meet its own load. As examples, under this less-restrictive standard, the Province permits Howe Sound’s Port Mellon pulp mill to arbitrage [text is redacted text] of its below-load electricity, and Tembec’s Skookumchuck pulp mill may arbitrage over [page 372]

[text is redacted text] of its below-load electricity. For Celgar, the comparable percentage is zero. 10. As recently as 23 November 2013, the BCUC ruled that it was

“unduly discriminatory” for a utility to hold one self-generation customer to a net-of-load standard and another to a GBL computed on the basis of historical usage. It is likewise “treatment less favorable” under NAFTA for the Province to hold Celgar to a net-of-load standard while applying to all other kraft pulp mills a historical usage baseline methodology, which affords them access to embedded cost utility electricity to facilitate some below-load electricity sales. 11. Indeed, Celgar is the only pulp mill with self-generation concerning which the Province has taken regulatory action to limit the mill’s access to embedded cost utility electricity while it is selling self-generated electricity. Other pulp mills not only have lower relative GBLs compared to their generation or load, enabling them to access utility electricity and thus sell more below-load electricity than Celgar (which can sell none), but also most of these other mills actually agreed voluntarily to use some of their selfgenerated energy to meet a portion of their own load, oftentimes in exchange for compensation from BC Hydro. In particular, BC Hydro contributed funds [text is redacted text] each toward the construction or financing of new generation at other mills, or provided other consideration, in exchange for the mills agreeing to meet a portion of their load with self-generated electricity and thereby “displace” electricity BC Hydro otherwise would have had to supply to the mills. In industry parlance, these are known as “load displacement” agreements. 12. Celgar obtained no such consideration from BC Hydro or any other Provincial instrumentality, and never voluntarily agreed to use its self-generated electricity to displace some or all of its own load. The Province, by regulatory action and without compensation, thus is forcing Celgar to use its self-generated electricity to displace its own load, whereas BC Hydro has provided valuable consideration to others to do so. 13. Because Canada is responsible under NAFTA for the actions of British Columbia, including the BCUC, Canada has breached Articles 1102 and 1103 of NAFTA by according Mercer and its investments less favorable treatment than it has accorded to

Canadian and third-country investors and their investments in like circumstances in British Columbia. Because Canada is obligated under NAFTA Chapter 15 to ensure that its state enterprises comply with the obligations of Article 1102 and 1103, Canada also has breached Article 1503(2) with respect to any measures imposed exclusively by BC Hydro. 14. In addition, the procedures and standards used by BC Hydro and the Province to determine the amount of arbitrage that is permissible (or the amount of below-load self-generated electricity that an industrial self-generator may sell at market rates and replace with purchases from its utility at embedded cost rates) are not well-established or transparent. There is no statute governing [page 373] this issue, nor has the Province adopted any written regulations, policies, guidelines, or procedures. 15. The BCUC has explicitly delegated the task of setting the GBL, and, correspondingly, the degree of access a self-generator is afforded to embedded cost utility electricity to meet the remainder of its load, to the Province’s utilities, and almost exclusively to BC Hydro, because BC Hydro has purchased the vast majority of the energy sold by self-generators in the province. Yet, when it made these GBL determinations, BC Hydro had no written policies or procedures for determining generator baselines, no internal controls, and no apparent mechanism for ensuring nondiscriminatory treatment. Indeed, it issued written guidelines for GBL determinations only in June 2012, long after it had set most GBLs, and after Celgar had filed its Notice of Claim under NAFTA. 16. Yet, even these unapproved, post-hoc guidelines are too vague to enable the calculation of a GBL or to explain or validate past determinations that BC Hydro has made. Indeed, on 13 December 2013, the BCUC commented that BC Hydro’s guidelines “are fairly general, subject to considerable interpretation, not

necessarily transparent and have not been approved by the Commission.”4 17. BC Hydro has unfairly and arbitrarily used different historical baseline periods for different mills, ignoring the cyclical nature of the pulp industry and changes over time in other factors that affect the economics of self-generation. The duration of the baseline period BC Hydro uses also varies from mill to mill, and even the basic calculation methodology it applies has not on its face been consistent. BC Hydro has revisited and amended baselines and baseline periods on an ad hoc basis. The BCUC then has ratified BC Hydro’s GBL determinations by approving the EPAs in which they are embodied (although many have been exempted from BCUC review). 18. Further, BC Hydro routinely shields its determinations from public scrutiny and comment through confidentiality agreements, such that no mill can ascertain any other mill’s GBL or how it was computed. It thus is impossible for any mill effectively to argue to BC Hydro or to the BCUC that its treatment was unjust or discriminatory, to the extent the Province even provides for BCUC review. 19. The whole process is rendered all the more unfair by the fact that BC Hydro is not a disinterested regulator but is instead a financially self-interested party. In most cases, it is either the purchaser of the self-generator’s power, or it agrees to sell the electricity through its affiliated trading company, Powerex, and in all cases to date except for Celgar, it is the supplying utility. [page 374] 20. In failing to provide reasons for its differences in treatment or any transparency in its regulatory regime for industrial self-generators, particularly those like Celgar that are not direct customers of BC Hydro, and through its arbitrary, discriminatory, and unfair actions that have denied Celgar regulatory fairness, Canada also has breached its obligations under NAFTA Article 1105 (and

Article 1503(2) with regard to the conduct of BC Hydro) by failing to provide fair and equitable treatment in accordance with the minimum standard. _____________________________ 1.

2. 3.

4.

“Embedded cost” electricity refers to the total cost of all a utility’s electricity resources, including the depreciation expense associated with the historical costs of generation assets, divided by the total electricity volume, which yields an overall average unit cost of electricity. The British Columbia Utilities Commission (“BCUC”), the Provincial public utility regulatory agency, has defined embedded cost of service power as “the weighted average cost of existing sources of power in a utility’s resource stack.” C-21, BCUC, Order Number G-191-13 and Accompanying Reasons for Decision (22 November 2013) (“Kelowna Decision”) at 6 n.2. In this Memorial, Mercer uses the terms “electricity,” “energy,” and “power” interchangeably. As the BCUC has noted, however, true arbitrage can only occur when a customer purchases more utility energy than is required to service its own electricity needs, and resells the excess energy. C-21, Kelowna Decision, at 22. See also C-26, BC Hydro, Information Report (June 2012) at 9 (“The simultaneous purchase and sale of a commodity such as electricity to profit from unequal prices is commonly referred to as ‘arbitrage.’”). C-27, Letter from Erica Hamilton, Comission Secretary, to Janet Fraser, Chief Regulatory Officer, BC Hydro (13 December 2013) (Exhibit A-17 to BC Hydro PPA - RS 3808, TS No. 2 & 3 Proceeding) at 1.

[page 375] …

VII. CANADA’S HAS VIOLATED ITS OBLIGATION UNDER ARTICLE 1105(1) OF NAFTA BY DENYING MERCER FAIR AND EQUITABLE TREAMENT IN ACCORDANCE WITH INTERNATIONAL LAW A.

The Legal Standard under NAFTA 1. Canada’s Treatment of Mercer Violates Article 1105 642. Celgar may accurately be described as the Cinderella of British Columbia kraft pulp mills. Celgar, of course, does not exemplify a “Cinderella Story” of happy endings. Celgar is the Cinderella before her happy ending, subjected to mistreatment by those responsible for her. Canada (through BC Hydro, the BCUC, and the MEM), although legally obligated to treat U.S. investments in a fair and equitable manner, instead has singled Celgar out for treatment that is discriminatory, arbitrary, and non-transparent. Instead of treating Celgar like all other BC kraft pulp mills, the Province has subjected Celgar to harmful, disparate treatment. Instead of providing reasons that might explain its discriminatory treatment of Celgar, BC has failed to provide reasons. Instead of providing a transparent regulatory regime in which Celgar could readily discern the legal requirements applicable to its access to embedded cost utility power, BC has provided an ad hoc regime with no clear rules or procedures, and shifting standards. This conduct discloses a lack of fairness antithetical to the purposes of NAFTA Article 1105’s State obligation to accord Celgar fair and equitable treatment in

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accordance with international law. That this mistreatment has caused up to C$ 243.2 million worth of harm only highlights the gravity of Canada’s conduct. a. The Minimum Standard of Treatment under Customary International Law NAFTA Article 1105(1) requires Canada to accord Mercer’s investment “treatment in accordance with international law, including fair and equitable treatment and full protection and security.”736 In 2001, the NAFTA Free Trade Commission issued a note of interpretation on Article 1105(1), which clarified that the minimum standard of fair and equitable treatment under NAFTA does not require “treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.”737 [page 376]

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This standard of treatment is progressive and not static, as Canada and the other NAFTA parties have recognized.738 Thus, as the tribunal noted in International Thunderbird, “{T}he minimum standard should not be rigidly interpreted and it should reflect evolving international customary law.”739 The evolution of the minimum standard of treatment has been significant. The tribunal in Mondev v. United States emphasized that “Neer and like arbitral awards were decided in the 1920s, when the status of the individual in international law, and the international protection of foreign investments, were far less developed than they have since come to be. In particular, both the substantive and procedural rights of the individual in international law have undergone considerable development …. To the modern eye, what is unfair or inequitable need not equate with the outrageous or the egregious.”740 The application of the international minimum standard of treatment is, of course, not exclusive to NAFTA. A variety of

instruments, including the Dominican Republic-Central American Free Trade Agreement (“CAFTA”) as well as a number of bilateral investment treaties, contain provisions binding their parties to the international minimum standard of treatment.741 [page 377]

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In decisions issued pursuant to these instruments, the tribunals’ analyses are instructive for our purposes, given that they are examining the “same base floor of conduct as the minimum standard of treatment under customary international law,” i.e., the standard contained in NAFTA Article 1105.742 As explained by the tribunal in Mondev v. United States, bilateral investment treaties incorporate the fair and equitable treatment standard in an attempt to incorporate customary international law; such adoption, as indicated by the United States, is both a matter of state practice and “can evidence opinio juris,” or a sense of legal obligation under customary international law.743 Decisions issued pursuant to these treaties can thus “serve as illustrations of customary international law if they involve an examination of customary international law, as opposed to a treaty-based, or autonomous, interpretation.”744 In Waste Management v. Mexico (II), the tribunal, considering decisions that came before it, illustrated some of the types of state action that would violate the minimum standard of fair and equitable treatment in its modern context: The S.D. Myers, Mondev, ADF and Loewen {NAFTA} cases suggest that the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety – as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candor in an administrative process.745

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Largely echoing Waste Management II, the tribunal in TECO Guatemala Holdings, LLC v. Republic of Guatemala, applying the

international minimum standard of treatment in a CAFTA dispute, and relying largely on NAFTA [page 378]

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awards,746 held that the international standard “is infringed by conduct attributed to the State and harmful to the investor if the conduct is arbitrary, grossly unfair or idiosyncratic, is discriminatory or involves a lack of due process leading to an outcome which offends judicial propriety.”747 The tribunal concluded that such is “the content of the minimum standard of treatment in customary international law.”748 In sum, the minimum standard of treatment involves four pillars: protection against discriminatory749, arbitrary,750 grossly unfair, unjust or idiosyncratic,751 or non-transparent752 treatment.753 A State may breach the standard with a single act involving the violation of at least one pillar, or the breach may be cumulative and become apparent only when considering the State’s acts in the aggregate, under one or more pillars.754 Finally, the standard of treatment primarily is focused on the effects State acts have upon a claimant, and not on the intentions of the State. Thus, for example, evidence of bad faith or willful neglect, while typically sufficient to establish a breach of the standard, is not necessary to establish that a breach has occurred.755 [page 379] b.

