International Investment Law 9781472561800, 9781849463638

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Editors’ Foreword Four years have passed since our first discussion about a Handbook on International Investment Law in January 2010. This has been a time of conceptual work, numerous e-mail exchanges with some 90 authors, and correspondence with our publisher. The main purpose of this handbook – aside from providing basic information – is to strive for more clarity and an attempt to achieve some coherence in this relatively young discipline of international law, a system consisting of arbitral awards and doctrinal interpretations, constituting the most dynamic field of international economic law. After a relatively slow beginning as an integral part of customary international law, international investment law has in the past decade evolved like almost no other field of public international law, especially on the basis of an increasing number of bilateral investment treaties. In this regard, the book approaches the most crucial aspects of international investment law and thereby hopefully provides answers to many questions arising in this field. We are particularly grateful to the contributors who have anxiously awaited the publication of this work. We owe them not only thanks for their contributions, but also for their patience. We are equally grateful to our assistant editor, Ms Yun-I Kim, for her skilful, meticulous and dedicated management of the entire editorial process. Whoever has edited a book of approximately 2000 pages will appreciate such outstanding commitment. Thanks also go to Mr Christoph Hölken and Ms Katharina Diel-Gligor who supported Ms Kim during parts of the editing process, and to the publisher for their excellent cooperation. Finally, it should also be mentioned that the resources at both the International Investment Law Centre Cologne (IILCC) and at the Department of European, International and Comparative Law of the University of Vienna, provided the necessary basis for such a comprehensive work. It goes without saying that this first attempt at providing an encompassing overview on existing international investment law is far from perfect. There is an academic responsibility of each author for every article, but also an overall responsibility of the editors who have read each contribution and where necessary, have discussed them with the authors. Therefore, any proposal for improvement of contributions is most welcome and can be directed to the authors as well as to the editors. In any event, we hope that you enjoy reading this handbook! Cologne, Siegen, and Vienna, December 2014 Marc Bungenberg

Jörn Griebel

Stephan Hobe

August Reinisch

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List of Abbreviations AAA AANZFTA AAPPI AC ACFTA ACHPR ACHR ACIA AcP ADR AF AfCHPR AFD AFDI AFR AGP AJCEPA AJIL ALI Am. Econ. Rev. Am. J. Comp. L. Am. Soc’y Int’l L. Proc. Am. U. Int’l L. Rev. Annuaire a.o. APEC APV AR Arb. Arb. Int’l ARE ARIEL ARSIWA Art(s). ASCM ASEAN Asian Int’l Arb. J. Asian J. Comp. L. Asper Rev. Int’l Bus. & Tr. L.

American Arbitration Association ASEAN–Australia–New Zealand Free Trade Agreement ASEAN Agreement for the Promotion and Protection of Investments Law Reports, Appeal Cases ASEAN–China Free Trade Agreement African Commission on Human and Peoples’ Rights American Convention on Human Rights ASEAN Comprehensive Investment Agreement Archiv für die civilistische Praxis alternative dispute resolution Additional Facility African Charter on Human and Peoples’ Rights Agence Française de Developpement Annuaire Français de Droit International Administrative and Financial Regulations Agreement on Government Procurement ASEAN–Japan Comprehensive Economic Partnership Agreement American Journal of International Law American Law Institute American Economic Review American Journal of Comparative Law Proceedings of the Annual Meeting of the American Society of International Law American University International Law Review Annuaire de l’Institut de Droit International and others; amongst others Asia Pacific Economic Cooperation adjusted present value Arbitration Rules Arbitration Arbitration International Arab Republic of Egypt Austrian Review of International and European Law ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts Article(s) Agreement on Subsidies and Countervailing Measures Association of South East Asian Nations Asian International Arbitration Journal Asian Journal of Comparative Law Asper Review of International Business and Trade Law

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List of Abbreviations

ATNIF Austl. YB Int’l L. Austrian Arb. YB Austrian Rev. Eur. & Int’l L. AVR BB B.C. Int’l & Comp. L. Rev. Berkeley J. Int’l L. BEE BGBl. BGE BHR BIICL BIRD BIT(s) BOO BOT Brook. J. Int’l L. Bus. Law. Bus. L. Int’l BVerfGE BYIL c. CAFTA CALS CAMCA Can. TS Can. YBIL CARIFORUM CAT CCF CCP CDE Centre CESCR CEPA CEPMLP CETA cf. XIV

Australian Treaties Not Yet in Force Australian Yearbook of International Law Austrian Arbitration Yearbook Austrian Review of European and International Law Archiv des Völkerrechts (Archive of Public International Law) Betriebs-Berater Boston College International and Comparative Law Review Berkeley Journal of International Law Black Economic Empowerment Bundesgesetzblatt Entscheidungen des Bundesgerichts (Switzerland) Business History Review British Institute of International and Comparative Law Bank for International Reconstruction and Development Bilateral Investment Treaty(ies) build-own-operate build-operate-transfer Brooklyn Journal of International Law Business Lawyer Business Law International Entscheidungen des Bundesverfassungsgerichts (Decisions of the German Constitutional Court) British Yearbook of International Law contre (against) United States – Dominican Republic – Central America Free Trade Agreement Centre for Applied Legal Studies Commercial Arbitration and Mediation Center for the Americas Canada Treaty Series Canadian Yearbook of International Law Caribbean Forum; Forum of the Caribbean Group of African, Caribbean and Pacific (ACP) States Convention against Torture capitalised cash flow Common Commercial Policy Clean Development Mechanism see ICSID Committee on Economic, Social and Cultural Rights Comprehensive Economic Partnership Agreement Centre for Energy, Petroleum and Mineral Law and Policy Comprehensive Economic Trade Agreement confer (compare)

List of Abbreviations

CFI ch. Chi. J. Int’l L. Chinese J. Int’l L. CIAA CIEL CIME

Court of First Instance chapter Chicago Journal of International Law Chinese Journal of International Law Common Investment Area Agreement Centre for International Environmental Law Committee on International Investment and Multinational Enterprises CIRDI Centre International pour le Règlement des Différends relatifs aux Investissements CIS Commonwealth of Independent States CJ Court of Justice CJEU Court of Justice of the European Union CLP Current Legal Problems CMIT Committee on Capital Movements and Invisible Transactions CMLR Common Market Law Review Colo. J. Int’l Envtl. L. & Colorado Journal of International Environmental Law Pol’y and Policy Colum. Hum. Rts. L. Rev. Columbia Human Rights Law Review Colum. J. Transnat’l L. Columbia Journal of Transnational Law Colum. L. Rev. Columbia Law Review COMESA Common Market for Eastern and Southern Africa Conf. Rep. Conference Report Conn. L. Rev. Connecticut Law Review Constr. L. J. Construction Law Journal Contemp. Asia Arb. J. Contemporary Asia Arbitration Journal Convention ICSID Convention Cornell Int’l L. J. Cornell International Law Journal Cornell L. Q. Cornell Law Quarterly Cowp. Cowper’s King’s Bench Reports CR Conciliation Rules CRCICA Cairo Regional Centre for International Commercial Arbitration CYIL Czech Yearbook of International Law DAC Development Assistance Committee DB Der Betrieb D.C. District of Columbia DCF discounted cash flow DEG Deutsche Investitions- und Entwicklungsgesellschaft mbH Denv. J. Int’l L. & Pol’y Denver Journal of International Law and Policy DFAIT Foreign Affairs and International Trade Canada DFI Development Finance Institution Disp. Res. Int’l Dispute Resolution International Disp. Res. J. Dispute Resolution Journal

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List of Abbreviations

Doc. DPCI Duke L. J. EBRD ECHR ECJ ECommHR Econ. & Pol. ECOWAS ECT ECtHR ed ed(s) EFTA e.g. EHRR EIA EIB EJIL Emory Int’l L. Rev. Energy L. J. ERPL ESG esp. et al. et seq. EU Eur. L. J. Eur. Pub. L. Exch. exh. EYIEL F. F. Supp. FAO FATF FDI Fed. Reg. FILJ FIPA fn. Fordham Int’l L. J. Fordham L. Rev. FPS

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Document Droit et pratique du commerce international Duke Law Journal European Bank for Reconstruction and Development European Convention on Human Rights European Court of Justice European Commission of Human Rights Economics and Politics Economic Community of West African States Energy Charter Treaty European Court of Human Rights edition editor(s) European Free Trade Association exempli gratia (for example) European Human Rights Reports Environmental Impact Assessment Estonian Innovation Bank European Journal of International Law Emory International Law Review Energy Law Journal European Review of Private Law Environmental, Social, and Corporate Governance especially et alii (and others) et sequens (and the following) European Union European Law Journal European Public Law Exchequer Cases Exhibit European Yearbook of International Economic Law Federal Reporter Federal Supplement Food and Agriculture Organization of the United Nations Financial Action Taskforce Foreign Direct Investment Federal Register Foreign Investment Law Journal Foreign Investment and Protection Agreement (Canada) footnote Fordham International Law Journal Fordham Law Review Full Protection and Security

List of Abbreviations

FSIA

Foreign Sovereign Immunities Act of the United States of 1976 FTA Free Trade Agreement FYIL Finnish Yearbook of International Law GA General Assembly GAFTA Grain and Feed Trade Association GAR Global Arbitration Review GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade Geo. Int’l Envt’l L. Rev. Georgetown International Environmental Law Review Geo. J. Int’l L. Georgetown Journal of International Law Geo. Mason U. L. Rev. George Mason University Law Review Geo. Wash. Int’l L. Rev. George Washington International Law Review Geo. Wash. L. Rev. George Washington Law Review German L. J. German Law Journal GHG Greenhouse Gas Glob. Envt’l Pol. Global Environmental Politics Glob. Trade & Customs J. Global Trade and Customs Journal Global Community YILJ Global Community Yearbook of International Law and Justice GYIL German Yearbook of International Law Harv. Int’l L. J. Harvard International Law Journal Harv. L. Rev. Harvard Law Review Hastings Int’l & Comp. Hastings International & Comparative Law Review L. Rev. IACHR Inter-American Convention on Human Rights IACtHR Inter-American Court of Human Rights IACommHR Inter-American Commission of Human Rights IAR Investment Arbitration Reporter IBA International Bar Association ibid. ibidem (the same) IBLJ International Business Law Journal ICC International Chamber of Commerce ICCPR International Covenant on Civil and Political Rights ICERD International Convention on the Elimination of All Forms of Racial Discrimination ICESCR International Covenant on Economic, Social and Cultural Rights ICJ International Court of Justice ICJ Rep. ICJ Reports ICLR International Construction Law Review ICLQ International and Comparative Law Quarterly ICRMW International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families ICSID International Centre for Settlement of Investment Disputes

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List of Abbreviations

ICSID Convention

Convention on the Settlement of Investment Disputes between States and Nationals of other States ICSID Rep. ICSID Reports ICSID Rev.–FILJ ICSID Review – Foreign Investment Law Journal ICtHR International Court of Human Rights id. idem (the same) IDATB Integrated Database of Trade Disputes for Latin America and the Carribean IDI Institut de Droit International i.e. id est (that is) IEL International Environmental Law IFAD International Fund for Agricultural Development IIA International Investment Agreement IFC International Finance Corporation IIC International Review of Intellectual Property and Competition Law; Inter-American Investment Corporation IIL International Investment Law IISD International Institute for Sustainable Development ILA International Law Association ILC International Law Commission ILM International Legal Materials ILO International Labor Organisation ILR International Law Reports ILSA J. Int’l & Comp. L. ILSA Journal of International and Comparative Law Ind. J. Global Legal Stud. Indiana Journal of Global Legal Studies infra below INTERIGHTS International Centre for the Legal Protection of Human Rights Int’l International Int’l Arb. L. Rev. International Arbitration Law Review Int’l Fin. L. Rev. International Financial Law Review Int’l J. International Journal Int’l Judicial Monitor International Judicial Monitor Int’l L. Forum International Law Forum Int’l Law. International Lawyer Int’l Neg. International Negotiation Int’l Stud. Q. International Studies Quarterly Int’l Tax & Bus. L. International Tax and Business Lawyer Int’l Trade Brief International Trade Brief IP Intellectual Property IPR Intellectual Property Rights IPRax Praxis des Internationalen Privat- und Verfahrensrechts IR Institution Rules Iran–US CTR Iran–United States Claims Tribunal, Iran–United States Claims Tribunal Reports IStR Internationales Steuerrecht (International Tax Law)

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List of Abbreviations

Ital. YIL ITLOS ITN IWG-SWF

Italian Yearbook of International Law International Tribunal for the Law of the Sea Investment Treaty News International Working Group of Sovereign Wealth Funds J. Journal J. Air L. & Com. Journal of Air Law and Commerce J. Bus. L. Journal of Business Law J. Chartered Inst. Arb. Journal of the Chartered Institute of Arbitrators J. Comp. Econ. Journal of Comparative Economics J. Constr. Engin. & Mgmt Journal of Construction Engineering and Management J. Econ. Growth Journal of Economic Growth J. Econ. Hist. Journal of Economic History J. Int’l Arb. Journal of International Arbitration J. Int’l Disp. Settlement Journal of International Dispute Settlement J. Int’l Econ. L. Journal of International Economic Law J. L. & Econ. Journal of Law and Economics J. L. Econ. & Org. Journal of Law, Economics and Organization J. Monetary Econ. Journal of Monetary Economics J. Pol. Econ. Journal of Political Economy J. Pub. L. Journal of Public Law J. Transnat’l L. & Pol’y Journal of Transnational Law and Policy JDI Journal du Droit International JDIA Journal of Damages in International Arbitration JERL Journal of Energy and Natural Resources Law JIDS Journal of International Dispute Settlement J.O. Journal Officiel JWELB Journal of World Energy Law and Business JWI Journal of World Investment JWIT Journal of World Investment & Trade JWT Journal of World Trade JWTL Journal of World Trade Law KfW Kreditanstalt für Wiederaufbau KSzW Kölner Schrift zum Wirtschaftsrecht L. Law Law & Bus. Rev. Am. Law & Business Review of the Americas Law & Contemp. Probs. Law and Contemporary Problems Law & Phil. Law and Philosophy Law. Am. Lawyer of the Americas LCIA London Court of International Arbitration LDCs Least Developed Countries LDR Law and Development Review Leiden J. Int’l L. Leiden Journal of International Law LGDJ Librairie Générale de Droit et de Jurisprudence LIEI Legal Issues of Economic Integration

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List of Abbreviations

lit. LNG LNTS loc. cit. Loy. L.A. Int’l & Comp. L. Rev. LPICT LQR LRC Ltd. m MAI Max Planck UN YB McGill L. J. MDB MEA MEP Mercosur MFN Mich. J. Int’l L. Mich. L. Rev. MIGA Minn. J. Global Trade Minn. J. Int’l L. Minn. L. Rev. mn. Modern L. Rev. n. NAAEC N.C. J. Int’l L. & Com. Reg. NCP NDP NAFTA NAFTA FTC New York Convention NGO NIEO NILR No. n.s. Nw. J. Int’l L. & Bus. NY CPLR NYIL XX

litera (character) liquefied natural gas League of Nations Treaty Series loco citato (in the place cited) Loyola of Los Angeles International and Comparative Law Review Law and Practice of International Courts and Tribunals Law Quarterly Review Legal Resources Centre Limited million Multilateral Agreement on Investments Max Planck Yearbook of United Nations Law McGill Law Journal multilateral development banks Multilateral Environmental Agreement Member of the European Parliament Mercado Común del Sur Most Favoured Nation Michigan Journal of International Law Michigan Law Review Multilateral Investment Guarantee Agency Minnesota Journal of Global Trade Minnesota Journal of International Law Minnesota Law Review marginal number The Modern Law Review note North-American Agreement on Environmental Cooperation North Carolina Journal of International Law and Commercial Regulation National Contract Point non-disputing party North American Free Trade Agreement NAFTA Free Trade Commission Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 non-governmental organisation New International Economic Order Netherlands International Law Review Number new series Northwestern Journal of International Law & Business New York Code – Civil Practice Law and Rules Netherlands Yearbook of International Law

List of Abbreviations

NY L. Sch. J. Int’l & Comp. L. NYLJ NYU Env. L. J. NYU JILP NYU L. Rev. NYU LQR OECD Off. Gaz. OGEL OJ OP op. cit. ÖZöR p., pp. Pace Int’l L. Rev. para(s). PCA PCIJ PDR PECL PEEREA Penn St. L. Rev. Pepp. L. Rev. P.L. PRC PRI Prof. PROPARCO Quart. J. Econ. QMLJ R&D RabelsZ R.B.D.I. RC RCADI RCAKL RCDIP RdE RDI REIO

New York Law School Journal of International and Comparative Law New York Law Journal New York University Environmental Law Journal New York University Journal of International Law and Politics New York University Law Review New York University Law Quarterly Review Organisation for Economic Co-operation and Development Official Gazette Oil, Gas & Energy Law Official Journal of the European Union Optional Protocol opere citato (in the work cited) Österreichische Zeitschrift für österreichisches Recht page(s) Pace International Law Review paragraph(s) Permanent Court of Arbitration Permanent Court of International Justice People’s Democratic Republic Principles of European Contract Law Protocol on Energy Efficiency and related Environmental Aspects Penn State Law Review Pepperdine Law Review Public Law People’s Republic of China Principles for Responsible Investment Professor Société de Promotion et de Participation pour la Coopération Économique The Quarterly Journal of Economics Queen Mary Law Journal Research and Development Rabels Zeitschrift für ausländisches und internationales Privatrecht (The Rabel Journal of Comparative and International Private Law) Revue belge de droit international Recueil des Cours Recueil des Cours de l’Académie de Droit International Regional Centre for Arbitration Kuala Lumpur Revue critique de droit international privé Recht der Energiewirtschaft Rivista di Diritto Internazionale Regional Economic Integration Organisation XXI

List of Abbreviations

Res Rev. Arb. RGDIP RIAA RIW RTA Rule S. Treaty Doc. SADC San Diego L. Rev. SCC

Resolution Revue de l’Arbitrage Revue Générale du Droit International Public Reports of International Arbitral Awards Recht der Internationalen Wirtschaft Regional Trade Agreement Arbitration Rule Senate Treaty Documents Southern African Development Community San Diego Law Review Arbitration Institute of the Stockholm Chamber of Commerce SchiedsVZ Zeitschrift für Schiedsverfahren (German Arbitration Journal) S.D.N.Y. Southern District of New York Sec. Section Ser. Series SFDI Société française pour le droit international SMEs small and medium-sized enterprises Soc. & Legal Stud. Social & Legal Studies SPS Sanitary and Phytosanitary Measures Stan. J. Int’l L. Stanford Journal of International Law Stan. L. Rev. Stanford Law Review Stat. Statute Stockholm Arb. Rep. Stockholm Arbitration Report Stockholm CC Stockholm Chamber of Commerce Stockholm Int’l Arb. Rev. Stockholm International Arbitration Review Suffolk Transnat’l L. Rev. Suffolk Transnational Law Review Suppl. Supplement supra above Sw. J. Int’l L. Southwestern Journal of International Law SWF Sovereign Wealth Fund Syracuse J. Int’l L. & Syracuse Journal of International Law and Commerce Com. Tampa Bay Bus. J. Tampa Bay Business Journal TBT Technical Barriers to Trade TDM Transnational Dispute Management Temp. L. Rev. Temple Law Review TEU Treaty on European Union Tex. Int’l L. J. Texas International Law Journal TFEU Treaty on the Functioning of the European Union Tilburg L. Rev. Tilburg Law Review TNC Transnational Corporation TPA Trade Promotion Agreement TPP Trans-Pacific Partnership TPPA Trans-Pacific Partnership Agreement XXII

List of Abbreviations

TRIMs TRIPS U. Miami Int.-Am. L. Rev. U. Pa. J. Const. L. U. Pa. J. Int’l Econ. L. U. Pa. J. Int’l L. U. Pa. L. Rev. U. Toronto L. J. U. Toronto Fac. L. Rev. UC Davis J. Int’l L. & Pol’y UDHR UK UKTS UMIC UN UNASUR UNCC UNCITRAL UNCLOS UNESCO UNIDROIT UNRIAA UNTS US USA USC USR UST v. Va. J. Int’l L. Vand. J. Transnat’l L. VAT VCLT viz. Vol. WACC WAMR Wis. L. Rev. WLR WM

Agreement on Trade-Related Investment Measures Agreement on Trade-Related Aspects of Intellectual Property Rights University of Miami Inter-American Law Review University of Pennsylvania Journal of Constitutional Law University of Pennsylvania Journal of International Economic Law University of Pennsylvania Journal of International Law University of Pennsylvania Law Review University of Toronto Law Journal University of Toronto Faculty of Law Review UC Davis Journal of International Law and Policy Universal Declaration of Human Rights United Kingdom United Kingdom Treaty Series upper middle income countries United Nations Unión de Naciones Suramericanas United Nations Compensation Commission United Nations Commission on International Trade Law United Nations Convention on the Law of the Sea United Nations Educational, Scientific and Cultural Organization International Institute for the Unification of Private Law United Nations Reports of International Arbitral Awards United Nations Treaty Series United States United States of America United States Code United States Reports United States Treaties and Other International Agreements versus (against) Virginia Journal of International Law Vanderbilt Journal of Transnational Law Value Added Tax Vienna Convention on the Law of Treaties videlicet (namely) Volume weighted average cost of capital World Arbitration and Mediation Review Wisconsin Law Review Weekly Law Reports Wertpapier-Mitteilungen XXIII

List of Abbreviations

World Trade Rev. WTO WTO DSU WTOA Yale J. Int’l L. Yale L. J. YB YB Int’l Inv. L. & Pol’y YBILC YCA ZaöRV ZVglRWiss

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World Trade Review World Trade Organization WTO Dispute Settlement Understanding WTO Agreement Yale Journal of International Law Yale Law Journal Yearbook Yearbook on International Investment Law and Policy Yearbook of the International Law Commission Yearbook Commercial Arbitration Zeitschrift für ausländisches öffentliches Recht und Völkerrecht Zeitschrift für Vergleichende Rechtswissenschaft

Notes on the Contributors Zeynep Akçay is a qualified lawyer in France. She holds a Bachelor and a Master in business law from Université de Strasbourg. She holds an LLM in public international law from LSE. She currently works for the Department of the European Social Charter at the Council of Europe. Vivienne Bath is Professor of Chinese and International Business Law at Sydney Law School, University of Sydney, Director of the Centre for Asian and Pacific Law and Chair of the China Studies Centre Research Committee at the University of Sydney. Her teaching and research interests are in International Business Law and Chinese law (particularly Chinese investment and commercial law). She has first class honours in Chinese and in Law from the Australian National University, and a Master of Laws from Harvard University. She is admitted to practice in Australia, New York, England and Wales and Hong Kong and, prior to joining Sydney Law School, was a partner of international law firm Coudert Brothers. She has extensive professional experience in Sydney, New York and Hong Kong, specialising in international commercial law, with a focus on foreign investment and commercial transactions in the People's Republic of China and the Asian region and was recently appointed to the Shanghai Arbitration Commission list of arbitrators. Representative publications include: Burnett and Bath, Law of International Business in Australasia, Federation Press 2009; Bath, V, ‘Foreign investment, the national interest and national security – foreign direct investment in Australia and China,’ (2012) 34 Sydney Law Review 5-34); Bath and Nottage (eds), Foreign Investment and Dispute Resolution Law and Practice in Asia, Routledge, 2011 and Bath, V, ‘ASEAN: The Liberalization of Investment through Regional Agreements,’ in Trackman and Ranieri (eds) Regionalism in International Investment Law, Oxford University Press, 2013. Professor Bath speaks Chinese (mandarin) and German. Dr. Morris Besch is a litigation lawyer in the Noerr LLP’s office in Dresden representing German and international clients in national and international litigation and arbitration proceedings, inter alia regarding post M&A-, corporate-, commercial- and price adaptation disputes and disputes with regard to renewable energies. He published the book ‘Schutz von Auslandsinvestitionen – Risikovorsorge durch Investitionsverträge’ – a practical guide for private foreign investors on contractual protection mechanisms in State Contracts. Christina Binder is Associate Professor of International Law at the Department of European, International and Comparative Law at the University of Vienna and Deputy Director of the interdisciplinary Research Centre ‘Human Rights’. She was a visiting fellow at the Lauterpacht Center for International Law in

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Cambridge (2007–08) and at the Max Planck Institute for Comparative Public Law and International Law in Heidelberg (2008–10). She is member of the Young Academy of the Austrian Academy of Sciences and of the ILA Committees on the Implementation of the Rights of Indigenous Peoples and on Feminism in International Law. Christina has likewise worked as legal and electoral expert for election observation and assessment missions with the EU and the OSCE/ODIHR. Nicholas Birch, Law Offices of Stewart and Stewart, Washington D.C., is an Associate with the Law Offices of Stewart and Stewart in Washington, D.C. and a J.D./M.B.A graduate from Georgetown University. Mr. Birch has practiced in trade remedies, U.S. regulatory, and international investment law. He has also been involved in research and writing on international investment, arbitration, and trade law and development, and has been featured in multiple books and articles. Dr. Jan Asmus Bischoff serves as inhouse counsel at the privately-owned bank M.M.Warburg & CO in Hamburg. He is admitted as ‘Rechtsanwalt’ to the Bar in Hamburg. Before joining M.M.Warburg & CO, he worked as attorney in the field of investment arbitration, commercial arbitration, offshore energy, and shipping law. After obtaining his first legal degree from the University of Hamburg in 2005, he worked for four years as a researcher at the Max Planck Insitute for Comparative and International Private Law, Hamburg. In 2008, he obtained his master’s degree as Hauser Scholar from New York University, School of Law. From 2008 to 2010, he did his legal clerkship (‘Referendariat’) at the Hamburg Higher Regional Court. In 2010, he completed his Ph.D. thesis. Jan Bischoff regularly publishes articles on international law and European law. Andrea K. Bjorklund is the L. Yves Fortier Chair in International Arbitration and International Commercial Law at McGill University Faculty of Law. She is Chair of the Academic Council of the Institute of Transnational Arbitration, an adviser to the American Law Institute’s project on restating the U.S. law of international commercial arbitration. Prior to entering the academy, Professor Bjorklund was an attorney-adviser in the U.S. State Department; senior counsel to Thelma Askey of the U.S. International Trade Commission; law clerk to Judge Sam J. Ervin, III, of the U.S. Court of Appeals for the Fourth Circuit; and an associate at Miller & Chevalier in Washington, DC. She received her J.D. from Yale Law School; her M.A. in French Studies from New York University, and her B.A. (High Honors) in History and French from the University of Nebraska. Karl-Heinz Böckstiegel Independent Arbitrator; Professor Emeritus for international business law, University of Cologne; practice as arbitrator and president of arbitration tribunals in many national and international arbitrations of ICSID, XXVI

Notes on the Contributors

ECT, ICC, LCIA, NAFTA, CAFTA, UNCITRAL, PCA, DIS, AAA, SCC, Swiss Rules, DIAC, VIAC, disputes between States, and others. Chairman of the Board, German Institution of Arbitration (DIS) 1996–2012; The Patron, Chartered Institute of Arbitrators 2007–2010; President, International Law Association (ILA) 2004–2006; President, London Court of International Arbitration (LCIA) 1993–1997; Panel Chairman, United Nations Compensation Commission 1994–1996. President, Iran–United States Claims Tribunal, The Hague, 1984–1988. Chair, ‘Arbitration of the Century’, IBA Conference Amsterdam 2000. Dr. Achim-Rüdiger Börner is a single practitioner attorney in Cologne. He advises on regulated and deregulated industries, especially the energy sector, and foreign investments (inbound and outbound OECD and MENA region). He is specialized in long-term commitments and their adjustments, acting as counsellor, arbitrator, and mediator. After studies of law, macro-economics (monetary policy and economic development) and orientalism at the universities of Cologne and Bonn, a doctoral thesis on US secured transactions law and a bank internship, he acted as an in-house lawyer in leading positions and was an associate in a M&A boutique law firm before starting his own firm in 1989. He has published some 150 papers on various issues of his main subjects which he likes to call ‘oil and money’. Gabriel Bottini, Adjunct Professor of Public International Law, University of Buenos Aires, Argentina, is an international arbitrator and advisor on issues of international law. He is the former National Director of International Affairs and Disputes of the Treasury Attorney-General’s Office of Argentina. The Treasury Attorney General’s Office defends Argentina before international arbitral tribunals. Mr. Bottini has extensive experience in ICSID, UNCITRAL and ICC arbitrations. Mr. Bottini teaches international law at the University of Buenos Aires, Argentina. He has lectured at many universities and international organizations around the world on issues of investment litigation and international law, and has published extensively on such matters. He has been awarded scholarships by the Fulbright Commission and other international institutions. Mr. Bottini holds a law degree magna cum laude from the University of Buenos Aires, an LLM from New York University School of Law and a post-graduate degree from Cambridge University. Professor Chester Brown is Professor of International Law and International Arbitration at the Faculty of Law, University of Sydney; a Barrister at 7 Selborne Chambers, Sydney, and a door tenant at Essex Court Chambers, London, and Maxwell Chambers, Singapore. He previously served as Assistant Legal Adviser at the Foreign and Commonwealth Office, London, and prior to this, he was a Senior Associate in the International Law and International Arbitration

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Group of Clifford Chance LLP, London. Professor Brown is the editor of Commentaries on Selected Model Investment Treaties (OUP, 2013), co-editor of Evolution in Investment Treaty Law and Arbitration (CUP, 2011), co-author of The International Arbitration Act 1974: A Commentary (LexisNexis, 2011), and author of A Common Law of International Adjudication (OUP, 2007). He is a graduate of the Universities of Melbourne, Oxford and Cambridge. Helene Bubrowski is a political journalist at the Frankfurter Allgemeine Zeitung. She holds a doctoral degree from the University of Cologne, the First and Second German State Examinations and a Maîtrise/LL.M. from the Université de Paris I (Panthéon-Sorbonne). Her doctoral thesis on international investment law focuses on the relationship between domestic courts and international arbitral tribunals. She was awarded the prize for the best thesis in international law of the University of Cologne. Ms Bubrowski was a visiting scholar at McGill University in Montreal. She practiced arbitration at an international law firm and acted as the Secretary to the Tribunal in several international arbitration proceedings. She is author or co-author of numerous articles on arbitration and investment law. Professor Dr. Marc Bungenberg, LL.M., University of Siegen, Germany/Visiting Professor at the University of Lausanne, Switzerland, is Professor for European Law, Public International Law and International Economic Law at the University of Siegen in Germany and visiting Professor at the Swiss Universities of Lausanne (permanent) and Lucerne. He is also Academic Council to the International Investment Law Centre Cologne. His main fields of research are European and international economic law, esp. state aids, public procurement, common commercial policy and WTO-law as well as of course international investment law. Manuel Busch is a partner at Chinese-German consulting firm Saide Germany. His principal consulting activities have been concerned with Sino-German business relations and investment projects. He is a graduate of Heinrich-Heine-University law school in Düsseldorf, Germany, where he also worked at the Chair of German and Foreign Public Law, European Law and Public International Law. Manjiao Chi, BA, LLM, Ph.D (law), is an associate professor of law, Law School, Xiamen University, China; Fellow, FoKoS Center, the University of Siegen, Germany. Formerly, he worked in the Department of Treaty and Law, Ministry of Commerce of the PRC. Prof. Chi’s major research area covers international economic law (investment and trade law) and international dispute settlement. Prof. Chi was Edwards Fellow of Columbia Law School and visiting fellow of the Max Planck Institute of International Law (Heidelberg) and UNIDROIT. He is Council Member, Chinese Society of International Law and Member, American Society of International Law. He also serves as arbitrator

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and expert witness in international and domestic arbitration cases and consultant for transnational companies on international investment and commercial issues. James Crawford AC SC FBA is Whewell Professor of International Law, University of Cambridge. He was a member of the International Law Commission from 1992–2001 and was its Special Rapporteur on State Responsibility (1997– 2001). He has had an extensive practice before international courts and tribunals. His recent work includes Brownlie’s Principles of Public International Law (8th edn 2012) (Oxford: Oxford University Press) and State Responsibility: The General Part (2013) (Cambridge: Cambridge University Press). Anna Crevon-Tarassova is counsel in Dentons’ Paris office. Her practice focuses on international arbitration, both investor-state and commercial. Anna represented clients in a wide range of arbitration cases conducted under the auspices of ICSID, LCIA, ICC and SCC, as well as ad hoc arbitrations, with particular emphasis on oil & gas, pharmaceutical and other regulated sectors. She has extensive experience advising on matters relating to the Energy Charter Treaty as well as bilateral investment protection treaties. A graduate of the Moscow State University, University Paris I – Sorbonne and University Paris II – Assas, she was admitted to the Paris Bar in 2004. Anna’s working languages are English, French and Russian. Jonathan E. Davis, an associate with the international arbitration group in the New York office of Freshfields Bruckhaus Deringer at the time of writing, is now an Attorney-Adviser in the Office of the Legal Adviser at the U.S. Department of State. He holds degrees from the New York University School of Law, the Woodrow Wilson School of Public and International Affairs at Princeton University, and the University of Georgia. Armand de Mestral, C.M. is an Emeritus Professor of Law at McGill University and holds the Jean Monnet Chair in the Law of International Economic Integration. He served as Co-Director of the Institute of European Studies at McGill/ Université de Montréal from 2002–2008 and as Interim Director of the Institute of Air and Space Law at McGill University from 1998–2002. His recent publications include Improving International Investment Agreements (Routledge, 2012) edited with C. Levesque, International Law (7th ed, 2006) as co-author, Law and Practice of International Trade (2nd edition, 1999), and The North American Free Trade Agreement – A Comparative Study, Hague Academy of International Law, Recueil des cours (2000). He has served as panelist and arbitrator in disputes under the WTO, CUFTA, and NAFTA. From 1973–1980, he was a member of the Canadian Delegation to the UN Law of the Sea Conference. He has also served as consultant to NACEC and Law Commission of Canada. He presided over the Canadian Red Cross Society from 1999–2001 and was appointed Member of the Order of Canada on 28 December 2007.