Canada’s Acts and Omissions are Discriminatory in Violation of the Minimum Standard of Treatment of NAFTA Article 1105

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Of the four pillars of the minimum standard of treatment, discrimination deserves special reference. Discrimination, in the form of “treatment less favorable,” also expressly is prohibited under NAFTA Articles 1102 and 1103. In order to establish a claim of discriminatory state conduct under Articles 1102 and 1103, a claimant must meet the specific standard applicable to those articles, as set forth above.756 Because discrimination also is encompassed within the minimum standard of treatment, it follows that discriminatory treatment can lead to separate and independent violations of NAFTA Articles 1102, 1103, and 1105. Unlike the jurisprudence that has developed under NAFTA Articles 1102 and 1103 — which has articulated specific elements that must be established to prove violative discriminatory conduct — there is a dearth of specificity with respect to the elements that must be established to establish discriminatory conduct that violates NAFTA Article 1105. The tribunal in S.D. Myers grappled briefly with the overlap of Articles 1102, 1103 and 1105 in prohibiting discriminatory treatment. In so doing, however, the tribunal refrained from providing further specificity or the elements of discriminatory conduct that a claimant must prove to establish a violation of the minimum standard. The tribunal instead focused on whether the breach of a rule of international law would necessarily lead to a breach of Article 1105.757 Other tribunals similarly have refrained from specifying the elements of a claim of discriminatory treatment under Article 1105. Nevertheless, there is accord among tribunals and jurists that discriminatory treatment is conduct that breaches the precepts of the international minimum standard of treatment.758 As Article 1105 is not limited by Articles 1102 and 1103, Article 1105 must prohibit additional types of discriminatory treatment. [page 380]

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Claimant posits that discriminatory treatment violative of customary international law must comprise discrimination that is fundamentally unfair and inequitable.759 That is, discriminatory State conduct that does not violate Articles 1102 or 1103 can nonetheless violate Article 1105 if the discrimination is manifest. Thus, a de minimis disparity in treatment would not rise to the level of a breach of the minimum standard under Article 1105. But because a tribunal must evaluate all four pillars of the minimum standard of treatment collectively as well as separately, the tribunal should evaluate the level of the disparate treatment on a sliding scale, in conjunction with the other requirements of the minimum standard. Thus, discrimination that also is arbitrary, grossly unfair, unjust or idiosyncratic, and/or carried out [page 381]

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non-transparently will violate the standard at a lower threshold of disparate treatment than if these other elements were not present. The tribunal in Chemtura Corporation v. Canada, in the context of alleged discriminatory conduct, focused on the state obligation under Article 1105 “to ensure that investors from NAFTA member States benefit from regulatory fairness.”760 Applying this principle, the tribunal found that Canada had complied with this objective where the investor was receiving treatment identical to that of other applicants for federal registration. To support this conclusion, the tribunal quoted the witness for Canada in that case. The witness stated, “under normal principles of regulatory fairness.… we try to treat Registrants in the same fashion…. I don’t see how an agreement could work if, in fact, one Registrant was getting one thing and anther Registrant another.”761 The tribunal concluded that Canada’s adherence to these principles fulfilled its obligation to provide fair and equitable treatment under Article 1105(1). As

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Professor Newcombe and Dr. Paradell have noted, “Discrimination in this sense overlaps substantially with concepts of arbitrariness, unreasonableness and unfairness.”762 In the present case, the disparate treatment to which Canada has subjected Mercer and its investment is manifest. As detailed above in Section VI.C-E, the BCUC and/or BC Hydro have (1) taken from Celgar by regulatory action and without compensation valuable load displacement services that BC Hydro has paid other pulp mills to provide: (2) applied a net-ofload regulatory standard to Celgar governing access to embedded cost utility power while selling power different than the historical usage standard they applied to other pulp mills, and (3) restricted Celgar’s access to embedded cost utility power and its ability to sell its self-generated below-load electricity under a GBL computed on a different basis, with a different methodology, using a different baseline period, of different duration, than other pulp mills. The resulting harm to Mercer and its investment has been substantial, as detailed in the Damages section below and in the Expert Report of Brent Kaczmarek. Moreover, neither BC Hydro nor the BCUC has acknowledged much less explained the discriminatory treatment afforded Celgar, or the arbitrary distinctions they have drawn, as discussed more fully below. Both in the result, and in the BC Hydro and BCUC processes Mercer has undergone, Canada has subjected Mercer to arbitrary, grossly unfair, unjust and idiosyncratic, and non-transparent treatment in violation of the minimum standard, and thus has denied Mercer and its investment fundamental regulatory fairness. [page 382] c.

Canada’s Acts and Omissions are Arbitrary, NonTransparent, and Grossly

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Unfair, Unjust or Idiosyncratic in Violation of the Minimum Standard of Treatment of NAFTA Article 1105 Wholly apart from its discriminatory treatment of Mercer, Canada’s conduct has denied Mercer the minimum standard of treatment required under Article 1105. Examined in its totality, Canada’s conduct violates the remaining three pillars of that standard, including (1) protection from arbitrary treatment (2) the obligation to provide transparency, and (3) protection from treatment that is grossly unfair, unjust or idiosyncratic. The prohibition against arbitrary treatment includes a requirement that States act with valid and clearly stated reasons for their actions.763 As the tribunal in TECO Guatemala Holdings LLC v. Guatemala explained, “The obligation to provide reasons derives from both the regulatory framework and from the international obligations of the State under the minimum standard.”764 The minimum standard of fair and equitable treatment also encompasses an obligation to act transparently when taking measures that affect a foreign investor.765 “{T}ransparency is closely related to the concept of the rule of law whereby it refers to procedural aspects of administrative law, such as the requirement to give sufficient reasons and the obligation to act in a comprehensible and predictable way.”766 As noted by the tribunal in Waste Management II, State acts evidencing a “complete lack of transparency and candour in an administrative process” would violate the Article 1105 Standard.767 Similarly, numerous NAFTA tribunals have recognized that the conduct which “grossly unfair, unjust, and idiosyncratic” the minimum standard of treatment.768 [page 383]

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Canada breached its obligation to provide a minimum standard

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of treatment to Celgar, as its actions reveal the arbitrary application of non-transparent and unclear regulatory procedures and standards in non-transparent and grossly unfair, unjust and idiosyncratic ways. BC’s legal regime governing selfgenerators is non-transparent, lacking any clear and binding rule of law applicable province-wide, and the BCUC and BC Hydro have made decisions on an arbitrary, ad hoc, and idiosyncratic basis, without providing reasons or justifications for the distinctions they have made. BC’s regulatory regime for self-generators lacks a governing statute. There are no regulations. There were no written policies, procedures, or guidelines at any relevant time. The determination of a self-generator’s level of access to embedded cost utility power, and thus the amount of its self-generation output it could sell to market, is tremendously important, involving up to tens of millions of dollars per year for an individual pulp mill, and hundreds of millions of dollars over time, and affecting the relative competitive position of the different pulp mills. Yet Canada permitted such determinations to be made arbitrarily on an ad hoc basis, applying different regulatory standards to different mills. BC Hydro then determined GBLs with virtually unfettered discretion, without public input, making up rules it did not disclose as it went along, and without providing written reasons to the affected entity for the decisions it made in the exercise of its discretion, much less disclosing any of its actions publicly. The lack of a clear regulatory scheme portends a violation of NAFTA Article 1105. Indeed, if one were to set out intentionally to design a regulatory scheme that would not meet a minimum standard of treatment, the BC regulatory scheme is a useful template from which to start. Celgar began its odyssey with this regulatory system from what should have been an advantageous position. It operated one of the most modern and efficient kraft pulp mills in BC. To its knowledge, over the years the Mill had invested more in electric generation assets than any other pulp mill in BC, and had installed more generation capacity relative to its load than any

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other pulp mill. Celgar had taken no money from BC or BC Hydro for its generation assets, it had entered into no LDAs, and it otherwise had made no commitment to use its generation for any specific purpose. Its generation output thus was unencumbered. And, at least since Mercer had taken over in 2005, the Mill never deliberately idled or shutdown pulp production or electricity production, [text is redacted text is redacted] Moreover, Celgar had various legal protections, or so it thought. The UCA provides that public utilities such as FortisBC have an obligation to serve their [page 384]

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eligible customers, which include Celgar. Even if Celgar were regarded to have left utility service to the extent it had been meeting part of its own load through self-generation, the APA provided it and others within FortisBC’s service territory with a right to return, subject only to notice requirements. And the 2003 Heritage Contract had preserved the benefits of BC Hydro’s low cost Heritage Resources for all ratepayers, including for Celgar, through the 1993 PPA, which contained no restrictions on FortisBC’s sales of PPA power to self-generators. At the time of Mercer’s investment in 2005, the only official governmental pronouncement regarding self-generation was BCUC Order G-38-01, issued in 2001. By its express terms, the Order applied only to BC Hydro and its customers. It did not apply to FortisBC or to Celgar. For BC Hydro’s self-generating customers, the Order established a mechanism whereby they could protect their pre-existing level of access to utility power, and preserve their ability to sell at market prices new or incremental generation, by requesting a GBL from BC Hydro. The Order established no such mechanism for FortisBC selfgenerating customers like Celgar. To the extent the BCUC had provided any guidance at all to Celgar, the Order implied that

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Celgar should deal with its utility, FortisBC. Moreover, even as to BC Hydro, and its self-generating customers, Order G-38-01 is remarkably vague and unclear. It contains no clear standards governing the establishment of a GBL. It articulates only a very general historical usage standard, whereby self-generators are allowed to sell their electricity provided that they do so without taking additional power from BC Hydro above historical levels. The Order vests enormous discretion in BC Hydro, which it directs to “negotiate” with its customers. In and of itself, this is an idiosyncratic approach to regulation, akin to an income tax regime that directs the tax collector simply to negotiate in secret with each taxpayer. The very process itself is inherently unfair, arbitrary, and non-transparent. In the context of the EPA negotiations in which BC Hydro has established all its GBLs, where there is one buyer and multiple sellers, BC Hydro has unequal bargaining power. Moreover, different pulp mills have different bargaining power, knowledge, and skill, amongst themselves, and different political connections and importance. On top of that, as Mr. Switlishoff explains, there is a problem of one-sided, or asymmetric information. “Only BC Hydro knows how it has computed GBLs for others. Only BC Hydro knows the data on which it relied. Only BC Hydro knows the discretionary decisions it made. It therefore is impossible for any self-generator to argue effectively for treatment similar to that afforded to one or more other pulp mills. BC Hydro alone holds all the information, and thus all the playing cards.”769 This system design enables BC Hydro to discriminate, [page 385] which should not be regarded as unintentional. BC Hydro jealously protected its information advantage through confidentiality obligations set out in each EPA, which were

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imposed as a standard term on each counter-party. No mill can ever argue that another was treated more favorably. Moreover, BC Hydro is not a disinterested party. It has a direct financial stake in the GBL it sets. For all pulp mills except Celgar, it is the supplying utility. For GBLs embodied in EPAs, it is the purchaser of power in excess of the GBL. BC Hydro had direct financial incentives to afford Howe Sound a more favorable GBL than Celgar, particularly in its 2001 agreements with Howe Sound, as BC Hydro’s Powerex subsidiary was taking some [text is redacted] of the revenue. The BCUC delegated regulatory authority to a party to the very transactions it was regulating. In 2007, Celgar did that which Order G-38-01 implies it should do. Celgar approached its utility, FortisBC, seeking to sell its self-generated power, including new power coming on line as a result of Mercer’s Project Blue Goose investment. [text is redacted text is redacted] by 2008, the parties agreed to a Power Sales Agreement enabling Celgar to purchase its full electric load from Fortis BC at embedded cost rates. Not just Celgar but also FortisBC believed this to be permissible under the existing legal regime. No statute or regulation prohibited it. No BCUC Order prohibited it. The 1993 PPA did not prohibit it. To the contrary, the UCA’s obligation to serve, and the APA, supported the parties’ view that FortisBC was required to serve Celgar’s load. This 2008 PSA nonetheless upset BC Hydro. A self-generator in the Province had shown the temerity to attempt to sell its own power, generated from its own resources, made without BC Hydro or Provincial investment, but not just to BC Hydro or through Powerex. BC Hydro rushed to the BCUC asking the Commission to apply the “principles” of Order G-38-01 to selfgenerators in FortisBC’s service territory, but not the Order G38-01 regulatory standard. In effect, BC Hydro abandoned the historical usage standard it applied to its own customers, and sought and obtained from the Commission, in 2009, Order G48-09’s net-of-load standard for Celgar. BC Hydro has never

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adequately explained why it sought a different standard for FortisBC, or why, in 2013, it proposed, in its replacement agreement to the 1993 PPA, to adopt for FortisBC selfgenerators the historical usage GBL standard. In 2008, BC Hydro arbitrarily sought to apply the more restrictive net-of-load regulatory standard to Celgar, and in 2013, just as arbitrarily, it sought a change to apply the historical usage standard it applied to its own customers. The Commission accepted BC Hydro’s 2008 request, and, in 2009, changed the 1993 PPA, altering the benefits and burdens undertaken by the parties to that agreement, over FortisBC’s objection. After identifying the principles of Order G-38-01 as fundamental aspects of the regulatory regime, applicable to all self-generators in BC, including self-generators in FortisBC territory, without explanation, the BCUC arbitrarily adopted a different standard for FortisBC self-generators. [page 386]