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Katharina Diel-Gligor is a doctoral candidate at the Law Faculty of Heidelberg University and currently a legal trainee at the Cologne Regional Court, Germany. During her research period at the Max Planck Institute for Comparative Public Law and International Law in Heidelberg, she focused primarily on international investment and trade law, and dispute resolution. She published several articles in these fields of study. Katharina Diel-Gligor holds an LL.M. degree from Columbia University, a Maîtrise en droit degree from Paris XII University (Val-de-Marne), and a Mag. iur. degree from Mainz University. She is admitted as an Attorney-at-law in New York. Kabir Duggal is an associate in the International Arbitration group of Curtis, Mallet-Prevost, Colt and Mosle LLP. His practice focuses on investor-state arbitration, commercial arbitration, and on issues and disputes relating to public international law. He is a graduate of the University of Mumbai, University of Oxford (Law Faculty), and NYU School of Law (Hauser Global Scholar). Mr. Duggal is also a Lecturer-in-Law at the Columbia Law School, teaching “International Investment Arbitration,” and also gives lectures at the Georgetown University Law School. He also serves on ICSID Review’s Peer Review Board and is a Fellow at the Columbia Center on Sustainable Investment. Patrick Dumberry, Ph.D. (Graduate Institute for International Studies, Geneva, Switzerland), is an Associate Professor at the University of Ottawa, Canada (Faculty of Law, Civil Law Section). He practiced international arbitration for several years with law firms (Lalive in Geneva and Ogilvy Renault in Montreal), as well as with Canada’s Ministry of Foreign Affairs (Trade Law Bureau). He publishes in the fields of international law and international investment law. His most recent book is The Fair and Equitable Treatment Standard: A Guide to NAFTA Case Law on Article 1105 (Wolters Kluwer, 2013). He is currently working on another book to be entitled A Study on the Rules of Customary International Investment Law, with Specific Reference to the Fair and Equitable Treatment Standard. Professor Pierre-Marie Dupuy is an emeritus Professor of International Law at the University of Paris (Panthéon-Assas) and at the Graduate Institute of International and Development Studies in Geneva. He was visiting professor at the universities of Michigan (Ann Arbor), Munich (LMU) and Madrid (Complutense) and a professor at the European University Institute in Florence from 2000 to 2008. He gave the general course at the Academy of International Law in The Hague (2000). He is the author of Public International Law (Ed. Dalloz, last ed. 2014 with Y. Kerbrat) and of numerous writings on the theory of public international law, general international law, international law of responsibility, of human rights, International Environmental Law and International Economic Law. He has a large experience as counsel of States before the International Court of Justice and as international arbitrator (ICSID, UNCITRAL, PCA).

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Joshua Fellenbaum is a member of Debevoise & Plimpton’s International Dispute Resolution Group residing in the London office. He primarily focuses on international arbitration and has been involved in disputes covering a variety of sectors including mining, energy, automotive, commodities, telecommunications and infrastructure. He also has experience representing clients in matters involving state responsibility and public international law. Mr. Fellenbaum has been involved in cases under the rules of various arbitral institutions, including the ICC, LCIA, FCCC, PCA and SCC. He has also been involved in ad hoc proceedings under the UNCITRAL rules and the Swedish Arbitration Act. Mr. Fellenbaum previously worked for Mannheimer Swartling in Stockholm, Sweden and Clayton Utz in Sydney, Australia. He currently serves on the Peer Review Board of ICSID Review and was appointed to the ICDR Young & International’s Global Advisory Board. John Gaffney is an international arbitration lawyer, based in Abu Dhabi with Al Tamimi & Company. An Irish national, John is admitted as a Solicitor in England & Wales and the Republic of Ireland. John's practice focuses on international arbitration. He has substantial experience in disputes involving construction, energy, investment, IP and telecommunications matters. He has also developed a particular expertise in the area of investment treaty arbitration, having acted for governments in the defense of investment treaty claims. John has worked with the international arbitration practices of King & Spalding and Freshfields Bruckhaus Deringer in Paris, and Skadden, Arps Slate Meagher & Flom in London. John also served as a legal officer with the United Nations Compensation Commission (UNCC) in Geneva, a subsidiary organ of the UN Security Council whose mandate was to process claims and pay compensation for losses and damage suffered during the so-called Gulf War in 1991. He also practiced with some of the leading commercial law firms in Ireland. In addition to his work as counsel, John is a member of a number of international and domestic arbitration panels and sits as an arbitrator in WIPO domain name disputes and an Expert in ICC Expertise proceedings. John is the Case Notes editor of the European International Arbitration Review, an Associate Editor of Transnational Dispute Management, an Associate Editor and Contributor of Investment Claims, and Rapporteur for the OGEMID listserv. He has published and spoken widely on international dispute resolution. John is listed in the Who’s Who of International Commercial Arbitration (2010, 2011), the Euromoney Guide to Leading Commercial Arbitration Experts (9th and 10th eds.) and the Legal 500 (2011) for Dispute Resolution – Ireland. Arno E. Gildemeister is a lawyer and arbitrator, practising International, German and French law. He teaches international arbitration and mediation at Sciences Po, Paris (Master Droit Economique) and at the University of Versailles (Master Arbitrage et Commerce International). He is also Head of the Dispute XXXI

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Resolution department of TÜV Rheinland group, Cologne, a leading international testing, inspection and certification company. He regularly publishes in the fields of public international law, international business and construction law and international arbitration. He has worked within the arbitration departments of Shearman & Sterling, Paris and Heuking Kühn Lüer Wojtek, Düsseldorf where he has gained significant practical experience, inter alia in investment proceedings. Arno’s PhD thesis ‘L’arbitrage des différends fiscaux en droit international des investissements’, supervised by Professors Emmanuel Gaillard (Paris) and Gerald Mäsch (Münster) has been published by LGDJ and received several prizes and distinctions. John Gotanda is the Arthur J. Kania Dean and Professor of Law at Villanova University School of Law. He has previously served as Associate Dean for Academic Affairs, Associate Dean for Faculty Research, and Director of the J.D./ M.B.A. Program. He has published widely on the subject of damages in international law, and has been cited by courts, tribunals and commentators, including most recently by the U.S. Supreme Court. He has spoken widely on the subjects of damages and the CISG, including at the Hague Academy of International Law, Gray’s Inn in London (at the invitation of the British Institute of International and Comparative Law), and the International Chamber of Commerce in Paris. He also serves as an expert on damages and an arbitrator in international investment disputes. He is a member of the Advisory Council of the United Nations Conventions on Contracts for the International Sale of Goods, an Associate Member of the ICC Institute of World Business Law, and the Co-Editor of The Journal of Damages in International Arbitration. Jörn Griebel is Associate Professor of Public Law, International Law and International Investment Law at the International Investment Law Centre Cologne (University of Cologne). He studied at the University of Cologne and University College London. He gained the qualification diplôme d'études supérieures (D.E.S.) from the Institut Universitaire de Hautes Études International (Geneva) and holds a Ph.D. (Dr. jur.) degree from the University of Cologne. He regularly publishes in various fields of law, in particular international law, European law and international investment law. His practical experience includes inter alia investment proceedings. Henning Grosse Ruse-Khan is a University Lecturer in Intellectual Property Law at the University of Cambridge and a Fellow at King’s College. In Cambridge, Henning is a Fellow at the Lauterpacht Centre for International Law and the Centre for Intellectual Property and Information Law. He also holds positions at the Max Planck Institute for Intellectual Property and Competition Law in Munich (Germany) and the Centre for International Sustainable Development Law (McGill University, Montreal). Henning’s research and teaching focuses on international intellectual property protection and development issues, world

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trade and investment law, as well as on interfaces among distinct legal orders in international law. He advises international organisations, NGOs as well as developing- and developed country governments on international IP, WTO and investment law issues and works as a legal expert for the World Intellectual Property Organization (WIPO). Professor Dr. Michael Hahn, LL.M., holds the Chair for European Law and is a Director of the LL.M. Programme in International and European Economic and Commercial Law at the University of Lausanne. Michael is a German lawyer and holds a doctorate from Heidelberg and an LL.M. degree from Michigan Law School. He has been a visiting professor in many universities, amongst them Ghent (2014–2015), PUCP Lima, Paris (Sorbonne Paris Cité), the World Trade Institute in Berne, UNSW Sydney, the Chicago-Kent College of Law and the Europainstitut of Saarland University. Michael is also an honorary professor at the University of Waikato Law School in Hamilton, New Zealand, where he was a full professor, before joining the Lausanne Faculty. Michael’s main research interests are European law and international trade law. Dr. Richard Happ is partner of Luther, based in the Hamburg office and cohead of the firm’s arbitration practice group. He graduated in 1996 from University of Kiel. After three years as a research assistant at the University of Kiel, he undertook his legal clerkship (Referendariat) in Kiel, Hamburg and Brussels (Energy Charter Secretariat). He joined Luther in 2001 and became a partner in 2009. He has acted as counsel or arbitrator in cases under DIS, ICC, SCC, UNCITRAL, ad hoc and ICSID rules. Among those cases were disputes arising out of foreign investments, international sales contracts, oil and gas joint ventures, service and marketing contracts, commercial production agreements and power plant construction. His practice focuses on national and international arbitration in general and investment arbitration in particular. Dr. Happ speaks German and English and has conducted arbitral proceedings in each of these languages. Rudolf Hennecke is a partner of Borris Hennecke Kneisel PartmbB Rechtsanwälte, Cologne, Germany. He specializes in international and domestic arbitration and litigation. His activity as counsel includes, inter alia, the representation of parties in investment arbitrations under the ICSID and UNCITRAL Rules, in commercial arbitrations under the ICC, SIAC, DIS and UNCITRAL Rules, as well as in other ad hoc arbitration proceedings. He has acted as arbitrator in ICC, DIS, and ad hoc arbitration proceedings. He publishes frequently on issues of international arbitration, and is a co-author of the 2012 Commentary on the New York Convention (Wolff, ed., C.H. Beck/Hart/Nomos). Professor Dr. Stephan Hobe is a Director at the International Investment Law Centre Cologne (IILCC) and the Director of the Institute of Air and Space XXXIII

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Law of Cologne University. Furthermore, he holds the Chair for Public International Law, European Law, European and International Economic Law at Cologne University. He teaches public international law, international economic law including the law of the WTO and International Investment Law, European Union law and air and space law. He has published about 25 books as author or editor and 220 articles on constitutional law, public international law, European and international economic law as well as air and space law. He serves on the Board of Directors of the German Branch of the International Law Association (ILA) as well as the boards of various other international organizations and institutions, inter alia the Council of the German Society of International Law. Kaj Hobér is a Partner in Mannheimer Swartling, Stockholm. He is former Professor of East European Commercial Law at the University of Uppsala from 1997 to 2009 and former Professor of International Law at the Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP), University of Dundee during 2010. As of 1 May 2012 he is Professor of International Investment and Trade Law at Uppsala University. Prof. Hobér has taught international trade law and international arbitration for decades. He has been involved in dozens of trade – and trade related – disputes. His arbitration experience includes several hundreds of arbitrations as counsel and arbitrator in investment treaty as well as commercial disputes. He is past chair of the IBA sub-committee on Investment Treaty Arbitration and past vice-chair of the IBA Arbitration Committee. He is the author of several books on international arbitration and international investment and trade law, including Investment Arbitration in Eastern Europe (2007), International Commercial Arbitration in Sweden (2011), Selected Writings on Investment Treaty Arbitration (2013), Res Judicata and Lis Pendens in International Arbitration, Lectures at the Hague Academy of International Law (2014), as well as of numerous articles. Anne K. Hoffmann is a Special Counsel at Al Tamimi & Co. in Dubai which she joined in 2013 after having practiced in London and Geneva for more than a decade. A lawyer qualified to practice both in Germany as well as in England & Wales, Anne’s practice focuses on international commercial and investment arbitration where she regularly acts as counsel in disputes arising under all major rules (in particular ICC, LCIA, ICSID, Swiss Rules, DIAC, UNCITRAL) as well as in ad hoc proceedings. Anne also regularly serves as arbitrator. Anne is also a visiting lecturer at Humboldt University Berlin and regularly speaks and publishes on arbitration issues. She speaks English, German, French and Russian. Rainer Hofmann, holds a Dr. iur. degree from Heidelberg University and is currently Professor of (German) Public Law, Public International Law and European Law at Goethe University, Frankfurt and Co-Director of the Wilhelm-Merton-Centre for European Integration and International Economic Order; he is a

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Member of the Advisory Council on Public International Law of the German Ministry of Foreign Affairs and Secretary-General of the German Association of International Law (German Branch, International Law Association). He has published widely on general international law, human rights law and investment law. Jean-Christophe Honlet is a partner in Dentons’ Paris office and the co-head of Dentons’ international arbitration practice. He has over 20 years of experience acting as counsel, expert witness or arbitrator in arbitrations involving multinational companies, individuals, states and state entities, in commercial and investment treaty arbitrations. He graduated from the Ecole Supérieure des Sciences Economiques et Commerciales, the University of Paris I Pantheon Sorbonne and was a Lavoisier Scholar at the Maison Française, University of Oxford. He is a member of the Paris Bar. Dr. Marc Jacob, LL.M. (Harvard) is a member of Shearman & Sterling’s International Arbitration Group and Public International Law Practice. He focuses on investment treaty arbitration and international commercial matters. He advises and represents States, State-owned entities, international organizations and private corporations. He is also a lecturer in international law at the University of Tübingen and was previously a Senior Research Fellow at the Max Planck Institute for Comparative Public Law and International Law. Joachim Karl, of German nationality, is Chief of the Policy Research Section in UNCTAD's Division on Investment and Enterprise. Before joining the UN in November 2005, he worked for seven years on international investment matters at the OECD and the Energy Charter Secretariat in Brussels. He started his professional career in the German Ministry of Economics in 1987, where he dealt with regional state aids, European Law issues and international investment agreements. Mr. Karl holds a PhD in international law from the University of Konstanz in Germany, and a Master of Public Administration degree from Harvard's J.F.Kennedy School of Government. He has written numerous articles on European law and international investment issues, and was a lecturer at the German Federal Academy of Public Administration. Carsten Kern is a qualified lawyer specializing in international arbitration, international and comparative civil procedure, private and public international law. He worked for the international arbitration practice group of a leading international firm focusing on both international commercial and investor-State arbitration. In addition, he worked as a Consultant at the UNIDROIT Secretariat in Rome, as a Research Fellow at the Institute of Comparative Private, Private International and International Business Law at the University of Heidelberg and as a case assistant to Professor James Crawford SC. He is a College Research Associate and an Affiliated Lecturer at the University of Cambridge.

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Catherine Kessedjian is the Deputy Director of the European College of Paris. She teaches European Business Law and International Dispute Resolution at the University Panthéon-Assas Paris II, where she is the Director of a Master programme in European Law. In 2004, she was appointed a Hauser Global Professor at New York University School of Law where she teaches International Commercial Transactions and a seminar on Rule Making Processes in a Global World. In 2010, she taught a class in International Dispute Resolution at Yale Law School. She currently acts as mediator or arbitrator in a selected number of transnational disputes either ad hoc or under the auspices of, among others, ICSID, ICC, LCIA and AAA. She was a practising attorney in Paris from 1982 to the end of 1998, focusing on transnational litigation and international business transactions. Yun-I Kim is a Research Assistant to Associate Professor Dr. Jörn Griebel at the International Investment Law Centre Cologne (IILCC). She holds a law degree from Cologne University and is currently a PhD candidate at the Friedrich Alexander University of Erlangen-Nürnberg. She has worked as case assistant for Professor Dr Karl-Heinz Böckstiegel and has served as secretary to arbitral tribunals in inter-State, investor-State and commercial arbitration proceedings. She has also gained experience by assisting counsel in various investment arbitration proceedings and publishes regularly on the subject of international investment law and arbitration. Ulrich Klemm studied law in Berlin and Freiburg (Germany) and sat his second state exam in 1976 in Hamburg (Germany). He then worked as a legal advisor for a consultancy firm of the Dresdner Bank Group in Sao Paulo (Brazil) for four years. In 1981, he joined the legal department of DEG (DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH) as an in-house lawyer, where he initially advised on the structuring and drafting of contracts for international project financing in Latin America. In 2003 he was appointed General Counsel (Chefsyndikus) and head of the legal department. Ulrich Klemm’s advice focuses on structuring, negotiating and drafting contracts for international project financing and acquisition financing. He has extensive local knowledge of Latin America, in particular of Brazil. In addition, he also advises on investment protection law and how to safeguard against adverse political decisions as well as banking supervisory law. Dr. Christina Knahr works at the Austrian Federal Ministry of Science, Research and Economy. From 2006-2011 she has been a Post-Doctoral Researcher at the Department for European, International and Comparative Law at the University of Vienna. She holds Master’s degrees in Law from the University of Vienna and in Public Administration from Harvard University as well as a Doctorate in Law from the University of Vienna. She has published several articles and co-edited three books on international investment arbitration and has given a

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number of presentations in this field. She is a member of the ILA Committee on Non-State Actors and of the Organizing Panel of the SIEL Investment Network. Dr. Sabine Konrad is a partner in McDermott Will & Emery LLP in Frankfurt. She focuses her practice on commercial international arbitration and public international law. She acts regularly for investors and governments in investment protection matters. She has represented clients in a broad range of industries, including energy and infrastructure. Dr. Konrad also acts as arbitrator both in investment treaty and international commercial arbitration cases. In 2007 and 2013, she was designated by the German government to ICSID’s Panel of Arbitrators. She is a member of the roster of arbitrators of the International Development Law Organisations (IDLO), the list of practitioners of the Vienna International Arbitral Centre (VIAC) and the panel of the Kuala Lumpur Regional Centre for Arbitration (KLRCA). Dr. Konrad is listed in GAR’s Who’s Who Legal and in the Roster of International Arbitrators and ranked by Chambers Global. Dr. Konrad founded the Frankfurt International Arbitration Moot Court, the leading international moot court in the investment treaty field. Markus Krajewski is professor of public law and international law at the University of Erlangen-Nuremberg (Germany). Previously he held positions at the universities of Bremen and Potsdam and at King's College London. His research interests include WTO law, trade in services, international investment law, external relations of the EU and the treatment of public services under European and international law. He is a regular consultant on international trade and investment law for national and international governmental institutions, trade unions and civil society groups. Ursula Kriebaum is Professor of International Law at the University of Vienna. Since 2010 she is responsible for the Field of Specialization ‘Law of International Relations’ of the University's Law School. She teaches courses in international investment law, international human rights law and general public international law. She is Alternate Member of the Court of Conciliation and Arbitration within the OSCE, Former Member of the Austrian Human Rights Advisory Board. She was a Member of the Team of the Special Envoy for Restitution Issues Dr. Ernst Sucharipa for the Austrian Holocaust Restitution Negotiations 2000/2001. She was appointed by the Austrian government as a candidate for the 2007 election as judge at the European Court of Human Rights. She has served as legal expert in investment arbitrations and human rights cases. She has extensively published in international law with a focus on investment arbitration and in the fields of human rights law. Stefan Kröll, Rechtsanwalt, Prof. Dr. iur., LL.M. (London), Honorary Professor Bucerius Law School, Visiting Reader School of Arbitration, CCLS – Queen Mary, London; Director Willem C Vis Moot, National Correspondent for Germany to UNCITRAL; practice as arbitrator in national and international cases XXXVII

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under DIS, ICC, WKO, SCC, Swiss Rules and UNCITRAL Rules and in other ad hoc proceedings; member of the board of editors of the ‘International Arbitration Law Review’ and of ‘Internationales Handelsrecht (IHR)’; author of various books, articles and case notes on arbitration including co-author of ‘Comparative International Commercial Arbitration’. Veronica Lavista is currently undertaking post graduate studies at the University of Oxford. Prior to that she worked at the National Direction of International Affairs and Disputes of the Treasury Attorney General's Office of the Argentine Republic. There she acquired extensive experience in international arbitration on investment disputes. Ms. Lavista also teaches international law at the University of Buenos Aires. She holds a law degree and a Master in Finance from the Torcuato Di Tella University, Argentina and an LL.M. in International Legal Studies from New York University. Barton Legum is a partner in Dentons’ Paris office and head of the firm's investment treaty arbitration practice. Barton has over 25 years' experience in litigating complex cases and has argued before numerous international arbitration tribunals, the International Court of Justice and a range of trial and appeals courts in the United States. His practice focuses on international arbitration and litigation in general and arbitration under investment treaties in particular. From 2000 to 2004, Barton served as Chief of the NAFTA Arbitration Division in the Office of the Legal Adviser, United States Department of State. In that capacity, he acted as lead counsel for the United States Government defending over $2 billion in claims submitted to arbitration under the investment chapter of the North American Free Trade Agreement (NAFTA). The United States won every case decided under his tenure. Professor Dr. Ralph Alexander Lorz was born 1965 at Nuremberg. He studied Law and Economics at the University of Mainz and took his First State Examination in Law in 1988. Afterwards, he worked as a research assistant at the University of Marburg and earned his Ph.D. there in 1992. Following his Second State Examination in 1993, he attended Harvard Law School, was awarded the degree of Master of Laws (LL.M.) in 1994 and became a member of the New York Bar. He then joined the University of Mannheim as an assistant professor until his post-doc examination („Habilitation“). In 2000, he was called to the Chair of German and Foreign Public Law, European Law and Public International Law at the Heinrich Heine University of Duesseldorf. From 2007 to 2009 and from 2012 to 2014, however, he took sabbatical leaves to serve as a Vice Minister in the State Government of Hesse, first in the Ministry of Science, Research and the Arts, then in his second term in the Ministry of Public Education. In January 2014, he eventually assumed responsibility for the latter as Minister of State.

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Ben Love is a senior associate in the international arbitration and public international law groups of Freshfields Bruckhaus Deringer LLP in Paris. He has advised and represented clients in a variety of cases under all major arbitral rules, including in over two dozen investment treaty matters. Ben serves on the Peer Review Board of the ICSID Review, the Advisory Board of the Institute for Transnational Arbitration, and the editorial boards of International Legal Materials and World Arbitration & Mediation Review. He publishes and speaks regularly on topics related to international law and international arbitration. Qualified to practice in New York and Texas, Ben speaks English and French, reads Spanish, and holds law degrees from the University of Texas and Université de Paris I Panthéon-Sorbonne. Mariana Lozza, Adjunct Director, National Direction of International Affairs and Disputes, Treasury Attorney-General’s Office of the Argentine Republic, is an international lawyer with extensive experience in international arbitration on investment disputes. Currently, she is the Adjunt National Director of International Affairs and Disputes of the Treasury Attorney-General’s Office of Argentina. The Treasury Attorney General’s Office defends Argentina before international arbitral tribunals. In the past, she worked as legal advisor at the Administrative Tribunal of the Organization of American States. Ms. Lozza also teaches international law at the University of Buenos Aires and Torcuato Di Tella University, Argentina. Ms. Lozza holds a law degree from the Nacional del Sur University, Argentina, and an LLM from American University Washington College of Law. Irmgard Marboe is Associate Professor of International Law at the Department of European, International and Comparative Law, Section for Public International Law and International Relations, at the Faculty of Law of the University of Vienna. She studied law and Roman languages at the University of Vienna (Austria) and at the Universidad Complutense de Madrid (Spain). For her post-doctoral thesis (habilitation) she undertook research on the issue of compensation and damages in international jurisprudence, with a special focus on international investment arbitration. The results of this research were published, amongst others, in the book “Calculation of Compensation and Damages in International Investment Law” (OUP, 2009). Other areas of interest include state responsibility, state liability, human rights, European competition law, space law, and Islamic law. Lars Markert is an associated partner in the international dispute resolution department of Gleiss Lutz's Stuttgart office, currently on secondment with the international arbitration group of Japanese law firm Nishimura & Asahi, Tokyo, until the end of 2014. He is admitted to the German and New York bars and frequently advises Western and Asian clients in both investor-state and international commercial arbitrations. Lars has experience in representing investors and

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states in proceedings under the ICSID Convention and the UNCITRAL Arbitration Rules. Besides his German legal education, Lars holds law degrees from France (maitrise, Aix-en-Provence) and the US (LL.M., Georgetown University), as well as a PhD in investment arbitration from the University of Cologne. He is an academic advisor to the International Investment Law Centre Cologne (IILCC) and regularly teaches, speaks and publishes on issues of investment law and arbitration. Andrew Newcombe is Associate Professor, Faculty of Law, University of Victoria, British Columbia, Canada, where he teaches international arbitration, international investment law, international trade law and commercial law. Prior to joining the University of Victoria in 2002, he worked in the International Arbitration and Public International Law groups of Freshfields Bruckhaus Deringer in Paris. Professor Newcombe’s research focuses on investment treaty law and arbitration. He is the co-author of Law and Practice of Investment Treaties: Standards of Treatment (Kluwer, 2009) and co-editor of Sustainable Development in World Investment Law (Kluwer, 2011). He created and operates italaw, a research website focused on investment treaty arbitration. Professor Newcombe is Associate Editor for the ICSID Review–Foreign Investment Law Journal, a contributing editor of the Investor-State Law Guide, Canadian treaty editor for Investment Claims, and a regular contributor to the KluwerArbitrationBlog. In addition to his academic work, Professor Newcombe advises governments, investors and non-state actors and acts as counsel and arbitrator in international arbitrations. Dr. Luke Nottage specialises in arbitration, contract law, consumer product safety law and corporate governance, with a particular interest in the Asia-Pacific region. He is Associate Dean (International) and Professor of Comparative and Transnational Business Law at Sydney Law School. Luke’s many books include International Arbitration in Australia (Federation Press, 2010, co-edited with Prof Richard Garnett) and Foreign Investment and Dispute Resolution Law and Practice in Asia (Routledge, 2011, co-edited with Prof Vivienne Bath). Luke is an ACICA Special Associate and founding member of the Rules drafting committee, the Australasian Forum for International Arbitration council’s Japan Representative, and on the panel of arbitrators for the JCAA and KCAB. He has also consulted for law firms world-wide, the EC, OECD, UNDP, ASEAN and the Japanese government, and is founding Director of Japanese Law Links Pty Ltd (japaneselawlinks.com). Professor Dr. Karsten Nowrot, LL.M. (Indiana) is Professor of Public Law, European Law and International Economic Law as well as Head of the Department of Law at the School of Socio-Economics of the Faculty of Business, Economics and Social Sciences at Hamburg University, Germany. He received his legal education at the Universities of Kiel/Germany, Surrey/UK, Halle-Witten-

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berg/Germany and the Indiana University School of Law/USA. Karsten Nowrot holds two German law degrees with distinction from 1997/2001 and was awarded the degree of Master of Laws in 1998 as well as his Ph.D. (Dr. iur.) in 2005, both with distinction. In 2012 he completed his habilitation (post-doctoral degree) in law at Martin Luther University Halle-Wittenberg, Germany. Simon Olleson, MA (Cantab); LLM (NYU); Dip Int Law (Cantab) is a barrister in private practice and a tenant at 13 Old Square Chambers, Lincoln’s Inn, London, specializing in public international law. Markus Perkams is an attorney in Skadden’s International Arbitration and Litigation Group. He is based in Frankfurt and represents clients in national and international arbitration proceedings as well as before German and English state courts. He is admitted as Rechtsanwalt in Germany and as a solicitor in England and Wales. Dirk Pulkowski is a Legal Counsel at the Permanent Court of Arbitration (PCA) in The Hague, where he serves as registrar in arbitrations between States and investor-State arbitrations. He is currently the PCA’s representative in Mauritius, from where he leads the institution’s Africa work. Prior to joining the PCA, Mr. Pulkowski worked as a lawyer at the trade and arbitration group of an international law firm in Brussels. Mr. Pulkowski holds a doctoral degree from the University of Munich and an LL.M. degree from Yale Law School. He has published widely on questions of general international law, legal theory, the law of the World Trade Organization, and international arbitration. Mr. Pulkowski is qualified to practice law in Germany. Matilde Recanati is currently Research fellow in European and International Law at Bocconi University in Milan, Italy. Her area of expertise is international economic law, in particular, the law of international trade and investment on which she has published articles in books and journals both in Italian and notItalian publications. Before Bocconi she worked as Associate with Clyde & Co Law Firm in Hong Kong and Shanghai where she advised clients on matters related to foreign direct investments in China. She was admitted to practise law in Italy in 2006, after completing her studies in Law and received a Ph.D. in International and European Law at the University of Macerata, Italy in 2008. Lucy Reed is head of the Freshfields global international arbitration group. She specializes in investment treaty arbitrations and other public international law disputes. In addition to representing private and public clients in international arbitration, Lucy was a Member of the Ethiopia-Eritrea Claims Commission and a co-director of the Claims Resolution Tribunal for Dormant Accounts in Switzerland. Before joining Freshfields, Lucy served as the US State Department’s Agent to the Iran-United States Claims Tribunal and as General Counsel of the Korean Peninsula Energy Development Organization (an international organizaXLI

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tion dealing with North Korea). Lucy is on the board of the Investment Treaty Forum and a member of the Council on Foreign Relations, and served as President of the American Society of International Law (2008–2010). Lucy was educated at the University of Chicago Law School and Brown University. August Reinisch has been a professor of international and European law at the University of Vienna since 1998. He currently serves as Head of its Law Schools Section of International Law and International Relations and as Director of the LL.M. Program in International Legal Studies. His professional experience includes arbitrator and expert adviser in Austrian and foreign court litigation as well as in international, mostly investment arbitration. He has served as arbitrator in investment cases mostly under ICSID and UNCITRAL Rules, and frequently provided expert opinions in the field. Noah Rubins is the head of the international arbitration group at Freshfields Bruckhaus Deringer's Paris office, and also head of Freshfields’ worldwide CIS/ Russia Dispute Resolution Group. He has advised and represented clients in arbitrations under ICSID, ICSID Additional Facility, ICC, AAA, SCC, LCIA, CRCICA, ICAC, and UNCITRAL rules. He specialises in energy disputes and investment arbitration and has also practiced law in New York, Washington, Houston, and Istanbul. He has served as arbitrator in 32 cases, including two investment treaty disputes adjudicated under the UNCITRAL Rules and one under the ICSID Rules. Noah received a Masters degree in dispute resolution and public international law from the Fletcher School of Law and Diplomacy, a J.D. from Harvard Law School, and a bachelors degree in international relations from Brown University. He speaks English, French and Russian fluently, and has a working knowledge of Hebrew and Spanish. Borzu Sabahi is an attorney in the International Arbitration Group of Curtis Mallet-Prevost Colt & Mosle LLP. He has acted as counsel and expert in international arbitrations pursuant to bilateral and multilateral investment treaties as well as complex contracts, under the rules of ICC, ICDR, ICSID, LCIA, and UNCITRAL. His industry experience includes acting in disputes involving oil & gas, mining, construction, gambling, telecommunications, licensing, tax, and allocation of water under international treaties. He is an Adjunct Professor at Georgetown and Columbia Law Schools where he co-teaches seminars on investor-State arbitration. He is Co-Director of the International Investment Law Center at the International Law Institute, and an editor of Oxford University Press’ Investment Claims website. Mr. Sabahi has widely published on various aspects of international investment law and arbitration and regularly speaks in and chairs professional conferences on these topics. Giorgio Sacerdoti is Professor of International Law and European Law at Bocconi University, Milan, Italy, since 1986. Professor Sacerdoti is a former Member of the WTO Appellate Body (2001–2009), where he was chairman in 2006– XLII

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2007. He was Vice-Chairman of the Organisation for Economic Cooperation and Development (OECD) Working Group on Bribery in International Business Transactions until 2001, where he was one of the drafters of the Anticorruption Convention of 1997. He has acted as consultant to the Council of Europe, UNCTAD, and the World Bank in matters related to foreign investments, trade, bribery, development and good governance. He has served as arbitrator at ICSID in investment disputes under BITs and in international commercial disputes. Professor Sacerdoti has published extensively on international law, trade,investments,international contracts and arbitration and has lectured extensively at universities around the world. He was a Senior Braudel Fellow at the European University Institute in 2012. Dr. Monique Sasson initially qualified as an Italian Avvocato and practiced in Rome, where she appeared before arbitral tribunals and Italian courts. In 2000, she joined Herbert Smith’s international litigation/arbitration practice group in London, qualified as an English solicitor (and subsequently as a solicitor advocate), and acted for clients in a number of international arbitration cases as well as litigation matters. In 2009, Monique obtained her Ph.D. degree, and the following year Kluwer published a revised version of her doctoral thesis under the titleSubstantive Law in Investment Treaty Arbitration: the Unsettled Relationship between International law and Municipal Law. Monique currently resides in New York City, is a member of the New York Bar, and serves on the New York City Bar Committee on Arbitration. She is an associate editor of Kluwer Arbitration Blog, and the Co-Managing Editor of the ITA Arbitration Report and the ITA Board of Reporters. Monique is also the Co-Managing Editor of World Trade and Arbitration Materials, Co-Managing Editor of theITA Scoreboard of Adherence to Transnational Arbitration Treaties, and a Member at Large of the ITA Advisory Board and its Executive Committee. Jan Schäfer, LL.M., Rechtsanwalt, Partner, International Arbitration, resident in the Frankfurt office of King & Spalding LLP. He works as counsel and regularly sits as arbitrator in investment and commercial arbitration cases under the ICC, SCC, ICSID and DIS rules as well as ad hoc proceedings. He studied law in Passau, London, Freiburg, Utrecht and Singapore (LL.M., National University, 1999). He is admitted in Germany since 2001 and sits on the ADR committee of the German Bar. He is listed in all relevant directories as a leading German arbitration lawyer and Global Arbitration Review included him on its list of "45 under 45" in 2011. He has published widely on arbitration and co-chairs the German Discussion Forum on Investment Law and Arbitration since 2004. Bruno Simma, Professor of international law at the University of Munich since 1973 (retired). Professor of Law at the University of Michigan Law School (currently on leave). Member of UN Committee on Economic, Social and Cultural Rights 1987–1996 and of the International Law Commission 1997–2002.