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The Commission then proceeded to draw additional arbitrary distinctions in 2011, in Order G-198-11, in which it held that Tolko, a self-generator in FortisBC territory, should not be subject to the newly-minted net-of-load standard, and permits Tolko to retain its 2001 historical usage GBL. The Commission decided that the net-of load standard applied only to selfgenerators that are direct customers of FortisBC, and not to selfgenerators that are customers of customers (City of Kelowna). It did not explain why customers of customers should get different treatment, much less better treatment, nor does it even appear to recognize that, with respect to the 1993 PPA it has amended, that Celgar is a customer of BC Hydro’s customer. Indeed, to the extent the purpose of the restriction self-generator access to embedded cost utility power is to “prevent harm” to other ratepayers, there is no principled reason for applying restrictions only upon direct customers and not also downstream customers,

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and the BCUC provided none. BC Hydro’s newly found interest in FortisBC self-generators, moreover, was as inconsistent and arbitrary as the different netof-load and historical usage regulatory standards. On the one hand, BC Hydro does not offer LDAs or other Demand Side Management programs to FortisBC self-generators, presumably because they are not BC Hydro customers and thus not part of its system planning. On the other hand, BC Hydro asserts the right to restrict the limited and indirect access these selfgenerators have to BC Hydro power, through the 1993 PPA (which caps FortisBC’s energy take), because of the potential impact they may have on BC Hydro. BC Hydro thus wants to have it both ways. It takes from FortisBC ratepayers load displacement services without compensation because they are not customers, but still wants to restrict their access to power as if they are customers. Put another way, the BCUC arbitrarily has established a system whereby BC Hydro is permitted to use carrots and sticks in its dealings with its own self-generators, but only sticks in dealing with FortisBC customers. And the BCUC gave BC Hydro a bigger stick with which to restrict FortisBC self-generators, prohibiting outright, at least until it provided “clarification” in Order G-188-11, all arbitrage and access to embedded cost power while selling power by FortisBC self-generators, while permitting some such arbitrage and access by BC Hydro selfgenerators. At best, the BCUC’s Order G-48-09 was unclear as to the scope of its restrictions, causing FortisBC to deny Celgar any access to embedded cost power while Celgar was selling power. At worst, the BCUC backtracked from an egregiously discriminatory and unfair ruling. It is utterly perverse and unfair for the BCUC in Order G-48-09 to have applied greater power access restrictions to FortisBC self-generators than to BC Hydro self-generators. BC Hydro provided many of the latter, including Howe Sound and Canfor, with tens of millions of dollars to install their generation. BC Hydro let mills like [text is redacted text is redacted text is

redacted text is redacted text is redacted] And the BC, in Order G-48-09, then subjected the Celgar mill, which received no payments [page 387]

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from BC Hydro or the Province, and made no contractual commitments that needed to be re-negotiated, to the harshest regulatory standard of any other pulp mill, allowing no access to embedded cost utility power while it is selling its own electricity, while all other pulp mills get some. In the BC self-generator regulatory regime, no good deed goes unpunished. Celgar’s unforeseen descent into regulatory purgatory only deepened when it began to “negotiate” in 2008 with BC Hydro over a GBL to be included in its Bioenergy Phase I EPA. There was no back and forth, and no negotiation. BC Hydro dictated a GBL that first just defined the demarcation point for BC Hydro’s purchase obligation, but in the end, restricted Celgar from selling below-load power to anyone. When it was assigned, the BC Hydro-determined GBL of 349 GWh/year was equal to Celgar’s most recent annual load, realized in 2007. This GBL, while consistent with BC Hydro’s proposal to the BCUC and the net-of-load standard the Commission eventually adopted in May 2009, was inconsistent with the historical usage standard applicable to BC Hydro customers under BCUC Order G-3801. Even if evaluated under the historical usage standard, the GBL that BC Hydro assigned to Celgar reflects the worst regulatory treatment possible, as it was impossible for BC Hydro to fix a higher GBL. Every discretionary decision BC Hydro made — for which BC Hydro articulated no reason, rule, or principle — was adverse to Celgar, including (i) BC Hydro’s use of only oneyear’s data, (ii) its selection of 2007 as the baseline period, (iii) its use of load as the basis for the GBL rather than the amount of self-generation Celgar actually had used to meet its load, and

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(iv) its rejection of Celgar’s request that its incremental Blue Goose generation not be treated as historical in computing the GBL. For other mills, BC Hydro used [text is redacted] baseline periods, or went back to [text is redacted text is redacted], and measured generation applied to load. BC Hydro applied to Celgar none of the few standards governing GBLs in Order G38-01, nor did it provide any reasons for its failure to do so. Celgar was not able to maintain even its 2007 level of access to embedded cost utility power, much less its 2001 level, because BC Hydro considered only Celgar’s load, and not the generation it had applied to serve its load. Celgar’s sales of electricity were disregarded [text is redacted text is redacted text is redacted text is redacted text is redacted text is redacted] BC Hydro applied different methodologies entirely in computing the GBLs for Tembec and Howe Sound. BC Hydro provided no written reasons for any of the discretionary decisions it made in determination Celgar’s GBL. The determination is as nontransparent as it is arbitrary. It is not until BC Hydro first releases, in June 2012, its perfunctory and parsimonious “GBL Guidelines” that Celgar learns that BC Hydro established a policy to set a GBL using a baseline period close in time to when its counterparty first approaches BC Hydro to request a GBL. This policy not only is arbitrary and inconsistent with the Commission’s intent behind Order G-38-01 when issued in 2001 “to preserve the status quo,” but also it penalizes [page 388] Celgar for not taking action earlier that it had no reason to know it should take. How would Celgar have known, before undertaking Project Blue Goose or its Green Energy Project, that it was obligated to contact BC Hydro — a utility from which it did not take service, and with which it did not have any

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business relationship — to preserve for itself the economic benefits of those investments? In later proceedings, the BCUC appears to have acknowledged that it has treated Celgar unfairly. It has “clarified” and backed away from the absoluteness of Order G-48-09, and ruled that Celgar should have some access to embedded cost power from FortisBC’s resource stack, without explaining the difference between BC Hydro power and FortisBC electricity, and why Celgar should have access to the latter but not the former while selling electricity. It has held expressly that the application of a net-of-load standard to some and a historical usage standard to others constitutes “undue discrimination.” But the BCUC still has provided no relief or certainty to Celgar, some five years after it issued Order G-48-09. In the interim, the market for BC biomass based green electricity largely has disappeared. The BCUC still has yet to approve any rate for Celgar to obtain either firm service from FortisBC to meet its load while selling power, or standby service to meet its needs when it cannot otherwise do so through its self-generation. And the proposed FortisBC rate currently under consideration is a Made-for-Celgar only rate, that would apply to no other selfgenerator in the province, embodying the peculiar notional matching mechanism and NECP Rate Rider that deprives Celgar of all the benefits of FortisBC’s historical generation assets, and subjects Celgar alone to the full cost of the required matching purchases. Celgar alone is afforded no access to BC Hydro Heritage Resources while selling power. Celgar alone is afforded no access to FortisBC legacy generation assets while selling power. Celgar’s complaints to the BC Government, through MEM, likewise went nowhere. Indeed, the MEM conducted no analysis of the regulatory treatment afforded to Celgar as compared to others. It simply told Celgar that a lower GBL for Celgar would mean higher costs for BC Hydro ratepayers. But this always is true, for any self-generator, and thus failed to address Celgar’s claim of discriminatory treatment.

683.

It is the hallmark of discriminatory and arbitrary action to single out one entity for unique and peculiar treatment, to subject it to a different and harsher regulatory standard, to apply more restrictive regulatory methodologies than other like entities, and to articulate no reasons for administering such differential treatment. It is the hallmark of non-transparent treatment for written laws, regulations, policies, procedures, and guidelines to be absent, for rules to be announced long after they are applied, and for decisions to be made without written reasons or explanation. All of these indicators are present in this case, and they are too numerous even to count. Canada has denied Celgar the minimum standard of treatment under NAFTA Article 1105. [page 389]

VIII. DAMAGES, INTEREST, AND COSTS A. 684.

685.

686.

Claimant is Entitled to Compensation for Canada’s NAFTA Violations Canada has breached NAFTA Articles 1102, 1103, 1105, and/or 1503, causing Mercer to suffer significant injury and loss. Mercer therefore is entitled under international law to full compensation for the losses it has sustained by reason of those breaches. NAFTA Article 1135 prescribes the damages that a tribunal may award against a Party. Namely, a tribunal may award, separately or in combination, (a) monetary damages and any applicable interest or (b) restitution of property. In this case, because the harm inflicted by Canada’s wrongful acts and omissions is pecuniary in nature, the appropriate remedy is monetary damages. As NAFTA is silent on rules or standard for determining compensation of investors injured by a Party’s NAFTA breaches, the customary international law standard applies. The

Permanent Court of International Justice famously formulated the relevant customary international law standard over eightyfive years ago in its judgment in the Chorzów Factory case: The essential principle contained in the actual notion of an illegal act — a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals — is that reparation must, as far as possible, wipe- out all the consequences of the illegal act and reestablish the situation which would, in.{SIC} all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it — such are the principles which should serve to determine the amount of compensation due for an act contrary to international law.770

687.

The principle of reparation recognized in Chorzów Factory reflects what the ICJ more recently has characterized as a “well established rule” of customary international law.771 As the NAFTA tribunal in S.D. Myers explained, the “principle of international law stated in the Chorzów Factory case is still recognised as authoritative on the matter of general principle.”772 Moreover, it is a principle that is codified in the ILC Articles of State Responsibility, Article 31(1), which provides that “the responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act.”773 [page 390]

688.

As provided in ILC Articles 35 and 36, reparation has two components. The first component is an obligation to provide “restitution,” which requires the State “to re-establish the situation which existed before the wrongful act was committed to the extent that restitution is not materially impossible.”774 Second, “in so far that such damage is not done good by restitution,” the ILC Articles recognize the State’s obligation to provide the investor compensation for the damage caused by the State’s international wrongful act.775 Under this principle, reparation is complete only when the damages award serves to

689.

B. 690.

691.

restore the investor to the situation it would have been in absent the State’s wrongful conduct. In order to be made whole, Mercer seeks compensation from Canada to place the Celgar Mill, and Mercer’s investment in Celgar, in the same place today that they would have been in had the BCUC and BC Hydro not discriminatorily, arbitrarily, and unfairly acted in 2009 to eliminate Celgar’s access to embedded cost utility power while selling self-generated electricity, and thereby treated Celgar less favorably than it treated its non-U.S. comparators Tembec, Howe Sound, and Canfor. All of the principal measures challenged by Mercer — the issuance of Order G-48-09 and the GBL imposed by BC Hydro — took place or were made final and effective in 2009. The Nature of Mercer’s Damages Celgar was provided less favorable access to embedded cost utility power to meet its own load while selling power than were comparators in like circumstances, and it was denied fair and equitable treatment, under both the BCUC’s imposition in Order G-48-09 of a “net-of-load” standard on Celgar alone among pulp mills, and BC Hydro’s discretionary GBL methods and calculations that were less favorable to Celgar than to other pulp mills. As access to below-load embedded cost utility power enables a self-generator to engage in arbitrage, and to sell at market prices electricity it otherwise would have used to meet its own load, Mercer sustained damages resulting from the discriminatory and unfair restrictions because it was unable to sell at market prices electricity it wrongly was forced to use to meet its own load. Accordingly, the Tribunal’s first task in assessing damages necessarily must be to determine the GBL Celgar should have received absent its unfavorable, unfair, and inequitable treatment. The difference between that GBL and the GBL that has governed its energy sales since 2009 — its 2007 load-based GBL of 349 GWh/year — will reflect the additional amount of electricity Celgar would have been able to sell each year at market prices absent Canada’s wrongful measures.

692.

To determine what Celgar’s GBL should have been, the Tribunal must consider each distinct element of wrongful treatment Mercer has set forth above, and, for each element the Tribunal accepts as a wrongful act, determine [page 391] what Celgar’s GBL would have been without the wrongful treatment caused by that element.

1.

Mercer’s Entitlement to Full Damages from the Restrictions

693.