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Judge at the International Court of Justice 2003–2012. Since 2012 Judge at the Iran–United States Claims Tribunal. Arbitrator in a number of inter-State cases under the auspices of the PCA, in (BIT- and NAFTA-based) investor-State arbitrations administered by ICSID and the PCA and an international commercial arbitration within the International Chamber of Commerce, presiding in some of them. General Course at the Hague Academy of International Law 2009. Around 150 publications. Associate Member of the Institut de Droit international. Dr. Stephan Schill, LL.M. (NYU) is Senior Research Fellow at the Max Planck Institute for Comparative Public Law and International Law in Heidelberg and Principal Investigator in the ERC-project on “Transnational Public-Private Arbitration as Global Regulatory Governance”. He is admitted to the bars in Germany and New York, has acted as counsel before the European Court of Human Rights, and is a Member of the ICSID List of Conciliators. He is the Editor-inChief of the Journal of World Investment and Trade and the author of two books and numerous articles on international investment law and arbitration. Professor Dr. Burkhard Schöbener is one of the Directors of the International Investment Law Centre Cologne. He also holds the Chair for Public Law, Public International Law and European Law of the University of Cologne. His research focuses on International Economic Law (including WTO and International Investment Law) as well as German and European Economic Law. He publishes articles and papers on these subjects on a regular basis. Christoph Schreuer is a graduate of the Universities of Vienna, Cambridge and Yale. Former Professor at Johns Hopkins University and University of Vienna. Member of the ICSID Panel of Arbitrators. Arbitrator in ICSID and UNCITRAL cases. Author of numerous publications in international investment law. Dr. Anthony Sinclair, BA, LLB (First Class Hons) (Canterbury, New Zealand) LLM (First Class Hons), Ph.D. (Cambridge) is a partner at Quinn Emanuel Urquhart & Sullivan LLP, based in London. He specialises in international commercial arbitration, investment treaty arbitration, and public international law, as counsel and arbitrator. His work spans a broad range of industry sectors, with particular focus on the oil and gas, energy and mining, telecommunications, infrastructure and utilities sectors, especially in emerging markets. Dr. Sinclair is co-author of the second edition of The ICSID Convention: A Commentary (Cambridge University Press, 2009). Ole Spiermann is a partner with Bruun & Hjejle Law Firm in Copenhagen specialising in dispute resolution as well as international and public law. He has been professor in international law at the University of Copenhagen and holds a PhD degree from the University of Cambridge. A special field of expertise is claims against governments, e.g. on be-half of foreign investors or holders of XLIV

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human rights. Ole Spiermann has advised foreign investors in claims against a number of states as well as parties and applicants before the EU Court of Justice and the European Court of Human Rights. Joachim Steffens, Alternate Director for Germany at the Board of Directors, European Bank for Reconstruction and Development, London, UK, a lawyer by training, has a long and distinguished career in the German institutions. He held several high ranking advisor roles in the Federal Chancellery, the Federal Ministry of Economics and in the Freestate of Saxony. From 2005 to 2012 he headed the division for International Investments and Finance in the Department for Foreign Economic Policy at the Federal Ministry of Economics and Technology. Mr Steffens was also an expert in Brussels, at the European Commission, for economic relations with Japan from 2001–2005. Dr. Christian Tietje is Professor (tenure) for European Law and International Economic Law, director of the Institute for Economic Law, and director of the Transnational Economic Law Research Centre (TELC) at the Law School at Martin-Luther-University Halle-Wittenberg, Germany. His primary research interests lie in the areas of EU common commercial policy and international economic law (world trade law, investment protection and arbitration, global financial markets). Christian Tietje received his legal education at the Universities of Kiel/Germany, Paris V, and University of Michigan Law School, Ann Arbor. He holds two German law degrees with distinction and is a Professor of Law since 2001. He has published several books and more than 150 articles and has advised Governments, international organizations, non-governmental organizations, business associations and multilateral companies in the above-mentioned research areas. He has been appointed legal expert and arbitrator is several investment arbitrations, was leading a working group of the investment law committee of the German branch of the International Law Association (ILA) dealing with the relationship of international investment law and general public international law, and is a member of the ‘ILA Study Group on the Role of Soft Law Instruments in International Investment Law’. He has been appointed by the EU on the roster of panelist for financial services under the EU–Korea free trade agreement. Catharine Titi is a postdoctoral research fellow at the University Panthéon-Assas Paris II. She holds a Ph.D. in Law from the University of Siegen, Germany, and she has completed earlier studies in Greece, France and the United Kingdom. Catharine also holds a postgraduate qualification from the Courtauld Institute of Art, London, and has previously worked in management consulting for PwC, UK. She has published in a variety of academic journals in English and French on international investment law and investment arbitration and has contributed to edited volumes, such as in the Yearbook on International Investment Law & Policy (Oxford University Press). Her monograph on The Right to Regu-

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late in International Investment Law was published in 2014 by Nomos and Hart Publishing. Jorge E. Viñuales is the Harold Samuel Professor of Law and Environmental Policy at the University of Cambridge. He has published widely in his specialty areas, most recently his books Foreign Investment and the Environment in International Law(Cambridge University Press, 2012), Harnessing Foreign Investment to Promote Environmental Protection: Incentives and Safeguards (Cambridge University Press, 2013, co-edited with P.-M. Dupuy), and Diplomatic and Judicial Means of Dispute Settlement (Martinus Nijhoff, 2012, co-edited with L. Boisson de Chazournes and M. G. Kohen). Professor Viñuales has wide experience as a practitioner. He has worked on many cases under ICSID, UNCITRAL, ICC or LCIA rules, including several high profile inter-State, investor-State, and commercial disputes, and he regularly advises companies, governments, international organisations or major NGOs on different matters of environmental law, investment law, and public international law at large. Professor Viñuales was educated in France (Doctorat – Sciences Po, Paris), the United States (LL.M. – Harvard Law School), Switzerland (Licence and Diplôme d’études approfondies in international relations – HEI; liz jur – Universität Freiburg; Licence and Diplôme d’études approfondies in political science – Université de Genève), and Argentina (Abogado – UNICEN). His native language is Spanish and he is fluent in English, French and Italian. Michael Waibel is a University Lecturer in Law at the University of Cambridge and a Fellow of Jesus College and the Lauterpacht Centre for International Law. His main research interests are public international law, international economic law with a particular focus on finance and the settlement of international disputes. He teaches international law and European Union law. Richard E. (Rory) Walck is a founding partner of Global Financial Analytics LLC, a Washington, DC area consultancy specializing in the evaluation of damages in commercial and investment treaty arbitration. He has nearly forty years of experience in business management, public accounting and financial consulting. He received B.A. degrees with high honors in philosophy and business, and an MBA in accounting and finance, and holds numerous professional credentials in accounting, finance and valuation. He has consulted on several hundred contested matters, and has testified as an expert on financial issues nearly one hundred times. He has authored several articles on topics relating to the determination of damages, and serves as the co-editor (with John Gotanda) of The Journal of Damages in International Arbitration. André von Walter is a Legal officer in the Directorate General for Trade of the European Commission. Prior to his current position, he acted as a political advisor and negotiator for international investment at the French Ministry of Foreign and European Affairs. André von Walter has lectured public international law XLVI

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and international economic law at the University of Paris (Panthéon-Sorbonne) and worked as a Senior Research Fellow at the Institute for public international law of Bonn University. He has authored several publications on international law and investment arbitration in English, German and French. Stephan Wittich is Associate Professor at the Department of International Law and International Relations at the University of Vienna Law School. He has published widely in and teaches public international law at the University of Vienna and several other universities in Austria and Slovakia. Professor Dr. Andreas R. Ziegler studied economics, international relations and law at the Universities of St. Gallen, Switzerland (BA, MA, BLaw, MLaw, PhD), Madrid (Escuela Diplomatica), Paris (SciencesPo), Florence (LL.M, European University Institute), Oxford and London (SOAS). He was a civil servant working for several Swiss Ministries in Berne as well as the EFTA Secretariat in Geneva and the European Commission in Brussels before being appointed full professor of law at the University of Lausanne in 2003. He currently is the Director of its LL.M. Program in International and European Economic and Commercial Law. He has represented clients in arbitral proceedings (UNCITRAL Arbitration Rules) and before the Swiss Federal Supreme Court and the European Court of Human Rights and is counsel with a law firm specialized in economic and business law (Blum & Grob Attorneys-at-law, Zurich). He is on the permanent roster of panelists of the WTO and ICSID.

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Chapter 1: General Introduction to International Investment Law Marc Bungenberg, Jörn Griebel, Stephan Hobe and August Reinisch The last two decades have firmly established international investment law (IIL) as one of the most important subfields of international economic law. The development has demonstrated the degree to which the conclusion of investment treaties has fostered and influenced the development not only of a new field of law but of the whole of public international law, especially by giving private investors extensive subjective rights and direct access to international dispute resolution. This is a development that we only find in this specific field of international law. The concept of IIL is disputed. This handbook presents a broad perspective of investment law, comprising all rules concerning investment protection. This embraces rules of general international law, in particular the rules governing the treatment of foreigners (international minimum standard)1 as well as the law of investment contracts.2 While ‘national’ investment law is within the scope of such an investment law definition, this handbook only covers ‘international’ investment law instruments. The most important field of international investment law is that stemming from by now more than 3,200 bi- and multilateral investment treaties as well as free trade agreements which have investment chapters. It is the wealth of arbitral jurisprudence based on bi- and multilateral investment agreements as well as investment contracts that has solidified the main concepts of IIL and given a more precise meaning to the often vague investment standards found in numerous similarly worded treaties. International investment agreements (IIAs) have been around since 1959, when the first bilateral investment treaty (BIT) was concluded between Germany and Pakistan,3 and some of their concepts have been expressed even in earlier treaties from the 19th century, such as those covering friendship, commerce, and navigation.4 The rise of direct investor-State arbitration since the end of the 1960s was made possible in its enormous scope only through the introduction of dispute settlement clauses in modern IIAs and has led to the current system of investment arbitration. This de-centralised enforcement of internationally agreed upon

1 See Stephan Hobe, ‘The Development of the Law of Aliens and the Emergence of General Principles of Protection under Public International Law’, ch. 2.I., 6–22. 2 See André von Walter, ‘Investor-State Contracts in the Context of International Investment Law’, ch. 3.I., 80–92 and Morris Besch, ‘Typical Questions Arising within Negotiations’, ch. 3.II., 93–152 in this volume. 3 See Chester Brown, ‘The Evolution of the Regime of International Investment Agreements: History, Economics and Politics’, ch. 4.I., 153–185 in this volume. 4 See Stephan Hobe, ‘The Development of the Law of Aliens and the Emergence of General Principles of Protection under Public International Law’, ch. 2.I., 6–22 in this volume.

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obligations as subjective rights by individual ‘market participants’ stands out as one of the distinctive features of IIL, as such mechanisms cannot be found in other fields of international economic law. It emerged by interpreting the arbitration clause in BITs as a unilateral offer by host States that can be accepted by investors from the other contracting State by merely instituting arbitral proceedings. This simplified form of consent to arbitration, sometimes referred to as ‘arbitration without privity’,5 was first accepted in an arbitral award of 1990 in the AAPL v. Sri Lanka case6 and has become established practice since the beginning of the new millennium. The importance of this development can hardly be overemphasised as it demonstrated that the right of investors to bring claims on the international level for the purpose of defending rights conferred to them within investment treaties worked. At the same time, it may have become obvious to some treaty negotiators what powerful mechanisms they had provided for within investment treaties, mechanisms possibly not intended by all of them. 5 This development toward investor-State arbitration was also strongly influenced by the establishment of the International Centre for Settlement of Investment Disputes (ICSID) in 1965/66. Created as an institution designated to administer arbitrations in investor-State disputes arising under investor-State contracts (contract-based investment arbitration), it strongly contributed to the idea of investment treaty-based arbitration as signified by the many references to ICSID in bi- and multilateral investment treaties. To date, most investment arbitrations (about 60 % of all known investment arbitrations) are taking place under the auspices of ICSID. In the meantime, the total number of arbitrations based on investment treaties has exceeded 600, the great majority of which have been initiated within the past ten years. Other arbitration rules and mechanisms such as the UNCITRAL rules have responded to this development by way of adapting their rules to better address the needs of investment arbitration. These will likely become more relevant again with the EU as a new actor in IIL. 6 The creation of investor-State arbitration also implied that dispute settlement was taken out of sovereign control, including political considerations whether or not to espouse the cause of one’s nationals.7 Here again the ICSID Convention played an important role as it prohibits the exercise of diplomatic protection by the home State of the investor where its national and another contracting State have consented to submit a dispute to arbitration under the ICSID rules. It is inter alia this ‘de-politicisation’8 that led to the described sharp increase in investment ‘treaty arbitration’, as opposed to diplomatic protection as well as the

5 Jan Paulsson, ‘Arbitration Without Privity’ (1995) 10 ICSID Rev.–FILJ 232–257. 6 Asian Agricultural Products Limited v. Sri Lanka, ICSID Case No. ARB/87/3, Award and Dissenting Opinion, 27 June 1990, (1991) 6 ICSID Rev.–FILJ 526. 7 See Rainer Hofmann, ‘The Protection of Individuals under Public International Law’, ch. 2.III., 46–63 in this volume. 8 See Ibrahim Shihata, ‘Towards a Greater Depoliticization of Investment Disputes: The Roles of ICSID and MIGA’ (1986) 1 ICSID Rev.–FILJ 1–25.

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classical ‘contract arbitration’ that was premised on a contractual arbitration stipulation between investors and host States.9 ‘Freed’ from State control, investment arbitration has produced an immensely 7 rich, albeit sometimes controversial and inconsistent jurisprudence. Within remarkably few years, the surge of investment arbitration has produced a wealth of cases unprecedented in the field of international law arbitration and dispute resolution in public international law. This has led to a new wave of scholars dealing with IIL, in turn critically reviewing recent developments and contributing to a new and more thorough discussion of fundamental questions of public international law. IIL has become a laboratory of public international law. Fundamental topics of international law such as State responsibility, treaty law, and customary international law principles governing the status and rights of foreigners and their property, are addressed and reflected in modern IIL. While IIL cannot operate without general international rules, it is also influencing these as well as the general concepts of public international law. This is particularly true for the status of investors in investment law, which strongly influences the degree of international personality awarded to the individual in general.10 Further and more intense debates are necessary to adjust the current set of rules for the purpose of achieving a more balanced and lasting system. It is one of the greatest challenges of the field to provide for rules which adequately reconcile the interests of the most relevant stakeholders. IIL currently faces many further challenges. First, the public and particularly 8 critical NGOs have taken notice of the system with all its advantages and disadvantages, and concern has been expressed regarding the sustainability of the current system.11 Additionally, a new player has entered the stage which can be expected to strongly influence the future shape of IIL. The European Union (EU) has assumed far-reaching powers in the field of investment protection from its member States by way of the Treaty of Lisbon.12 It has concluded its first free trade agreement comprising an investment chapter with Canada, and it is negotiating comparable FTAs, inter alia with Japan, the United States, Singapore and India as well as a stand-alone BIT with China. Even irrespective of MFN clauses13 in these treaties one can expect that the rules provided for therein will in the future strongly influence global standards of investment protection. Discussions within the EU as well as various lobby groups and NGOs focus 9 on two significant topics: the future design of the investor-State dispute settle9 See Michael Waibel, ‘Investment Arbitration: Jurisdiction and Admissibility’, ch. 11.II., 1212–1287 in this volume. 10 See Yun-I Kim, ‘Investment Law and the Individual’, ch. 13.I., 1587–1603 in this volume. 11 See Markus Krajewski, ‘Investment Law and Public Services’, ch. 13.III., 1631–1645 in this volume. 12 On this Marc Bungenberg and Stephan Hobe, ‘The Relationship of International Investment Law and European Union Law’, ch. 13.II., 1605–1631 in this volume, Jörn Griebel, ‘The New EU Investment Policy Approach’, ch. 4.III.D., 304–325 in this volume and August Reinisch, ‘The Likely Content of Future EU Investment Agreements’, ch. 14.IV., 1886–1905. 13 See August Reinisch, ‘Most Favoured Nation Treatment’, ch. 8.IV., 807–845 in this volume.

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ment mechanism as well as the balance between the investors’ protection and host States’ interest to regulate for the protection of inter alia the environment, public health or human rights. As for investor-State dispute resolution and the role of transparency it is widely agreed that the current investor-State mechanism should be preserved in principle. There are, however, intense debates concerning the wish of some actors to provide for as much transparency of investment arbitration proceedings as possible. Others prefer leaving the choice of the appropriate arbitral institution to the disputing parties, which covers the right to conduct proceedings in complete confidentiality. It can be expected, however, that the future EU system of investment dispute resolution will be a transparent one. As far as the States’ ‘right to regulate’ is concerned, contemporary investment treaties hardly provide for explicit exceptions from their standards of protection comparable to the established rules within the WTO system. Here again one can expect that the system will change considerably and that future EU investment treaties will provide for clauses laying down the conditions under which a State may legitimately intervene in an investment without violating investment treaty standards. Another problem which may not necessarily be resolved in the emerging new IIL system is the relationship between investment rules and conflicting rules of other international law regimes, such as human rights,14 environmental law,15 or the trade regime.16 International law suffers from fragmentation which often leads to solutions being adopted in one regime without properly observing conflicting rules and interests within others. While attempts have been made to consolidate the various conflicting fields of international law by way of interpretation or otherwise, it can only be hoped that future investment treaties will appropriately address this problem. In the meantime academic writings such as those in this handbook, as well as arbitral decisions, will contribute to finding solutions fostering a systemic integration of the various regimes. IIL is currently in a process of consolidation. While some States withdrew from the ICSID Convention and started to terminate their investment treaties due to negative experiences with the system (the termination by South Africa of its BIT with Germany being one of the most recent examples), it can be expected that the transformation IIL is currently undergoing will contribute to a greater acceptance of the system by the most relevant actors, the States. In light of the many new co-operations in the field of investment law which are currently being established in all regions of the world as well as the mostly identical investment provisions negotiated in these contexts, it is in fact surprising that the experience 14 See Pierre-Marie Dupuy and Jorge Viñuales, ‘Human Rights and Investment Disciplines: Integration in Progress’, ch. 13.VIII., 1741–1769 in this volume. 15 See Jorge Viñuales, ‘Investment Law and Sustainable Development: The Environment breaks into Investment Disputes’, ch. 13.VII., 1716–1740 in this volume. 16 See Andreas Ziegler, ‘Investment Law in Conflict with WTO Law?’, ch. 13.X., 1786–1803 in this volume.

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of the failed multilateral agreement on investments negotiated under the auspices of the OECD in the 1990s still hinders the idea of a genuine multilateral regime.17 Another important aspect of IIL can be seen in its hybrid nature as a paradig- 14 matic example of transnational law. This is clearly evidenced by the fact that the applicable law in most investment cases is not limited to public international law, but also comprises national law (i.e. the law of the host State or the national or international law applicable to an investment treaty) as well as often general principles of law.18 Furthermore, the hybrid nature of IIL is also evident in the dual pedigree of investment arbitration as a combination of commercial arbitration and dispute settlement under public international law.19 Due to these characteristics, the precise nature of IIL still remains contested today. While it is certainly too early to conclude that the law concerning investment 15 protection has been fully clarified, it has become obvious that the existing adjudicatory practice of investment tribunals as well as the treaty practice of States outline the major contours of IIL. The editors of this handbook thus consider it important to present a ‘tour d’horizon’ of the entire field. The 80 plus chapters of the present volume represent an overview of the main substantive and procedural aspects of IIL, but they are not limited to them. The handbook situates the development of IIL in a historical context, embeds IIL into the larger field of public international law, explains regional divergences of investment protection, and provides a broader outlook.20 Furthermore, the handbook offers cross-referencing analysis by explaining the links to other sub-fields of international law and international economic law21 in particular. While an edited volume like the present handbook is intended to address as 16 many of these issues as possible, it is not capable of addressing them all. We hope, however, that it will contribute to the conceptual clarification of fundamental IIL aspects. Any comments by readers are much appreciated, and will improve this handbook for future readers.

17 See Stephan Schill, ‘Multilateralization: An Ordering Paradigm for International Investment Law’, ch. 13.XII., 1819–1840 in this volume. 18 See Ole Spiermann, ‘Investment Arbitration: Applicable Law’, ch. 11.IV., 1374–1391 in this volume. 19 See Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 151–284. 20 See chapter 14 with contributions by Karl-Heinz Böckstiegel, Kaj Hobér, Catherine Kessedjian, August Reinisch and Christoph Schreuer on the future of investment arbitration. 21 See Andreas Ziegler, ‘Investment Law in Conflict with WTO Law?’, ch. 13.X., 1786–1803 in this volume.

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Chapter 2: The Law Relating to Aliens, the International Minimum Standard and State Responsibility I. The Development of the Law of Aliens and the Emergence of General Principles of Protection under Public International Law

Stephan Hobe A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The Development of the Origins of International Investment Law a) Developments until 1945. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Developments after 1945 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Substantive Aspects of the International Minimum Standard . . a) National Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fair and Equitable Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Protection of Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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B. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Adronico O. Adede, ‘The Minimum Standards in a World of Disparities’ in Ronald S. J. MacDonald and Douglas M. Johnston (eds), The Structure and Process of International Law (Martinus Nijhoff Publishers, 1983) 1001–1026; Justus Alenfeld, Die Investitionsförderungsverträge der Bundesrepublik Deutschland (Athenäum, 1971); Rainer Arnold, ‘Law of Aliens’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 1 (Elsevier, 1997) 102 et seq.; Wolfgang Benedek, ‘Drago-Porter Convention (1907)’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 1 (North Holland, 1981) 1102 et seq.; Andrea Bjorklund, ‘National Treatment’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 29–58; Edwin M. Borchard, ‘Responsibility of States at the Hague Codification Conference’ (1930) 24 AJIL 517–540; Tomer Broude, ‘Investment and Trade: The “Lottie and Lisa” of International Economic Law?’ in Pierre Sauvé and Roberto Echandi (eds), New Directions and Emerging Challenges in International Investment Law and Policy (Cambridge University Press, 2012) 139–155; Ian Brownlie, Principles of Public International Law (Oxford University Press, 2003); Carlos Calvo, Le Droit International – Théorique et Pratique, vol. VI (Guillaumin, 1896); Stephen Canner, ‘The Multilateral Investment Agreement’ (1998) 31 Cornell Int’l L. J. 657–681; Fons Coomans, ‘The Ogoni Case Before the African Commission on Human and Peoples Rights’ (2003) 52 ICLQ 749– 760; Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Springer, 1985); Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008); Rudolf Dolzer and André von Walter, ‘Fair and Equitable Treatment – Lines of Jurisprudence and Customary Law’ in Federico Ortino, Lahra Liberti, Audley Sheppard and Hugo Warner (eds), Investment Treaty Law: Current Issues, vol. II (BIICL, 2007) 99–115; Jörn Griebel, Internationales Investitionsrecht (C.H. Beck, 2008); Ulrich Häde, ‘Der völkerrechtliche Schutz von Direktinvestitionen im Ausland – Vom Fremdenrecht zum Multilateralen Investitionsabkommen’ (1997) 35 AVR 181–212; Kay Hailbronner, ‘Der Staat und der Einzelne im Völkerrecht’ in Wolfgang Graf Vitzthum (ed), Völkerrecht (De Gruyter, 2007) 149–243; Günther Jaenicke, ‘Havana Charter’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 2 (North Holland, 1999) 679–683; Robert Jennings and Arthur Watts, Oppenheim’s International Law (Oxford University Press, 1996); Joachim Karl, ‘The Promotion and Protection of German Foreign Investment Abroad’ (1996) 11 ICSID Rev.–FILJ 1–36; Joachim Karl, ‘Das Multilaterale Investitionsabkommen’ 6

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I. The Development of the Law of Aliens (1998) RIW 432–440; Kläger, Fair and Equitable Treatment in International Law (Cambridge University Press, 2011); Joseph L. Kunz, ‘The Mexican Expropriations’ (1940) 17 NYU LQR 327–384; Roland Richard B. Lillich, Burns H. Weston and David J. Bederman, International Claims: Their Settlement by Lump Sum Agreements, 1975–1995 (Transnational, 1999); Peter T. Muchlinski, The Rise and Fall of the Multilateral Agreement on Investment: where now? (2000) 34 Int’l Law 1033–1053; Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Kluwer Law International, 2009); Shabtai Rosenne, The Law and Practice of the International Court 1920–1996, vol. II (Martinus Nijhoff, 1997); Jeswald Salacuse, The Law of Investment Treaties (Oxford University Press, 2010); Christoph Schreuer, ‘Fair and Equitable Treatment in Arbitral Practice’ (2005) 6 JWIT 357–386; Christoph Schreuer, ‘The Concept of Expropriation under the ECT and other Investment Protection Treaties’ in Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (Juris, 2006) 108–159; Nico Schrijver, Sovereignty over Natural Resources (Cambridge University Press, 2008); Malcolm N. Shaw, International Law (Cambridge University Press, 2008); Donald R. Shea, The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy (University of Minnesota Press 1955); Ibrahim Shihata, ‘Towards a Greater Depolitization of Investment Disputes’ (1986) 1 ICSID Rev.–FILJ 1–25; Alexander M. Stuyt, Survey of International Arbitration, 1794–1989 (Martinus Nijhoff, 1976); Emer de Vattel, Law of Nations, Book II, Ch. VIII (T. & J. W. Johnson, 1883); Katia Yannaca-Small, ‘Fair and Equitable Standard: Recent Developments’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 111–130.

A. Introduction

As is well known the international law of aliens covers those rules that grant a 1 certain standard of protection to foreign legal and natural persons vis-à-vis the host State.1 The early development of general international law thereby did not pay particular tribute to the situation of investors but followed in the legal assessment in a much more general way the situation of an alien. In the following the development of the standard of protection for foreigners is described all with a view to assess how much this has contributed to the position that a foreign investor possesses today in the host State. Therefore, in the following, first the brief development of the origins of international investment law will be described (1.), before the current standard especially under the general principles is laid down as a rough overview (2.). 1. The Development of the Origins of International Investment Law a) Developments until 1945

Already in early political communities outsiders, then often known as aliens,2 2 were treated quite differently compared to the national.3 Famous writers such as Francisco de Vitoria and Hugo Grotius pleaded for a right to travel, live and trade in foreign countries as well as a level of non-discrimination in the treat1 Rainer Arnold, ‘Law of Aliens’ in: Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 1 (Elsevier, 1997) 102 et seq. 2 This stems from the Latin word ‘alius’ which means: the other. 3 Rainer Arnold (n. 1) 102.

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ment of foreigners. Emmerich de Vattel first addressed the status of foreigners in its ‘Law of Nations’ of 1758 in more detail. He held that a State would be able to control and determine the requirements to admit foreigners to stay in the country. After admission they would be subject to local laws. Moreover, such State would be obliged to protect foreigners in the same manner as its own citizens.4 3 Even older is the right to diplomatic protection.5 Under this doctrine any injury to a State’s national was considered an injury to the State itself for which compensation could be claimed from the responsible State. In 1924 the Permanent Court of International Justice (PCIJ) recognised a States’ right to exercise diplomatic protection over its nationals as an ‘elementary principle of international law’.6 Also the settlement of disputes in the area of diplomatic protection led to the early establishment of ad hoc commissions and arbitral tribunals to adjudicate specific claims. Here the famous Treaty of Amity, Commerce and Navigation between Great Britain and the United States of America, called the Jay Treaty of 1794, is the most famous early example. It established a commission to decide claims regarding the treatment of British and US nationals during and after the American Revolution.7 Since the entry into force of this treaty numerous mixed claims commissions were established for the purpose of resolving problems of injury to aliens.8 4 It must not be overlooked that the standard of protection awarded to aliens was developed in an era of colonialism and imperialism.9 The time was characterised by States protecting the interests of their nationals abroad by all possible means, be they political, economic or even military. Thus, in the 19th and early 20th century means of diplomatic protection by powerful States often were accompanied by ‘gunboat diplomacy’, which involved the threat or the use of force in order to achieve political aims. This was the case although in the 1899 and 1907 Hague Convention for the Pacific Settlement of International Disputes the involved parties made a strong plead for the Pacific Settlement of Disputes. One such incident gave rise to the establishment of the Drago Doctrine.10 When English, German and Italian forces had intervened in Venezuela in 1902 to enforce claims relating to State-issued bonds, the then Argentine Foreign Minister 4 Emer de Vattel, Law of Nations, Book II, Ch. VIII (T. & J. W. Johnson, 1883) paras. 100, 104, 108 and 109. 5 See Ian Brownlie, Principles of Public International Law (Oxford University Press, 2003) 500. 6 Mavrommatis Palestine Concessions (Greece v. UK), 1924, PCIJ Series A, Nos. 2 and 12. Details by Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Kluwer Law International, 2009) 16 et seq. 7 See Alexander M. Stuyt, Survey of International Arbitration, 1794–1989 (Martinus Nijhoff, 1976) 2–3. 8 See Richard B. Lillich, Burns H. Weston and David J. Bederman, International Claims: Their Settlement by Lump Sum Agreements, 1975–1995 (Transnational, 1999) 25 et seq. 9 See Andrew Newcombe and Lluís Paradell (n. 6) 8. 10 See Wolfgang Benedek, ‘Drago-Porter Convention (1907)’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 1 (North Holland, 1981) 1102 et seq.

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Drago sent a diplomatic note to the US in December 1902 arguing that the political debt of Latin American countries should not give rise to any armed intervention by outside States. This diplomatic statement led to the development of the Drago Doctrine, later incorporated into the Hague Convention of 1907 which asked to respect the limitations of the use of force for the recovery of contract debts, the so-called Drago–Porter Convention.11 This Convention brought about an agreement not to use armed force for the recovery of State debts until there was the refusal to submit the claim to arbitration. Moreover, the expansion of trade and investment in the 19th and early 20th century led to diverging views on the standard of protection of foreigners abroad. Various commercial treaties, State practice and the decisions of arbitral tribunals and mixed commissions led to the consolidation of a certain body of international law at that time. In the early 20th century the major capital-exporting countries – including the US and the United Kingdom – took the position that foreign nationals and their property were entitled, under customary international law, to a minimum standard of treatment. This standard equalled the one accepted by so-called ‘civilised States’ including the US and European States. In response to such an assertion of a minimum standard of treatment other States, particularly those in Latin America, endorsed the doctrine of a national treatment. As early as 1868 the Argentine jurist Carlos Calvo had argued against the exercise of diplomatic protection and the existence of a minimum standard of treatment. Calvo held that due to the standard of equality of States, foreigners would not be entitled to a better treatment than host State nationals.12 More precisely the Calvo Doctrine held that foreign nationals were entitled to no better treatment than the host State nationals, that the rights of foreign nationals were governed by host State law and that finally host State courts had exclusive jurisdiction over disputes involving foreign nationals. Absolute equality of foreigners with nationals and the principle of non-intervention characterised this doctrine which however, as has been held correctly, never attained the quality of a norm of customary international law.13 This was also due to the fact that according to the revolutionary movement in Russia in 1917 all private property at least with regard to the means of production, was abolished which included the property of foreign nationals. The protection of foreign property had never been challenged before World War II. This was, however, the case with regard to the Soviet nationalisation of property after 1945. Moreover, ideological differences started to develop. Jurisprudence with regard to the minimum standard of treatment included a judgement of the US– 11 Hague Convention II of 1907, 18 October 1907, (1907) 205 Consolidated Treaty Series 250. 12 See Carlos Calvo, Le Droit International – Théorique et Pratique, vol. VI (Guillaumin, 1896) 231. 13 Donald R. Shea, The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy (University of Minnesota Press, 1955) 20.

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Mexico General Claims Commission of 1923 which rejected Calvo’s Doctrine and affirmed the existence of the minimum standard of treatment.14 10 Moreover, in 1922 a commission between Norway and the US declared that international law required ‘just compensation’ for the taking of property rights. Very important were the judgements of the PCIJ. In the famous Mavrommatis Palestine Concessions case, the PCIJ held that diplomatic protection was an ‘elementary principle of international law’15 and in 1926 in the case Concerning Certain German Interests in Polish Upper Silesia the PCIJ confirmed that vested rights of foreign nationals must be recognised.16 Finally in the 1928 case Concerning the Factory at Chorzów the PCIJ held that an illegal seizure of property required reparation.17 With these judgements it was held that the treatment of foreigners and their property enjoyed a minimum standard of treatment.18 11 Thereafter, there were numerous efforts to codify the existing rules. In 1924 the League of Nations had established a committee of experts for the progressive codification of international law which had pleaded in 1927 for a conference on the codification of international law including the responsibility of States for damage done in their territory to the person or property of foreigners.19 Numerous private associations like the Institut de Droit International, the Association de Droit International du Japon and the American Institute of International Law delivered interesting proposals. The 1930 Hague Conference with an Article 10 of a draft codification brought a slight majority of 21 to 17 States maintaining the existence of a minimum standard of treatment.20 Finally with an attempt to conclude a Convention on the Treatment of Foreigners under the auspices of the League of Nations in 1929 this led to the unsuccessful end of this attempt to qualification.21 Here also differences of opinion between capital-importing and exporting States on the principle of equality led to an end of these attempts. In 1933 the Convention on the Rights and Duties of States, the so-called Montevideo Convention, finally supported the Latin American perspective of an equality of treatment standard in Article 9 of this Convention.22

14 See the Harry Roberts case, (1927) 21 AJIL 357; the Neer case, (1926) IV RIAA 60, the Hopkins case, (1927) 21 AJIL 160, the Faulkner case, (1927) 21 AJIL 349, and the Way case, (1929) 23 AJIL 466. 15 Mavrommatis Palestine Concessions (Greece v. UK) (n. 6) 12. 16 See Case Concerning Certain German Interests in Polish Upper Silesia (Germany v. Poland), 1926, PCIJ Series A, No. 7, 22 and 42. 17 Case Concerning the Factory at Chorzów (Claim for Indemnity) (Germany v. Poland), 1928, PCIJ Series A, No. 17, 47. 18 Andrew Newcombe and Lluís Paradell (n. 6) 17. 19 League of Nations, (1925) 5 Official Journal 143. 20 See Edwin M. Borchard, ‘Responsibility of States at the Hague Codification Conference’ (1930) 24 AJIL 517, 533–537. 21 1929 Draft Convention on the Treatment of Foreigners, L.N. Doc. C. 36.M.21.1929.II; see for the conference proceedings in L.N. Doc. C.23.1930.II. 22 Convention on the Rights and Duties of States, 26 December 1933 (entry into force 26 December 1924), (1933) 165 LNTS 19.

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Finally in 1938 then US Secretary of State, Cordell Hull, in response to the 12 expropriation of American-held oil interest by Mexico argued that ‘adequate effective and prompt payment for the properties ceased’23 was required under international law. Mexico, on the other hand, had held that it was required only to pay compensation in accordance with its national laws. Of course the question as to the standard of international law with regard to 13 the compensation for the expropriated property could be asked. But at that time as well as for the early times after World War II one must really state a fundamental disagreement between, on the one hand, capital-exporting countries, represented more or less by the opinion of the US and of the capital-importing countries for whom more or less the opinion of Mexico was representative. The US insisted on the Hull formula of prompt, adequate and effective compensation – which in itself met with disagreement by the capital-importing countries and could thus not evolve to some customary international law24 and by Mexico which held that in case of expropriation it was only required to pay compensation in accordance with its national laws.25 b) Developments after 1945

As just indicated, questions of the adequate standard of treatment of foreign- 14 ers abroad as well as the standard of the required compensation were subject to discussion also even more after the Second World War. With regard to post-World War II developments we must first take into ac- 15 count that attempts had failed to establish a centralised International Trade Organization (ITO) as a third pillar besides the new international financial system alongside the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD, the so-called World Bank). The then adopted Havana Charter26 for the ITO only briefly addressed the issue of investment protection by providing a prohibition on ‘unreasonable or unjustifiable action’ and prohibiting the ITO to make recommendations for bilateral or multilateral investment agreements. The provisionally applied General Agreement on Tariffs and Trade (GATT) did not contain a specific chapter on investment protection. Thus the protection of investment developed independently from the international trade agreements. As is discussed in this volume this protection was done on a bilateral basis, first in the form of international treaties on friendship,

23 See US Secretary of State to Mexican Ambassador, 22 August 1938, in (1938) 32 AJIL, Suppl., 191–201. 24 See e.g. Joseph L. Kunz, ‘The Mexican Expropriations’ (1940) 17 NYU LQR 327. 25 Mexican Minister of Foreign Affairs to US Ambassador, 1 September 1938, in ‘Mexico–US: Expropriation by Mexico of Agrarian Properties Owned by American Citizens’ (1938) 33 AJIL Suppl. 201–207. 26 Havana Charter for an International Trade Organization, US Department of State, Publ. 3206; see on this Günther Jaenicke, ‘Havana Charter’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 2 (North Holland, 1999) 679 et seq.