The first element of wrongful treatment Mercer has established is that Canada, through the regulatory restrictions the BCUC and BC Hydro imposed on Celgar, effectively took from Celgar load displacement services that it paid others to provide. The Province, through both Order G-48-09 and the GBL contained in Celgar’s 2009 EPA, imposed a net-of-load access restriction on Celgar that it imposed on no other pulp mill in British Columbia, thereby prohibiting Celgar from selling any electricity it generated below the level of its 2007 load. (Indeed, the BCUC has not even imposed historical usage-based restrictions on other pulp mills without their agreement, as required by Order G-3801, and frequently with compensation.) Because neither BC nor BC Hydro entered into a LDA with Celgar to obtain Celgar’s agreement to provide load displacement services in exchange for compensation, whereas BC Hydro did so for Howe Sound, Canfor, and others, elimination of the Province’s disparate treatment would mean that the Province could not have required Celgar to provide load displacement services at all. Celgar’s GBL thus should have been zero, and it would have had the ability to sell an additional 349 GWh/year of electricity annually since 2009. Put another way, Order G-48-09 violated Canada’s NAFTA

694.

obligations, and Celgar should be put in the place it would have been in absent Order G-48-09 and the GBL. Absent Order G48-09, Celgar would have put into effect its 2008 Power Supply Agreement with FortisBC, which was due to be implemented no later than January 2009, and from that time forward would have been in a position to sell all of its electricity at market prices while having full access to embedded cost utility power to meet its own load.

2.

Mercer’s Entitlement to Damages from an Excessive GBL

695.

If the Tribunal does not accept this first element of Mercer’s claims, then it must proceed to the remaining elements, which in sum and substance demonstrate that BC Hydro and the BCUC set Celgar’s GBL too high relative to the treatment BC Hydro and/or the BCUC afforded to comparators Tembec and Howe Sound, both in terms of the overall result and the specific methodologies applied. This discriminatory, unfair, and inequitable treatment consists of many separate elements, including the application of different regulatory standards, and exercises of discretion in selecting GBL baseline periods, baseline durations, and computation methodologies that were unfavorable to Celgar, and, indeed, inconsistent with the BCUC’s Order G-38-01 that BC Hydro was purporting to apply. The proper measure of damages for these NAFTA violations should start with a determination by the Tribunal that comparable, fair, and equitable

696.

[page 392] treatment requires that Mercer have access to embedded cost utility electricity while selling its self-generated electricity based on the highest benchmark afforded to a comparator. As

697.

698.

699.

C. 700.

established above, under both Canada’s national treatment and MFN obligations, Mercer was entitled to the “best” treatment afforded a comparator in like circumstances. As between Canada’s distinct national treatment and MFN obligations, NAFTA Article 1104 provides that “Each Party shall accord to investors of another Party and to investments of investors of another Party the better of the treatment required by Article 1102 {(national treatment)} and 1103 {(MFN)}.” Accordingly, Mercer is entitled to the best treatment afforded to a Canadian or third-country comparator among all of the comparators either Mercer or Canada identifies. Mercer submits that the appropriate benchmark for best treatment should be the Below-Load Access Percentage. As established above, this factor accurately measures, on a comparable basis, the degree of access afforded different mills. The highest comparator Below-Load Access Percentage is [text is redacted text is redacted] For Celgar, such an access rate would translate into a GBL of [text is redacted] GWh/year, and additional energy sales of [text is redacted] GWh/year.776 Alternatively, should the Tribunal reject the Below-Load Access Percentage as an appropriate benchmark, it may itself recompute Celgar’s GBL by eliminating each discriminatory or unfair element that went into its calculation. Mercer has endeavored to quantify such elements above, where possible, and has provided all of the raw data necessary.777 For example, the Tribunal could conclude that Celgar should have been treated like Tembec in its 2009 EPA, or Howe Sound in its [text is redacted text is redacted] agreements, and have its GBL set based on its 2001 level of generation-to-load (as the BCUC intended in Order G-38-01 to maintain the status quo).778 That figure, as already noted, would be 186.1 GWh/year. (Celgar’s total generation in that year was 190.5 GWh, and its generationto-load (subtracting export sales) was 186.1 GWh.)779 Damage Methodology and Calculations The methodology and calculations of Mercer’s damages, under various alternative GBL scenarios, are set forth in the Expert

Report of Brent C. Kaczmarek, CFA, attached to this Memorial.780 Mr. Kaczmarek is the Managing Director of Navigant Consulting, Inc. (“Navigant”), where he [page 393]

701.

702.

703.

leads his firm’s International Arbitration practice. Mr. Kaczmarek holds the designation of Chartered Financial Analyst, a globally recognized designation held by professionals demonstrating competence in the investment valuation and decision-making process.781 He has served as a financial, valuation, and damages expert in over 90 international arbitrations, including at least 80 investor-state arbitrations.782 In those 70 investor-state arbitrations, he was appointed as an expert by both investors and states in a balanced proportion.783 Mr. Kaczmarek has evaluated the damages suffered by Mercer as of3l December 2013, and will update his analysis as appropriate at the time of Mercer’s Reply Memorial.784 Mr. Kaczmarek concludes that Mercer’s damages have two components. First, Mercer has been harmed to the extent of lost profits on the electricity sales it has not been able to make due to the measures. Mr. Kaczmarek computes that loss as of 31 December 2013, and beginning in January 2009, when Celgar expected that its 2008 Power Supply Agreement with FortisBC would have taken effect.785 Second, Mr. Kaczmarek concludes that the measures have impaired the value of Celgar as an ongoing enterprise, due to the expected discounted future revenue and earnings impact of the measures on Celgar. Mr. Kaczmarek computes that loss as of 31 December 2013 as well.786 As noted above, Mercer’s losses are a function of the GBL that Celgar should have received absent all discriminatory, unfair, and inequitable treatment. That figure is dependent upon the Tribunal’s rulings on liability. Accordingly, Mr. Kaczmarek presents a table containing alternative damages calculations for

various possible GBL scenarios identified by Mr. Switlishoff or counsel.787

1.

Summary of Losses

704.

Accepting Mercer’s claim that it should not have been forced to provide any load displacement services without compensation, or that it should be put in the position it would have been in absent BCUC Order G-48-09, and that its GBL should therefore have been zero, the total losses suffered by Mercer (excluding interest) are, as calculated by Mr. Kaczmarek as of 31 December 2013, C$ 232 million.788 [page 394]

2.

Interest

705.

As explained in Mr. Kaczmarek’s Report, Claimant must be compensated for “the time value and opportunity cost of money” and it “would be appropriate for the tribunal to consider two different commercial rates of interest when calculating the interest due to Claimant.”789 In each case, interest is compounded annually based upon the effective annual interest rate applicable.790 Depending upon the interest rate applied, Mercer is entitled to interest of either C$ 6 or C$ 11 million, should the Tribunal agree that Celgar should not have been forced to provide load displacement services and that its GBL should have been zero.791 The present total damages (including interest) claimed by Mercer as a result of Canada’s wrongful acts and omissions, based on a valuation date of 31 December 2013, thus are up to C$ 243 million.792

706.

707.

IX. RELIEF REQUESTED 708.

For the reasons articulated herein, Mercer respectfully requests that the Tribunal make the following determinations: a. The Tribunal has jurisdiction to address all of the claims asserted by Mercer in this arbitration; b. Canada, through the various wrongful acts and omissions described above, has violated its obligations under NAFTA with respect to Mercer and its investment, including violations of Articles 1102, 1103, 1105, and 1503(2): c. Mercer is entitled to compensation for the harm it has suffered as a result of Canada’s unlawful acts and omissions with respect to Mercer and its investment in Canada, in the amount of up to C$ 232 million, plus interest starting from 1 January 2009, compounded annually at the prime rate plus 2 percent, until the date of payment of the Award. [page 395] d.

Mercer is entitled to all costs of this arbitration, including fees and expenses of its attorneys and external advisers. Respectfully submitted, Michael T. Shor Gaela K. Gehring Flores Andrew M. Treaster Amy V. Endicott Pedro G. Soto ARNOLD & PORTER LLP 555Twelfth Street N.W. Washington, D.C. 20004 United States of America Kim Moller

SANGRA MOLLER LLP 925 W Georgia Street Suite 1000 Vancouver, BC V6C 3L2 Canada Counsel for Claimant _____________________________ 736. As discussed above, this obligation extends to the BCUC and MEM directly, and also to BC Hydro, through Article 1503(2). 737. CA-44, OAS, NAFTA Notes of Interpretation of Certain Chapter 11 Provisions, NAFTA Free Trade Commission (31 July 2001). 738. See CA-43, OECD, “Fair and Equitable Treatment Standard in International Investment Law,” September 2004, at 11-12. (Mexico, Canada, and the United States, acknowledge that the minimum standard has evolved since its articulation in the Neer case in 1926); CA-1, ADF (NAFTA), n. 170 (“Canada’s position has never been that the customary international law regarding the treatment of aliens was ‘frozen in amber at the time of the Neer decision’… Canada’s position has always been that customary international law can evolve over time, but that the threshold for finding violation of the minimum standard of treatment is still high.”). 739. CA-15, Thunderbird (NAFTA), ¶194; CA-4, Cargill (NAFTA), ¶284 (recognizing the dynamic nature of the minimum standard); CA-40, Chemtura Corp. v. Government of Canada (NAFTA), UNCITRAL (Award, 2 August 2010) (Kaufmann-Kohler, Brower, Crawford) (“Chemtura (NAFTA)”), ¶112 (recognizing evolution of the minimum standard since the Neer case). Tribunals interpreting other treaties have also recognize this evolution. See, e.g., CA-37, Railroad Development Corporation v. Republic of Guatemala (CAFTA-DR), ICSID Case No. ARB/07/23 (Award, 29 June 2012) (Sureda, Eizenstat, Crawford) (“RDC (CAFTA-DR)”), ¶216 (interpreting the minimum standard as incorporated in CAFTA-DR); CA-35, Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/2 (Award, 31 October 2012) (Hanotiau, Khan, Williams) (“Deutsche Bank”), ¶419-420 (citing Waste Management II (NAFTA)) (interpreting BIT). 740. CA-45, Mondev International Ltd. v. United States of America (NAFTA), ICSID Case No. ARB(AF)/99/2 (Award, 11 October 2002) (Stephen, Crawford, Schwebel) (“Mondev (NAFTA)”), ¶116; accord CA-10, Merrill (NAFTA), ¶213 (“today’s minimum standard of treatment is broader than that defined in Neer and its progency”); CA-40, Chemtura (NAFTA), ¶215 (a violation does not need to be outrageous); CA-13, Pope & Talbot II (NAFTA), ¶118 (fairness standard is an ordinary one, without any threshold limitation that the conduct be egregious, outrageous or shocking, or otherwise extraordinary); CA39, Waste Management, Inc. v. United Mexican States (NAFTA), ICSID Case No. ARB(AF)/00/3 (Award, 30 April 2004) (Crawford, Civiletti, Gomez) (“Waste Management II (NAFTA)”), ¶91-93 (final award cites Mondev (NAFTA) and ADF as rejecting outrageous Neer standard); CA-36, GAMI Investment, Inc. v. Government of the United Mexican States (NAFTA), UNCITRAL (Award, 15 November 2004) (Paulsson, Reisman, Murô) (“GAMI (NAFTA)”), 1 95 (concurring with Waste Management II (NAFTA)).

741. CA-42, Dominican Republic-Central America Free Trade Agreement, Chapter 10 (Investment) (2004), Art. 10.5. Similarly, various tribunals addressing the fair and equitable treatment standard as contained in a number of bilateral investment treaties have held that the standard applied there does not differ from customary international law. See, e.g., CA-52, CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8 (Award, 12 May 2005) (Orrego Vicuña, Lalonde, Rezek) (“CMS”), ¶266 (interpreting the treaty clause “Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law”); CA-53, Occidental Exploration and Production Co. v. Republic of Ecuador, LCIA Case No. UN 3467 (Award, 1 July 2004) (Orrego Vicuña, Brower, Sweeney) (“OPEC”), ¶180 (same). 742. CA-22, Glamis Gold (NAFTA), ¶¶608, 611; CA-4, Cargill (NAFTA), ¶267-268. 743. CA-54, Mondev (NAFTA), ¶111. 744. CA-22, Glamis Gold (NAFTA), ¶605. 745. CA-39, Waste Management II (NAFTA), ¶98. The tribunal in Biwater extensively cited Waste Management II (NAFTA) in explaining that the general standard of fair and equitable treatment includes a number of components, including “Transparency, consistency, non- discrimination: the standard also implies that the conduct of the State must be transparent, consistent and non-discriminatory, that is, not based on unjustifiable distinctions or arbitrary.” CA-26, Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22 (Award with Dissent, 24 July 2008) (Honotiau, Born, Landau) (“Biwater”), ¶602. 746. CA-38, TECO Guatemala Holdings, LLC v. Republic of Guatemala (CAFTA-DR), ICSID Case No. ARB/10/23 (Award, 19 December 2013) (Mourre, Park, von Wobeser) (“TECO (CAFTA-DR)”), ¶450. 747. CA-38, TECO (CAFTA-DR), ¶454. 748. CA-38, TECO (CAFTA-DR), ¶455. 749. See CA-39, Waste Management II (NAFTA), ¶98; CA-36, GAMI (NAFTA), ¶94; CA-38, TECO (CAFTA-DR), ¶454. 750. See CA-21, S.D. Myers I (NAFTA), ¶¶262-263; CA-10, Merrill (NAFTA), ¶187; CA-39, Waste Management II (NAFTA), ¶98; CA-36, GAMI (NAFTA), ¶94; CA-38, TECO (CAFTA-DR), ¶454. 751. See CA-39, Waste Management II (NAFTA), ¶98 (“the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic …”). 752. See CA-38, TECO (CAFTA-DR), ¶457; CA-10, Merrill (NAFTA), ¶187; CA-39, Waste Management II (NAFTA), ¶98; CA-23, Metalclad, ¶76. 753. In addition to this general standard, tribunals also have identified several specialized claims under the minimum standard, such as for denial of justice. Mercer is not making any such specialized claim. 754. See CA-38, TECO (CAFTA-DR), ¶¶658, et seq. (the state regulator’s issuance of a resolution that disregarded, without providing reasons, a neutral (but non-binding) commission report was arbitrary and therefore breached the minimum standard of treatment under Article 10.5 of CAFTA-DR): CA-4, Cargill (NAFTA), ¶¶297-305 (finding that a single import permit requirement violated Article 1105 because it was “manifestly unjust”). 755. CA-4, Cargill (NAFTA), ¶296 (“The Tribunal observes that other NAFTA tribunals have