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commerce and navigation and later on, as will be described infra, through bilateral and also few multilateral investment treaties. 16 Besides this lack of institutionalised investment protection in the area of international trade,27 a strong movement for decolonisation characterised the first twenty years after the Second World War. Many of the newly independent States, along with Eastern European communist States adopted socialist economic policies which allowed for nationalisations of key sectors of their economies. A new policy perspective started to develop in that countries like China, Cuba and countries in Latin America had nationalised their industries (including the Egyptian nationalisation of the Suez Canal) or in the Middle East and Northern Africa like in Algeria, Iran, Iraq, Libya, Kuwait, and Saudi Arabia which brought the issue to attention as to what extent acquired rights through the natural resource concession granted by colonial powers had to be respected and moreover, which standard of compensation for the expropriation of those acquired rights was due. 17 The claims of developing countries were furthermore stipulated in some international law documents such as the Declaration on the Permanent Sovereignty over Natural Resources.28 This was a United Nations (UN) General Assembly (GA) Resolution which, although non-binding, had an eminent political value. Moreover, in 1962 the GA passed Resolution 1803 which declared that ‘the rights of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the state concerned’.29 This resolution reaffirmed that the admission of foreign investment was subject to the authorisation, restriction or prohibition of the host State. Moreover, the move of developing countries culminated in other GA resolutions including the 1974 Declaration on the Establishment of a New International Economic Order (NIEO)30 and the 1974 Charter of Economic Rights and Duties of States.31 Here the principle of permanent sovereignty over natural resources and economic activities was reaffirmed.32 These declarations were more of political than of legal value. In the important arbitral award Texaco Overseas Petroleum Co. (TOPCO) and Californian Asiatic Oil Co. v. Libya33 it was observed that these resolutions were sup27 See on this e.g. Tomer Broude, ‘Investment and Trade: The “Lottie and Lisa” of International Economic Law?’ in Pierre Sauvé and Roberto Echandi (eds), New Directions and Emerging Challenges in International Investment Law and Policy (Cambridge University Press, 2012) 139–155. 28 Resolution on the Permanent Sovereignty over Natural Resources, UN GA Res. 626 (VII), 21 December 1952, (1952). 29 Resolution on the Permanent Sovereignty over Natural Resources, UN GA Res. 1803 (XVII), 14 December 1962, (1963) 2 ILM 223. 30 Declaration on the Establishment of a New International Economic Order, UN GA Res. 3201, 1 May 1974, (1974) 13 ILM 715. 31 Charter of Economic Rights and Duties of States, UN GA Res. 3281, 12 Dec. 1974 (1975), 14 ILM 251. 32 See on this development esp. Nico Schrijver, Sovereignty over Natural Resources (Cambridge University Press, 2008) passim.

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ported ‘by a majority of states but not any of the developed countries with market economies which carry on the largest part of international trade’.34 Other instruments such as the Draft UN Code of Conduct on Transnational 18 Corporations or the OECD Declaration on International Investment and Multinational Enterprises did not reach overarching consensus of the international community. To a certain extent, however, the creation of the International Centre for Set- 19 tlement of Investment Disputes (ICSID) in 1965 under the auspices of the World Bank helped to ease the discussion and to further development. ICSID was designed to provide a neutral forum for the settlement of investment disputes. So there was the outspoken aim to create a forum of mutual confidence.35 Created not as a permanent international arbitral tribunal but as a legal and organisational framework for the arbitration of disputes between contracting States and investors who qualify as nationals of other contracting States, ICSID has succeeded in getting growing international acceptance, both by capital-importing as well as -exporting countries. Just little before, as a response to then existing uncertainties and inadequacies 20 of customary international law on State responsibility for injuries of aliens and their property, countries began to enter into bilateral investment treaties (BITs). Before this new phase of the investment treaties, treaties on friendship, commerce and navigation had served that purpose in depth in that they had contained a considerable portion of investment protection. With the first BIT between Germany and Pakistan in 195936 the contracting States undertook to summarise their natural investment interests. This treaty as well as the subsequent BITs contained clauses asking for the encouragement of foreign investment, a non-discrimination clause for host investment activities, provisions for the compensation due in the event of an expropriation, guarantees on the transfer of capital and investment return and also State to State dispute settlement, at that time by a three person arbitral tribunal selected from the International Court of Justice. Later on and most importantly BITs started to include also the possibility for investor–State arbitration. The BIT between Chad and Italy of 1969 was one of the first of such new BITs.37 At the beginning of this new phase States were

33 Texaco Overseas Petroleum Co. (TOPCO) and Californian Asiatic Oil Co. v. Libya, (1977) 104 JDI 350 (French original) and (1979) 53 ILR 358 (English translation). 34 Ibid., at (1979) 53 ILR 491, para. 86. 35 See particularly Ibrahim Shihata, ‘Towards a Greater Depolitization of Investment Disputes’ (1986) 1 ICSID Rev.–FILJ 1. 36 Agreement Between the Federal Republic of Germany and the Islamic Republic of Pakistan on the Encouragement and Reciprocal Protection of Investments, 25 November 1959, (1961 II) German Law Gazette 793; for a description of the development of German BITs, see Justus Alenfeld, Die Investitionsförderungsverträge der Bundesrepublik Deutschland (Athenäum, 1971) and Joachim Karl, ‘The Promotion and Protection of German Foreign Investment Abroad’ (1996) 11 ICSID Rev.–FILJ 1–36. 37 Accord entre le Gouvernement de la République Italienne et le Gouvernement de la République du Tchad en vue de Proteger et Favoriser les Investissements de Capitaux, 11

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relatively reluctant to enter into BITs. This lasted approximately until the end of the 1980s. Between the end of the 1980s and the end of the century the number of BITs grew, however, quite significantly. This was mostly due to a greater commitment of States, both developed and developing, to economic liberalism and the free flow of good services in investment. Moreover, developing countries had to learn that there were very few alternatives to foreign direct investments with regard to the furtherance of their economies. So until now, there is a worldwide net of approximately 3000 BITs. Attempts to arrive at a Multilateral Investment Agreement (MAI) failed, however. Some groups of States particularly under Ch. XI of the North American Free Trade Agreement (NAFTA) as well as under the Energy Charter Treaty (ECT) have included in these instruments of rather limited reach a specific chapter on investment. 21 The MAI,38 negotiated between 1996 and 1998, was to develop universally applicable investment protection standards in order to replace the bilateral model of the BITs. After enormous general protests France had announced in October 1998 that it would not adhere to the Agreement. This was the end of the respective negotiations with the effect that until now there is no international agreement among States with regard to any universally agreed principles. 22 In Asia the Draft Agreement on a Trans-Pacific Partnership39 among eleven countries, including the US, expressly includes clauses on environmental protection and public welfare. Clauses on investor-State arbitration permitting investors to bring claims directly against States that had expropriated their property are subject to protest of anti-globalisation groups. They basically criticise that the traditional claims of investment protection would be incompatible with environmental and human rights protection. In order to enhance the openness of investor-State arbitration, amicus curiae submissions are allowed. Moreover the treaty expressly requests on the partners to publish all aspects of the proceedings in order to increase transparency. 2. The Substantive Aspects of the International Minimum Standard 23

As had been shown in the previous section, the law of aliens had started to develop from the middle ages on. This law has developed until today more in the form of customary international law than in the form of treaties. However, the basic principles as will be laid down in the following can also be extracted June 1969. On the importance of the Chad–Italy BIT, see Andrew Newcombe and Lluís Paradell (n. 6) 45 with further remarks in fn. 266. 38 On the MAI, see Stephen Canner, ‘The Multilateral Investment Agreement’ (1998) 31 Cornell Int’l L. J. 657–681; Joachim Karl, ‘Das Multilaterale Investitionsabkommen’ (1998) RIW 432–440; Peter T. Muchlinski, The Rise and Fall of the Multilateral Agreement on Investment: where now? (2000) 34 Int’l Law 1033–1053. 39 For the text of the Draft Agreement and an all-encompassing overview on the current status of the negotiations, see http://www.mfat.govt.nz/downloads/trade-agreement/transpacific/mainagreement.pdf and http://www.mfat.govt.nz/Trade-and-Economic-Relations/2-Trade-Relationships-and-Agreements/Trans-Pacific/index.php (Trans–Pacific Strategic_Economic_Partnership).

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from the BITs. These follow a basic structure that includes certain minimum rights, as will be briefly described in the following. 24 There is, first of all, (1) the recognition of a right to legal personality as a basic requirement for any legal position. Moreover, there is an entitlement to the right to life and the protection of the body.40 Furthermore, (2) one can find some law-abiding procedures in case of detention and (3) the right to fall to a non-obstructed access to court. Finally, one would (4) also include the right not to be expropriated without the requirements and the requisites for expropriation being completely fulfilled.41 There are, however, at least three areas where it is contested whether the stan- 25 dard of the international law of aliens encompasses also those areas as an international minimum standard. Such areas are the standard of national treatment, the standard of fair and equitable treatment and the standard of protection in cases of an unlawful expropriation. These three areas shall therefore be discussed in the following. a) National Treatment

It is contested whether foreigners may enjoy a right to be treated equally to a 26 national as a rule contained in the international minimum standard. Such legal position has been accepted in the legal literature where some authors even go so far as to describe this as a principle of customary nature.42 But the acceptance of such a position raises fundamental doubts. States are free to treat their own nationals more favourably than the foreigners living on their territory. Such privilege of the State is only limited or even eliminated in cases where a concrete treaty provision as in the area of the GATT establishes a standard of non-discrimination or national treatment. Therefore, it is more than doubtful that the national treatment standard can be understood as part of customary international law.43 Rather one must state that arguably there is no protection of aliens against any economic discrimination in the relation to the domestic competitors included in the international minimum standard. Jurisprudence of arbitral tribunals acting under the ICSID Convention clearly goes in this direction. In the Methanex award the panel held that ‘[i]n the absence of a contrary rule of international law 40 See inter alia, Jörn Griebel, Internationales Investitionsrecht (C.H. Beck, 2008) 62 et seq. 41 See Kay Hailbronner, ‘Der Staat und der Einzelne als Völkerrechtssubjekte’ in Wolfgang Graf Vitzthum (ed), Völkerrecht (De Gruyter, 2011) 157, 243; Rainer Arnold (n. 1) 102, 105. 42 See Ulrich Häde, ‘Der völkerrechtliche Schutz von Direktinvestitionen im Ausland – Vom Fremdenrecht zum Multilateralen Investitionsabkommen’ (1997) 35 AVR 181–212. 43 See Jörn Griebel (n. 40) 15.

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binding on the States’ parties, whether of conventional or customary origin, a State may differentiate in its treatment of nationals and aliens’.44 27 In principle the national treatment obligation aims at abandoning protectionist attitudes of governments which try to protect home producers from foreign competition.45 Rather any host State must treat foreigners and nationals in a ‘like’ manner if those are in a comparable situation. Thus the claimant must be in ‘like circumstances’ with the more favourably treated entity. As has been shown in the previous part of this chapter, Carlos Calvo strongly opted in favour of national treatment as being the most a foreign investor could demand.46 In principle, however, a certain degree of discrimination is permissible as a matter of customary international law.47 28 It should be noted that the scope of national treatment varies by treaty.48 If it comes to interpreting the national treatment obligations of investment agreements, relatively rarely recourse is had to the practice under GATT and the General Agreement on Trade in Services (GATS) as the panel in the above quoted Methanex award has made it clear.49 Many legal issues in the more recent past were based on an identification of the appropriate domestic comparator, followed by the analysis which treatment was less favourable and then whether the host government could give legitimate reasons for the difference in treatment.50 Hereby the identification of the appropriate comparator is the most important part of this analysis of national treatment.51 Various approaches were taken in order to identify the comparator. Typical cases are S.D. Myers v. Canada,52 Pope & Talbot v. Canada,53 Feldman v. Mexico,54 Occidental Exploration and Production Co. v. Ecuador,55 Loewen Group Inc. v. USA,56 Gami v. Mexico57 and United Parcel Service Inc. v. Canada.58 Thereby it has been analysed that the determination of ‘like circumstances’ was a fact-specific inquiry.59 Furthermore 44 Methanex Corp. v. USA, UNCITRAL (NAFTA), Award, 3 August 2005, Part IV, Ch. C, No. 25. 45 Andrea Bjorklund, ‘National Treatment’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 29–58. 46 Andrea Bjorklund (n. 45) 29, 31. 47 Robert Jennings and Arthur Watts, Oppenheim’s International Law (Oxford University Press, 1996) 932. 48 Andrea Bjorklund (n. 45) 32 with numerous examples. 49 Methanex Corp. v. USA (n. 44) Part II, Ch. B, para. 6. 50 Andrew Newcombe and Lluís Paradell (n. 6) 19–20. 51 Andrea Bjorklund (n. 45) 38. 52 S.D. Myers Inc. v. Canada, UNCITRAL (NAFTA), Partial Award, 13 November 2000. 53 Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award on the Merits of Phase 2, 10 April 2001. 54 Feldman v. USA, ICSID Case No. ARB(AF)/99/1, Award, 16 December 2002. 55 Occidental Exploration and Production Company v. Ecuador, LCIA Case No. UN 3467, Final Award, 1 July 2004. 56 The Loewen Group Inc. & Raimond L. Loewen v. USA, ICSID Case No. ARB(AF)/98/3, Award, 26 June 2003. 57 Gami Investments v. Mexico, ICSID Case No. ARB(AF)/00/1, Award, 9 January 2003. 58 United Parcel Service of America Inc. v. Canada, UNCITRAL (NAFTA), Award, 24 May 2007.

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the claimant must show that the respective treatment is less favourable then that accorded to the domestic comparator, this involving de jure as well as de facto discrimination on the basis of nationality. Such was e.g. the case in Methanex.60 Thereby in general the claimant bears the burden of proof.61 Thus, in conclusion, the national treatment requirement is an important re- 29 quirement although it has decreasing importance and many of the issues have been discussed under the standard of fair and equitable treatment as a standard which could be treated more easily in practice.62 b) Fair and Equitable Treatment

With regard to fair and equitable treatment it is again contested what precisely 30 is covered by this principle and whether or not this principle belongs to the international minimum standard.63 Thereby it is already controversial whether at all such an international minimum standard exists.64 Two different concepts can be observed: one opinion holds that the fair and equitable standard reflects the international minimum standard whereas another opinion is of the view that the standard is autonomous and adds to the international minimum standard. The first opinion, often advanced by developing countries can hint to the US Model BIT as well as to the Canadian Model BIT and to certain arbitral decisions.65 Others hold that the equitable standard would be autonomous and higher than 31 the minimum standard because otherwise a clear reference to the minimum standard would have been sufficient; also the entire uncertainty about the existence of a minimum standard would have necessitated an explicit statement of its inclusion which however never existed.66 In any case there is a significant overlap

59 Andrea Bjorklund (n. 45) 48. 60 Summary of the jurisprudence by Andrea Bjorklund (n. 45) 48–54. 61 Shabtai Rosenne, The Law and Practice of the International Court 1920–1996, vol. II (Martinus Nijhoff, 1997) 1083. 62 Andrea Bjorklund (n. 45) 58. 63 On fair and equitable treatment, see Rudolf Dolzer and André von Walter, ‘Fair and Equitable Treatment – Lines of Jurisprudence and Customary Law’ in Federico Ortino, Lahra Liberti, Audley Sheppard and Hugo Warner (eds), Investment Treaty Law: Current Issues, vol. II (BIICL, 2007) 99–115; Christoph Schreuer, ‘Fair and Equitable Treatment in Arbitral Practice’ (2005) 6 JWIT 357–386. 64 This controversy is inter alia reflected in the Calvo Doctrine and later in the 1974 Charter on Economic Rights and Duties of States respectively in the Hull formula; see inter alia Adronico O. Adede, ‘The Minimum Standards in a World of Disparities’ in Ronald S.J. MacDonald and Douglas M. Johnston (eds), The Structure and Process of International Law (Martinus Nijhoff Publishers, 1983) 1001–1026; Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Springer, 1985) 23–54. 65 Art. 5 of the US Model BIT of 2004, available at www.ustr.gov/sited/default/files/U.S.%20model%20BIT.pdf; as well as Genin v. Estonia, ICSID Case No. ARB/99/2, Award, 25 June 2001; Occidental Exploration and Production Company v. Ecuador (n. 55); S.D. Myers Inc. v. Canada (n. 52), separate opinion by Dr Bryan Schwartz, (2001) 40 ILM 1447 et seq.; as well as Pope & Talbot v. Canada (n. 53) 7 ICSID Rep. 102, 105–112. 66 See correctly Jeswald Salacuse, The Law of Investment Treaties (Oxford University Press, 2010) 227.

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between the international minimum standard and the fair and equitable treatment standard.67 As to the contents of this principle one can state that it encompasses several facets. Certainly the components of this principle encompass sovereignty, legitimate expectations, non-discrimination, as well as the procedural principles of fair procedure, denial of justice, administrative due process and transparency. Thereby the meaning of sovereignty has been subject to some controversy. Incontestably one must anticipate an understanding of sovereignty as meaning sovereignty under law and its consequential restriction to the domaine réservé as being consented during the time and in the course of the process of decolonisation. As mentioned above this time brought about claims like the one on National Sovereignty over Natural Resources of 1962 and the Charter on Economic Rights and Duties of States of 1974. These resolutions meant a challenge to but eventually no final knock-out criterion for sovereignty. Still the notion of sovereignty remained broad enough in order to be opposed to a certain level of protection for a foreign investor.68 This standard would encompass a variety of legal positions such as the right to an orderly procedure, the right to be heard in court and the protection against wilful detention. Those positions can certainly be considered to be part of a recognised principle of fair and equitable treatment.69 Moreover, there are indications to recognise the principle of fair and equitable treatment as a standard which has achieved customary nature.70 However, despite the customary value of such regulation one must always look into the concrete context of the BIT in order to gain the importance of such principle in the concrete case. Moreover the fair and equitable principle encompasses an element of protection of the foreign investor’s legitimate expectations. This covers the fact whether and in how far public statements or decisions notified by officials can be relied upon.71 Arbitral tribunals have acknowledged the investors’ interest in stability and predictability. They have also developed criteria for the assessment of the legitimacy of the investor’s expectations. This kind of protection is relatively well established in the jurisprudence on the protection of the investors’ interests.72 The element of non-discrimination turns out to be one key concept inherent in the concept of fair and equitable treatment which is, however, not entirely uncontroversial in the interpretation of the tribunals. Arbitral tribunals have recog-

67 Jeswald Salacuse (n. 66) 227. 68 See Roland Kläger, Fair and Equitable treatment in International Law (Cambridge University Press, 2011) 163 et seq., on the importance of a relative concept of sovereignty. 69 See Rudolf Dolzer and André von Walter (n. 63) 112. 70 See id. 71 See on this aspect particularly Katia Yannaca-Small, ‘Fair and Equitable Standard: Recent Developments’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 111, 124 et seq. 72 See the examples given by Katia Yannaca-Small (n. 71) 124 et seq.

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nised the value of the principle73 and a court held in CME v. Czech Republic74 that the Czech Republic was discriminatory against the investor. On the other hand, another tribunal has eventually found the opposite in Methanex Corp. v. USA. By applying a narrow approach the tribunal negated the fulfilment of the criterion of non-discrimination to be an element of fair and equitable treatment.75 But in sum one can hold that arbitral tribunals strongly support non-discrimination as an element of fair and equitable treatment.76 Finally an element of sustainable development has already been established. 37 Arbitral tribunals in Ogoniland77as well as in other cases make evident that the jurisprudence has accepted that the concept of sustainable development is a well established principle in international law.78 This principle demands a comprehensive balancing of all relevant factors and interests.79 Next to procedural principles like fair procedure80 and administrative good 38 process there is finally an element of transparency contained in the fair and equitable standard.81 c) Protection of Property

Most contested in the framework of the international law of aliens were, as 39 has been indicated above, all questions involving the protection of property. Particularly questions of an unlawful expropriation respectively of an unlawful nationalisation were and are contested. It is rather clear under international law that any State is legitimised to adopt measures of nationalisation on its own territory.82 As a consequence, measures with expropriating effect are in principle legitimate; however, there are some restrictions of public international law that respect basic property right of individuals as well as of foreigners. Therefore one can say that the expropriation of alien property is legitimate,83 but only under certain conditions.84 73 See S.D. Myers Inc. v. Canada (n. 52) fn. 804. 74 CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001, esp. para. 611. 75 See Methanex Corp. v. USA, UNCITRAL, Final Award, 3 August 2002, Part IV. 76 See Roland Kläger (n. 68) 195 with further references. 77 Decision of the African Commission on Human and Peoples’ Rights, Communication No. 155/06 (2001), 13 October 2001 (based on the 1981 African Charter on Humans and Peoples’ Rights); see also Fons Coomans, ‘The Ogoni Case Before the African Commission on Human and Peoples’ Rights’ (2003) 52 ICLQ 749–760. 78 On the problem of language see Roland Kläger (n. 68) 21. 79 Id., at 206 et seq. 80 Id., at 213 et seq. 81 Id., at 130. 82 See De Sanchez v. Banco Central de Nicaragua and others, 770 F.2d 1385 (5th Cir. 1985), 1397, (1992) 88 ILR 75, 89; Malcolm N. Shaw, International Law (Cambridge University Press, 2008) 828. 83 See Amco v. Indonesia, ICSID Case No. ARB/81/1, Award, 20 November 1984, (1992) 89 ILR 405, 466. 84 See World Bank Guidelines on the Treatment of Foreign Direct Investment, (1992) 31 ILM 1363.

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It is not contested that all international human rights documents such as the Universal Declaration on Human Rights and the two Human Rights Covenants of the United Nations (e.g. in Article 17) protect property only against wilful expropriation but not generally from expropriation without indemnification. International law distinguishes direct and indirect expropriation. The latter does not infringe upon property in a direct way but only de facto. However, the international law of aliens protects also against de facto expropriation.85 It is clear that expropriation involves the taking of property, but actions short of direct possession of the assets in question may also fall within this category.86 That includes ‘any such unreasonable interference with the use, enjoyment or disposal of property as to justify interference that the owner thereof will not be able to use, enjoy or dispose of the property within a reasonable period of time after the inception of such interference’.87 The Iran–US Claims Tribunal held that measures taken by a state can interfere with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated, even though the state does not purport to have expropriated them and the legal title to the property formerly remains with the original owner.88

The taking of property can also constitute a process rather than one clear act. In these cases it is decisive when the process has reached the point at which an expropriation in fact has occurred. One would speak in these cases of a so-called creeping expropriation.89 Most important are the requirements under which an expropriation or nationalisation is legitimate under international law of aliens. The PCIJ held in the famous case of Certain German Interests in Polish Upper Silesia that an expropriation must be for ‘reason of public utility, judicial liquidation and similar measures’.90 In the BP case91 the reason for the expropriation of BP property was the Libyan belief that the UK had encouraged Iran to occupy certain Persian Gulf islands. It was made clear that the taking had violated international law, ‘as it was made for purely extraneous political reasons and was arbitrary and discriminatory in character’.92 42 In the LIAMCO case93 the tribunal held that ‘the public utility principle is not a necessary prerequisite for the legality of a nationalization’.94 The 1962 UN GA 41

85 See Christoph Schreuer, ‘The Concept of Expropriation under the ECT and other Investment Protection Treaties’ in Clarisse Ribeiro, Investment Arbitration and the Energy Charter Treaty (Juris, 2006) 108–159, particularly sub. 2. and 3. 86 See 1961 Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens in Louis B. Sohn and Richard R. Baxter, ‘Responsibility of States for Injuries to Economic Interests of Aliens’ (1961) 55 AJIL 545 et seq. 87 See ibid., 545, 553–554. 88 The Interlocutory Award, 19 December 1983, 4 Iran–US CTR 122, (1991) 85 ILR 349. 89 See e.g. Generation Ukraine v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003, (2005) 44 ILM 404. 90 Case of Certain German Interests in Polish Upper Silesia (Germany v. Poland), 1926, PCIJ Series A, No. 7, 22. 91 British Petroleum (BP) Exploration Co (Libya) Ltd v. Libya, Award, 10 October 1973, (1979) 53 ILR 297. 92 Ibid., 329.

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Resolution on Permanent Sovereignty over Natural Resources repeats this requirement, but the 1974 Charter of Economic Rights and Duties of States does not.95 Finally a tribunal in the Santa Helena v. Costa Rica case was of the opinion that international law permitted expropriation of foreign-owned property, for example for a public purpose and noted that this might include a taking for environmental reasons.96 Thus, in principle, expropriation is possible even against foreign nationals. The first requirement is that this expropriation must have taken place in the public interest. Moreover, the expropriation shall not have any discriminatory character. This is a rather disputed principle. Only certain facts may hint as to whether or not these requirements are fulfilled. An essential hint for any discrimination could be that the expropriation may also indicate the importance of the nationality of an enterprise as a necessary criterion. The real dispute, however, is the standard of compensation. At least this was the case for a long time. This involved the fundamental question on the existence of a minimum standard of protection of property which started with the controversy between the Hull and Calvo Doctrine97 and was reiterated in the second half of the 20th century with respect to the UN GA Resolution on Permanent Sovereignty over Natural Resources, the Charter of Economic Rights and Duties of States and other documents. Whereas some assert that today the Hull formula according to which indemnification must be prompt, effective and adequate can be considered to be the general rule accepted by international law, case law is not so clear. Many cases did not use the Hull Formula.98 Moreover, the 1962 Permanent Sovereignty Resolution made reference to the so-called additional standard of appropriate compensation. This was reiterated by the arbitrator in the TEXACO case.99 It was furthermore underlined in the AMINOIL case.100 Here the tribunal referred to the standard of appropriate compensation, including the 1962 resolution as codifying positive principles.101 The 1974 Charter of Economic Rights and Duties of States linked the formula only to domestic considerations. Sec. IV(1) of the World Bank Guidelines on the Treatment of Foreign Direct Investment finally provides that a State may not ex93 Libyan American Oil Company v. the Libya (LIAMCO case), ad hoc Award, 12 April 1977, (1981) 20 ILM 1. 94 Ibid., at 58, 59. 95 See para. 4 of the 1962 Resolution; and Art. 2 para. 2 lit. c. of the 1974 Charter of Economic Rights and Duties of States. 96 Compañía del Desarrollo de Santa Elena S.A. v. Costa Rica, ICSID Case No. ARB/96/1, Award, 17 February 2000, (2000) 39 ILM 1317, 1329. 97 See supra, sub. A.1.a). 98 See for example the Chorzów Factory case, 1928, PCIJ Series A, No. 17, 46. 99 Texaco Overseas Petroleum Company v. Libya, ad hoc Award, 19 January 1977, (1978) 17 ILM 3, 29. 100 Kuwait v. The American Independent Oil Company (AMINOIL), ad hoc Award, 24 March 1982, (1982) 21 ILM 976. 101 Ibid., 1033.

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propriate foreign private investment except where this is done in accordance with applicable legal procedures, in pursuance of good faith of a public purpose, without discrimination on the basis of nationality and against the payment of appropriate compensation. Here the following sec. IV(2) notes that compensation is considered to be appropriate when it is adequate, prompt and effective.102 The same criterion is more or less taken up by Article 1110 of the NAFTA of 1992. Also Article 13 of the ECT of 1994 provides that the expropriation must be for a purpose which is in the public interest, non-discriminatory, carried out under due process of law and accompanied by the payment of prompt, adequate and effective compensation.103 So in sum we can conclude that the standard of the Hull formula after some turbulences in the 1960s and 70s may, by today, be the generally accepted standard of also customary international law under the law of aliens.104 B. Conclusion

It is evident that the international law of aliens can protect the investor only to a limited extent. Many relevant dangers for the success of an investment are not really protected. There are only limited prohibitions of discrimination. But there is an explicit permission of the discriminatory treatment of a foreigner vis-à-vis the national. Whereas the standard of protection concerning the indemnification may be adequate in the sense of the formula, by today the extent of compensation may also give rise to some problems105 with references to State practice. 48 Today international investment law which basically operates through a web of bilateral and multilateral investment treaties has very much taken up the function of enriching the international law of aliens in a considerable way in order to come to an adequate balance of all interests involved. Although international investment law cannot deny its roots in the international law of aliens, it has made considerable steps of development and thus must be regarded as a new and as an original contribution to general international law. 47

102 The World Bank Guidelines on the Treatment of Foreign Direct Investment, 21 September 1992, (1992) 31 ILM, 1382. 103 The Energy Charter Treaty, 17 December 1994, (1995) 34 ILM 391. 104 Such is the leading opinion, see only Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 92 et seq., Andrew Newcombe and Lluís Paradell (n. 6) 34 et seq. 105 See on the following Malcolm N. Shaw (n. 82) 835–837.

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Stephan Wittich A. The Concept of State Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Outline of the Historical Development of the Law on State Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Codification Efforts outside the ILC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Private and Regional Codification Work . . . . . . . . . . . . . . . . . . . . . . . . . . b) The League of Nations and the Hague Conference (1925–1930) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Work of the ILC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Early Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) A New Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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C. Conceptual Issues concerning State Responsibility in Relation to Investment Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The Hybrid Nature of Investment Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Scope of the ILC Articles on State Responsibility . . . . . . . . . . . . . . a) General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Open Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: James Crawford, The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries (Cambridge University Press, 2002); James Crawford, ‘Investment Arbitration and the ILC Articles on State Responsibility’ (2010) 25 ICSID Rev.–FILJ 127–199; James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010); James Crawford, State Responsibility. The General Part (Cambridge University Press, 2013); Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 152–289; Zachary Douglas, ‘Other Specific Regimes of Responsibility: Investment Treaty Arbitration and ICSID’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 815–842; Yoshiro Matsui, ‘The Transformation of the Law of State Responsibility’ (1993) 20 Thesaurum Acroasium 5–65, reprinted in René Provost (ed), State Responsibility in International Law (Ashgate, 2002) 3–63; Martins Paparinskis, ‘Investment Treaty Arbitration and the (New) Law of State Responsibility’ (2013) 24 EJIL 617–647; Alain Pellet, ‘La Codification du droit de la responsabilité internationale: tâtonnements et affrontements’ in Laurence Boisson de Chazournes and Vera Gowlland-Debbas (eds), The International Legal System in Quest of Equity and Universality. Liber Amicorum Georges Abi-Saab (Martinus Nijhoff, 2001) 285–304; Alain Pellet, ‘Les Articles de la CDI sur la responsabilité de l’État pour fait internationalement illicit. Suite – et fin?’ (2002) 50 AFDI 1–23; Christian Tams, ‘All’s Well That Ends Well: Comments on the ILC’s Articles on State Responsibility’ (2002) 62 ZaöRV 759–808; Stephan Wittich, ‘The ILC’s Articles on the Responsibility of States for Internationally Wrongful Acts Adopted on Second Reading’ (2002) 15 LJIL 891–919.

A. The Concept of State Responsibility

State responsibility is the term describing the sum of rules of international 1 law concerning the origin and the consequences of breaches of norms of international law by States. This broad perception of State responsibility can be traced back to a general principle of law common to all, or at least the major, legal sys-

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tems according to which every violation of a legal norm entails the legal accountability of the wrongdoing subject. In its narrowest, and probably most important, form this legal accountability covers the obligation to make good the consequences of the unlawful act. Such is the gist of the very idea of being a subject of the law as a holder of rights and obligations. This common understanding of State responsibility as a general principle of law is already reflected in the famous pronouncement of the Permanent Court of International Justice in the merits phase of the Chorzów Factory case where it stated that ‘it is a principle of international law, and even a general conception of law, that any breach of an engagement involves an obligation to make reparation’.1 2 Similar to liability and responsibility in other legal orders, State responsibility performs an important task of ensuring, within the confines of the overall structure of the international legal order, the observance and ultimately the effectiveness of international law. A potential law-breaker anticipating certain adverse effects of his own breach will be induced to comply with his obligations rather than ignore them. But State responsibility is also warranted by various other considerations such as legal certainty, stability and predictability, and the continued validity and force of the law even if it was breached in a given case. By making the law-breaker legally accountable for his wrongdoing and by attaching some form of ‘sanction’ in the broadest, most general sense, the validity of the norm breached is strengthened, and it is ensured that, in principle, the breach does not generate new law (ex iniuria non oritur ius). 3 In international law, the concept of State responsibility encompasses a variety of aspects or, if viewed in a procedural sense, stages of the process of responsibility. These include the generating conditions or the origin of responsibility – notably attribution and defences (that is, circumstances precluding wrongfulness in the parlance of the Articles of the International Law Commission (ILC)) – and the consequences of a wrongful act. The latter comprise new legal relationships (rights and obligations) between the author of the wrongful act, the injured State and, exceptionally, other States than the injured one or even non-State entities. The consequences also include the rules on how the responsibility of the wrongdoing State is to be implemented. 4 The aim of this chapter is twofold. First it shall outline the historical development of the law of State responsibility, primarily by depicting the various efforts of codification by different bodies (section B.). Secondly, it shall briefly discuss two related conceptual problems of State responsibility in relation to international investment law (section C.). The particular application of the rules of State re-

1 Factory at Chorzów (Germany v. Poland), PCIJ Judgment, Merits, (1928) PCIJ (Ser. A) No. 17, 29. See also Judge Huber in Spanish Zone in Morocco, (1923) 2 RIAA 615, 641, stating that ‘[l]a responsabilité est le corollaire nécessaire du droit. Tous droits d’ordre international ont pour conséquence une responsabilité internationale. La responsabilité entraîne comme conséquence l’obligation d’accorder une réparation au cas où l’obligation n’aurait pas été remplie.’