expressed the view that the standard of fair and equitable treatment is not so strict as to require “bad faith” or ‘willful neglect of duty’. The Tribunal agrees. However, the Tribunal emphasizes that although bad faith or willful neglect of duty is not required, the presence of such circumstances will certainly suffice.”); CA-22, Glamis Gold, ¶560 (NAFTA) (“Although bad faith would meet the standards described, most tribunals agree that a breach of Article 1105 does not require bad faith.”). 756. See supra Section VI.A (Discussion of legal standard applicable to claims under Arts. 1102 and 1103). 757. CA-21, S.D. Myers I (NAFTA), ¶¶264-267 (noting, inter alia, that “the fact that a host Party has breached a rule of international law that is specifically designed to protect investors will tend to weigh heavily in favour of finding a breach of Article 1105.”). 758. See CA-10, Merrill (NAFTA), ¶187 (“Even if the Tribunal were to accept Canada’s argument to the effect that good faith, the prohibition of arbitrariness, discrimination and other questions raised in this case are not stand-alone obligations under Article 1105(1) or international law, and might not be a part of customary law either, these concepts are to a large extent the expression of general principles of law and hence also part of international law”); CA-38, TECO (CAFTA-DR), ¶454 (noting that the minimum standard of fair and equitable treatment under CAFTA-DR includes protection against conduct that is discriminatory); CA-39, Waste Management II (NAFTA); ¶98; CA-34, Bayindir Insaat Turizm Ticaret Ve Sanayi A.S v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29 (Award, 27 August 2009) (Kaufmann-Kohler, Berman, B6ckstiegel)(“Bayindir”), ¶178 (using customary international law, and citing Waste Management II (NAFTA) to inform a general obligation of fair and equitable treatment in the Pakistan-Swizterland BIT to include a non-discrimination factor); see also CA - 21, SD Myers I (NAFTA), ¶¶263, et seq.; CA- 54, Mondev (NAFTA), ¶156, CA - 55, Loewen, ¶¶35; CA-40, Chemtura (NAFTA) ¶¶215, et seq.; CA -49, Dumberry, P., THE FAIR AND EQUITABLE TREATMENT STANDARD: A GUIDE TO NAFTA (Kluwer Law International, 2013) Case Law on Article 1105 The Substantive Content of Article 1105 (Chapter 3), 207-221 (“the reasoning of some {NAFTA} tribunals suggests that discrimination is one of the elements of the FET standard that is protected under Article 1105”); CA-51, Schreuer, C., THE FUTURE OF INVESTMENT ARBITRATION (C.A. Rogers, R.P. Alford eds, 2009) Protection against Arbitrary or Discriminatory Measures (Chapter 10), p. 183-84, 189-90 (“In a number of cases, tribunals have dealt with the prohibition of unreasonable or arbitrary measures in close conjunction with the fair and equitable treatment standard. This tendency is particularly pronounced with tribunals apply the NAFTA. It may be explained, at least in part, by the fact that the NAFTA does not contain a separate provision on arbitrary or discriminatory treatment.”); CA-48, Newcombe, A. and Paradell, L., LAW AND PRACTICE OF INVESTMENT TREATIES (Kluwer Law International, 2009) Minimum Standards of Treatment (Chapter 6), § 6.10. Discrimination (“discrimination may occur where the state makes an arbitrary or unreasonable distinction between similarly situated investors or investments.”). Of course, discriminatory treatment is not necessary for a breach of the minimum standard of fair and equitable treatment. For example, in SD Myers, the tribunal described the minimum standard as “a floor below which treatment of foreign investors must not fall, even if a government were not acting in a discriminatory manner.” CA-21, S.D. Myers I (NAFTA), ¶259. 759. It is a maxim nearly as old as law itself that likes should be treated alike, and evidence to the contrary suggests a presumptive violation of the norms of equity and fairness. See, e.g., CA-50, Aristotle, NICOMACHEAN ETHICS, Politics, III.9. III. 12. Therefore, a breach of customary international law would exist if “unjustifiable or arbitrary regulatory

distinctions { are } made between things that are like ….” CA-49, Dumberry, P., THE FAIR AND EQUITABLE TREATMENT STANDARD: A GUIDE TO NAFTA (Kluwer Law International, 2013) Case Law on Article 1105 The Substantive Content of Article 1105 (Chapter 3); see also, CA-41, Nykomb Synergetics Technology Holding AB v. Republic of Latvia, SCC (Award, 16 December 2003) (Haug, Schutze, Gernandt) (“Nykomb”), ¶4.3.2 (Applying the Energy Charter Treaty but considering the meaning of “discriminatory treatment” under international law, the tribunal concluded that “in evaluating whether there is discrimination in the sense of the Treaty one should only ‘compare like with like.’ … {A}ll of the information available to the Tribunal suggests that the three companies are comparable, and subject to the same laws and regulations …. In such a situation, and in accordance with established international law, the burden of proof lies with the Respondent to prove that no discrimination has taken or is taking place.”) See also CA-40, Chemtura (NAFTA), ¶179 (“Article 1105 of NAFTA seeks to ensure that investors from NAFTA member States benefit from regulatory fairness,” where nondiscriminatory treatment was understood to be an essential component of regulatory fairness.) 760. CA-40, Chemtura (NAFTA), ¶179. 761. CA-40, Chemtura (NAFTA), ¶179. 762. CA-48, Newcombe, A. and Paradell, L., LAW AND PRACTICE OF INVESTMENT TREATIES (Kluwer Law International, 2009) Minimum Standards of Treatment (Chapter 6), § 6.10. Discrimination. 763. CA-38, TECO (CAFTA-DR), ¶576; see also, Glamis Gold (NAFTA), ¶617 (“a manifest lack of reasoning” would violate the minimum standard of fair and equitable treatment). 764. CA-38, TECO (CAFTA-DR); ¶583; CA-42, Dominican Republic-Central America Free Trade Agreement, Chapter 10 (Investment) (2004) (“CAFTA-DR”), Article 10.5 states “Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments.”. 765. See CA-38, TECO (CAFTA-DR), ¶457; CA-10, Merrill (NAFTA), ¶187; CA-39, Waste Management II (NAFTA), ¶98; CA-23, Metalclad, ¶76. 766. CA-49, Dumberry, P., THE FAIR AND EQUITABLE TREATMENT STANDARD: A GUIDE TO NAFTA (Kluwer Law International, 2013) Case Law on Article 1105 The Substantive Content of Article 1105 (Chapter 3), 172. 767. CA-39, Waste Management II (NAFTA), ¶98. 768. See e.g., CA-39, Waste ManagementII (NAFTA), ¶98 (“the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic …”); CA-4, Cargill (NAFTA), ¶296 (“To determine whether an action fails to meet the requirement of fair and equitable treatment, a tribunal must carefully examine whether the complained of measures were grossly unfair, unjust or idiosyncratic …”); CA38, TECO (CAFTA-DR), ¶454 (“The Arbitral Tribunal considers that the minimum standard of FET under Article 10.5 of CAFTA-DR is infringed by conduct attributed to the State and harmful to the investor if the conduct is arbitrary, grossly unfair or idiosyncratic …”); CA-36, GAMI (NAFTA), ¶94 (quoting Waste Management II (NAFTA), ¶98). 769. Switlishoff Expert Statement, ¶101.

770. CA-24, Case Concerning the Factory at Chorzów (Claim for Indemnity) (Germany v. Poland), Judgment of 13 September 1928 P.C.I.J., ser. A, No. 17, at 40 (“Chorzów Factory”) (emphasis added). 771. CA-25, Gabcikovo-Nagymaros Project (Hung. v. Slovakia), 1997 I.C.J. 7 (Judgement, 25 September 1997), ¶152; CA-26, Biwater, ¶440. 772. CA-21, S.D. Myers I (NAFTA), ¶311. 773. CA-18, ILC Articles, Art. 31(1). 774. CA-18, ILC Articles, Art. 35. 775. CA-18, ILC Articles Arts. 35, 36. 776. Celgar’s below-load access would be [text is redacted] percent multiplied by its 2007 load of 349 GWh, which equals [text is redacted] Its GBL would equal [text is redacted text is redacted] 777. Celgar’s annual electricity generation, load, purchase, and sale data all are provided as Annex A to this Memorial. 778. See Switlishoff Expert Statement, ¶216. 779. Merwin Witness Statement, Annex A. 780. Kaczmarek Expert Report, ¶¶108 et seq. 781. Kaczmarek Expert Report, ¶13. 782. Kaczmarek Expert Report, ¶12. 783. Kaczmarek Expert Report, ¶12. 784. Kaczmarek Expert Report, ¶109. 785. See Kaczmarek Expert Report, ¶109. 786. See Kaczmarek Expert Report, ¶109. 787. Kaczmarek Expert Report, ¶¶21-24, 222, Tables 2, 3, 20. 788. Kaczmarek Expert Report, ¶¶1122, Table 2. 789. Kaczmarek Expert Report, ¶¶217-218. 790. Kaczmarek Expert Report, ¶221. 791. Kaczmarek Expert Report, ¶221, Table 19. 792. Kaczmarek Expert Report, ¶¶24, 222; Tables 3, 20.

[page 397]

Appendix 5.6

List of further selected practice precedents Notice of Arbitration – Sanum Investments Limited v Lao People’s Democratic Republic (UNCITRAL, PCA Case No 2013-13), 14 August 2012, available for download at the ITA Law website . Request for Arbitration – Transglobal Green Energy LLC and Transglobal Green Energy de Panama SA v Republic of Panama (ICSID Case No ARB/13/28) Request for Arbitration, 19 September 2013, available for download at the ITA Law website . Procedural Order No 1 – Churchill Mining PLC v Republic of Indonesia (ICSID Case No ARB/12/14), Procedural Order No 1, 6 December 2012, available for download at the ITA Law website . Request for Interim Measures – Chevron Corporation and Texaco Petroleum Company v Republic of Ecuador (UNCITRAL, PCA Case No 2009-23) Claimant’s Request for Interim Measures, 1 April 2010, available for download at the ITA Law website . Settlement Agreement – Sanum Investments Limited v Lao People’s Democratic Republic (UNCITRAL, PCA Case No 2013-13), 15 June

2014, available for download at the ITA Law website . Consent Award – St Marys VCNA LLC v Government of Canada (UNCITRAL) Consent Award, 12 April 2013, available for download at the ITA Law website . Written Transcript and Audio Recording of Merits Hearing – Guaracachi America, Inc and Rurelec plc v Plurinational State of Bolivia (UNCITRAL, PCA Case No 2011-17), 2-9 April 2013, available for download at the Permanent Court of Arbitration website . Post-Hearing Submission – Guaracachi America, Inc and Rurelec plc v Plurinational State of Bolivia (UNCITRAL, PCA Case No 201117) Claimant’s Post-Hearing Brief, 31 May 2013, available for download at the Permanent Court of Arbitration website . [page 398] Request for Annulment under the ICSID Convention – Rafat Ali Rizvi v Republic of Indonesia (ICSID Case No ARB/11/13) Application for Annulment and Stay of Enforcement of Award on Jurisdiction, 11 November 2013, available for download at the ITA Law website . Application to Set-Aside an Arbitral Award in a Domestic Court – BG Group plc v Republic of Argentina (UNCITRAL) Petition to Vacate or Modify Arbitration Award, filed by the Republic of Argentina in the United States District Court for the District of Columbia, Case No 08-0485 (RBW), 20 March 2008, available for download at the ITA Law website .