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sponsibility to investment law and the problems arising from their scope will be dealt with elsewhere in this volume.2 B. Outline of the Historical Development of the Law on State Responsibility 1. General

In its earliest form, which however continued to exist until the second half of 5 the 20th century, the law of international responsibility was characterised by several features. First, it was an exclusively inter-State law, and international responsibility was even equated with State responsibility. This means that only the breach of obligations owed by one State to another could give rise to international, that is, State responsibility. Accordingly, the potential responsibility of other actors was not the subject of the international law rules of responsibility. Secondly, State responsibility was generally treated in relation to specific substantive areas of international law, notably the treatment by the host State of aliens on its territory.3 This strong focus on responsibility for the treatment of foreigners was certainly influenced by the arbitral practice at the time which almost exclusively concerned injuries to foreigners and diplomatic protection exercised by the home State of the individual in enforcing its international rights against the host State. At the same time, however, this narrow focus on the treatment of aliens had a somewhat broadening effect on earlier codification efforts as they not only attempted to lay down the consequences of wrongful acts and the procedural rules of implementation – especially the conditions for the exercise of diplomatic protection, such as the rule of the exhaustion of local remedies –, but also endeavoured to codify in detail the relevant substantive, or primary, norms containing obligations breach of which would give rise to State responsibility. Thirdly and closely connected thereto, the focus on the law concerning the 6 treatment of foreigners laid much emphasis on the concept of damage. One reason for this is that most primary rules in this field indeed require the infliction of some kind of damage or harm in order to be breached.4 Indeed, the entire law on the treatment of foreigners was equated with the rules concerning the injuries caused to them (standard of treatment, expropriation, prevention, and damages). Another reason for the ‘prominent’ role of damage is again to be found in arbi2 See chapter 5.III. on ‘The Application of Rules on State Responsibility’, chapter 5.IV. on ‘Circumstances Precluding Wrongfulness’, and chapter 9 on ‘Restitution, Damages and Compensation’ in this volume. 3 See in particular the private efforts to codify the law of State responsibility as discussed below in section B. But the approach to State responsibility as focusing on the treatment of aliens persisted well into the 20th century, see e.g. Chittharanjan F. Amerasinghe, State Responsibility for Injuries to Aliens (Clarendon Press, 1967); Richard B. Lillich (ed), International Law of State Responsibility for Injuries to Aliens (University Press of Virginia, 1983). 4 This is already borne out by the designation of the topic as State responsibility for injuries suffered by foreigners.

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7

8

9

10

tral practice because many tribunals dismissed claims for reparation absent any, particularly material, damage. Yet, the motivation for this case law was not based on the conceptual understanding that damage is a constitutive element (or fait générateur) of State responsibility; rather the jurisdiction of the tribunals in these cases usually was clearly confined to awarding the specific remedy of damages for tangible harm or loss that could be quantified and assessed in monetary terms. As a result, these tribunals simply did not possess jurisdiction in cases where no damage had occurred, but that does not mean that they viewed the existence of responsibility as depending on the existence of some form of (material) damage. Finally, responsibility was considered as being purely civil in nature, concerning only the relations between the wrongdoing and the injured State, similar to the situation in municipal private law. Broader collective or, for that matter, public interests affecting other States or a community of States – or even the international community as a whole – were largely unknown to that early understanding of State responsibility. It was not until the second half of the 20th century that public law considerations found their way into the law of State responsibility. Viewed against that backdrop, the modern law of international responsibility, especially State responsibility, is fundamentally different as to its nature, concept, and structure.5 With the broadening of subjecthood, resulting in a much larger circle of international law subjects, international responsibility is no longer restricted to States. Suffice it to refer to the impressive development of international criminal responsibility during the last two or so decades, as well as the still embryonic, yet existent law of responsibility of international organisations. Furthermore, and much more pertinent for present purposes, States may not only become responsible for breaches of obligations owed to other States, but also for violations of obligations owed to individuals, such as investors. On the other hand, the modern law of State responsibility is subject to an important conceptual limitation. As is well known and nowadays uncontested, the law of State responsibility largely is confined to setting forth the secondary rules, that is, the rules concerning its origin, content and implementation, whereas it is generally without prejudice to the primary norm whose breach is at issue.6 Also, the concept of damage has long been abandoned as a distinct condition for the origin of State responsibility7 – if it ever was viewed this way in the past. 5 Yoshiro Matsui, ‘The Transformation of the Law of State Responsibility’ (1993) 20 Thesaurum Acroasium 5–65. 6 Eric David, ‘Primary and Secondary Rules’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 2733; Jean Combacau and Denis Alland, ‘Primary and Secondary Rules in the Law of State Responsibility: Categorizing International Obligations’ (1985) 16 NYIL 81–109. 7 See James Crawford, ‘The System of International Responsibility’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 17, 23–24.

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Accordingly, damage is principally a matter of the primary norm which may indeed require the infliction of damage for its own breach. This, to be sure, does not mean that damage has become irrelevant to issues of State responsibility. Thus, damage usually plays an important role in assessing the form and amount of reparation and in determining the State or States entitled to invoke responsibility. And finally, the modern law of State responsibility has paved the way for an attenuated form of ‘responsibility in the public interest’, particularly in, but not restricted to, cases where serious violations of peremptory norms of general international law are at issue.8 As noted at the beginning, the entire concept of State responsibility as well as 11 many of its individual aspects or rules (such as attribution, circumstances precluding wrongfulness, reparation, causation) are but a manifestation of general principles of law to be found in the major legal systems. As such they were taken up by arbitral and judicial practice which refined and adapted them to the particular needs of international law and relations. This process culminated in the emergence of a body of customary international law largely codified and further developed in significant details by the ILC in its 2001 Articles on Responsibility of States for Internationally Wrongful Acts. In the following, the major steps and contributions in this process of development shall be outlined. 2. Codification Efforts outside the ILC a) Private and Regional Codification Work

Given the fact that already in the late 19th and early 20th century there existed 12 a bulk of arbitral practice in the field of State responsibility, it is little surprising that State responsibility was the object of several codification projects already at an early stage. These early attempts were made by both private and public institutions and were largely driven by the conviction that the law of State responsibility had already been sufficiently consolidated by the wealth of case law, even though mainly limited to cases of injuries to foreigners and the exercise of diplomatic protection.9 Notably the work of the mixed claims commissions and other arbitral bodies during the first third of the 20th century provided fertile ground on which to proceed in terms of codification.10 The beginning of the 20th century therefore saw a number of private drafts all 13 of which concerned responsibility of States for injury to foreigners, or particular aspects thereof. Private institutions or societies, such as the Institut de droit in8 See in particular Bruno Simma, ‘Bilateralism and Community Interest in the Law of State Responsibility’ in Yoram Dinstein (ed), International Law at a Time of Perplexity: Essays in Honour of Shabtai Rosenne (Nijhoff, 1989) 821–844; Bruno Simma, ‘From Bilateralism to Community Interest in International Law’ (1994) 250 RC 217–384. 9 Patrick Daillier, ‘The Development of the Law of Responsibility through the Case Law’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 37, 39. 10 This conviction, however, turned out to be deceptive in the case of the Hague Conference of 1930, see below B.2.b).

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ternational (IDI), the International Law Association (ILA), or national societies in the field of international law, have undertaken various studies in the field of State responsibility.11 The most elaborate and most influential private codification work was carried out by Harvard Law School and resulted in the 1929 Harvard Draft Convention on Responsibility of States for Damage Done in their Territory to the Person or Property of Foreigners.12 The Harvard Draft was prepared under the lead of Professor Borchard during the preparation of the Hague Conference and was intended to assist the conference in its work. It consisted of 18 articles accompanied by comprehensive and lengthy commentaries. It was guided by the idea of combining ‘a restatement of the existing law with proposals for moderate changes which seem[ed] necessary to secure the acceptance of the convention by all countries’.13 While it had virtually no influence on the Hague Conference, some 25 years later the 1929 Harvard Draft made a great impression on the ILC, particularly given its detailed articles and commentaries and its overall high quality. Thus, the ILC secretariat took the initiative of requesting the Harvard Law School Research Center to revise the Draft and bring it up to date,14 an initiative confirmed by the Commission in 1956, that is, the starting year of the ILC’s work on State responsibility. The task of revision was entrusted to Professors Louis Sohn and Richard Baxter, and their work resulted in the substantially revised Draft of 1961, consisting of 40 articles and again quite lengthy explanatory notes.15 This second Harvard Draft was greatly influenced by the ideas of the first Special Rapporteur of the ILC on State responsibility, Mr García Amador. Although it remained within the strict confines of the responsibility for injuries to aliens, the Draft envisaged an important place of the individual in the law of State responsibility, including the entitlement of individuals to present their claims directly to the defendant State.16 But just like

11 Draft on International responsibility of States for injuries on their territory to the person or property of foreigners, prepared by the IDI 1927, reprinted in (1956) YBILC, vol. II, 227– 229; Resolution on ‘The rule of the exhaustion of local remedies’, adopted by the IDI in 1956, (1956) Annuaire, vol. 46, 364; Resolution on ‘The national character of an international claim presented by a State for injury suffered by an individual’, adopted by the IDI in 1965, (1965) Annuaire, vol. 51 (II), 269–271; Draft code of international law that included ‘Rules concerning the responsibility of a State in relation to the life, person and property of aliens’, adopted by the Japanese branch of the ILA, Report of the Thirty-Fourth Conference, 1926, 382–383. See also the project on ‘Diplomatic protection’, prepared by the American Institute of International Law in 1925, reprinted in (1956) YBILC, vol. II, 227; Draft convention on the responsibility of States for injuries caused in their territory to the person or property of aliens, prepared by the German Society of International Law, translated in (1969) YBILC, vol. II, 149– 151. 12 (1929) 23 AJIL Special Supplement, 131, reprinted (albeit without commentaries) in (1956) YBILC, vol. II, 229, annex 9. 13 (1929) 23 AJIL Special Supplement, 140. 14 (1969) YBILC, vol. II, 133, para. 46. 15 Draft Convention on the International Responsibility of States for Injuries to Aliens, reprinted in (1961) 55 AJIL 548. The draft without explanatory notes is also reprinted in (1969) YBILC, vol. II, 142. 16 See the very detailed Article 22.

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Amador’s work17 the revised Harvard Draft too had no lasting impact on the work of the ILC. On the regional level, the International Conferences of American States and 14 the Inter-American Juridical Committee engaged in preparing recommendations and principles in the field of State responsibility,18 and even a Convention.19 Finally, there are also drafts elaborated by individual German scholars20 who, quite interestingly, approached State responsibility from a more general perspective, by not limiting it to the breach of specific obligations in the field of the law concerning foreigners. b) The League of Nations and the Hague Conference (1925–1930)

As for institutional efforts, the Hague Conference was the first, and in fact the 15 only ‘official’, body until the International Law Commission to assume the task of codifying the law of State responsibility.21 That effort was undertaken in a three-tier process. In 1924, the Assembly of the League of Nations requested the League’s Council to convene a committee of experts (representing ‘the main forms of civilization and the principal legal systems of the world’) to set up a provisional list of topics of international law apparently suitable for codification, of preliminary reports and memoranda upon each, of questionnaires on these submitted to governments, analysis and arrangement of the replies thereto. The committee held four sessions from 1925 to 1928. Already during the general debate it soon became clear that the Committee of Experts, consisting of 17 members, significantly disagreed on its mandate.22 The questions raised ranged from 17 See below B.3.a). 18 Recommendation concerning ‘Claims and Diplomatic Intervention’, adopted at the First International American Conference (Washington, 1889–1890), reprinted in (1956) YBILC, vol. II, 226; Resolution on ‘International Responsibility of the State’, adopted at the Seventh International Conference of American States (Montevideo, 1933), reprinted in ibid.; Principles of international law that govern the responsibility of the State in the opinion of the Latin American States, prepared by the Inter-American Juridical Committee in 1962, reprinted in (1969) YBILC, vol. II, 153; Principles of international law that govern the responsibility of the State in the opinion of the United States of America, prepared by the Inter-American Juridical Committee in 1965, reprinted in ibid. 19 Convention relative to the rights of aliens, signed at the Second International Conference of American States (Mexico City, 1902), reprinted in (1956) YBILC, vol. II, 226. 20 See, e.g., Draft treaty concerning the responsibility of a State for internationally illegal acts, prepared by Professor Strupp in 1927 (Karl Strupp, Die völkerrechtliche Haftung des Staates insbesondere bei Handlungen Privater, Abhandlung zur fortschreitenden Kodification des internationalen Rechts, Heft 1, Kiel, 1927), translation in (1969) YBILC, vol. II, 151–152; Draft convention on the responsibility of States for International wrongful acts, prepared by Professor Roth in 1932 (Anton Roth, Das völkerrechtliche Delikt vor und in den Verhandlungen auf der Haager Kodifications Konferenz 1930 [1932] 177–178), translated in ibid., 152. 21 Clémentine Bories, ‘The Hague Conference of 1930’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 61; Yoshiro Matsui (n. 5) 24–40. For contemporary conference reports see Jesse S. Reeves, ‘The Hague Conference on the Codification of International Law’ (1930) 24 AJIL 52; Manley O. Hudson, ‘The First Conference for the Codification of International Law’, (1930) ibid., 447; Green H. Hackworth, ‘Responsibility of States for Damages Caused in Their Territory to the Person or Property of Foreigners’, ibid., 500; Edwin M. Borchard, ‘“Responsibility of States,” at the Hague Codification Conference’, ibid., 517.

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the meaning of codification, especially whether it should be confined to existing law or also develop it further, the desirability to include questions of private international law or whether it was necessary to study the methods which might lead to the unification of national law. Eventually, the committee appointed a Drafting Sub-Committee entrusted with the task of ‘collating the various lists of subjects’.23 Among the subjects chosen by that committee was ‘Responsibility of a State for Crimes [sic] committed against Foreigners’.24 For each of the subjects, a sub-committee was established. The Sub-Committee for Responsibility, whose ‘mandate’ included the question to examine a possible drafting of a convention,25 submitted a report entitled ‘Responsibility of States for Damage Done in Their Territories to the Person or Property of Foreigners’ which had largely been drafted by Rapporteur Gustavo Guerrero.26 Throughout his report, Guerrero favoured equal treatment of foreigners with nationals over an international standard of protection, and it was mainly for this reason that the report was heavily criticised by several members of the committee as not reflecting international practice or international law.27 The report was adopted by the committee only after several modifications and, tellingly, only as ‘the personal work of the Rapporteur’.28 16 After State governments had considered the topic of State responsibility for injuries to foreigners ripe for codification in 1927,29 the Assembly of the League agreed to limit the programme of codification to three subjects, among them State responsibility,30 and decided to convene a first Codification Conference which should also deal with the topic of State responsibility. For that purpose the Council was asked to appoint a Preparatory Committee that should elaborate detailed bases of discussion in order to facilitate the work of the conference. Initially it was intended to prepare complete drafts which might be used to serve as a detailed starting point for the negotiations at the conference. But, as the experience of the Committee of Experts showed, this soon turned out to be impossible for lack of time and (financial) resources.31 The committee held three sessions in

22 See the summary in Shabtai Rosenne (ed), League of Nations Committee of Experts for the Progressive Codification of International Law (Oceana Publications, 1972), vol. I, xlii-lii. 23 Ibid., 27. 24 Ibid., 34. 25 The somewhat enigmatic mandate of the Sub-Committee was to examine ‘(1) Whether, and in what cases, a State may be liable for injury caused on its territory to the person or property of foreigners; (2) Whether and, if so, in what terms it would be possible to contemplate the conclusion of an international convention providing for the ascertainment of the facts which may involve liability on the part of a State, in prohibiting in such cases recourse to measures of coercion before the means of pacific settlement have been exhausted’. Ibid., 49. 26 Ibid., vol. II, 118; also reprinted in (1926) 20 AJIL 177. 27 See the discussion ibid., vol. I, 75–101. 28 Ibid., 172. 29 Ibid., vol. II, 1–2 and 116–117. 30 League of Nations Official Journal, special supplement no. 54, Records of the 8th ordinary session, Plenary meetings, 484–488, Annex 35. The two other subjects were nationality and territorial waters.

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1928 and 1929, and within this relatively short period of less than two years, and in light of the replies from governments to questionnaires, it drew up ‘Bases of Discussion’ on each subject.32 Somewhat surprisingly, the Bases of Discussion deviated in some respects from the work of the Committee of Experts. For example, when replies from the governments displayed divergent opinions on a question, the committee would virtually always opt for one that affirmed responsibility or that provided for responsibility broader in scope.33 Furthermore, unlike Guerrero’s report, they clearly advocated an international standard of justice. To be sure, these changes did not indicate a new direction in the committee’s approach to State responsibility as its work still focused on the responsibility of States for damage done in their territories to the persons or property of foreigners, since after all this was the mandate of the Preparatory Committee.34 But it nevertheless significantly compromised the preparatory work carried out by both the Committee of Experts and the Preparatory Committee. The Hague Conference itself was held from 13 March to 12 April 1930 and 17 attended by 47 States. Overall, it was not successful in exercising its mandate in relation to State responsibility. This was clearly expressed by the oral communication of the chairman of the Third Community, that is, the committee on State responsibility, J. Basdevant, who tersely said: ‘I have the honour to report to the Conference that the Third Committee has been unable to finish the examination of the questions relating to the responsibility of States (…). The Third Committee accordingly is not in a position to submit to the Conference any conclusions on this point.’35 The reasons for the almost total failure of the Third Committee are manifold. 18 Some of them concerned the Hague Conference as a whole. In the first place, the conference was under extreme time pressure as only four weeks were allocated to produce a draft convention in each of the topics selected. Secondly, although five years had been devoted to preparing the drafts, and while the work of both the Committee of Experts and the Preparatory Committee was extraordinary in terms of substantive analysis of the various issues, the conference was insufficiently prepared.36 The list of errors includes rather ‘technical’ flaws, such as the 31 Manley Hudson (n. 20) 464; Shabtai Rosenne, League of Nations Conference for the Codification of International Law (1930), vol. I, xviii. 32 For the bases of discussion concerning responsibility and the responses see League of Nations Conference for the Codification of International Law (n. 31), vol. II, 432–702. 33 Yoshiro Matsui (n. 5) 29. 34 This despite the suggestions of some States, see for instance the observations by Germany: ‘Most authorities on international law, however, consider the problem of the responsibility of States in its more restricted sense, as distinct from the law of foreigners. They argue that the responsibility of States does not include all the duties of a State with regard to the treatment of foreigners, but amounts merely to the determination of the conditions under which such responsibility arises when the corresponding rules of international law are broken (…) After careful consideration of the problem, the German Government has come to the conclusion that (…) it will be desirable to limit the discussion (…) to the problem of the responsibility of States in the more restricted sense.’ League of Nations Conference (n. 31), vol. II, 166. 35 Ibid., vol. III, 745–746.

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composition of the Preparatory Committee37 – which led to discontinuance, in relation to the Committee of Experts, in terms of the preparation of the issues and the contents of the work38 – or the chaotic organisation and conduct of the conference itself;39 but also more ‘tactical’ errors, such as the little involvement by the Committee of Experts of participating States in preparing the Bases of Discussion40 or the undecidedness of the idea and purpose of codification,41 were crucial for the generally disappointing outcome of the conference. 19 Other reasons for failure related specifically to the topic of State responsibility. In particular, and despite the earlier assumption of the Committee of Experts, the topic was obviously not yet ripe for codification.42 Unsurprisingly, the main bone of contention was the deep disagreement on the substantive standard of protection of foreigners. The committee floundered on the cardinal question of whether foreigners were entitled to preferential treatment over, or at least equal treatment with, the nationals of the host State.43 As a matter of principle, the topic of State responsibility seems to have affected the vital interests of many States, a fact that prevented any political compromise.44 To select State responsibility as a topic for codification ultimately turned out to be too daring a choice. This problem was again exacerbated by the overly ambitious agenda for the little time allotted to the conference. In fact, the Third Committee could only spend 50 or so hours for its deliberations.45 It soon realised that not all of the Bases of Discussion could be fully examined and hence focused on the more fundamental issues.46 But it is precisely here that the conference indeed produced some results that proved to have lasting significance. 20 Thus, while some contemporary commentators were extremely harsh in their assessment of the conference,47 it may well be said that its efforts are not to be 36 Ramaa P. Dhokalia, The Codification of Public International Law (Manchester University Press, 1970) 128. 37 The Committee consisted of five members appointed by the League Council, four of whom came from Western Europe and the fifth from Latin America. 38 Yoshiro Matsui (n. 5) 29. 39 See ibid., 38; Clémentine Bories (n. 21) 6. 40 Ramaa Dhokalia (n. 36) 121. See also League of Nations Conference for the Codification of International Law (n. 31), vol. I, xxxv, speaking of the weaknesses in the ‘diplomatic aspects’ of the preparatory work of the conference. 41 Ramaa Dhokalia (n. 36) 129. 42 Alain Pellet, ‘La Codification du droit de la responsabilité internationale: tâtonnements et affrontements’ in Laurence Boisson de Chazournes and Vera Gowlland-Debbas (eds), The International Legal System in Quest of Equity and Universality. Liber Amicorum Georges AbiSaab (Martinus Nijhoff, 2001) 285, 287. 43 Manley Hudson (n. 21) 460; Yoshiro Matsui (n. 5) 38. 44 League of Nations Conference (n. 31), vol. I, xli. 45 Yoshiro Matsui (n. 5) 38. 46 In fact, only ten out of thirty-one Bases of Discussion were discussed. See the draft report of the Rapporteur of the Third Committee (Charles de Visscher), in League of Nations Conference (n. 31), vol. IV, 1661. 47 In a speech to the Grotius Society, Sir Cecil Hurst for instance delivered a devastating critique, saying that the Conference ‘was ushered in with high hopes and ended in dismal failure’ as it ‘achieved nothing worth speaking of beyond a series of disagreements’. Cecil Hurst, ‘A

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underestimated even with regard to the topic of State responsibility on which the work of the conference was the least successful. A number of rules and principles, notably on the origin of State responsibility, which today are beyond dispute but which were not generally shared at the time, were agreed upon.48 For instance, the conference acknowledged the principle according to which a State cannot escape its responsibility under international law by invoking its municipal law, something not self-evident then.49 It further clarified that a breach of international law may be committed by any State organ, whether it exercises legislative, judicial or executive functions and irrespective of whether it acted outside its competences. Agreement was also reached on the principle that responsibility entails the obligation to make reparation for the damage caused by the breach and that the local remedies have to be exhausted before the victim State may raise a claim. That the conference left its mark even on the 2001 ILC Articles is borne out by the fact that the commentaries refer to it – notably the detailed Bases of Discussion – on several occasions.50 As a final remark, it is telling that the principles agreed upon by the confer- 21 ence pertain to what is commonly categorised as secondary norms, whereas it totally failed to reach any agreement on the substantive obligations, that is, the primary norms. This can perhaps be seen as a first sign indicating a new direction of the development of the law of State responsibility that eventually resulted in the latter’s conceptual transformation during the work of the International Law Commission. Yet it was not until its second attempt to codify the law of State responsibility that the International Law Commission learned that lesson from the almost complete failure of the Hague Conference of 1930. 3. The Work of the ILC a) The Early Work

Within the United Nations, work on State responsibility kicked off with a 22 memorandum prepared by the UN Secretariat and entitled ‘Survey of Interna-

Plea for the Codification of International Law on New Lines’ (1946) 32 Transactions of the Grotius Society 135, 139. 48 See e.g. the judgement of the delegate of the United States to the Conference, Green H. Hackworth (n. 21) 515, stating that ‘[w]hile no tangible results were achieved (…) the Conference was beneficial, in that the discussions (…) marked some progress toward the crystallization of certain principles’. See also Ramaa Dhokalia (n. 36) 125; Clémentine Bories (n. 21) 64–65. 49 See e.g. the observations by Romania: ‘We cannot admit absolutely the principle (…) which presupposes the existence of an international law on a higher plane than the constitution and internal law of the various States. In principle, a sovereign State may enact any measures it thinks necessary to ensure its existence, and no restriction can be imposed upon it in this respect without interfering with its independence (…)’. League of Nations Conference (n. 31), vol. II, 445 (paragraph break suppressed). 50 See e.g. commentary to Article 3, para. 5; commentary to Article 4, paras. 4 and 8; commentary to Article 5, para. 4; commentary to Article 7, para. 3; commentary to Article 10, para. 13; introductory commentary to Part One, Chapter V, para. 5; commentary to Article 49, para. 2, n. 787.

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tional Law in Relation to the Work of Codification of the International Law Commission’.51 That survey listed a number of selected topics for codification among which featured the treatment of aliens – under the section on the individual in international law – and the law of State responsibility as distinct sections. This clearly shows that already at this preliminary stage of codification in the ILC, the law of State responsibility was viewed as independent of, though still related to, the law on the treatment of aliens. On the basis of the Secretariat’s memorandum, the ILC decided at its first session to include these two topics in its provisional list of topics for codification.52 It was however not until 1953 that the General Assembly requested the ILC ‘to undertake the codification of the principles of international law governing State responsibility’.53 Yet given its workload at the time, it took the Commission another four years to appoint Francisco V. García Amador as Special Rapporteur.54 23 As its whole history shows, the topic of State responsibility still was anything but uncontroversial. For Western States, State responsibility meant the substantive body of law on the treatment of foreigners abroad, whereas ‘other’ States, in particular in Latin America, thought that the most important aspect of State responsibility was that it limited the exercise of diplomatic protection and to thus uphold the sovereignty of the host State as far as possible. García Amador was well aware of that split of opinion and attempted to overcome this ‘traditional’ divide. He presented six reports between 1956 and 1961. 24 His first report was very innovative and departed from the traditional approach of diplomatic protection in the field of injuries to aliens.55 He basically combined, by way of a suggested synthesis, the concept of diplomatic protection with the ‘international recognition of the essential rights of man’. Thus while conceptually still confining the topic to responsibility for injuries to foreigners and hence also equating the consequences of international responsibility with reparation, García Amador strongly advocated a human rights approach to State responsibility, where the individual not only enjoyed, in a substantive sense, fundamental rights, but would also have the capacity to enforce and directly claim those rights against the respondent State. As such, direct recourse by the individual would supplement diplomatic protection by the State and provide a tool to mitigate the shortcomings of the latter.56 Furthermore García Amador also envisaged a place for criminal law aspects within State responsibility, including the 51 Survey of International Law in Relation to the Work of Codification of the International Law Commission: Preparatory work within the purview of article 18, paragraph 1, of the International Law Commission – Memorandum submitted by the Secretary-General, A/CN. 4/1/ Rev. 1, available at http://legal.un.org/ilc/documentation/english/a_cn4_1_rev 1.pdf. 52 (1949) YBILC 281. 53 Request for the Codification of the Principles of International Law Governing State Responsibility, GA Res. 799 (VIII). 54 (1955) YBILC, vol. I, 190; ibid., vol. II, 42. See Daniel Müller, ‘The Work of García Amador on State Responsibility for Injury Caused to Aliens’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 69–74. 55 Francisco García Amador, International responsibility, (1956) YBILC, vol. II, 173.

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remedy of punitive damages. In sum, as Philip Allott noted, García Amador’s concept, at least initially, was ‘full of dramatic views as to the very nature of international law and many of its leading principles’.57 However, as is well known, García Amador’s ideas were not approved either 25 by the commission or by the member States. He subsequently toned down his approach significantly and his second report was but a pale shadow of the first. Yet even his humble proposals that were ‘purified’ to the traditional law of State responsibility for damage caused to the person and property of foreigners, were not substantially discussed in the commission, not only because of the ambitious agenda of the commission at the time – which seems to have been a pretext or a polite representation of a more complex reality – or because of the enlargement of the commission from 15 to 21 members. The main reason for the commission’s ignorance was the fact that García Amador’s work again met with widespread disapproval. The commission’s divisiveness and undecidedness suggested that there was no agreement as to the way forward. It is probably an irony of history that one of the most progressive ideas of García Amador’s, that is the concept of capacity of individuals to enforce their own rights in case of breach, has in the meantime been realised in some important areas of international law, such as human rights law and investment law, and that this realisation has had an enormous influence on the confirmation and strengthening of the law of State responsibility as expressed in the ILC Articles. b) A New Approach

Given the importance of the topic, the commission decided to go ahead and to 26 start the work on State responsibility afresh in 1963. With Roberto Ago, first as chairman of the relevant sub-committee and subsequently as (second) Special Rapporteur, the whole project underwent a veritable ‘revolution’.58 The linchpin for the new approach was the detachment, for the purpose of codifying the rules of State responsibility, of the substantive rules whose breach might give rise to responsibility (the so-called ‘primary norms’) from the rules that regulate the 56 This could have offered the ideal basis for political compromise: on the one hand Amador’s approach would have made the codification of State responsibility more acceptable to the Latin American States as diplomatic protection would only have taken a subsidiary role. On the other hand, direct action by the individuals affected would have made enforcement of their rights more effective and less dependent on the political imponderabilities of the exercise of diplomatic protection. 57 Philip Allott, ‘State Responsibility and the Unmaking of International Law’ (1988) 29 Harvard Int’l L. J. 503, 507. But see Richard B. Lillich, ‘The Current Status of the Law of State Responsibility for Injuries to Aliens’ in Richard B. Lillich (ed), International Law of State Responsibility for Injuries to Aliens (University Press of Virginia, 1983) 18–19, stating that Amador ‘was not so much “bridging the gap” between the international minimum standard and the national treatment doctrine as he was adopting the former and then progressively developing it by vouching in contemporary international human rights norms’. 58 Alain Pellet, ‘The ILC’s Articles on State Responsibility for Internationally Wrongful Acts and Related Texts’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 75, 76–78 (with bibliographical references at 92–94).

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‘origin’ of responsibility, particularly those concerning the faits générateurs (i.e. the constitutive elements generating responsibility), as well as the content (notably reparation) and implementation of responsibility (especially invocation and countermeasures). This enabled Ago to focus on the general rules of responsibility that apply to each and every breach irrespective of the nature of the specific norm breached or the holder of the right at issue. As such, responsibility was no longer confined to the consequences of a breach, damage was no longer considered a constituent element of wrongfulness, and the conceptual understanding Ago introduced into the ILC paved the way for the elaboration of a general theory of State responsibility that has proved valid until today.59 27 Under the lead of Roberto Ago, the Commission adopted 35 Draft Articles, making up Part One of the Draft. Of Special Rapporteur Willem Riphagen’s proposed set of articles on the content, forms and degrees of State responsibility the commission only adopted five Articles provisionally. The text was finished by Special Rapporteur Gaetano Arangio-Ruiz who not only covered the content and forms of responsibility, but also its implementation. By 1996, the ILC completed the first reading of the Draft, consisting of 60 Articles and two annexes (on dispute settlement by conciliation and arbitration, respectively). As to both its structure and content the 1996 Draft was a well-elaborated text which however raised a number of – often minor – technical problems, but also more significant questions. As to the former, the text adopted on first reading suffered from many general drafting deficiencies, such as excessive prescription and over-refinement, and it injected far more complexity into the draft than necessary. In particular, the provisions on attribution consisted of a series of convoluted articles establishing a typology of obligations, which turned out to be unnecessarily complex, unhelpful and even counterproductive because the distinction did not entail any significant consequence.60 The same holds true for cumbersome definitions, such as that on the injured State (Draft Article 40), which were hardly understandable even if one read the commentary carefully. 28 In hindsight, the articles adopted on first reading, as compared to those finally adopted, give the impression of an attempt to detailed statutory regulation in an exhaustive manner, rather than of a set of rules which seeks to give real and firm guidance for State conduct in everyday inter-State relations. This result was perhaps partly due to the fact that the Special Rapporteurs during the first reading had a civil law background. In that respect, it was certainly an advantage that the last Special Rapporteur, James Crawford, represented the common law tradition, which emphasises pragmatic and practice-oriented approaches, much more than does the civil law tradition. On the other hand, it was no doubt an achievement 59 See the recommendation of the sub-committee in (1963) YBILC, vol. II, 228, para. 5, endorsed by the Commission, ibid., vol. I, 86, para. 75. Ago also provided for the general structure of the draft, consisting of three main parts, see YBILC (1975), vol. II, 56, para. 41. 60 See James Crawford, The International Law Commission’s Articles on State Responsibility (Cambridge University Press, 2002) 20–23.

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of the civil law tradition to provide the project with an overall structure which proved to be coherent and comprehensive and which stood the test of time. Among the more substantial problems of the text adopted on first reading fig- 29 ured the idea of international crimes of States which eventually was abandoned and replaced by the concept of serious breaches of obligations arising under peremptory norms of general international law (Part Two, Chapter III). Former Part Three on the settlement of disputes, containing obligatory conciliation for all disputes concerning the application of the draft and obligatory arbitration for all disputes concerning countermeasures, was deleted as dispute settlement is not specific to the topic of State responsibility and, moreover, as the proposed articles were not approved by most States. In terms of reparation, the focus shifted from the wrongdoing State and its obligations to the injured State and its rights. Furthermore, the structure of the regime of countermeasures was improved and the substantive and procedural limitations were refined. Finally, the commission and the General Assembly left open the question of the form of the Articles, a decision that proved to be wise in the end. For the Articles are regularly applied and invoked in practice even though – or perhaps precisely because – they are not per se binding, but generally considered reflective of customary international law. Thus it may be said that the impact of the Articles does not hinge on the conclusion of a convention; quite to the contrary, the latter approach might have been detrimental to their effect in practice, given the possibility of only few States ratifying the treaty, or of watering down individual provisions through or reservations or even substantial amendment by a State conference. C. Conceptual Issues concerning State Responsibility in Relation to Investment Law 1. The Hybrid Nature of Investment Law

Unlike the general law on State responsibility, which is well entrenched in, 30 and forms part of, ‘traditional’ public international law, international investment law is multi-layered. It conceptually and structurally differs from traditional public international law in that it not only provides for norms protecting legal interests between States but also – and in fact mainly – governs the relationship between the host State and the investor. In this sense one may speak of the ‘hybrid nature’ of investment law.61 While these two sets of relationships in investment law (State/State and State/investor) theoretically are designed to perform complementary functions in terms of responsibility and enforcement, they assume a quite distinct position in practice, notably when it comes to enforcement.

61 Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 152 passim.

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This double feature is implied in any international treaty on investment protection, be it a specific bilateral investment treaty, a sectoral or regional treaty (such as the Energy Charter Treaty or NAFTA), or a treaty providing for a procedural framework for investment dispute settlement, notably the ICSID Convention. The main expression of this double layer are the respective dispute settlement provisions providing for investor-State arbitration for disputes concerning the investment, on the one hand, and State-to-State arbitration or adjudication for disputes between the contracting parties of the BIT or the ICSID Convention. Direct disputes between contracting States may concern a number of different issues, such as matters of general treaty law (for instance interpretation or termination), breach of (treaty) obligations, responsibility and implementation (particularly diplomatic protection), procedural aspects such as the relationship between investor-State arbitration and State-to-State arbitration, or recognition and enforcement of arbitral awards.62 32 Given the overall effectiveness of investor-State arbitration, cases involving disputes arising directly as between the host State and the home State of the investor are extremely rare. Yet such disputes have occurred in practice63 and may also touch upon issues of responsibility. Thus in Italy v. Cuba, Italy exercised diplomatic protection on behalf of several companies and claimed violation of its own rights under the Italy–Cuba BIT. In its submissions, Italy alleged a number of breaches of the BIT and claimed the whole range of remedies under the law of State responsibility (cessation, guarantees of non-repetition, compensation, and satisfaction).64 While the tribunal rejected these claims, partly on jurisdictional and merits-related grounds, it did in principle – and by analogy to Article 27 of the ICSID Convention – uphold the right of the national State of the investor to exercise diplomatic protection, at least in situations where the investor has not (yet) consented to international arbitration with the host State, or submitted the dispute to arbitration.65 Thus, Italy v. Cuba illustrates some of the State responsibility aspects raised by, and inherent in, the hybrid nature of investment law. 31

62 See Zachary Douglas, ‘Other Specific Regimes of Responsibility: Investment Treaty Arbitration and ICSID’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 815, 816– 817. 63 Empresas Lucchetti v. Peru, ICSID No. ARB/03/4, Award on Jurisdiction, 7 February 2005, paras. 7 and 9 (in which the host State challenged the jurisdiction of the ICSID tribunal by initiating inter-State proceedings under the BIT and by seeking suspension of the investorState arbitration which, however, was denied); Ecuador v. USA, PCA (unpublished, but the tribunal declined jurisdiction absence a dispute; Ecuador obviously wanted to challenge an earlier interpretation by the investor-State arbitral tribunal of a provision of the BIT, see Dapo Akande, ‘Ecuador v. United States Inter-State Arbitration under a BIT: How to Interpret the Word “Interpretation”?’ EJIL: Talk!, available at http://www.ejiltalk.org/ecuador-v-unitedstates-inter-state-arbitration-under-a-bit-how-to-interpret-the-word-interpretation. 64 Italy v. Cuba, Interim Award, 15 March 2005, Final Award, 1 January 2008, available at http:// www.italaw.com/cases/580. See Michael Potestà, ‘Case Note’ (2012) 106 AJIL 341. 65 Italy v. Cuba, Interim Award (n. 63) para. 65. But see Zachary Douglas (n. 61) 189–193.

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2. The Scope of the ILC Articles on State Responsibility a) General

As mentioned above, the ILC Articles on State Responsibility are the yard- 33 stick for any assessment of issues of responsibility in international law, whatever the precise subject. However, in order to adequately ascertain the significance of the law of State responsibility to international investment law it is necessary to answer the question whether the Articles are applicable at all to investment law, especially where that law regulates the relationship between States and investors as non-State entities. For a start, this question seems moot as the very idea of the codification of the rules of State responsibility by the ILC precisely was to establish a general set of (secondary) rules that, as the ILC Commentary points out, ‘apply to the whole field of the international obligations of States, whether the obligation is owed to one or several States, to an individual or group, or to the international community as a whole’.66 This is illustrated by the broad approach in Article 2 which only sets forth two conditions for the existence of an internationally wrongful act, namely conduct which (a) is attributable to a State under international law, and (b) constitutes a breach of an international obligation of that State. However, the Articles do not contain a provision that lays down their scope in a general, unitary way, but distinguish as to their scope between their individual parts. Accordingly, the scope of these parts must be determined by way of contextual interpretation.67 Thus, while the idea of the rules on State responsibility as a coherent ‘system’ 34 of rules is a recurring feature of the Articles,68 it is crucial to point out that it is limited to Part One of the Articles,69 dealing with the concept of the internationally wrongful act, that is, the origin of State responsibility. The situation with regard to other parts, especially Part Two on the content and implementation of re66 Preliminary Commentary to the ILC Articles, para. 5 (emphasis added). 67 The problem of the scope of the Articles cannot be avoided or circumvented simply by arguing that the Articles mirror customary law because the binding force of the Articles can in any case only be derived from this source. What is more, the customary character cannot dispose of the problem that the substantive or personal scope of the Articles themselves, independent of their source, is allegedly confined to inter-State obligations. In other words, if the scope of the rules on State responsibility is limited, this is so irrespective of whether the applicable rules derive from custom or not. See however Kaj Hobér, ‘State Responsibility and Attribution’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 549, 553, concluding that the Articles in their entirety are applicable to investment arbitration qua customary law. 68 See the commentary to Article 1, para. 5: ‘Thus the term “international responsibility” in article 1 covers the relations which arise under international law from the internationally wrongful act of a State, whether such relations are limited to the wrongdoing State and one injured State or whether they extend also to other States or indeed to other subjects of international law’ (emphasis added). The commentary to Article 12, para. 12 similarly states that ‘there is a single régime of State responsibility’. 69 This is for example expressed in the above-mentioned commentary to Article 12 which, in its full wording, provides that ‘[a]s far as the origin of the obligation breached is concerned, there is a single general régime of State responsibility’.

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sponsibility, clearly is different. Most importantly, Part Two contains an express provision on its scope. Article 33 stipulates that ‘[t]he obligations of the responsible State set out in this Part may be owed to another State, to several States, or to the international community as a whole, depending in particular on the character and content of the international obligation and on the circumstances of the breach’ (para. 1), and further that Part Two ‘is without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State’ (para. 2). Now this would clearly suggest that in contrast to Part One of the ILC Articles, Part Two is confined to setting out the rules on the content of the responsibility for breach of inter-State obligations only.70 35 This reading is further confirmed by the commentary to the Articles. In the first place, the commentary to Article 28,71 which introduces Part Two, provides: Article 28 does not exclude the possibility that an internationally wrongful act may involve legal consequences in the relations between the State responsible for that act and persons or entities other than States. This follows from article 1, which covers all international wrongful obligations of the State and not only those owed to other States. Thus State responsibility extends, for example, to human rights violations and other breaches of international law where the primary beneficiary of the obligation breached is not a State. However, while Part One applies to all the cases in which an internationally wrongful act may be committed by a State, Part Two has a more limited scope. It does not apply to obligations of reparation to the extent that these arise towards or are invoked by a person or entity other than a State. In other words, the provisions of Part Two are without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State, and article 33 makes this clear.72

Similarly, the Introductory Commentary to Chapter 1 of Part Two clarifies that ‘article 33 specifies the scope of the Part, both in terms of the States to which obligations are owed and also in terms of certain legal consequences which, because they accrue directly to persons or entities other than States, are not covered by Parts Two or Three of the Articles’.73 37 As for Part Three of the Articles, entitled ‘The Implementation of the International Responsibility of a State’, a perusal of the relevant Articles shows that they are invariably formulated in terms of the injured State or, per Article 48, of a State ‘other than the injured State’. On that basis, the commentary to Article 33 expressly states that the ‘articles do not deal with the possibility of the invocation of responsibility by persons or entities other than States’ and refers to the 36

70 Zachary Douglas, The International Law of Investment Claims (Cambridge University Press, 2009) 97; id., ‘Specific Regimes of Responsibility: Investment Treaty Arbitration’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 815, 820. 71 Article 28, entitled ‘Legal consequences of an internationally wrongful act’, provides that ‘[t]he international responsibility of a State which is entailed by an internationally wrongful act in accordance with the provisions of Part One involves legal consequences as set out in this Part’. 72 Commentary to Article 28, para. 3 (emphasis in the original). 73 Introductory Commentary to Part Two, Chapter 1, para. 1 in fine.

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relevant primary norm to determine whether and to what extent persons or entities other than States are entitled to invoke responsibility on their own account.74 Thus the Articles concerning both the invocation of responsibility and countermeasures do not apply in relation between a wrongdoing State and a non-State entity as victim of the breach. This contextual interpretation of the Articles clearly shows that only Part One 38 of the ILC Articles is applicable to investor-State relations, whereas Parts Two and Three are confined to inter-State relations. For international investment law this means that the Articles in their entirety only apply in the extremely rare cases of inter-State disputes between State parties to a BIT.75 And yet, most investment tribunals in investor-State disputes do refer to the Articles without distinction as to questions of attribution – to which the Articles apply – or of reparation – to which they do not. The point of the scope of the Articles is hardly ever made in the practice of investment arbitration. An exception in this regard was the tribunal in Wintershall Aktiengesellschaft v. Argentina, which expressly invoked Article 33 and concluded that [t]he ILC’s Articles on State Responsibility is a detailed and official study on the subject but it contains no rules and regulations of State Responsibility vis-à-vis non-State actors. Tribunals are left to determine ‘the ways in which State Responsibility may be invoked by non-State entities’ from the provisions of the text of the particular Treaty under consideration.76

Similarly, the annulment committee in MTD v. Chile referred to Article 33(2) 39 when stating that ‘Part II of the ILC Articles (…) is concerned with claims between States’.77 Other tribunals reach the same result by applying the lex specialis rule.78 For example, mingling the lex specialis with Article 33, the tribunal in Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. United Mexican States held: The customary international law that the ILC Articles codify do not apply to matters which are specifically governed by lex specialis – i.e., Chapter Eleven of the NAFTA in the present case. These matters also include the possibility of private claimants (who are nationals of a NAFTA Member State) invoking in an international arbitration the responsibility of another NAFTA Member State, as it is a matter of the particular provisions of Chapter Eleven to determine whether and to what extent persons or entities other than States are entitled to invoke responsibility on their own account. This is confirmed by Article 33 (2) of the ILC Articles, which provides that the customary rules on state responsibility codified by the ILC Articles operate ‘(...) without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State.’ Customary international law – pursuant to which only sovereign States may invoke the responsibility of another State – does not therefore affect the rights of non-State ac-

74 Commentary to Article 33, para. 4. 75 See above section C.1. 76 Wintershall Aktiengesellschaft v. Argentina, ICSID Case No. ARB/04/14, Award, 8 November 2008, para. 113. 77 MTD Equity Sdn Bhd. & MTD Chile S.A. v. Chile, ICSID Case No. ARB/01/7, Decision on Annulment, 21 March 2007, para. 99. 78 The lex specialis rule is contained in Article 55 of the Articles which reads: ‘These articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or the content or implementation of the international responsibility of a State are governed by special rules of international law.’

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Chapter 2: The Law Relating to Aliens tors under particular treaties to invoke state responsibility. This rule is not only true in the context of investment protection, but also in the human rights and environmental protection arena.79

40

To be sure, both tribunals ultimately went too far in holding that the ILC Articles did not contain any rules concerning responsibility in relation to non-State actors, or did not at all apply to matters governed by lex specialis. Furthermore, the lex specialis rule only operates if and to the extent there are specific rules applicable, whereas Article 33 generally renders Part Two of the Articles inapplicable irrespective of whether there are such specific rules. In any event, tribunals usually do not enter into such sophisticated discussions but take the Articles for granted and apply them or invoke them regardless of their expressly limited scope. This is particularly striking in the context of reparation, especially with regard to Articles 31,80 34,81 35,82 36,83 38,84 and 39,85 but also concerns other provisions.86

79 Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. Mexico, ICSID Case No. ARB(AF)/04/05, Award, 21 November 2007, para. 118. 80 CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001, paras. 580, 583 and 616; LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. Argentina, ICSID Case No. ARB/02/1, Award on Damages, 25 July 2007, para. 31; BG Group plc. v. Argentina, UNCITRAL, Final Award, 24 December 2007, paras. 427– 428; Archer Daniels Midlands v. Mexico (n. 79) paras. 275 and 280; Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, 28 March 2011, para. 147; Gemplus SA, SLP SA, Gemplus Industrial SA de C.V. and Talsud S. v. Mexico, ICSID Case Nos. ARB(AF)/04/3 and ARB(AF)/04/3, Award, 16 June 2010, at paras. 11.9–11.10, 11.12–11.13, 12.51, 13.79– 13.80, 13.82–13.83; Chevron Corporation and Texaco Petroleum Company v. Ecuador, ICSID Case No. ARB/06/11, Award, 5 October 2012, paras. 665–668 and 673; EDF International SA v. Argentina, ICSID Case No. ARB/03/23, Final Award, 11 June 2012, para. 1302 in n. 91. 81 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para. 399 in n. 211; Nykomb Synergetics Technology Holding AB v. Latvia, Award, 16 December 2003, 38–39; LG&E Energy Corp. (n. 80) paras. 32; Archer Daniels Midland Company (n. 79) para. 280. 82 Nykomb Synergetics (n. 81) 38–39; CMS Gas Transmission v. Argentina (n. 81) para. 400; Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 401; ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006, paras. 494–495; Occidental Petroleum Corporation and Occidental Petroleum and Exploration Company v. Ecuador, ICSID Case No. ARB/06/11, Decision on Provisional Measures, 17 August 2007, para. 82; Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, para. 227; Burlington Resources Oriente Limited v. Ecuador and Empresa Estatal Petroleos del Ecuador, ICSID Case No. ARB/08/5, Procedural Order No. 1, 29 June 2009, para. 70. 83 Joseph Charles Lemire v. Ukraine (n. 80), paras. 151 and 155–156; Gemplus SA v. Mexico (n. 80), at paras. 13.79–13.83; CME v. Czech Republic (n. 80) para. 501; CMS Gas Transmission v. Argentina (n. 79) paras. 401–402; LG&E Energy Corp. v. Argentina (n. 80) paras. 41–43 and 51; ADC Affiliate v. Hungary (n. 82) paras. 494–495; Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007, paras. 349–352; Sempra Energy International v. Argentina (n. 80) para. 401.

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b) Open Questions

But the conclusion that Parts Two and Three are not applicable in investor- 41 State disputes raises a number of issues, some of them being uncomplicated, others being trickier. First of all, the Articles remain of course applicable in those cases where the State parties to a BIT or other international treaty (like the ICSID Convention) have a dispute.87 Given the fact that these cases are extremely rare and that they usually do not concern substantive matters of State responsibility, this situation is however negligible. Secondly, the fact that the ILC Articles concerning invocation and implementation are inapplicable is without prejudice to the enforcement of investor rights as they are usually guaranteed by specific dispute settlement clauses providing for direct access of the investor, notably to arbitral tribunals, in order to enforce his rights. As much is acknowledged in the ILC commentary to Article 33, where it is stated that ‘[i]n cases where the primary obligation is owed to a non-State entity, it may be that some procedure is available whereby that entity can invoke the responsibility on its own account and without intermediation of any State. This is true, for example, (…) in the case of rights under bilateral or regional investment protection agreements’.88 In any event, as the Italy v. Cuba case indicates,89 the national State of the investor may even exercise diplomatic protection on the inter-State level, at least as long as the investor has not consented to arbitration. However, one issue that raises a number of questions concerns the content of 42 State responsibility, particularly the forms of reparation. For it is difficult to see how the routine application of the modes and forms of reparation to investorState disputes is reconcilable with the clear and unambiguous restriction of the scope of Part Two in Article 33(2). Several considerations might help to sort that problem out.90 First of all, it is important to note that Article 33(2) is a saving 84 CME Czech Republic B.V. v. Czech Republic (UNCITRAL) Final Award, 14 March 2003, para. 647; Siemens A.G. v. Argentina (n. 83) paras. 394–396; Enron Corporation and Ponderosa Assets, L.P. v. Argentina, ICSID Case ARB/01/3, Decision on Claimant’s Request for Rectification and/or Supplementary Decision of the Award, 25 October 2007, paras. 45–47; SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Order on Further Proceedings, 17 December 2007, para. 16, n. 19. 85 MTD Equity Sdn Bhd. & MTD Chile S.A. v. Chile, ICSID Case No. ARB/01/7, Decision on Annulment, 21 March 2007, para. 99; Occidental Petroleum Corporation, Occidental Exploration and Production Company v. Ecuador, ICSID Case No. ARB/06/11, Award, 5 October 2012, paras. 665–668, 673; Joseph Charles Lemire (n. 80) para. 245. 86 Reference to Article 44 was made for example in The Loewen Group, Inc. and Raymond L. Loewen v. USA, ICSID Case No. ARB(AF)/98/3, Award, 26 June 2003, para. 149, and in Wintershall Aktiengesellschaft (n. 76) para. 126. In the Eurotunnel case, the tribunal referred to Article 47, see In the Matter of an Arbitration before a Tribunal Constituted in Accordance with Article 19 of the Treaty between the French Republic and the United Kingdom of Great Britain and Northern Ireland Concerning the Construction and Operation by Private Concessionaires of a Channel Fixed Link Signed at Canterbury on 12 February 1986, Partial Award of 30 January 2007, paras. 173–174. 87 See above C.1. 88 Commentary to Article 33, para. 4. 89 Above (n. 63).

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clause that suggests neither that the rules on State responsibility to individuals are the same as the ones applicable in inter-State relations, nor that they are different.91 Secondly, it must be recalled that the whole concept of State responsibility is but the manifestation of a general principle of law,92 according to which every unlawful act entails responsibility with specific consequences, irrespective of the nature of the person to whom the violated right accrues. And the specific forms of reparation, aimed at making good the damage caused, are general principles, too. This character as general principles, is evident in case of restitution and compensation (or the payment of damages), which are to be found in municipal private law as well and which, in the ILC Articles, are formulated in vague, because general, terms.93 43 It is against the background of these considerations that, in the context of the forms of reparation, particularly compensation, the ILC commentary itself heavily draws on the practice of courts and tribunals dealing with disputes and claims involving individuals. Thus, with regard to Article 36 on compensation, the commentary states that ‘[t]he rules and principles developed by these bodies in assessing compensation can be seen as manifestation of the general principle stated in article 36’.94 Examples of such ‘bodies’ mentioned include the Iran–US Claims Tribunal, human rights courts and, most importantly, also ICSID tribunals. If the rules on reparation contained in Part Two were not also applicable to relations between States and non-State entities or individuals, this reference would be completely out of place. In any event, it would be unreasonable for investor-State tribunals to ‘invent’ rules that would be different to those of the ILC Articles. This was for instance alluded to by the ad hoc committee in MTD v. Chile which, after stating that Article 39 on contribution to the injury is located in Part Two of the Articles which is concerned with claims between States, held that ‘[t]here is no reason not to apply the same principle of contribution to claims for breach of treaty brought by individuals’.95 Such an approach by analogy is also warranted by considerations of uniformity and consistency, unless of course the applicable law (as lex specialis) provides otherwise. Furthermore, given the lack of any other coherent body on the rules of responsibility and reparation applicable to the investor-State relation, ‘[t]here is simply no source of 90 For a thorough and convincing discussion of some of the problems involved see Martins Paparinskis, ‘Investment Treaty Arbitration and the (New) Law of State Responsibility’ (2013) 24 EJIL 617, 636–640. 91 Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (BIICL, 2008) 30. 92 See above section A. 93 The situation is conceptually different in case of satisfaction which is a form of reparation that invariably applies in inter-State relations only. 94 Commentary to Art. 36, para. 6 (emphasis added). See also Ahmadou Sadio Diallo (Guinea v. Congo) (Compensation), ICJ Judgment, 19 June 2012, para. 13, invoking the case law inter alia of the European Court of Human Rights, the Inter-American Court of Human Rights, the Iran–US Claims Tribunal, and the UN Compensation Commission, ‘which have applied general principles governing compensation when fixing its amount’. 95 MTD v. Chile (n. 85) para. 99.

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guidance on the international law of compensation better than the Articles’.96 Finally, the vast practice of investor-State tribunals subsequent to the adoption of the ILC Articles that have consistently invoked and applied Part Two have ultimately not only confirmed the usefulness of the ILC Articles for settling questions of responsibility in investment law, but probably also constitutively enhanced the scope of the Articles.97

96 Sergey Ripinsky and Kevin Williams (n. 91) 31, referring also to David D. Caron, ‘The ILC Articles on State Responsibility: The Paradoxical Relationship between Form and Authority’ (2002) 96 AJIL 857, 866. 97 This is considered by Martins Paparinskis (n. 90) 639 as at least ‘provid[ing] the law-making seal of approval to the practice that may initially “have simply been wrong as a matter of law”’.

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III. The Protection of Individuals under Public International Law

Rainer Hofmann A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Individuals under Traditional Public International Law . . . . . . . . . . . . . . . . . . 1. Subjects of Public International Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Legal Status of Individuals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Essential Role of Diplomatic Protection . . . . . . . . . . . . . . . . . . . . . . . . .

5 6 7 8

C. Individuals under Contemporary Public International Law . . . . . . . . . . . . . . 1. Individuals as Subjects of Public International Law . . . . . . . . . . . . . . . . . a) Individuals as Holders of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Individuals as Bearers of Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Human Rights and Their Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Universally Applicable Human Rights Treaties . . . . . . . . . . . . . . . . . . . b) Regionally Applicable Human Rights Treaties . . . . . . . . . . . . . . . . . . . . 3. Human Rights Protection Systems and Their Potential Relevance for International Investment Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10 11 12 15 17 18 20

D. Diplomatic Protection under Contemporary Public International Law. . 1. A Decline of the Relevance of Diplomatic Protection?. . . . . . . . . . . . . . 2. A Renaissance of the Relevance of Diplomatic Protection? . . . . . . . . 3. Diplomatic Protection under Contemporary Public International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Internationally Wrongful Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Nationality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Exhaustion of Local Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Means of Diplomatic Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27 28 31

E. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44

24

35 36 37 42 43

Literature: Tillmann Braun, Ausprägungen der Globalisierung: Der Investor als partielles Subjekt im Internationalen Investitionsrecht (Nomos, 2012); John Dugard, ‘Diplomatic Protection’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (Oxford University Press, 2012), vol. III, 114–134; Simone Gorski, ‘Individuals in International Law’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (Oxford University Press, 2012), vol. V, 147–157; Walter Kälin and Jörg Künzli, The International Law of Human Rights Protection (Oxford University Press, 2009); Kate Parlett, ‘Diplomatic Protection and Investment Arbitration’ in Rainer Hofmann and Christian Tams (eds), International Investment Law and General International Law (Nomos, 2011), 211–229; Christian Walter, ‘Subjects of International Law’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (Oxford University Press, 2012), vol. IX, 634–643.

A. Introduction

The scope and contents of the protection of individuals (understood throughout this contribution as encompassing both natural and legal persons) under public international law depends, to a very large extent, on the status accorded to the individual under public international law. Insofar, there is a most fundamental difference between the situation under traditional public international law and contemporary public international law. 2 Under the former (i.e. traditional public international law), States were the sole subjects of public international law, and the individual did not have any in1

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dividual rights under public international law or, if so, was unable to enforce them but dependent on the State of his or her nationality to enforce them by way of diplomatic protection. Therefore, under traditional public international law, diplomatic protection constituted the key element as concerns the actual protection of the individual (and his or her rights) under public international law. Under the latter (i.e. contemporary public international law), individuals have 3 acquired the status of (partial) subjects of public international law, at least as regards the field of human rights. In this field, the individual is also empowered by the various human rights instruments to enforce such human rights by action of him- or herself taken before the competent international monitoring bodies, be they human rights courts or other institutions. Notwithstanding all its shortcomings, this human rights machinery constitutes the most important element of the present system of protection offered to the individual by public international law and might be of particular relevance for the effective protection of foreign investments outside the scope of international investment law as such. This development results in the question as to whether diplomatic protection 4 still has a role to play in contemporary public international law. While the establishment of the present human rights protection system and the creation of modern international investment law providing the investor with individual rights not only as regards the actual legal protection of the investment, but also the procedural enforcement before international arbitral tribunals seemed to diminish the relevance of diplomatic protection, the pertinent work of the United Nations International Law Commission on Draft Articles on Diplomatic Protection, adopted in 2006, as well as the 2010 judgement of the International Court of Justice in the Diallo case might point to a renaissance of diplomatic protection in current and future public international law. B. Individuals under Traditional Public International Law

For the purposes of this paper, the term ‘traditional’ public international law 5 refers, in line with the dominant position in the literature,1 to the period between 1648, the year of the conclusion of the Westphalian Peace Treaties, and 1919 or 1945, the years in which the League of Nations or the United Nations were founded, respectively. The following overview is concerned with three elements of this ‘traditional’ public international law which are of central relevance for this paper, i.e. its subjects,2 the legal status of the individual3 and the essential 1 On the history of public international law, see Stephan Verosta, ‘History of International Law, 1648 to 1815’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (MPEPIL) (Oxford University Press, 2012), vol. IV, 823–843; Hans-Ulrich Scupin, ‘History of International Law, 1815 to World War I’, ibid., 843–869; Martti Koskenniemi, ‘History of International Law, World War I to World War II’, ibid., 925–934; and Martti Koskenniemi, ‘History of International Law, Since 1945’, ibid., 902–925; all the articles published in the 2012 print edition of MPEPIL are also available in the online edition (www.mpepil.com), last visited on 31 October 2011.

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role of diplomatic protection as the only effective means to protect the rights of the individual during that period.4 1. Subjects of Public International Law 6

The Westphalian Peace Treaties created the Westphalian System5 which, at least in the Anglo-Saxon doctrine, seems to be tantamount to the traditional system of public international law as an international order characterised by States, in the 19th century national States, which interacted on the basis of sovereign equality. It is generally seen as an international legal order the primary purpose of which was to regulate the co-existence of States as the sole subjects of that international legal order and, therefore, international law; this order was not based on any value system, i.e. it did not have any primary goals such as, e.g., the preservation of peace. Notwithstanding the foundation of the first international organisations,6 States remained for quite some time the only (relevant) subjects of public international law: as international organisations were founded by States and their existence was fully dependant on the will of the States concerned, the international legal personality of such international organisations remained disputed. Moreover, this period of time was also characterised by the almost total demise of non-State subjects of public international law such as the Hanseatic League or other trading companies which previously had been able to act to quite a considerable extent within the realm of international law. Only very few non-State subjects of public international law maintained their status as subjects of international law such as the (Sovereign) Order of Malta7 after its expulsion from Malta by Napoleon I in 1798, or the Holy See8 after the end of the Papal States in 1870. 2. The Legal Status of Individuals

7

As to the legal status of individuals, it is clear that, under traditional public international law, individuals did not have, in principle, any legal personality.9 If 2 See e.g. James Crawford, Brownlie’s Principles of Public International Law (Oxford University Press, 2012), 115 et seq.; and Malcolm Shaw, International Law (Cambridge University Press, 2008), 195 et seq.; see also Christian Walter, ‘Subjects of International Law’ in MPEPIL (n. 1), vol. IX, 634–643. 3 See e.g. James Crawford (n. 2) 121; and Malcolm Shaw (n. 2) 257 et seq.; see also Simone Gorski, ‘Individuals in International Law’ in MPEPIL (n. 1), vol. V, 147–157. 4 See e.g. Edwin M. Borchard, The Diplomatic Protection of Citizens Abroad or the Law of International Claims (The Banks Law Publishing, 1916); and John Dugard, ‘Diplomatic Protection’ in MPEPIL (n. 1), vol. III, 114–134. 5 See e.g. Rainer Grote, ‘Westphalian System’ in MPEPIL (n. 1), vol. X, 870–874. 6 See e.g. James Crawford (n. 2) 166 et seq.; and Malcolm Shaw (n. 2) 1282 et seq.; see also Robert Kolb, ‘International Organizations or Institutions, History of’ in MPEPIL (n. 1), vol. VI, 1–10. 7 See e.g. Malcolm Shaw (n. 2) 243; see also Francesco Gazzoni, ‘Malta, Order of’ in MPEPIL (n. 1), vol. VI, 984–988. 8 See e.g. Malcolm Shaw (n. 2) 243; see also Gerd Westdickenberg, ‘Holy See’ in MPEPIL (n. 1), vol. IV, 953–958.

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they had been accorded some limited rights protected under international law, such as the freedom of religion guaranteed to the Christian minorities in the Ottoman Empire or the rights of some religious or ethnic minorities in Eastern Central Europe or the Balkans10 or the rights encompassed by the law of aliens11 as developed during the 19th century, such rights were always depending on action and guarantees by States; this meant that States were always in a position to limit such rights or even fully withdraw them. 3. The Essential Role of Diplomatic Protection

This legal status of the individual during that period has generally – and cor- 8 rectly – been described as the Mediatisierung12 of the individual: individuals could invoke such rights, if at all, only before the administrative authorities and judicial bodies of the respective State; they had no independent access to international courts or tribunals; standing before such institutions was limited to States only, which, in their capacity as subjects of public international law, could, by exercising their right to diplomatic protection, invoke the alleged violations of the rights accorded to their nationals under the law of aliens – and invoke them as rights of their own, i.e. rights of the State of nationality and not by way of claiming the rights of their nationals.13 Finally, it should be mentioned that this situation has not changed as regards many international courts and tribunals: suffice it to mention the International Court of Justice (ICJ) which, as concerns the issue of standing, is not different from its predecessor, the Permanent Court of International Justice (PCIJ). As the individual could not enforce his or her rights guaranteed under the law of aliens, i.e. under public international law, as public international law did not provide for any effective remedies to enforce such rights, the individual had to rely on action taken by his or her State of nationality as a subject of public international law. Thus, diplomatic protection played an essential – if not decisive – role in protecting such rights.14 9 See Simone Gorski (n. 3) mn. 11. 10 See e.g. Rainer Hofmann, ‘Religion und Minderheitenschutz’ in Andreas Zimmermann (ed), Religion und Internationales Recht (Duncker & Humblot, 2006) 157–181, 158; and Zdenka Machnyiková, ‘Religious Rights’ in Marc Weller (ed), Universal Minority Rights (Oxford University Press, 2007), 179–202. 11 See Stephan Hobe, ‘The Development of the Law of Aliens and the Emergence of General Principles of Protection under Public International Law’, ch. 2.I., 6–22; and Malcolm Shaw (n. 2) 823 et seq.; see also James Crawford (n. 2) 613–614; and Hollin Dickerson, ‘Minimum Standard’ in MPEPIL (n. 1), vol. II, 235–240. 12 See e.g. Kay Hailbronner und Marcel Kau, ‘Der Staat und der Einzelne im Völkerrecht’ in Wolfgang Graf Vitzthum (ed), Völkerrecht (de Gruyter, 2010) 159. 13 See e.g. John Dugard (n. 4) mn. 7; and Malcolm Shaw (n. 2) 810. This approach was approved by the Permanent Court of International Justice in the Mavrommatis Palestine Concessions Case (Greece v. Great Britain), Jurisdiction, PCIJ Series A No. 2, at 12 [see e.g. Robert Uerpmann-Wittzack, ‘Mavrommatis Concessions Case’ in MPEPIL (n. 1), vol. VII, 28–32] and later endorsed by the International Court of Justice in the Nottebohm Case (Liechtenstein v. Guatemala), Second Phase, ICJ Rep. 1955, 4, 24 [see e.g. Oliver Dörr, ‘Nottebohm Case’ in MPEPIL (n. 1), vol. VII, 839–843]. 14 On the history of diplomatic protection, see e.g. John Dugard (n. 4) mn. 3–4.

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Against this background, the main features and purposes of diplomatic protection have been rightly described as follows: ‘Under international law, a State is responsible for injury to an alien caused by that State’s wrongful act or omission. Diplomatic protection is the procedure employed by the State of nationality of the injured person to secure protection of that person, and to obtain reparation for the internationally wrongful act inflicted. Such protection extends to both natural and legal persons.’15 C. Individuals under Contemporary Public International Law

10

Since 1945, natural (and to some extent also legal) persons have acquired the status of subjects of public international law; this enlargement process has fundamentally changed the basic structure of international law and constitutes one of the most relevant elements of modern international law.16 1. Individuals as Subjects of Public International Law

11

In the framework of this contribution it is clearly impossible to address the various stages of this complex process or to discuss all the possible repercussions for the future international law; the focus must be on individuals, i.e. natural and legal persons, as holders of rights and possibly also bearers of duties under international law. a) Individuals as Holders of Rights

First, it is beyond any doubt that natural persons and, to some extent, also legal persons have become, as holders of human rights, partial subjects of international law. Initially, this was based on the regionally and universally applicable human rights treaties; presently, however, there seems to be no doubt that the basic human rights constitute customary international law and are, therefore, binding upon also those States which have not ratified the respective human rights instruments.17 13 Second, and this is much more important for natural and legal persons and their status as (partial) subjects of international law, such treaty-based human rights can be invoked before various international monitoring bodies by these persons themselves,18 and not only – and increasingly less so – by their States of nationality exercising their right to diplomatic protection. Such procedural human rights are best protected under the various regional human rights treaties, in particular the European Convention on Human Rights,19 but also the InterAmerican Convention on Human Rights (IACHR)20 and, possibly to a more li12

15 16 17 18

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John Dugard (n. 4) mn. 1. See e.g. Christian Walter (n. 2) mn. 15–18. See e.g. Malcolm Shaw (n. 2) 275. See e.g. Thomas Buergenthal, ‘Human Rights’ in MPEPIL (n. 1), vol. IV, 1021–1031, mn. 19–23.

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mited extent, the African Charter on Human and Peoples’ Rights.21 While it is true that the various UN human rights instruments do not provide for any competent court to hand down binding judgements, it ought to be stressed that all these treaties now foresee the possibility of addressing individual communications to the respective monitoring committees.22 In addition to human rights law, some other branches of (present) public inter- 14 national law are seen to accord rights to individuals. This applies, in particular, to international humanitarian law which has been traditionally understood as granting rights only to States; however, some relevant treaty provisions might indeed be interpreted as conferring rights also to natural persons, i.e. some individuals.23 Moreover, it is beyond doubt that modern international investment law constitutes a prime example of a branch of public international law according both substantive and procedural rights to individuals, both natural and legal persons.24 b) Individuals as Bearers of Duties

For the purposes of this contribution the question as to whether individuals 15 are also bearers of duties under present public international law is only of limited relevance. As to natural persons, suffice it to point to the fact that the establishment of international criminal law in the 1990s imposed international legal obligations upon individuals (natural persons) and, thus, added duties as components of his or her status as partial subject of international law.25 Whereas this development does not seem to be disputed, the question remains 16 as to whether legal (less so: natural) persons might be considered as addressees of obligations or duties under international human rights law. The pertinent discussion focuses on the issue of international or transnational corporations which are seen, by an increasing number of scholars, not only as holders of human rights, such as the right to a fair trial or the right to property, but also as bearers of duties.26 While it must be noted that, even for the proponents of this opinion, 19 See e.g. David Harris, Michael O’Boyle and Colin Warbrick (eds), Law of the European Convention on Human Rights (Oxford University Press, 2009) 757 et seq.; and Robin White and Clare Ovey, The European Convention on Human Rights (Oxford University Press, 2010) 24 et seq.; see also Jochen A. Frowein, ‘European Convention for the Protection of Human Rights and Fundamental Freedoms’ in MPEPIL (n. 1), vol. III, 882–889; and Malcolm Shaw (n. 2) 347 et seq. 20 See Gerald L. Neuman, ‘American Convention on Human Rights’ in MPEPIL (n. 1), vol. I, 327–336; and Malcolm Shaw (n. 2) 381–391. 21 See Fatsah Ouguergouz, ‘African Charter on Human and Peoples’ Rights’ in MPEPIL (n. 1), vol. I, 136–147; and Malcolm Shaw (n. 2) 391–395. 22 See Walter Kälin and Jörg Künzli, The Law of International Human Rights Protection (Oxford University Press, 2009) 220 et seq.; see also Simone Gorski (n. 3) mn. 21–24. 23 See e.g. Simone Gorski (n. 3) mn. 23. 24 See e.g. John Dugard (n. 4) mn. 9; and Simone Gorski (n. 3) mn. 42; see also Marc Jacob, ‘Investments, Bilateral Treaties’ in MPEPIL (n. 1), vol. VI, 317–328. 25 See e.g. Antonio Cassese, International Criminal Law (Oxford University Press, 2008) 33 et seq.; and Malcolm Shaw (n. 2) 397 et seq.; see also Simone Gorski (n. 3) mn. 44–49.