[page 399]

Selective bibliography and online resources The authors consulted a wide range of academic materials on investment-treaty arbitration when preparing this book. There is an abundance of detailed reference materials on the interpretation of investment treaties, application of substantive protection standards, the various institutional rules, damages and post-award remedies. As this field of practice grows from its infancy, so to the number of such materials grows exponentially. We include below a selection of the core texts as of January 2015.

Bibliograhy Brown, C (ed) Commentaries on Selected Model BITs, Oxford University Press, Oxford, 2013. Caron, D, and Caplan, L, The UNCITRAL Arbitration Rules: A Commentary, 2nd ed, Oxford University Press, New York, 2013. Cheng, B, General Principles of Law as Applied by International Courts and Tribunals, Stevens & Sons Limited, London, 1953 (reprinted by Cambridge University Press, New York, 2006). Diehl, A, The Core Standard of International Investment Protection, Kluwer Law International, The Netherlands, 2012. Dolzer, R, and Schreuer, C, Principles of International Investment Law, 2nd ed, Oxford University Press, New York, 2012. Douglas, Z, The International Law of Investment Claims, Cambridge University Press, New York, 2009. Douglas, Z, The Foundations of International Investment Law: Bringing Theory into Practice, Oxford University Press, New York, 2014. Dugan C, Rubins, N, Sabahi, B, Wallace, D, Investor-State Arbitration, Oxford University Press, New York, 2011.

Kantor, M, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence, Kluwer Law International, The Netherlands, 2008. Marboe, I, Calculation of Compensation and Damages in International Investment Law, Oxford University Press, New York, 2009.

[page 400] McLachlan, C, Shore, L, Weiniger, M, International Investment Arbitration: Substantive Principles, Oxford University Press, New York, 2007. Montt, S, State Liability in Investment Treaty Arbitration: Global Constitutional and Administrative Law in the BIT Generation, Hart Publishing, Oxford, 2009. Muchlinski, P, Ortino, F and Schreuer, C (eds), The Oxford Handbook of International Investment Law, Oxford University Press, New York, 2008. Newcombe, A, and Paradell, L, Law and Practice of Investment Treaties, Kluwer Law International, The Netherlands, 2009. Sabahi, B, Compensation and Restitution in Investor-State Arbitration, Oxford University Press, New York, 2011. Salacuse, J, The Law of Investment Treaties, Oxford University Press, Oxford, 2010. Schreuer, C, The ICSID Convention: A Commentary, 2nd ed, Cambridge University Press, New York, 2009. Sornarajah, M, International Law of Foreign Investment, 3rd ed, Cambridge University Press, New York, 2010. Reed, L, Paulsson, J, Blackaby, N, Guide to ICSID Arbitration, 2nd ed, Kluwer Law International, 2010. Ripinsky, S, and Williams, K, Damages in International Investment Law, British Institute of International and Comparative Law, London, 2009. Vandevelde, KJ, Bilateral Investment Treaties: History, Policy and Interpretation, Oxford University Press, New York, 2010. Weeramantry, R, Treaty Interpretation in Investment Arbitration, Oxford University Press, New York, 2012. Yannaca-Small, K (ed) Arbitration under International Investment Agreements: A Guide to the Key Issues, Oxford University Press, New York, 2010.

Online resources For electronic versions of investment treaties and publicly available materials relating to investment treaty arbitrations, including arbitral awards: ICSID ()

Investment Treaty Arbitration Law (ITA Law) () Investment Claims () Investor-State Law Guide () Kluwer Arbitration () NAFTA Claims () UNCTAD International Investment Agreements Navigator () United States Department of State, NAFTA Investor-State Arbitrations () For investment treaty arbitration news and commentary: Global Arbitration Reporter () Investment Arbitration Reporter (IA Reporter) () [page 401] Jurisnet Arbitration Law () Kluwer Arbitration Blog () Practical Law Company (PLC) Arbitration () Transnational Dispute Management (TDM) () OGEMID Electronic Mailing List ()

Index References are to paragraphs

A Annulment ICSID Convention, under …. 14.7–14.12 duration of proceedings, typical …. 14.12 effect of …. 14.9 grounds …. 14.6 hearing of applications …. 14.10 partial …. 14.9 procedure …. 14.11 stay of enforcement during proceedings …. 14.9 success rate of applications …. 14.8 set-aside for non-ICSID awards …. 14.13–14.17 commencement in local fora …. 14.17 national arbitration laws, review by …. 14.14 UNCTAD, grounds under …. 14.15 Appendices ASEAN–Australia–New Zealand FTA …. Appendix 4 Australia–Republic of Korea FTA, Chapter 11 and Annexes …. Appendix 4 Canada–China BIT …. Appendix 4

Japan–Australia Economic Partnership Agreement (JAEPA), Chapter 14 …. Appendix 4 Malaysia–United-Kingdom BIT …. Appendix 4 Notice of Arbitration …. Appendix 5.2 Notice to State to Claim (‘trigger letter’) …. Appendix 5.1 Overview of selected investment treaties in Asia-Pacific …. Appendix 1 Practice precedents …. Appendix 5.6 Request for Bifurcation …. Appendix 5.4 Response to Notice of Arbitration …. Appendix 5.3 Selected list of publicly-known investor–State disputes based on a treaty involving parties from the Asia-Pacific region as of March 2015 …. Appendix 2 Selected list of publicly-known investor–State disputes based on a contract involving parties from the Asia-Pacific region as of March 2015 …. Appendix 3 Written pleading, extract …. Appendix 5.5 Applicable law provisions arbitration rules, guidance from applicable …. 12.55 China–Mongolia BIT …. 12.51 domestic law …. 12.52, 12.57–12.59 ICSID Convention default rule …. 12.55 importance of …. 12.48 international law, role of …. 12.54, 12.58 interplay between domestic and international law …. 12.59 investment treaties, in …. 12.49–12.52 prior decisions, role of …. 12.60–12.61 no doctrine of precedent …. 12.60 treaty silent, where …. 12.53–12.56 UNCITRAL provisions …. 12.56 Arbitrary conduct

see also Arbitrary, discriminatory or unreasonable impairment conduct amounting to …. 8.9 context of conduct …. 8.10 fair and equitable treatment standards and conduct considered to be …. 4.20, 8.9 context of …. 4.21, 8.10 guarantee of protection from …. 4.19 Arbitrary, discriminatory or unreasonable impairment application of standard …. 8.8 arbitrary conduct amounting to …. 8.9 context of conduct …. 8.10 beneficiary/comparator identification of …. 8.7 common formulation of …. 8.4 different wording variations …. 8.5 Thailand–Germany BIT …. 8.4 discriminatory …. 8.11 nationality-based, not limited to …. 8.12 exceptions not usually provided …. 8.7 fair and equitable treatment, overlap …. 8.16–8.17 features of measures …. 8.7 frequency in investment treaties …. 8.1 impairment, meaning …. 8.15 investments, application to …. 8.8 nationality not usually mentioned …. 8.7 practical relevance …. 8.16–8.17 unreasonable …. 8.13–8.14 Arbitration applicable law provisions arbitration rules, guidance from applicable …. 12.55

China–Mongolia BIT …. 12.51 domestic law …. 12.52, 12.57–12.59 ICSID Convention default rule …. 12.55 importance of …. 12.48 international law, role of …. 12.54, 12.58 interplay between domestic and international law …. 12.59 investment treaties, in …. 12.49–12.52 prior decisions, role of …. 12.60–12.61 treaty silent, where …. 12.53–12.56 UNCITRAL provisions …. 12.56 awards see Awards consent to by host State …. 12.21–12.29 equivocal through investment treaty …. 12.26–12.27 instruments can be made through …. 12.22 pre-investment due diligence and …. 12.29 specific types of claim, for …. 12.28–12.29 unequivocal through investment treaty …. 12.24–12.25 costs Australia–Republic of Korea FTA …. 13.42 discretion to apportion …. 13.40 power in treaty, express provision …. 13.42 dispute settlement mechanism …. 1.17, 1.19–1.20, 11.2 equivocal consent through investment treaty …. 12.26–12.27 Malaysia–Sweden BIT …. 12.27 Philippines–Netherlands BIT …. 12.26 forum choice between …. 12.40–12.43 ‘fork-in-the-road’ provisions …. 12.41 Japan–Republic of Korea BIT …. 12.42

common …. 12.38–12.39 ICSID …. 12.38 ICSID Additional Facility …. 12.38 Japan-Republic of Korea BIT …. 12.37 multiplicity of proceedings …. 12.43 procedural rules of …. 12.39 treaty specified …. 12.36 UNCITRAL …. 12.38 interim relief under arbitration rules …. 12.44–12.47 criteria for …. 12.47 types of …. 12.46 Investor–State dispute settlement, course of awards, final …. 12.9 commencement of proceedings …. 12.6–12.7 duration …. 12.10 interlocutory steps …. 12.8 international commercial arbitration, similarities …. 12.7 Notice to State to Claim (‘trigger letter’) …. Appendix 5.1 post-arbitration phase …. 12.11 pre-arbitration phase …. 12.4–12.5 trigger letter …. 12.5, Appendix 5.1 Notice of Arbitration …. Appendix 5.2 Response to Notice of Arbitration …. Appendix 5.3 prior decisions, role of …. 12.60–12.61 no doctrine of precedent …. 12.60 relief which can be granted …. 12.64 China–New Zealand FTA …. 12.65 interim …. 12.44–12.47 restrictions …. 12.65 specific types of claim, consent for …. 12.28–12.29

China’s treaties …. 12.29 State–State common features of provisions …. 11.5 forum, preferred …. 11.3 infrequency of use …. 11.6–11.8 interpretation of treaty, as to …. 11.2 Mongolia–Republic of Korea BIT …. 11.4 scope of, usual …. 11.2 time limits …. 12.62–12.63 ASEAN–Australia–New Zealand FTA …. 12.63 unequivocal consent through investment treaty …. 12.24–12.25 Australia–Indonesia BIT provisions …. 12.25 Asia-Pacific Overview of selected investment treaties in Asia-Pacific …. Appendix 1 Selected list of publicly-known investor–State disputes based on a treaty involving parties from the Asia-Pacific region as of March 2015 …. Appendix 2 Selected list of publicly-known investor–State disputes based on a contract involving parties from the Asia-Pacific region as of March 2015 …. Appendix 3 ASEAN–Australia–New Zealand FTA …. Appendix 4 compensation for expropriation provision …. 13.5 corporate nationality …. 2.46 ‘covered investment’ defined …. 2.15 expropriation provision …. 3.10 free transfer of funds provision …. 10.5 ‘investment’ defined …. 2.15 most-favoured nation treatment, absence of …. 7.4 national treatment, absence of …. 6.4

non-pecuniary remedies provision …. 13.16 remedies under, limitation provision …. 13.39 time limits for bringing claims …. 12.63 Australia–China BIT admission of investment …. 2.81 free transfers of funds provision …. 10.13 temporal application …. 2.70 termination and sunset provisions …. 2.76 Australia–India BIT national treatment provision …. 6.9 Australia–Indonesia BIT dispute resolution provisions …. 12.25 ‘investment’ admission of …. 2.80 definition …. 2.14 ‘investor’ defined …. 2.37 nationality corporate …. 2.46, 2.47 natural persons …. 2.40, 2.41 termination and sunset provisions …. 2.77–2.78 ‘territory’ of application …. 2.62 Australia–Papua New Guinea BIT arbitrary, discriminatory or unreasonable impairment provision …. 8.5 Australia–Republic of Korea FTA Chapter 11 and Annexes, text …. Appendix 4 full protection and security provision …. 5.8 tribunal’s power to apportion costs …. 13.42 Australia–Sri Lanka BIT national treatment provision …. 6.5

Awards annulment see Annulment enforcement …. 14.18 asset identification …. 14.19 procedures …. 14.21 sale of rights in …. 14.20 execution …. 14.18, 14.32, 14.37 ICSID provisions …. 14.33–14.34 domestic laws, subject to …. 14.33 sovereign immunity …. 14.35–14.36 finality of …. 14.1 ICSID Convention, under …. 14.22 ICSIDS, recognition and enforcement …. 14.22–14.26 automatic obligation …. 14.23 effect …. 14.24 implementation by domestic legislation …. 14.25 non-ICSIDS, recognition and enforcement …. 14.27–14.31 New York Convention provisions …. 14.27–14.31 enforced as judgments in domestic courts …. 14.28 grounds to refuse recognition under …. 14.30 post-award remedies see Remedies recognition of …. 14.18