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States remain the subjects of international law primarily responsible for the protection and enforcement of human rights, there are good reasons to argue that some of these transnational corporations are vested with such economic powers that they can exercise quite a significant influence on ‘weak’ or corrupt governments in order to make them less willing to enforce compliance by such transnational corporations as very important employers and tax-payers, for the so-called core social and labour rights. In order to solve this problem, it is proposed to consider such corporations as (secondary) addressees of these human rights; this would imply that they are not under a duty to respect human rights of others, but under a responsibility to respect and to protect the human rights of others by exercising ‘human rights due diligence’. Whether and to what extent non-compliance with such a responsibility to respect and protect human rights of others might result in an obligation to pay compensation remains to be seen;27 this is, in any case, the approach which has been (and still is) particularly popular in the United States where the Aliens Tort Statute has been (and still is being) used as a means to sue such corporations before domestic courts.28 In this perspective, one category of individuals, i.e. natural persons, might be able to seek protection against human rights violations attributable to another category of individuals, i.e. legal persons. 2. Human Rights and Their Enforcement 17

As mentioned above, international human rights law differs, as regards the enforcement systems available, considerably between human rights treaties drafted under the aegis of the United Nations and, thus, vested with, in principle, global or universal applicability, and those human rights instruments established under the various regional systems. Importantly, however, they practically all provide for some kind of international monitoring system which can be accessed by individuals. a) Universally Applicable Human Rights Treaties

18

On the universal level, the major general human rights instrument is the 1966 International Covenant on Civil and Political Rights (ICCPR).29 Its substantive rights can be individually enforced by means of individual complaints (commu26 See on this issue Peter Muchlinski, ‘Corporations in International Law’ in MPEPIL (n. 1), vol. II, 797–813, mn. 32–37; see also James Crawford (n. 2) 121–123; and Malcolm Shaw (n. 2) 249 et seq. 27 This is the approach proposed by John Ruggie, the Special Rapporteur of the UN SecretaryGeneral on the issue of human rights and transnational corporation and other business enterprises; see his Report to the Human Rights Council, UN Doc. A/HRC/14/27 (9 April 2010), also available at http://198.170.85.29/Ruggie-report-2010.pdf. 28 See e.g. James Crawford (n. 2) 475–476; and Walter Kälin and Jörg Künzli (n. 22) 83 et seq.; see also the decision of the United States Supreme Court of 17 April 2013 in the case of Kiobel v. Royal Dutch Shell (569 U.S. (2013) where the Court held unanimously that the Alien Tort Statute does not apply extraterritorially; electronically available at www.supremecourtgov/opinions/12pdf/10-1491_16gn.pdf.

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nications) addressed to the Human Rights Committee30 which eventually might formulate legally non-binding views, as provided for in the 1966 Optional Protocol to the ICCPR. In contrast thereto, the 1966 International Covenant on Economic, Social and Cultural Rights (ICESCR),31 conceived as a kind of complimentary instrument to the ICCPR, originally did not provide for any complaint mechanism available for individuals; this situation changed, however, with the recent opening for signature of the 2009 Optional Protocol to the ICESCR which, once entered into force, will allow individuals to submit communications to the Committee on Economic, Social and Cultural Rights.32 After the adoption by the UN General Assembly, on 19 December 2011, of 19 the Third Optional Protocol to the 1989 Convention on the Rights of the Child,33 all human rights treaties applicable on the universal level now provide for complaints mechanisms which can be accessed by individuals: their legal bases are to be found in Article 14 of the 1966 International Convention on the Elimination of All Forms of Racial Discrimination (ICERD),34 Article 22 of the 1984 Convention against Torture (CAT)35 as well as the 1999 Optional Protocol to the 1979 Convention on the Elimination of all Forms of Discrimination against Women36 and the 2006 Optional Protocol to the 2006 Convention on the Rights of Persons with Disabilities;37 in contrast to these instruments, the Committee on Migrant Workers established under the 1990 International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families (ICRMW) is not yet entitled to receive individual complaints pending the necessary number of ten declarations to be made by State parties under Article 77 of

29 See e.g. Simone Gorski (n. 3) mn. 28; and Christian Tomuschat, ‘International Covenant on Civil and Political Rights (1966)’ in MPEPIL (n. 1), vol. V, 639–650. 30 See e.g. Malcolm Shaw (n. 2) 314–322; and Christian Tomuschat, ‘Human Rights Committee’ in MPEPIL (n. 1), vol. IV, 1058–1068. 31 See e.g. Simone Gorski (n. 3) mn. 29; Eibe Riedel, ’International Covenant on Economic, Social and Cultural Rights’ in MPEPIL (n. 1), vol. V, 650–667; and Malcolm Shaw (n. 2) 308– 311. 32 See e.g. Eibe Riedel, ’Committee on Economic, Social and Cultural Rights’ in MPEPIL (n. 1), vol. II, 427–435. 33 See e.g. Simone Gorski (n. 3) mn. 32; and Malcolm Shaw (n. 2) 331–333: see also Evarist Baimu, ‘Children, International Protection’ in MPEPIL (n. 1), vol. II, 138–145. 34 See e.g. Simone Gorski (n. 3) mn. 30; and Malcolm Shaw (n. 2) 311–314; see also Dinah Shelton, ‘Human Rights, Individual Communications/Complaints’ in MPEPIL (n. 1), vol. IV, 1086–1097, mn. 10; and Theo van Boven, ‘Racial and Religious Discrimination’ in MPEPIL (n. 1), vol. VIII, 608–617. 35 See e.g. Simone Gorski (n. 3) mn. 30; and Malcolm Shaw (n. 2) 326–332: see also David Kretzmer, ’Torture, Prohibition of’ in MPEPIL (n. 1), vol. IX, 950–964, mn. 40–45. 36 See e.g. Simone Gorski (n. 3) mn. 31; and Malcolm Shaw (n. 2) 322–326; see also Christine Chinkin, ‘Women, Rights of, International Protection’ in MPEPIL (n. 1), vol. X, 891–901, mn. 7–17. 37 See e.g. Simone Gorski (n. 3) mn. 31; and Malcolm Shaw (n. 2) 334; see also Theresia Degener, ‘Disabled Persons, Non-Discrimination of’ in MPEPIL (n. 1), vol. III, 140–146, mn. 12–15.

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the ICRMW.38 Again, it must be stressed that all the monitoring bodies are only vested with the power to formulate legally non-binding opinions. b) Regionally Applicable Human Rights Treaties

Monitoring mechanisms open for individual complaints were first conceived within the framework of the Council of Europe: under the 1950 European Convention on Human Rights (ECHR),39 individuals were entitled to submit such complaints to the then European Commission of Human Rights (ECommHR) if the State concerned had accepted its jurisdiction. After several steps taken gradually to improve the access of individuals to the very European Court of Human Rights (ECtHR),40 the decisive step was taken with the entry into force of Additional Protocol No. 11 in 1998, which abolished the ECommHR and offered direct access to the ECtHR for all individuals claiming a violation of their rights protected in the ECHR and its various Additional Protocols. In contrast to the monitoring bodies acting under the UN human rights treaties, the ECtHR is empowered to hand down legally binding judgements. 21 The legal position of the individual under the 1969 American Convention on Human Rights41 is comparable to the European system of human rights protection prior to the entry into force of Additional Protocol No. 11: all individuals are entitled to submit complaints to the Inter-American Commission of Human Rights (IACommHR);42 access, at a later stage of procedures, to the Inter-American Court of Human Rights (IACtHR)43 is only available if the State party concerned has made a declaration accepting the jurisdiction of that court. Like its European counterpart, the IACtHR hands down legally binding judgements. 22 Originally, the 1981 African Charter on Human and Peoples’ Rights (Banjul Charter)44 foresaw only a quasi-judicial body, the African Commission on Human and Peoples’ Rights45 which could be accessed by individuals but was not empowered to issue legally binding judgements. This situation changed, in principle, upon the establishment of the African Court of Human and Peoples’ Rights46 pursuant to the pertinent 1999 Protocol; now, States may declare that 20

38 See e.g. Simone Gorski (n. 3) mn. 33; and Malcolm Shaw (n. 2) 333–334, see also Ryszard Cholewinski, ‘Migrant Workers’ in MPEPIL (n. 1), vol. VII, 139–149, mn. 11–12. 39 See e.g. Frowein (n. 19) mn. 3. 40 See e.g. Mario Oetheimer and Guillem Cano Palomares, ‘European Court of Human Rights’ in MPEPIL (n. 1), vol. III, 894–903, mn. 15–45. 41 See e.g. Gerald Neuman (n. 20) mn. 26–32. 42 See e.g. Claudio Grossman, ’Inter-American Commission for Human Rights’ in MPEPIL (n. 1), vol. V, 251–261, mn. 22–30; and Dinah Shelton (n. 34) mn. 24. 43 See e.g. Gerald L. Neuman, ’Inter-American Court of Human Rights’ in MPEPIL (n. 1), vol. V, 261–270, mn. 16–25. 44 See e.g. Ouguergouz (n. 21) mn. 35–38. 45 See e.g. Rachel Murray, ’African Commission on Human and Peoples’ Rights’ in MPEPIL (n. 1), vol. I, 147–154; and Dinah Shelton (n. 34) mn. 25. 46 See e.g. Frans Viljoen, ’African Court of Human and Peoples’ Rights’ in MPEPIL (n. 1), vol. I, 157–161; and Dinah Shelton (n. 34) mn. 26.

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they accept the competence of that court to deal with individual complaints. Up to now, however, only very few States have made such a declaration. Finally, under the 2004 Arab Charter on Human Rights,47 elaborated under 23 the aegis of the League of Arab States, an Arab Commission on Human Rights was established which, however, is not vested with the power to receive individual complaints. 3. Human Rights Protection Systems and Their Potential Relevance for International Investment Law

Among all these human rights protection systems, only those of a general 24 character have some (potential) relevance for international investment law: in order to do so, they must at least provide for procedural rights of investors such as fair trial or due process which might be – allegedly – impaired during an administrative or judicial procedure concerning State actions taken in the context of the establishment or termination of an investment, in particular in cases of alleged expropriation or regulatory takings. Such human rights instruments acquire more such relevance if they provide, in addition to such procedural rights, also for substantive rights such as, in particular, the right to property. Insofar it is important to note that the right to property48 is only protected on 25 the regional level, i.e. under Article 1 of the 1952 Additional Protocol to the ECHR, Article 21 of the IACHR, Article 14 of the Banjul Charter and Article 31 of the Arab Charter. There is no such protection under the ICCPR which, however, guarantees, in its Article 14, the right to a fair trial – similarly to Article 6 of the ECHR, Article 8 of the IACHR, Articles 7 and 26 of the Banjul Charter and Article 13 of the Arab Charter. As regards international investment law, the ECHR (and the Court, respec- 26 tively) might be of particular relevance.49 Suffice it to mention the Yukos case.50 It must be borne in mind, however, that the protection of property under the human rights system considerably differs from the protection of property under international investment law: in the field of human rights, courts are concerned with the protection of fundamental individual rights whereas international investment law and its tribunals are primarily concerned with the (balanced) regu47 See e.g. Mervat Rishawi, ’Arab Charter on Human Rights (2004)’ in MPEPIL (n. 1), vol. I, 480–493. 48 See e.g. James Crawford (n. 2) 620–622; and Ursula Kriebaum and August Reinisch, ’Property, International Protection’ in MPEPIL (n. 1), vol. VIII, 523–533, mn. 7. 49 See e.g. Christina Pfaff, ’Investment Protection by Other Mechanisms: The Role of Human Rights Institutions and the WTO’ in Rainer Hofmann and Christian Tams (eds), The International Convention on the Settlement of Investment Disputes (ICSID) (Nomos, 2007) 267–321, 290 et seq. 50 See ECtHR, OAO Neftyanaya Kompanyia Yukos v. Russia, Application No. 14902/04, Judgement (Chamber), 20 September 2011, where the Court held that there had been a violation of Art. 1 of Additional Protocol No. 1 to the ECHR. The judgement became final on 8 March 2012 when the Panel of the Grand Chamber rejected the request to refer under Article 43 ECHR. The Court has still to decide on the amount of an eventual just satisfaction.

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lation of the mainly economic interests of all actors involved.51 Therefore, human rights courts might play a relevant role mainly (or exclusively) in situations where the parties to a dispute cannot rely on a bilateral or multilateral investment treaty providing for direct access to an investor-State arbitration procedure. D. Diplomatic Protection under Contemporary Public International Law 27

This development resulting in the individual gradually acquiring the status of a (partial) subject of public international law led some to consider that diplomatic protection might have lost some (or most) of its relevance. So, one might argue that diplomatic protection is in an era of decline. On the other hand, as mentioned above, the International Law Commission finalised, only some years ago, the drafting of its Articles on Diplomatic Protection,52 and the International Court of Justice has been seized again in some cases involving issues of diplomatic protection.53 So, there might also be indications for a renaissance of diplomatic protection. In any case, the recent adoption by the International Law Commission, of its Draft Articles on Diplomatic Protection justifies a short overview of its contents and mechanisms under present public international law. 1. A Decline of the Relevance of Diplomatic Protection?

28

One of the major arguments in favour of the assessment that there is a considerable decline in the relevance of diplomatic protection is linked to the just mentioned development in the field of human rights, in particular the entry into force of human rights treaties for a large majority of States. These treaties, both on the universal and regional level, confer rights to every individual: to nationals against their own government (which constitutes the very raison d’être of human rights) and to aliens (foreigners) against the government of the State in which they happen to be (the sole difference as compared to traditional law of aliens being the extent and scope of the rights conferred).54 Large parts of this human rights treaty law can be rightly considered as forming part of customary international law.55

51 See e.g. Ursula Kriebaum, Eigentumsschutz im Völkerrecht (Duncker und Humblot, 2008) 32. 52 UN International Law Commission, ‘Draft Articles on Diplomatic Protection’, GAOR 61st Session Supp. 10, 16. 53 See International Court of Justice, Barcelona Traction (Belgium v. Spain), ICJ Rep. 1970, 3; see e.g. Stephan Wittich, ‘Barcelona Traction Case’ in MPEPIL (n. 1), vol. I, 832–840; International Court of Justice, Elettronica Sicula (USA v. Italy), ICJ Rep. 1989, 15, see e.g. Peter Tomka, ‘Elettronica Sicula Case’ in MPEPIL (n. 1), vol. III, 377–382; and International Court of Justice, ICJ Rep. 2007, 20; and International Court of Justice, Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of Congo), Judgment, 30 November 2010, General List No. 103, see e.g. Kirsten Schmalenbach, ‘Ahmadou Sadio Diallo Case’ in MPEPIL (n. 1), vol. I, 224–231. 54 See e.g. John Dugard (n. 4) mn. 9. 55 See e.g. Malcolm Shaw (n. 2) 275.

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Under traditional law of aliens, one of the most important fields of application 29 was the protection of foreign investment against arbitrary interference by host State authorities. Here, the previous customary law rules have been replaced or superseded, to a very large extent, by the vast set of bilateral investment treaties (BITs).56 The dispute settlement mechanisms provided for by these treaties offer indeed ‘greater advantages to the foreign investor than the customary international law system of diplomatic protection, as they give the investor direct access to international arbitration, avoid the political uncertainty inherent in the discretionary nature of diplomatic protection and dispense with the conditions for the exercise of diplomatic protection’.57 Also the third main area of diplomatic protection, the actual exercise of such 30 protection by diplomatic and consular staff, has become the subject of treaty law: Article 3(1)(b) of the 1961 Vienna Convention on Diplomatic Relations58 and Article 5(9) of the 1963 Vienna Convention on the Law of Consular Relations59 recognise the right of diplomats and consular officials to protect nationals of the sending State within the receiving State. It has been rightly stated60 that these treaties give further (treaty-based) recognition to the (customary lawbased) right of diplomatic protection: furthermore, Article 36 of the Vienna Convention on Consular Relations expressly endorses one of the most important mechanisms of diplomatic protection, namely the right of consular officials to communicate with and to assist nationals imprisoned in the receiving State. The relevance of this right has been highlighted by the International Court of Justice in its judgements in both the LaGrand case61 and the Avena case.62 2. A Renaissance of the Relevance of Diplomatic Protection?

But do these developments really mean that there is a decline of the relevance 31 of diplomatic protection? As regards the development in the field of diplomatic and consular relations, the answer must clearly be negative: the two mentioned treaties do nothing but codify some (most relevant) aspects of the rights of States encompassed under diplomatic protection; what have been before customary rules of law have now been turned into treaty law provisions. This develop-

56 See e.g. John Dugard (n. 4) mn. 12; and Marc Jacob (n. 24) mn. 2–18; see also Malcolm Shaw (n. 2) 837–840. 57 John Dugard (n. 4) mn. 12. 58 See e.g. Holger Hestermeyer, ‘Vienna Convention on Diplomatic Relations (1961)’ in MPEPIL (n. 1), vol. X, 697–709. 59 See e.g. Andreas Paulus and Anne Dienelt, ‘Vienna Convention on the Law of Consular Relations (1963)’ in MPEPIL (n. 1), vol. X, 683–697. 60 John Dugard (n. 4) mn. 11. 61 International Court of Justice, LaGrand (Germany v. USA), ICJ Rep. 2001, 466; see e.g. Pierre-Marie Dupuy and Christina Hoss, ‘LaGrand Case (Germany v United States of America)’ in MPEPIL (n. 1), vol. VI, 629–637. 62 International Court of Justice, Avena (Mexico v. USA), ICJ Rep. 2004, 12; see e.g. PierreMarie Dupuy and Christina Hoss, ‘Avena Case (Mexico v United States of America)’ in MPEPIL (n. 1), vol. I, 768–775.

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ment and in particular the fact that both Germany and Mexico achieved condemnations by the International Court of Justice in its judgements in the LaGrand and Avena cases of the United States of America, for their failure to respect these two States’ right to exercise diplomatic protection, rather points to a renaissance of the relevance of diplomatic protection. 32 The situation seems to be different, however, as regards the field of international investment law.63 Notwithstanding the recent judgement of the International Court of Justice in the Diallo case, the above-reported statement64 by John Dugard seems to be correct. Dugard, as the former Special Rapporteur of the International Law Commission on Diplomatic Protection and the author of its pertinent Draft Articles, can surely not be held likely to minimise the relevance of diplomatic protection: as long as investors can rely on a BIT (or a multilateral treaty such as the North American Free Trade Agreement (NAFTA) or the Energy Charter) or any other legal document such as an investor-State contract which allows them to directly access an international arbitration tribunal, be it under ICSID, UNCITRAL or any other rules of procedure, there seems to be a very strong tendency to do so. In addition to the aspects mentioned by John Dugard himself, there is also the issue of the execution or enforcement of such arbitral awards; especially those rendered by a tribunal established under ICSID, are to be executed in every State party respecting, however, the customary law rules pertaining to State immunity.65 This constitutes a clear advantage as compared to judgements by international courts or tribunals rendered in the context of diplomatic protection procedures. 33 As regards human rights, the situation depends very much on the specific human rights treaty system. It is true that while these offer extensive guarantees of substantive rights, they do not offer equally extensive (let alone effective) procedural remedies. This is obviously the case with regards to the whole UN human rights treaty machinery in which no treaty foresees the establishment of a court which would be empowered to hand down legally binding judgements. The situation is, at least prima facie, different in respect to the regional human rights treaties which, however, do not extend to Asia and Oceania; moreover, considerable doubts remain as to the extent to which future judgements of the African Court of Human and Peoples’ Rights will actually be domestically respected and implemented. Whereas there clearly is much more respect for and implementation of judgements rendered by the Inter-American Court of Human Rights, 63 On this issue, see also Kate Parlett, ‘Diplomatic Protection and Investment Arbitration’ in Rainer Hofmann and Christian Tams (eds), International Investment Law and General International Law (Nomos, 2011) 211–229. 64 See text accompanying n. 57. 65 See Stefan Kröll, ‘Enforcement of Awards’, ch. 11.VII., 1483–1505; see also Stephan Schill, ‘International Investment Law and the Law of State Immunity: Antagonists or Two Sides of the Same Coin?’ in Rainer Hofmann and Christian Tams (n. 63) 231–275; Christoph Schreuer, ‘International Centre for Settlement of Investment Disputes’ in MPEPIL (n. 1), vol. V, 309– 407, mn. 65–70; and Xiadong Yang, State Immunity in International Law (Cambridge University Press, 2012) 327.

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there still seem to persist some problems regarding the attribution of full satisfaction in cases of violations of human rights. Even in Europe, there seems to be an increasing number of judgements rendered by the European Court of Human Rights which, notwithstanding pertinent action by the competent Committee of Ministers, are not adequately implemented and executed on the national level. So, it might indeed be argued that there remains space for diplomatic protection also in the field of human rights; or, as John Dugard states: ‘Diplomatic protection remains the most effective means for the individual to secure redress for injury suffered abroad’66 – at least as concerns the situation outside Europe, one might be tempted to add. This assessment justifies a short overview on the present state of diplomatic 34 protection. 3. Diplomatic Protection under Contemporary Public International Law

The following short overview is based on the mentioned Draft Articles on 35 Diplomatic Protection, prepared by Special Rapporteur John Dugard and adopted by the International Law Commission in 2006.67 These 19 draft articles are generally considered to constitute a good codification and restatement of existing rules of customary law. Therefore, their structure reflects the traditional conditions which have to be fulfilled to allow a State to exercise its right to diplomatic protection in accordance with international law: first, there must be an internationally wrongful act attributable to the State against which diplomatic protection should be directed; this internationally wrongful act must have violated the rights of an individual having the nationality of the State wishing to exercise diplomatic protection; and, finally, diplomatic protection, as a rule, might only be resorted to after the prior exhaustion of local remedies by the individual concerned. Moreover, States are no longer free to choose the means by which they wish to exercise diplomatic protection. a) Internationally Wrongful Acts

As any act of diplomatic protection is only compatible with international law 36 if it seeks to address the results of a violation of the internationally protected rights of a national of the plaintiff State, this State must first establish that there has been a violation, attributable under the applicable rules of the law of State responsibility68 to the defendant State, of a primary rule of the international law of aliens. This is, as a rule, the case when the conduct of the defendant State is 66 John Dugard (n. 4) mn. 10. 67 For the following see John Dugard (n. 4) mn. 19–73; see also Chittaranjan Felix Amerasinghe, Diplomatic Protection (Oxford University Press, 2008); and Annemarieke VermeerKünzli, ‘Exercising Diplomatic Protection’ (2006) 66 ZaöRV 321–350; for a critical analysis see Alain Pellet, ‘Le projet d’articles de la CDI sur la protection diplomatique: une codification pour (presque) rien’ in Marcelo Kohen (ed), Promoting Justice, Human Rights and Conflict Resolution through InternationalLaw: Liber amicorum Lucius Caflisch (Nijhoff, 2007) 1133–1156.

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incompatible with the international minimum standards69 required for the treatment of the person and the property of aliens. Today, this minimum standard corresponds largely with the standards enshrined in the major international human rights treaties.70 b) Nationality

The clearly most important precondition for the lawful exercise of diplomatic protection is the bond of nationality. This precondition as such is generally recognised, its application in specific cases might be utterly complex and controversial. It should also be mentioned that States may indeed, under some human rights treaties (inter-State proceedings as foreseen, e.g., in the ECHR) and under customary international law, act in order to protect the human rights of non-nationals, but such action does not constitute diplomatic protection in the legal sense.71 There is, however, a growing acceptance of States exercising actual diplomatic protection on behalf of refugees and stateless persons who are lawfully and habitually resident on their territory as recognised by, e.g. Article 8 of the ILC Draft Articles.72 38 In the framework of this contribution, it is not possible to embark upon a thorough presentation and analysis of the current state of international law as regards issues of nationality.73 It is a well-known feature of international law that, in principle, questions of nationality are within the domaine reservé of States.74 39 As regards natural persons, international law accepts as modes of acquisition of nationality75 upon birth descent (ius sanguinis) and birth on the territory of a State (ius soli); at a later stage, persons might be granted nationality by naturalisation, usually subsequent to a period of lawful residence. Cases of State succession inevitably impact on the nationality of the persons concerned. There may also be specific rules applicable to spouses. As regards the loss of nationality against the will of the person concerned (denaturalisation), international law provides for only very few limitations to domestic legislation.76 There has been some controversy as to the true meaning of the ruling of the ICJ in the Nottebohm case:77 it has been sometimes construed in such a way as to require that a 37

68 See e.g. James Crawford, ‘State Responsibility’ in MPEPIL (n. 1), vol. IX, 517–533, mn. 17– 22; and Malcolm Shaw (n. 2) 778 et seq. 69 See e.g. Hollin Dickerson (n. 11) mn. 11–20; and Malcolm Shaw (n. 2) 823–827. 70 John Dugard (n. 4) mn. 18. 71 John Dugard (n. 4) mn. 20. 72 On this issue see John Dugard (n. 4) mn. 47–49. 73 For an overview see Oliver Dörr, ‘Nationality’ in MPEPIL (n. 1), vol. VII, 496–510; see also James Crawford (n. 2) 511–512. 74 For an overview of the pertinent practice of international courts see Seline Trevisanut, ‘Nationality Cases before International Courts and Tribunals’ in MPEPIL (n. 1), vol. VII, 517. 75 See Oliver Dörr (n. 73) mn. 11–23. 76 See Rainer Hofmann, ‘Denaturalization and Forced Exile’ in MPEPIL (n. 1), vol. III, 27–36, mn. 17. 77 See Oliver Dörr (n. 12) mn. 12–15.

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claimant State must prove, in addition to the nationality of the person concerned, that there exists a ‘genuine link’ between the injured individual and the claimant State. Today, the ruling is predominantly understood in such a way as to be limited to cases of dual or multiple nationality where the genuine link requirement is used as a means to determine which of the various States involved may indeed lawfully exercise diplomatic protection. Whereas international law sought, for a long period of time, to eliminate such cases of dual or multiple nationality,78 present international law is characterised by a strongly growing acceptance of such cases.79 Such cases raise intricate issues as regards diplomatic protection; there seems to be growing acceptance that the State of dominant or effective nationality may indeed bring claims against another State of nationality.80 In deciding which nationality is dominant or effective, tribunals have had to consider various factors such as (length) of residence, family ties, etc.81 As in international investment law, the ‘nationality’ of legal persons, as a rule 40 corporations, raises specific and sometimes intricate problems. International law as such does not provide for any pertinent rules but accepts that, depending on the relevant domestic law, the ‘nationality’ of a corporation might be governed by the place of its incorporation or its registered office.82 For the purposes of diplomatic protection, however, the real problem is whether the State of nationality of the shareholders of a corporation which is not the State of either incorporation or seat, may – and, if so, under what circumstances – exercise diplomatic protection.83 While the ICJ in its famous decision in the Barcelona Traction case84 held that corporations are to be protected by the State of their nationality and not by the State or States of nationality of their shareholders, recent practice seems to indicate some exceptions to this rule, in particular if the State of nationality of the corporation is itself inflicting injury onto the (alien) shareholders.85 Finally, it ought to be stressed that claimant States must prove that the injured 41 person was a national from the date of the injury to the date of the presentation of the claim or, possibly, even to the date of judgement (principle of continuous nationality).86 c) Exhaustion of Local Remedies

The third precondition for the lawful exercise of diplomatic protection is the 42 requirement that the injured individuals, both natural and legal persons, have ex78 79 80 81 82 83 84 85 86

See Peter Spiro, ‘Multiple Nationality’ in MPEPIL (n. 1), vol. VII, 416–421, mn. 5–12. See Peter Spiro (n. 78) mn. 13–18. See John Dugard (n. 4) mn. 26–27. See John Dugard (n. 4) mn. 28–29. See James Crawford (n. 2) 527–530; and Peter Muchlinski (n. 26) mn. 19–24. For the following see John Dugard (n. 4) mn. 35–44. For a discussion see Stephan Wittich (n. 53) mn. 19–27; see also John Dugard (n. 4) mn. 35. See John Dugard (n. 4) mn. 37–40. See John Dugard (n. 4) mn. 46.

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hausted all available local remedies (exhaustion of local remedies rule).87 This rule is generally considered as reflecting customary international law.88 There are equally well-established customary law exceptions to this rule: local remedies do not need to be exhausted if they are ineffective or if their exercise would be futile;89 this is the case if there are no reasonably available local remedies to provide effective redress, or the existing local remedies do not provide for any reasonable possibility of such redress – examples would be lack of jurisdiction of the local courts or their notorious lack of independence. The burden of proof as to the existence of such exceptions is on the claimant State.90 Finally, there is the possibility that the respondent State has, expressly or impliedly, waived the requirement that local remedies be exhausted.91 d) Means of Diplomatic Protection 43

Present international law recognises various means of diplomatic protection;92 in contrast to the situation before World War I, it is clear that they must not include the use of armed force.93 Usually, a distinction is made between diplomatic actions such as protests, requests for mediation, measures of retorsion, severance of diplomatic relations, and economic measures, and international judicial proceedings. Such proceedings require the consent of the respondent State, either given on ad hoc basis or, prior to the incident, in a pertinent treaty or other agreement. E. Conclusions

44

By way of conclusion, it seems justified to state that present public international law provides for a significant amount of rules aimed at protecting the individual. Most relevant are the various human rights treaties, both on the universal and regional level, which confer to individuals a wide range of rights on which they can rely against any State, including the State of their nationality. Insofar, present public international law differs fundamentally from traditional public international law which was only concerned with the rights of aliens. It must be seen, however, that only very few of these instruments, possibly only the ECHR, provide for truly effective (international) remedies: none of the UN human rights instruments provides for the establishment of a human rights court which could 87 For an overview see e.g. James Crawford (n. 2) 710–715; and James Crawford and Thomas Grant, ‘Local remedies, Exhaustion of’ in MPEPIL (n. 1), vol. VI, 895–905. 88 See John Dugard (n. 4) mn. 53. 89 See James Crawford and Thomas Grant (n. 87) mn. 19–25; and John Dugard (n. 4) mn. 58– 59. 90 See John Dugard (n. 4) mn. 67. 91 See James Crawford and Thomas Grant (n. 87) mn. 14–18; and John Dugard (n. 4) mn. 63. 92 See John Dugard (n. 4) mn. 68–73. 93 See, however, the discussion in John Dugard (n. 4) mn. 70 on actions such as the military intervention by the United States of America in Grenada (1983) or the raid by Israeli forces to Entebbe in Uganda (1976).

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be directly accessed by individuals and which would be empowered to render legally binding judgements. Moreover, considerable doubts remain as to the effectiveness of the human rights protection system provided for in the regional human rights treaties; this assessment applies in particular as regards the African Court on Human and Peoples’ Rights which still has to develop jurisprudence of any significance, and, although to a much lesser extent, to the Inter-American Court of Human Rights. But even in the European context, one must not overlook the fact that there is a growing number of judgements of the European Court of Human Rights which are not or only partially implemented on the national level; this is a situation which clearly calls for a considerable strengthening of the enforcement mechanisms foreseen in the European Convention on Human Rights. This means, indeed, that the traditional institute of diplomatic protection still 45 has to play a significant role in public international law. To some extent, its customary law rules have been codified in the 1961 Vienna Convention on Diplomatic Relations and the 1963 Vienna Convention on Consular Relations; as regards violations of human rights of aliens, it retains some of its previous importance in view of the described lack of effective remedies for the enforcement of the rights enshrined in the universally applicable human rights treaties. The one area, however, where diplomatic protection seems to have lost most of its previous importance is international investment law: the establishment of the current legal system protecting foreign investment which entitles investors to directly address international arbitration tribunals which then render awards which can in many cases be effectively enforced, seem to limit the relevance of diplomatic protection to those investments which, for whatever reasons, are not protected under any of the treaties constituting the present body of international investment law.

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Burkhard Schöbener* A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. The Rules of International Law that Protect Investments . . . . . . . . . . . . . . . . 1. The Protection of Property as a Human Right . . . . . . . . . . . . . . . . . . . . . . . . 2. Protection under Customary International Law via the International Minimum Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Neer Formula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The ICJ’s Decision in ELSI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Recognised Content of the International Minimum Standard. . . .

2 3

C. The Further Development of the International Minimum Standard through IIAs? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. State of International Legal Jurisprudence. . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Restrictive Line of the ICJ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Evolutionary Understanding of Investment Arbitration Awards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Possibility of the Further Development of the International Minimum Standard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Prerequisites for the Formation of Customary International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Requirement of Uniform State Practice. . . . . . . . . . . . . . . . . . . . . . . c) The Requirement of Opinio Juris. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) The States’ Limited Willingness to be Bound . . . . . . . . . . . . . . . . . (2) BITs as leges speciales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. The Customary International Legal Applicability of Individual Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Protection of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. National and Most Favoured Nation Treatment . . . . . . . . . . . . . . . . . . . . . . 4. Fair and Equitable Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) An Independent Standard or a Component of Customary International Law?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Influence of Customary International Law?. . . . . . . . . . . . . . . . . . . . . . . E. Conclusion and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 7 9 11 13 14 15 19 21 22 23 24 25 28 30 32 33 36 40 43 44 47 50

Literature: Steffen Hindelang, ‘Bilateral Investment Treaties, Custom and a Healthy Investment Climate – The Question of Whether BITs Influence Customary International Law Revisited’ (2004) 5 JWIT 789–809; Bernard Kishoiyian, ‘The Utility of Bilateral Investment Treaties in the Formulation of Customary International Law’ (1994) 14 Nw. J. Int’l L. & Bus. 327–375; Campbell McLachlan, ‘Investment Treaties and General Invernational Law’ (2008) ICLQ 361–399; Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2004) 204–267; Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (Oxford University Press, 2008); Thomas W. Wälde, ‘The Specific Nature of Investment Arbitration’ in Philippe Kahn and Thomas W. Wälde (eds), New Aspects of International Investment Law (Martinus Nijhoff Publishers, 2007) 43–120. * The author thanks advocate Dr. Andrea Schernbeck and legal trainee Mr. Markus Jobst, both of whom have worked at the Department for Public Law, International Law, and European Law at the University of Cologne, for their attentive support throughout the preparation of this chapter.