B Bilateral investment treaty (BIT) advantages …. 1.15 application temporal …. 2.67–2.78 territorial …. 2.60–2.66 Australia–China see Australia–China BIT

Australia–Indonesia see Australia–Indonesia BIT Canada–China …. 1.32 China–Laos see China–Laos BIT concerns …. 1.13–1.14 dispute resolution …. 1.28–1.29 investor–State imbalance …. 1.40–1.42 definition …. 1.8 interpretation …. 2.2, 2.6, 2.12 investments under see Investment investors in see Investor Japan–Australia see Japan–Australia Economic Partnership Agreement (JAEPA) protection mechanisms …. 1.18–1.20 purpose …. 1.11 Singapore–European Union …. 1.32 standard provisions …. 2.1–2.7 use of …. 1.12, 1.35–1.36 Asia-Pacific region …. 1.15, 1.28–1.29, 1.32–1.33 statistics …. 1.31–1.32

C Canada–China BIT …. Appendix 4 China–Germany BIT national treatment exclusion as to non-conforming measures …. 6.17 China–Japan–Republic of Korea trilateral investment treaty most-favoured nation and dispute resolution …. 7.24 China–Laos BIT expropriation provision …. 3.11 China–Mongolia BIT applicable law provision …. 12.51

China–Myanmar BIT most-favoured nation provision …. 7.4 China–New Zealand BIT most-favoured nation exception …. 7.11 China–Peru FTA most-favoured nation exception …. 7.13 China–Singapore BIT most-favoured nation exception …. 7.10 China–Syria BIT national treatment, differing scope of protections …. 6.18 Compensation expropriation of investment …. 3.13, 3.43–3.48 ASEAN–Australia–New Zealand FTA …. 13.5 fair market standard …. 3.14–3.15, 3.45 market value immediately before …. 13.4 rules governing …. 13.4 inadequate …. 3.48 income-based valuation method …. 13.55–13.62 discounted cash flow analysis …. 13.55–13.61 market value …. 13.46 asset-based approach …. 13.64 date of assessment of lawful expropriation …. 13.47 unlawful expropriation …. 13.48–13.50 economic definition of …. 13.46 expert evidence …. 13.53 income-based method …. 13.55–13.62 market-based approach …. 13.63 methods of …. 13.44–13.64 measure of …. 13.44

unlawful expropriation, for …. 13.8 valuation methods …. 13.44–13.64 Contracts breach amounting to expropriation of rights …. 3.32–3.36 Corporations nationality of see Nationality Covered investment see also Investment definition JAEPA, under …. 2.10

D Discrimination see also Arbitrary, discriminatory or unreasonable impairment expropriation, in …. 3.51, 3.54 meaning …. 3.51 Discriminatory conduct see also Arbitrary, discriminatory or unreasonable impairment fair and equitable treatment standard and context of …. 4.23 guarantee of protection from …. 4.22 nature of guarantee …. 4.22 Dispute resolution see also Investor–State Dispute Settlement (ISDS) arbitration see Arbitration common features of …. 11.5 arbitral tribunal, appointment of …. 11.5 award to be final and binding …. 11.5 costs provisions …. 11.5 default appointing authority, nomination of …. 11.5 tribunal free to determine procedure …. 11.5

voting provisions …. 11.5 forum, preferred …. 11.3 interpretation of treaty, as to …. 11.2 Productivity Commission report …. 1.26–1.27 provisions as to State–State common features of …. 11.5 frequency …. 11.1 Mongolia–Republic of Korea BIT …. 11.4 scope of, usual …. 11.2 restrictions on claims …. 1.38 Due process entitlement of investors to …. 3.52

E Execution arbitral awards, of …. 14.18, 14.32, 14.37 ICSID provisions …. 14.33–14.34 domestic laws, subject to …. 14.33 sovereign immunity …. 14.35–14.36 Expropriation see also Nationalisation approach under investment treaties …. 3.6 compensation for …. 3.13 ASEAN–Australia–New Zealand FTA …. 13.5 fair market standard …. 3.14–3.15 lawful expropriation, for …. 13.4–13.5 unlawful expropriation, for …. 13.8 contractual rights, of …. 3.32–3.36 creeping expropriation …. 3.26–3.29 direct expropriation …. 3.16

discriminatory …. 3.51, 3.54 effect …. 3.3 examples of provisions ASEAN–Australia–New Zealand FTA …. 3.10 China–Laos BIT …. 3.11 features of provisions …. 3.9–3.15 Hull Formula …. 3.2 indirect expropriation …. 3.17–3.25 examples …. 3.24 measures not amounting to …. 3.25 intention, relevance of …. 3.19, 3.20 lawful practice …. 3.2, 3.44 criteria …. 3.49–3.50 meaning …. 3.5 measures tantamount to …. 3.17, 3.19, 3.22, 3.23 examples …. 3.24 measures not tantamount to …. 3.25 nature of property …. 3.30–3.31 partial expropriation …. 3.37–3.42 public interest and welfare as paramount …. 3.50 relationship to other treaty standards …. 3.53–3.55 tension between foreign investor and State …. 3.7 unlawful …. 13.8

F Fair and equitable treatment (FET) application of standard …. 4.8 arbitrary, discriminatory or unreasonable impairment, overlap …. 8.16 arbitrary conduct

conduct considered to be …. 4.20, 8.9 context of …. 4.21, 8.10 guarantee of protection from 4.19 central guarantee, as …. 4.1 discriminatory conduct …. 8.11 context of …. 4.23 guarantee of protection from …. 4.22 nature of guarantee …. 4.22 non-nationality based …. 8.12 examples …. 4.4 fair procedure …. 4.13 breaches of, examples …. 4.13 denial of justice claims …. 4.14–4.15 domestic appeals and …. 4.14 foreign nationals, minimum standard of treatment of …. 4.34 absence of link to international law, where …. 4.37 concept of, emergence …. 4.36 customary international law, under …. 4.34 example in Korea–Australia FTA …. 4.35 good faith …. 4.24 evidence of …. 4.25 international standard …. 1.17, 1.39, 4.1 interpretation of …. 4.9 reasonableness, applying …. 4.32 Korea–Australia see Korea–Australia FTA legitimate expectations, investor’s …. 4.27 cancel or frustration of …. 4.26 case examples …. 4.28–4.29 stability of legal framework, as to …. 4.30–4.31 time of …. 4.27

linking of customary international law, minimum standards …. 4.7 domestic laws, with …. 4.6 specific investment protection guarantees, with …. 4.5 meaning …. 4.1 proportionality …. 4.33 reasonableness, applying …. 4.32 requirements of, recent authorities …. 4.10 role …. 4.2 transparency of legal and regulatory regimes …. 4.16 concept of transparency …. 4.18 investment treaties, in …. 4.19 legal system, indicators of …. 4.17 Forum choice between …. 12.40–12.43 ‘fork-in-the-road’ provisions …. 12.41 Japan–Republic of Korea BIT …. 12.42 common …. 12.38–12.39 ICSID …. 12.38 ICSID Additional Facility …. 12.38 Japan–Republic of Korea BIT …. 12.37 multiplicity of proceedings …. 12.43 procedural rules of …. 12.39 treaty specified …. 12.36 UNCITRAL …. 12.38 Free trade agreement (FTA) ASEAN–Australia–New Zealand see ASEAN–Australia–New Zealand FTA Australia–New Zealand Closer Economic Relations Trade Agreement …. 1.38

Australia–Republic of Korea …. 1.32, 1.38 definition …. 1.10 Japan–Australia …. 1.32 purpose …. 1.10 Free transfer of funds ASEAN–Australia–New Zealand FTA provision …. 10.5 convertibility rights Australia–China BIT …. 10.13 freely convertible currency …. 10.12 freely usable currency, meaning …. 10.12 exceptions, express domestic laws, compliance with …. 10.16–10.17 financial crises, restrictions in …. 10.18–10.20 exchange rate applicable …. 10.14 financial crises, restrictions in …. 10.18 Myanmar–Thailand BIT …. 10.19 Republic of Korea–Japan BIT …. 10.20 frequency of provisions for …. 10.3 international money transfers, protection of …. 10.1 international regime regulating …. 10.3 most-favoured nation treatment, application to …. 10.9 restrictions by States, legitimate reasons for …. 10.2 time period for …. 10.15 transactions protected, categories …. 10.10 example …. 10.11 transfer rights domestic laws, where subject to …. 10.7 general scope of …. 10.5 Hong Kong–Netherlands BIT …. 10.8 ‘repatriate’ funds, limited to …. 10.6

Republic of Korea–Thailand BIT …. 10.7 unrestricted rights …. 10.8 Full protection and security Australia–Republic of Korea FTA …. 5.8 common formulation of …. 5.4 due diligence requirement …. 5.9–5.11 meaning …. 5.10 minimum standards of under international law …. 5.11 examples of formulations …. 5.4–5.7 fair and equitable treatment, overlap with …. 5.18–5.19 Indonesia–United Kingdom BIT …. 5.4 legal protection …. 5.2, 5.14–5.17 linking to international minimum standard …. 5.8 Mongolia–Singapore see Mongolia–Singapore BIT nature of protection …. 5.1, 5.9 physical protection …. 5.2, 5.13 non-physical injuries, whether extends to …. 5.12–5.17 standard of care …. 5.1

G Good faith fair and equitable standard and …. 4.24 evidence of lack of …. 4.25

H Hong Kong–Netherlands BIT transfer of funds, unrestricted right …. 10.8 Hull Formula expropriation of assets …. 3.2

I India review of investment agreements …. 1.29 India–Indonesia BIT domestic law, national treatment subject to …. 6.20 Indonesia Australia–Indonesia BIT see Australia–Indonesia BIT concerns about BITs …. 1.29 Indonesia–United Kingdom BIT full protection and security provision …. 5.4 International Centre for the Settlement of Investment Disputes (ICSID) applicable law default rule …. 12.55 arbitration …. 1.17 establishment …. 12.38 forum, common for Asia-Pacific investment treaties …. 12.38 ICSID Additional Facility …. 12.38 number of arbitrations registered …. 12.12 procedural rules under …. 12.39 settled or discontinued disputes …. 12.12 International investment agreement (IIA) concerns …. 1.14 International investment law focus of protection …. 1.23 history …. 1.1–1.4 State contracts …. 1.22–1.24 International money transfers see Free transfer of funds Investment admission and establishment …. 2.79–2.84

‘assets’, as …. 2.9, 2.13, 2.24, 3.12 basic features …. 2.19 complex projects …. 2.25 construction contracts …. 2.27 covered investment definition in JAEPA …. 2.10 definition …. 2.9 ASEAN–Australia–New Zealand FTA …. 2.15 Australia–Indonesia BIT …. 2.14 breadth of language …. 2.17–2.20, 3.12 excluded activities …. 2.17 JAEPA …. 2.11 indicative factors …. 2.26 indirect interests …. 2.23, 2.57 portfolio investment …. 2.31–2.34 pre-contractual expenditure …. 2.28–2.30 types …. 2.16, 2.20 Investment protection arbitration process …. 1.16–1.21 BITs, under …. 2.8 disputes, pre-existing …. 2.73 duration of treaty …. 2.74 post-investment claims …. 2.75 pre-existing investments …. 2.71 scope …. 2.8 security interest …. 2.21–2.22 standards of protection …. 1.18 temporal application …. 2.67–2.68 examples …. 2.69–2.70 retroactive application …. 2.72

termination and sunset provisions …. 2.76–2.78 territorial application …. 2.60–2.66 approach of tribunals …. 2.64 examples …. 2.61–2.62 geographical scope …. 2.63 handover of territory …. 2.65–2.66 Investment treaties bilateral see Bilateral investment treaty (BIT) categories …. 1.7 criticisms …. 1.25–1.30 definition …. 1.6 duration …. 2.74 expropriation see Expropriation free monetary transfer see Free transfer of funds imbalance between investors and States …. 1.41–1.42 importance of …. 1.31–1.34 multilateral see Multilateral investment treaty (MIT) operation …. 1.16, 1.37–1.43 purpose …. 1.11, 1.16, 1.40 restrictions …. 1.38 standards of treatment see Standards of treatment statistics …. 1.31–1.32 termination and sunset provisions …. 2.76–2.78 umbrella clauses see Umbrella clauses Investor definition Australia–Indonesia BIT …. 2.37 JAEPA …. 2.38 nationality of see Nationality

portfolio, in …. 2.32 scope of protection …. 2.35 Investor–State Dispute Settlement (ISDS) approach …. 1.28 arbitration, course of awards, final …. 12.9 commencement of proceedings …. 12.6–12.7 duration …. 12.10 interlocutory steps …. 12.8 international commercial arbitration, similarities …. 12.7 Notice to State to Claim (‘trigger letter’) …. Appendix 5.1 post-arbitration phase …. 12.11 pre-arbitration phase …. 12.4–12.5 trigger letter …. 12.5, Appendix 5.1 consent to by host State …. 12.21–12.29 equivocal through investment treaty …. 12.26–12.27 instruments can be made through …. 12.22 pre-investment due diligence and …. 12.29 specific types of claim, for …. 12.28–12.29 unequivocal through investment treaty …. 12.24–12.25 cooling-off provisions, pre-arbitration …. 12.30–12.33 common period of …. 12.30, 12.33 frequency of …. 12.30 mandatory nature of …. 12.32 Philippines–Republic of Korea BIT …. 12.31 purpose of …. 12.30, 12.33 equivocal consent through investment treaty …. 12.26–12.27 Malaysia–Sweden BIT …. 12.27 Philippines–Netherlands BIT …. 12.26 forum

arbitration, common …. 12.38–12.39 choice between …. 12.40–12.43 ‘fork-in-the-road’ provisions …. 12.41 Japan–Republic of Korea BIT …. 12.42 ICSID …. 12.38 ICSID Additional Facility …. 12.38 Japan–Republic of Korea BIT …. 12.37 multiplicity of proceedings …. 12.43 procedural rules of …. 12.39 treaty specified …. 12.36 UNCITRAL …. 12.38 interim relief under arbitration rules …. 12.44–12.47 criteria for …. 12.47 types of …. 12.46 International Centre for Settlement of Investment Disputes (ICSID) arbitrations, number of …. 12.12 settled or discontinued …. 12.12 jurisdictional requirements …. 12.18–12.20 claimants, as to …. 12.19–12.20 subject-matter, as to …. 12.19 local remedies, pursuit of …. 12.34–12.35 merits of a potential claim, assessment of …. 12.15–12.17 procedural requirements, pre-arbitration cooling-off provisions …. 12.30–12.33 local remedies, pursuit of …. 12.34–12.35 provisions, frequency of …. 12.13 relief which can be granted …. 12.64 China–New Zealand FTA 12.65 interim …. 12.44–12.47

restrictions …. 12.65 remedies see Remedies risk minimisation mechanisms …. 1.27 scope of provisions, usual …. 12.1 specific types of claim, consent for …. 12.28–12.29 China’s treaties …. 12.29 time limits …. 12.62–12.63 ASEAN–Australia–New Zealand FTA …. 12.63 unequivocal consent through investment treaty …. 12.24–12.25 Australia–Indonesia BIT provisions …. 12.25

J Japan–Australia Economic Partnership Agreement (JAEPA) ‘area’ of application …. 2.61 Chapter 14, text …. Appendix 4 commencement …. 1.28 ‘covered investment’ defined …. 2.10 ‘investment’ defined …. 2.10 ‘investor’ defined …. 2.38 ISDS provisions …. 1.28 most-favoured nation exception …. 7.12 temporal application …. 2.69 Japan–Laos BIT national treatment comparison of investments and …. 6.8 scope of protection …. 6.12 Japan–Republic of Korea BIT forum for dispute resolution ‘fork-in-the-road’ provision …. 12.42 specification of …. 12.37

Japan–Vietnam BIT, Annex to exceptions to national treatment …. 6.16

K Korea–Australia FTA foreign nationals, standard of treatment provision …. 4.35 Korea–Malaysia BIT national treatment, exclusion of …. 6.14

M Malaysia–Sweden BIT dispute resolution, consent to arbitration …. 12.27 Malaysia–United-Kingdom BIT …. Appendix 4 Monetary damages causation …. 13.33 burden on claimant …. 13.34 commonly sought …. 13.12 compensation for expropriation …. 13.15 contributory negligence …. 13.36–13.37 ILC Articles provisions …. 13.36 ILC Articles provision for …. 13.14 full reparation, calculation of …. 13.13 limitations on …. 13.33–13.37 mitigation …. 13.35 restitution for unlawful acts …. 13.15 Mongolia–Republic of Korea BIT State–State dispute resolution provision …. 11.4 Mongolia–Singapore BIT protection treatment provision …. 5.6 Most-favoured nation treatment

application of …. 7.14 procedural rights in treaties, to …. 7.23–7.27 substantive treatment standards, to …. 7.18–7.22 ASEAN–Australia–New Zealand FTA, absence in …. 7.4 China–Myanmar BIT …. 7.4 China–New Zealand BIT …. 7.11 China–Peru FTA …. 7.13 China–Singapore BIT …. 7.10 claims based on …. 7.15 analytical approach to …. 7.16 common and extensive use of …. 7.4 comparative analysis …. 7.6 exceptions …. 7.9 general …. 7.12 inclusion lists …. 7.11 sector carve-outs …. 7.9, 7.11 subject-specific …. 7.12 investor or investment, beneficiary of …. 7.8 issues affecting …. 7.5 Japan–Australia Economic Partnership Agreement (JAEPA), in …. 7.12 nation treatment compared …. 7.2 nature of standard …. 7.1–7.2 procedural rights in treaties application to …. 7.23–7.27 avoiding unfavourable requirements …. 7.23 dispute resolution clauses …. 7.24–7.27 substantive treatment standards application to …. 7.18–7.22 case examples …. 7.19–7.22

time/duration of protection …. 7.7 traditional wording of …. 7.4 Multilateral investment treaty (MIT) China–Japan–Republic of Korea …. 1.32 definition …. 1.9 examples …. 1.9, 1.32 Regional Comprehensive Economic Partnership …. 1.32 Trans–Pacific Partnership …. 1.32 Myanmar–Thailand BIT free transfer of funds, permissible restriction provisions …. 10.19

N National treatment absent from many treaties …. 6.4 anti-protectionist nature of …. 6.2 application in practice, approach …. 6.21 comparator, determining …. 6.22–6.25 different treatment than comparator 6.26–6.27 justification for treatment …. 6.28–6.29 Australia–Sri Lanka BIT …. 6.5 basic provision, example of …. 6.5 Australia–Sri Lanka BIT …. 6.5 comparator, determining …. 6.22–6.25 competitor, where …. 6.22 identical …. 6.23 other sectors, from …. 6.25 comparison required for application …. 6.8 Australia–India BIT …. 6.9 comparator analysis …. 6.9–6.11 Japan–Laos BIT …. 6.8

different protections for States …. 6.18 different treatment than comparator 6.26–6.27 domestic law, subject to …. 6.19–6.20 India–Indonesia BIT …. 6.20 established investments, application to …. 6.13 examples of failure to accord protected foreign investments …. 6.1 exclusions China–Germany BIT …. 6.17 China–Syria BIT …. 6.18 Japan–Vietnam BIT, Annex to …. 6.16 Korea–Malaysia BIT …. 6.14 non-conforming measures …. 6.17 purpose of the negative list …. 6.16 sectors, economic …. 6.14 subject-specific matters …. 6.15 investments or investors, protection of …. 6.6 Timor–Leste–Argentina BIT …. 6.6 issues affecting …. 6.7 justification for treatment by State burden on State …. 6.28 examples of factors …. 6.29 nature of …. 6.1 object of …. 6.1 most-favoured nation treatment compared 7.2 States reluctant to include …. 6.2 time/duration treatment is guaranteed …. 6.12 Japan–Laos BIT …. 6.12 Nationalisation see also Expropriation definition …. 3.2

history …. 3.1 Nationality corporate …. 2.44–2.59 approaches …. 2.45 continuity of nationality …. 2.53 control by shareholders in host State …. 2.48, 2.49–2.52 examples …. 2.46 indirect claims by subsidiaries and minority shareholders …. 2.56–2.59 legal or factual control …. 2.54–2.55 place of control …. 2.47 natural persons …. 2.39–2.43 citizenship …. 2.40 dual nationality …. 2.42, 2.43 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards contracting parties, number …. 14.29 grounds to refuse recognition under …. 14.30 implementation into domestic legislation …. 14.29 non-ICSID investment treaties, applicable to …. 14.27 system for recognition …. 14.28

P Pakistan understanding of BITs …. 1.41 Philippines–Netherlands BIT dispute resolution, consent to arbitration …. 12.26 Philippines–Republic of Korea BIT pre-arbitration cooling-off provisions …. 12.31

Property expropriation of see Expropriation laws affecting or interfering with …. 3.4 Public interest expropriation, in …. 3.50

R Remedies breaches, legal standard for assessing …. 13.9 diminishment of value of investment …. 13.9 substantial deprivation of investment …. 13.9 compensation for lawful expropriation ASEAN–Australia–New Zealand FTA …. 13.5 compensation for, rules governing …. 13.4 market value immediately before …. 13.4 compensation for unlawful expropriation …. 13.8 full reparation principle 13.10 calculation of …. 13.13 ILC Articles, codification in …. 13.11 monetary damages …. 13.12–13.15 non-pecuniary remedies 13.16–13.26 general nature of …. 13.2–13.3 interest compound …. 13.29 customary international law, under …. 13.27 ILC Articles …. 13.28 monetary damages see Monetary damages moral damages …. 13.30 ICL Articles …. 13.30 investment treaty disputes, in …. 13.31–13.32

non-pecuniary remedies 13.16–13.26 ancillary to monetary damages …. 13.18 ASEAN–Australia–New Zealand FTA …. 13.16 enforceability issues …. 13.24 injunctive relief …. 13.18 restitution …. 13.20–13.24 specific performance …. 13.19 post-award remedies annulment see Annulment ICSID Convention, under …. 14.3, 14.6–14.12 set-aside for non-ICSID awards …. 14.13–14.17 restitution …. 13.20–13.24 depreciation of value of investment, where …. 13.23 materially impossible …. 13.22 set-aside for non-ICSID awards …. 14.13–14.17 commencement in local fora …. 14.17 national arbitration laws, review by …. 14.14 UNCTAD, grounds under …. 14.15 specific performance …. 13.19 types available, limitations in treaty …. 13.38 ASEAN–Australia–New Zealand FTA …. 13.39 Republic of Korea–Japan BIT free transfer of funds, permissible restriction provisions …. 10.20 Republic of Korea–Thailand BIT transfer of funds subject to domestic laws …. 10.7

S Singapore–Indonesia BIT free transfers, transactions protected …. 10.11 Specific performance

ancillary relief to damages …. 13.18 nature of in breach of investment treaties …. 13.19 tribunals power to order …. 13.19 Standards of treatment fair and equitable see Fair and equitable treatment (FET) most-favoured nation see Most-favoured nation treatment national see National treatment protection and security see Full protection and security State contracts legal complexities …. 1.22–1.24 State–State dispute resolution see Dispute resolution

T Thailand–Germany BIT arbitrary, discriminatory or unreasonable impairment provision …. 8.4 Timor–Leste–Argentina BIT beneficiary of national treatment protection …. 6.6

U Umbrella clauses breaches covered by, nature of …. 9.19–9.26 international law, under …. 9.20 literal interpretation approach …. 9.19–9.24 national law, under …. 9.20 purpose of the investment treaty approach …. 9.25 common features of …. 9.6–9.9 ‘commitment’ to the investor …. 9.7 ‘observe any obligation’ clause …. 9.6 contract breaches as treaty breaches …. 9.21

multiplicity of proceedings …. 9.23 contractual obligations …. 9.11 frequency of use of …. 9.1 interpretation of, approaches …. 9.10 literal …. 9.10 purposive …. 9.10 issues as to treaty interpretation …. 9.3 nature of …. 9.1 non-contractual obligations …. 9.11–9.14 non-contractual …. 9.11–9.17 ‘observe any obligation’ clause …. 9.6 contractual …. 9.11, 9.18 legal …. 9.16–9.17 protection offered by …. 9.2 responsibility for the breach State a party, where …. 9.27–9.28 State not a counter-party, where …. 9.29–9.31 role of …. 9.2 scope of protection …. 9.38 standing to claim by foreign investors …. 9.32–9.38 local subsidiary, where obligation owed to …. 9.32–9.36 United Arab Emirates–Vietnam BIT most-favoured nation and dispute resolution …. 7.27 United-Kingdom–Laos BIT most-favoured nation and dispute resolution clauses …. 7.25 United Nations Conference on Trade and Development (UNCTAD) World Investment Report …. 1.31, 1.33, 1.40 United Nations Commission on International Trade Law (UNCITRAL)

applicable law provisions …. 12.56 arbitration …. 1.17 forum for, common …. 12.38