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A. Introduction

In international law, foreign investments are protected not only through inter- 1 national investment agreements (IIAs), but also by customary international law and by the human rights-based protection of property. Against the background of the developments of the last century, this chapter examines whether a recognised customary international protection of investments – the development of which has likely been promoted through more than 3100 IIAs, including more than 2800 bilateral investment treaties (BITs)1 – is recognised or, alternatively, will be recognised in the foreseeable future. In this regard, this chapter sheds light on the decisions of the International Court of Justice (ICJ) and other arbitral tribunals and provides a critical examination of the many viewpoints represented in the literature. To make a prognosis with respect to future developments, however, one must begin by evaluating past developments and the present legal situation. B. The Rules of International Law that Protect Investments

In addition to IIAs, the human rights-based protection of property and the in- 2 ternational minimum standard found in customary international law also serve to protect investments. 1. The Protection of Property as a Human Right

In the area of human rights, the protection of property – as an object/purpose 3 of international treaties – is largely confined to regional conventions. The European, American, and also the African human rights conventions contain such rules providing for the protection of property. These provisions provide individuals with an effective enforcement mechanism by enabling them to file individual complaints.2 Protection of foreign assets could, in any event, be a result of the acceptance 4 of globally applicable human rights norms (i.e. those extending beyond the regional guarantees).3 Undeniably, as a result of the human rights declarations and pacts that followed World War II, there has been a development in public international law that at least acknowledges that an individual can be a subject in international law.4 Today, human rights norms such as the respect for human dig1 UNCTAD, World Investment Report 2012 (United Nations, 2012) xx, available at http:// www.unctad-docs.org/UNCTAD-WIR2012-Full-en.pdf (last access in January 2014). 2 To date, however, only very few of the State signatories to the African Charter on Human and Peoples’ Rights (AfCHPR) have recognised the AfCHPR’s instrument for the individual complaint. 3 Regarding the topic of the protection of property through human rights, see Bernhard Kempen, ‘Eigentum: Ein universelles Menschenrecht?’ (2009) Wirtschaft und Verwaltung (Economy and Administration, WuV) 19–30; Burkhard Schöbener, ‘Der menschenrechtliche Schutz des privaten Eigentums im universellen Völkerrecht’ in Michael Sachs and Helmut Siekmann (eds), Der grundrechtsgeprägte Verfassungsstaat (Duncker & Humblot, 2012) 901 et seq.

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nity and the prohibition of torture, among others, are not only categorised as customary international law,5 but are also at least partially regarded as having jus cogens character and erga omnes effect. The prevailing legal opinion, however, does not confer these attributes to the human right of property. Nevertheless, there are good reasons to argue that the right to property is also recognised as a universal human right.6 Even if one is to proceed from the basis of a universal human right to property, the protection that arises from such a human right remains far behind the protection provided through BITs and IIAs. Faced with the lack of an effective enforcement mechanism, the investor remains dependent on his or her home State’s exercise of diplomatic protection, in order to submit his or her claims of a violation of human rights vis-à-vis the host State. 2. Protection under Customary International Law via the International Minimum Standard

The rules of customary international law that serve to protect the individual are characterised as the international minimum standard. Every investor who makes an investment in a foreign country is, based on his or her characteristic of being an alien in the territory of the host State, protected by the international minimum standard. Insofar as property and foreign investments are concerned, the international minimum standard already provides international legal protection. 6 The applicability of the international minimum standard under customary international law has always been controversial. Latin American countries, in particular, have always refused to allow their trade practices to be measured by international standards.7 Instead, foreign nationals, pursuant to the so-called ‘Calvo Doctrine’ would receive the same treatment as did domestic nationals.8 A much observed confirmation of the customary legal applicability of the international minimum standard was elaborated in the Neer case of 1926.9 This case, as well as the ELSI decision from 1989,10 is frequently used by investment tribunals to determine the normative content of the international minimum standard. 5

4 Cf. Nadja Gaus, Materiell-rechtliche Gewährleistungen und verfahrensrechtliche Durchsetzbarkeit völkerrechtlich garantierter Menschenrechte (Peter Lang Verlag, 2011). 5 Cf. Thomas Buergenthal, ‘The Evolving International Human Rights System’ (2006) 100 AJIL 783–807, 783 et seq. 6 For extensive elaboration on this topic, see Burkhard Schöbener (n. 3) 901 et seq. 7 Hollin Dickerson, ‘International Standards’ in Rüdiger Wolfrum (ed), The Max Planck Encyclopedia of Public International Law (Oxford University Press, online edition available at www.mpepil.com), last access in March 2012, para. 5. 8 Patrick Juillard, ‘Calvo Doctrine’ in Rüdiger Wolfrum (ed), The Max Planck Encyclopedia of Public International Law (Oxford University Press, online edition available at www.mpepil.com), last access in January 2014, para. 3. 9 LFH Neer and Pauline Neer (USA v. Mexico), American–Mexican Claims Commission, Award, October 1926, 4 RIAA 60. 10 Elettronica Sicula SpA (ELSI) (USA v. Italy), ICJ Judgment, 20 July 1989, ICJ Rep. 1989, 15 et seq.

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a) The Neer Formula

In Neer, the General Claims Commission (Mexico and the United States) de- 7 termined that a violation of the international minimum standard exists, if: the treatment of an alien (...) amount[s] to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.11

Even today, investment tribunals and others engaged in the making or elabo- 8 ration of investment law continue to use the Neer Formula as a benchmark.12 The importance of this arbitral award is, however, over-stated. While Neer is among the first judicial confirmations of the customary international legal applicability of the international minimum standard,13 the General Claims Commission based its conclusion not on the required analysis of State practice, but rather on individual scholarly opinions.14 Furthermore, since the decision is based on uncertain legal terms and does not take further ‘international standards’ into consideration, the Neer Formula does not bring about a concretisation of the international minimum standard. b) The ICJ’s Decision in ELSI

In addition to the Neer Formula, a large portion of investment awards rely on 9 the ICJ’s decision in ELSI in determining the content of the international minimum standard.15 According to the ELSI standard, a State has international responsibility when its behaviour displays ‘(…) a willful disregard of due process of law, which shocks or at least surprises a sense of judicial propriety.’16 The applicability of this statement is, however, limited to the determination of 10 the breadth of the international minimum standard. The ICJ’s reasoning in ELSI 11 LFH Neer and Pauline Neer (USA v. Mexico) (n. 9) 61–62. For more information concerning the development of the international minimum standard, see Hollin Dickerson (n. 7) para. 2 et seq. 12 See also Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. Estonia, ICSID Case No. ARB/99/2, Award, 25 June 2001, para. 367; Glamis Gold Ltd. v. USA, UNCITRAL, Award, 8 June 2009, para. 616, and Cargill Incorp. v. Mexico, ICSID Case No. ARB(AF)/05/2, Award, 13 August 2009, para. 271. 13 Although Jan Paulsson and Georgios Petrochilos, ‘Neer-ly Misled’ (2007) 22 ICSID Rev.– FILJ 242–257, 244 correctly argue that the arbitral decision, based on the prior decisions of the Permanent Court of Arbitration, Norwegian Ship Owners (Norway v. USA), Award, 13 October 1922, (1922) UNRIAA, vol. 1, 307 et seq. and Certain German Interests in Polish Upper Silesia (Germany v. Poland), PCIJ Judgment, 25 May 1926, Series A, vol. 6 (1925) 1 et seq., 22, do not demonstrate a fully new tendency. 14 See also the criticism in the decision Railroad Development Corp. v. Guatemala, ICSID Case No. ARB/07/23, Award, 29 June 2012, para. 216. 15 See e.g. Mondev International Ltd. v. USA, ICSID Case No. ARB(AF)/99/2, Award, 11 October 2002, para. 127; Loewen Inc. and Loewen v. USA, ICSID Case No ARB(AF)/98/3, Award, 25 June 2003, para. 131 et seq.; International Thunderbird Gaming Corp. v. Mexico, UNCITRAL, Award, 26 June 2006, para. 200. In the field of BIT jurisprudence see Jan de Nul N.V. & Dredging Int. N.V. v. Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008, para. 193 et seq. 16 Elettronica Sicula SpA (ELSI) (USA v. Italy) (n. 10) para. 128.

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was not based on customary international law, but rather on the text of a ‘Treaty of Friendship, Commerce and Navigation.’17 c) Recognised Content of the International Minimum Standard

Based on Neer, individual lines of cases concerning the international minimum standard have developed in other court decisions and in the literature. These include the right to legal personality, the right to life, the right to bodily integrity and the protection of the person, and also the right to due process.18 In addition and already beginning in the 18th century, the customary international legal principle that foreign property is to be protected and can only be expropriated upon payment of compensation, developed.19 From the investor’s perspective, this was very important. 12 An individual, however, cannot assert a claim for a violation of the international minimum standard. Rather, he or she is dependent on the exercise of diplomatic protection by his or her home State. 11

C. The Further Development of the International Minimum Standard through IIAs? 13

Since the very existence of customary international law is based on dynamic prerequisites – prerequisites that are always changing and developing – one can imagine that the international minimum standard has been further developed through tendencies in international law that protect the individual. As a result of the rapid increase in the conclusion of BITs and the increasing reach and use of BITs, however, it is more often asserted that the normative content of the international minimum standard corresponds with the BIT standards. The following sections will address this issue from the perspective of international jurisprudence (1.). In closing, the fundamental possibility of such a further development of the international minimum standard will be examined (2.). 1. State of International Legal Jurisprudence

14

Two competing tendencies can be derived from international jurisprudence in response to the issues above. While the investment law arbitral decisions note that the international minimum standard has experienced significant further de17 Stephen Vasciannie, ‘The Fair and Equitable Treatment Standard in International Investment Law and Practice’ (1999) 70 BYIL 99–164, 137. 18 Cf. Jörn Griebel, Internationales Investitionsrecht (C.H. Beck, 2008) 14 et seq.; Hollin Dickerson (n. 7) para. 11. 19 Regarding the amount of compensation, the Hull Formula (‘prompt, adequate and effective compensation’) had long enjoyed customary international legal recognition. It is debatable, however, whether in the time following the Second World War, as well as during the decolonisation, the Hull Formula could be applied. Regarding the historic development and the current status of the Hull Formula, see Burkhard Schöbener, Jochen Herbst and Markus Perkams, Internationales Wirtschaftsrecht (C.F. Müller, 2010) para. 4/31 et seq., 4/66 et seq.

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velopment through the conclusion of more than 3100 IIAs (b), the ICJ refuses to recognise a customary international applicability of these IIA standards (a). a) The Restrictive Line of the ICJ

In its 1970 decision in Barcelona Traction,20 the ICJ made the following re- 15 mark: Considering the important developments of the last half-century, the growth of foreign investments and the expansion of the international activities of corporations, in particular of holding companies, which are often multinational, and considering the way in which the economic interests of States have proliferated, it may at first sight appear surprising that the evolution of law has not gone further and that no generally accepted rules in the matter have crystallized on the international plane.

The ICJ did not adopt the position that the IIAs that the parties had entered 16 into led to a change or further evolution of the then existing customary international law within the field of investment law.21 According to the ICJ, those BITs, as well as the other international conventions regarding the protection of investments, were to be regarded as lex specialis to the then existing customary international law.22 The ICJ repeated this evaluation in Diallo23 in 2007. In that case, Guinea ar- 17 gued that a clause contained in investment agreements had developed into a generally applicable rule of customary international law. The ICJ, however, rejected Guinea’s argument24 and instead stated: The fact invoked by Guinea that various international agreements, such as agreements for the promotion and protection of foreign investments and the Washington Convention, have established special legal régimes governing investment protection, or that provisions in this regard are commonly included in contracts entered into directly between States and foreign investors, is not sufficient to show that there has been a change in the customary rules of diplomatic protection; it could equally show the contrary.25

The ICJ further supported its decision by stating that the required State prac- 18 tice – contrary to Guinea’s arguments – could not be established upon further investigation.26

20 Case concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain), ICJ Judgment, 5 February 1970, ICJ Rep. 1970, 3, para. 89. For a basic evaluation of the case in relation to the later development of customary international investment law, see Ian A. Laird, ‘A Community of Destiny – The Barcelona Traction Case and the Development of Shareholder Rights to Bring Investment Claims’ in Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID (Cameron May Ltd 2005) 77–96. 21 See also Ian Laird (n. 20) 77, 84. 22 Cf. Case concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain) (n. 20) para. 89. 23 Case Concerning Ahmadou Sadio Diallo (Guinea v. Congo), Preliminary Objections, 24 May 2007, ICJ Rep. 2007, 582. 24 Case Concerning Ahmadou Sadio Diallo (Guinea v. Congo) (n. 23) para. 89. 25 Case Concerning Ahmadou Sadio Diallo (Guinea v. Congo) (n. 23) para. 90. 26 Case Concerning Ahmadou Sadio Diallo (Guinea v. Congo) (n. 23) para. 89.

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b) The Evolutionary Understanding of Investment Arbitration Awards 19

A completely opposite understanding of customary international law is found in investment jurisprudence. Indeed, there is a nearly uniform prevailing legal view that the international minimum standard has been strongly developed through the conclusion of numerous IIAs. In 2002, the NAFTA tribunal in Pope & Talbot noted as follows: The true number [of bilateral investment treaties] is in excess of 1800. Therefore, applying the ordinary rules for determining the content of custom in international law, one must conclude that the practice of states is now represented by those treaties.27

20

Also, other subsequent arbitral decisions note the further development of the international minimum standard28 and the tremendous influence that IIAs have had on this development.29 An examination of the concrete impact of IIAs and the degree of further development of the international minimum standard is, however, missing from the arbitral awards. 2. Possibility of the Further Development of the International Minimum Standard

21

Fundamentally, it is recognised that customary international law can develop from bilateral treaties.30 In this regard, therefore, even a further evolution of already existing customary international legal rules through bilateral treaties – such as the international minimum standard – is also possible. a) The Prerequisites for the Formation of Customary International Law

22

Proof of the existence of both elements for the development of customary international law is always necessary.31 The prevailing legal opinion views these 27 Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in Respect of Damages, 31 May 2002, para. 62. 28 ADF Group Inc. v. USA, ICSID Case No. ARB(AF)/00/1 (NAFTA), Award, 6 January 2003, para. 179; Waste Management Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3 (NAFTA), Award, 30 April 2004, para. 92; Thunderbird Gaming Corp. v. Mexico (n. 15) para. 194; Merrill & Ring Forestry v. Canada, UNCITRAL, Award, 31 March 2010, para. 193; Chemtura Corp. v. Canada, UNCITRAL, Award, 2 August 2010, para. 121. 29 Mondev v. USA (n. 15) paras. 117, 125; Chemtura Corp. v. Canada (n. 28), UNCITRAL, Award, 2 August 2010, para. 121. 30 Cf. Richard R. Baxter, ‘Treaties and Custom’ (1970) 129 RC 27–105, 75 et seq.; Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2010) 176 et seq.; Mark E. Villiger, Customary International Law and Treaties (Kluwer Law International, 1997), ch. 6, 167–192, para. 296. For the development of customary international law through a series of numerous, identically worded bilateral treaties, see also Nottebohm (Liechtenstein v. Guatemala), 6 April 1955, ICJ Rep. 1955, 4 et seq., paras. 23 et seq. 31 Cf. Steffen Hindelang ‘Bilateral Investment Treaties, Custom and a Healthy Investment Climate – The Question of whether BITs influence Customary International Law Revisited’ (2004) 5 JWIT 789–809, 795; Mark Villiger (n. 30), para. 296; contra Andreas F. Lowenfeld, ‘Investment Agreements and International Law’ (2003) 42 Colum. J. Transnat’l L. 123–130, 129 et seq., which also recognises the differentiation among the sources of law within Art. 38

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as a uniform State practice (b), combined with the States’ belief that their behaviour is required by legal norms, the so-called ‘opinio juris’ (c).32 The ICJ solidified its views on the development of customary international law from conventional international law, in particular, in its decision in the North Sea Continental Shelf case. Accordingly, a conventional international legal norm must be ‘of a fundamentally norm-creating character such as could be regarded as forming the basis of a general rule of law’ in order for customary international law to develop from it.33 The prerequisite to this is the basic interest of the contracting States to create an all-encompassing and generally applicable rule.34 b) The Requirement of Uniform State Practice

The ubiquitous argument in the international investment law literature and ar- 23 bitral decisions is the overwhelming number of BIT conclusions in the past decades. The conclusion of a treaty (namely, the acts of negotiation, signing, and ratification) in and of itself, however, contains no normative content with respect to the creation of customary international law. Rather, only the State’s post-contractual, BIT conforming behaviour can be valued as legally significant State behaviour. The second prerequisite for the customary international legal applicability of BITs – uniform practice grounded in the belief that it is legally required (‘opinio juris’) – must be connected with the behaviour that follows the treaty’s conclusion. Here, however, the State in question will always act based on the belief that it is contractually (and not necessarily customarily) bound to behave in such a manner.35 It is possible that the opinio juris of the community of States, as a result of the wide distribution of BITs and their connected homogenous, treaty-conforming behaviour, has also transformed with the passage of time. The answer to the question of whether BITs have thus far earned customary international legal validity depends, in decisive part, upon whether the opinio juris of the community of States has emerged.

32

33 34 35

of the ICJ Statute, and that they have been overtaken, and declares BITs to be the new form of ‘international legislation.’ Cf. North Sea Continental Shelf (Germany v. Denmark), 20 February 1969, ICJ Rep. 1969, 3 et seq., para. 73 et seq.; Richard K. Gardiner, ‘International Law’ (Pearson Longman, 2003), 101 et seq.; Malcom N. Shaw, International Law (Cambridge University Press, 2003) 68 et seq. The definition of the prerequisites to the formation of customary international law is also debated. For general information concerning the development of customary international law, see e.g. Stephan Hobe, Einführung in das Völkerrecht (UTB, 2008) 191; Tullio Treves, ‘Customary International Law’ in Rüdiger Wolfrum (ed), The Max Planck Encyclopedia of Public International Law (Oxford University Press, online edition available at www.mpepil.com), last access in January 2014, para. 17. North Sea Continental Shelf (Germany v. Denmark) (n. 32) para. 72 et seq. Also approving of the view held by the ICJ in the aforementioned decision: Markus Notter, Völkerrechtlicher Investitionsschutz ([s.n.] 1989), 44 et seq. Karl Doehring, ‘Gewohnheitsrecht aus Verträgen’ (1976) 36 ZaöRV (Heidelberg Journal of International Law) 77–95, 87. See also Mark E. Villiger, Customary International Law and Treaties (Martinus Nijhoff, 1985) 11, para. 36.

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c) The Requirement of Opinio Juris 24

The statement that a uniform opinio juris of the community of States exists, often rests on the same argument as given by Guinea in Diallo, namely, the multiplicity of BITs. The failure of numerous attempts – in particular by the OECD – to reach an agreement on a multilateral basis, however, stands in sharp contrast to the strong increase of BIT conclusions.36 In this regard, it is disputable whether such a uniform opinio juris between States exists or that IIA-contracting States have the intention to establish an obligation of a ‘fundamentally norm-creating character’. (1) The States’ Limited Willingness to be Bound

The creation of customary international law through the observance of bilateral treaties is a well-known phenomenon in international law. For instance, the recognised customary international law concerning consular law developed from numerous bilateral consular treaties.37 In the field of diplomatic and consular relations, it was only possible to establish an all-encompassing, customary international legal obligation of all States due to the necessity of consistent, uniform rules. Based on the necessity of this uniform regulation – as well as the willingness of States to bind themselves as a matter of customary international law – States obligated themselves vis-à-vis numerous States in a similar manner. 26 In contrast, however, in the field of international business and investment law, the willingness and necessity of States to bind themselves under the same conditions as one another cannot be established. On the contrary, the global economy is based on national economies competing to attract foreign investment. If BITs had customary international applicability, this competition would be abolished, since investors – independent of treaty obligations – would be subject to the same standards and obligations in all countries. Moreover, international business and investment law is based on the principle of differentiation within national economic orders. Indeed, even the possibility to differentiate in the treatment of foreign investments, trade, and services (such as pursuant to the State of origin) establishes the willingness of States to open their markets to foreign investments and international trade.38 If BIT standards – in particular the prohibition on dis25

36 Concerning the efforts to find a multilateral solution, see Ahmad A. Ghouri, ‘The evolution of bilateral investment treaties, investment treaty arbitration and international investment law’ (2011) 14 Int’l Arb. L. Rev. 189–204, 192 et seq.; Andreas Lowenfeld (n. 31) 123–130, 123 et seq.; see also contribution of Joachim Karl, ‘The Negotiations on the OECD Multilateral Agreement on Investment’, ch. 4.III.F., 342–360. 37 Stephen S. Schwebel, ‘The Influence of Bilateral Investment Treaties on Customary International Law’ (2005) 2 TDM 26–30, at p. 29 referring to the Report of the International Law Commission on the work of its twelfth session, 2 YBILC 145, UN Doc. A/4425 (1960). For a general overview concerning the question of whether BITs in toto can have an influence on customary international law see also Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im Völkerrecht (Springer, 1985) 54 et seq. 38 The numerous exceptions to the prohibitions on discrimination within the WTO confirm this. In addition to the general exception rules (such as in Art. XX of the GATT 1994), there are

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crimination and guarantees of national or most favoured nation (MFN) treatment – were to create customary international law, States would basically be robbed of the possibility to differentiate based on origin. This would entail a significant loss of the State’s sovereignty. In these circumstances, no general opinio juris for States to bind themselves 27 to all other States and their citizens in a consistent, general, BIT-conforming manner can be assumed. (2) BITs as leges speciales

Contracting States constantly pursue the goal of creating incentives for for- 28 eign investment when concluding BITs. Customary international law originally offered inadequate protection to foreign investors.39 To increase trust in certain business locations, risks that are typical to investments needed to be minimised through binding regulations – regulations upon which the investor could rely, without having to depend on the diplomatic protection of his or her home State.40 Since BITs should provide incentives for foreign investment, they confer very significant rights to investors, while restricting the actions and regulatory powers of the contracting State. This necessarily presupposes that a State does not wish to admit investors from all States, but rather only those from its chosen contracting State parties and only after individual negotiations. BIT provisions are, therefore, to be understood in relation to the international minimum standard as leges speciales, whose benefits will apply only to the respective party and its investors. In this regard, the existence of an opinio juris among the community of States 29 to ensure these additional rights to all foreigners on a State’s territory – independently from treaty obligations – would be unthinkable. d) Conclusion

Investment protection legal standards include commitments that affect sensi- 30 tive areas of national economic systems – areas that are so sensitive that States in the international community are unwilling to bind themselves towards third States or their nationals. As compared to customary international law, therefore, BITs are intended as more specific regulations whose benefits would be subject

also clauses in individual trade agreements that guarantee the principles of most favoured nation treatment (i.e. GATS Art. II:2, TRIPS Art. 4 lit. a–d) and national treatment (e.g. GATT 1994 Art. III:8 and GATS Art. XIII:1). See Peter-Tobias Stoll and Frank Schorkopf, WTO – Welthandelsordnung und Welthandelsrecht (Heymanns, 2002) para. 125 et seq., 143 et seq., 145 et seq.; Peter van den Bossche, The Law and Policy of the World Trade Organization (Cambridge University Press, 2008) 320 et seq., 342 et seq. 39 The individual aspects of the customary international legal protection of property are, in this regard, debated. In addition, the diplomatic protection of the home State does not constitute a satisfactory or reliable medium for the resolution of disputes. Regarding the deficits of customary international law, see Jörn Griebel (n. 18) 14 et seq. 40 Jörn Griebel (n. 18) 14 et seq.

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only to the respective party and its nationals. Both arguments stand against the adoption of a comprehensive opinio juris and the norm-creating character required by the ICJ. Even if a general BIT-conforming State practice would be detectable, this would not be based on the conviction that the State is committed to such conduct based on customary international law. 31 Since the BITs differ greatly in terms of their structure and text, the customary international legal validity of BITs is, in toto, unthinkable. The individual treaty standards that are regularly included in BITs diverge in many ways. It is, however, nevertheless still possible that individual contractual standards may have a ‘fundamentally norm-creating character’ and have attained customary international law status. D. The Customary International Legal Applicability of Individual Clauses 32

The following section examines whether particular treaty provisions, which are often found in BITs, have further developed the international minimum standard such that they have now become a component of the customary international legal rights recognised for every investor. 1. Arbitration Clauses

Through the arbitration clauses regularly contained in IIAs, contracting States express their consent to resolve their treaty-based disputes through investorState arbitration proceedings. Although such a clause is included in all IIAs, it cannot crystallise into customary international law, since the essential feature of international law is that States are only subject to international jurisdiction if they have given their express consent thereto.41 Such general consent cannot be assumed from the consent given in a bilateral IIA. 34 The fact that the design of arbitration clauses in treaties is not uniform also prevents the formation of a customary international legal recognition of a generalised consent to investor-State arbitration. Indeed, the concrete formulation often depends not only on whether the parties are members of the ICSID Convention,42 but also on whether and how the inter-State assertion of a breach is required.43 There, different rules can also be found. In this respect, due to the divergent treaty terms, the State practice necessary for the formation of customary international law cannot be demonstrated. 33

41 Here, the ICSID Convention can be used as an example. Pursuant to Art. 1(2) of the ICSID Convention, the Convention is applicable to ‘(...) Contracting States and nationals of other Contracting States (...)’. For a similarly disapproving view, see Stephen Schwebel (n. 37) 26– 30, 30. 42 Cf. the different German model treaties, which distinguish between ICSID contracting parties and States that have not accepted the ICSID Convention. 43 Cf. Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 217. Regarding the question of the extent to which the exhaustion of domestic remedies is required, see Waste Management v. Mexico (n. 28) para. 97.

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A customary international legal protection of investments – without the dis- 35 pute resolution mechanism of the investor-State procedure that is specific to investment law – is conceivable. Should any substantive provisions from IIAs be so strengthened as to form customary international law, these would be enforced through the diplomatic protection of the home State. 2. Protection of Shareholders

In BIT-based arbitration, the prevailing view is that not only the injured cor- 36 poration, but also those standing behind the corporation – the shareholders – may bring BIT claims.44 Even minority or non-controlling shareholders are, accordingly, entitled to initiate proceedings independently of the corporation.45 This raises the question of whether the protection extended to the shareholder 37 through BITs and the shareholder’s associated direct right to bring an action, also have customary international legal validity.46 In such a situation, the grant of diplomatic protection in favour of shareholders would be permissible. This would play a role especially where the company has the nationality of its host State, but the shareholders have a different nationality. In this manner, the shareholder’s home State could grant diplomatic protection with regard to the host State’s acts of infringement against the company. The arbitral tribunal in CMS v. Argentina seems to advocate for this when it states that the investors’ independent legal standing is mostly the result of lex specialis and specific treaty arrangements that have so allowed, the fact is that lex specialis in this respect is so prevalent that it can now be considered the general rule, certainly in respect of foreign investments and international claims and increasingly in respect of other matters.47

It must be recalled that the tribunal’s conclusion in CMS v. Argentina is the 38 result of the interpretation of the term ‘investment’ found in the ICSID Convention and the underlying BIT. Thus, it concerns a specific question of the term ‘investment’ – one that cannot, on its own, be transferred over to the realm of customary international law. Moreover, the definition of the term ‘investment’ in BITs is not uniform. While the vast majority of BITs make no restriction of the term and, thus, enable an unlimited possibility of standing, other treaties, such as Article 1 of the US 2004 Model BIT and Article 1 No. 6 b) of the ECT, restrict the term to cases where the plaintiff investor holds a controlling stake in the in-

44 Cf. Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Objections to Jurisdiction, 25 January 2000, para. 65; CME v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001, para. 392; CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Decision on Objections to Jurisdiction, 17 July 2003, para. 48; GAMI Investments Inc. v. Mexico, UNCITRAL, Award, 15 November 2004, para. 27 et seq.; Daimler Financial Services AG v. Argentina, ICSID Case No. ARB/05/1, Award, 22 August 2012, para. 90. 45 CMS v. Argentina (n. 44) para. 48; CMS v. Argentina, Decision on Annulment, 25 September 2007, para. 69; Daimler Financial Services AG v. Argentina (n. 44) para. 90. 46 See Ian A. Laird (n. 20) 85. 47 CMS v. Argentina (n. 44) para. 48.

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jured company. Given this non-uniformity of treaty practices, a rule of customary international law that supports the diplomatic protection of shareholders has not crystallised from the BITs. 39 Finally, in Diallo, the ICJ affirmed its attitude in the Barcelona Traction judgment48 and rejected Guinea’s arguments concerning the development of customary international law through BITs.49 In both cases, the ICJ found that, in the absence of differing international conventions, such as BITs, only the home State of a company, and not the home State of the shareholders, was entitled to exercise diplomatic protection.50 3. National and Most Favoured Nation Treatment

The substantive protection standards most commonly contained in IIAs include national and most favoured nation treatment. Occasionally, it is represented in the literature that national treatment is generally encompassed by the international minimum standard and is, therefore, recognised under customary international law.51 The traditional sovereign right of States to grant their nationals political rights and, in particular, better economic benefits as compared to foreigners stands, however, in stark contrast to this.52 This is demonstrated by the necessity in most countries of the world that non-citizens obtain work permits. Moreover, this is also demonstrated by the mere existence of the international minimum standard in international law, which permits different treatment of nationals and foreigners. Otherwise, an accepted customary international legal norm, which obliges States to maintain a certain minimum standard for the treatment of aliens in their territory, could not be explained.53 41 International arbitral decisions also recognise that there is no rule of international law that prohibits States from treating their own and foreign nationals dif40

48 Case concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain) (n. 20). 49 Cf. Case Concerning Ahmadou Sadio Diallo (Guinea v. Congo) (n. 23) para. 90; for an equally critical evaluation, see Rudolf Dolzer and Christoph Schreuer (n. 43) 56. 50 Cf. Case concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain) (n. 20) para. 90. For an analysis of this decision, see also Burkhard Schöbener, Jochen Herbst and Markus Perkams (n. 19) para. 1/216 et seq.; 4/175. 51 Cf. Ulrich Häde, ‘Der völkerrechtliche Schutz von Direktinvestitionen im Ausland’ (1997) 35 AVR 181–212, 187 (accepting this for the event of the prior admission of the investment). 52 Andrea K. Bjorklund, ‘The National Treatment Obligation’ in Katia Yannaca-Small (ed), Arbitration under International Investment Agreements (Oxford University Press, 2010) 412, 413. 53 The fact that the international minimum standard does not concern uniform rules for the equal treatment of foreign and domestic investors can result in foreigners receiving better treatment than nationals do. Presently, it is uncontroversial that the expropriation of a foreigner’s property can only be lawful when conducted according to certain pre-conditions and the payment of compensation. There is, however, no universal international rule for the expropriation of a State’s national’s property. Cf. Burkhard Schöbener, Jochen Herbst and Markus Perkams (n. 19) para. 4/59 et seq., 4/442 et seq. The convergence of the contents of the international minimum standard and the human rights-based protection of property, however, are becoming more apparent. For more on this, see Burkhard Schöbener (n. 3) 917 et seq.

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ferently.54 Agreement on a national treatment clause is usually the result of extensive negotiations. An inter-State agreement to treat foreign investors and residents alike will only be concluded if the State in question aims to receive a benefit from such an agreement. The personal scope of such provisions is restricted to the investors from the State parties. Where the will to be bound is clearly limited to a certain circle of people, such arrangements cannot simultaneously contribute to the formation of customary international law, as this would also apply to investors of third States. The principle of national treatment is, thus, exclusively the result of an explicit contractual agreement of the States. For the same reason, the fact that most favoured nation clauses are often 42 adopted in BITs does not lead to the creation of an identical rule under customary international law. An agreement between the contracting parties on the principle of ‘most favoured nation treatment’ is, like with the clauses for national treatment, the result of extensive negotiations and, therefore, is to be evaluated like a quid pro quo determination, knowingly only agreed to between the parties. 4. Fair and Equitable Treatment

The fair and equitable treatment standard (FET), contained in virtually all 43 BITs, is the most often claimed cause of action in investor-State disputes before arbitral tribunals.55 Despite its general formulation, many lines of cases could be and in fact have been built through arbitral decisions. The recognised content of FET includes the prohibition of denial of justice,56 commitment to due process,57 and the freedom from coercion and harassment.58 The most important protection provided by FET is the protection of legitimate expectations.59 This protects the foreign investor from any State action that would violate his or her legitimate expectations. 54 Cf. Methanex Corp. v. USA, UNCITRAL (NAFTA), Final Award, part IV, ch. C, para. 25. 55 Cf. Andrea Schernbeck, Der Fair and Equitable Treatment Standard in internationalen Investitionsabkommen (Nomos, 2013); Rudolf Dolzer, ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’ (2005) 39 Int’l Law. 87–106, 87; Burkhard Schöbener, Jochen Herbst and Markus Perkams (n. 19) para. 4/198; Alexandra Diehl, The Core Standard of International Investment Protection (Kluwer Law International, 2012). 56 See e.g. Waste Management v. Mexico (n. 28) para. 108; Rumeli Telekom AS and Telsim Mobil Telekomikasyon Hizmetleri AS v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 21 July 2008, para. 651; Jan de Nul & Dredging Int. v. Egypt (n. 15) para. 188. 57 See Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (Oxford University Press, 2008) 157. 58 See Ioana Tudor (n. 57) 157. 59 Cf. Técnicas Medioambientales Tecmed S.A. v. Mexico, ICSID Case No. ARB (AF)/00/2, Award, 29 May 2003, para. 154; Waste Management v. Mexico (n. 28) para. 98; Saluka v. Czech Republic, Award, 17 March 2006, para. 302; Separate Opinion of arbitrator Wälde in the decision Thunderbird v. Mexico (n. 15), Award, 26 June 2006, para. 25; Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, para. 320; Duke Energy v. Ecuador, ICSID Case No. ARB/04/19, Award, 18 August 2008, para. 339 et seq.; EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, para. 216; Walter Bau v. Thailand, UNCITRAL, Award, 1 July 2009, para. 12.1; Suez, Sociedad General de Aguas de Barcelona S.A., and InterAgua Servicios Integrales del Agua S.A. v. Argentina, ICSID Case No. ARB/03/17, Decision on Liability, 30 July 2010, para. 205.

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a) An Independent Standard or a Component of Customary International Law?

The relationship between FET and customary international law has long been a highly controversial issue. This is due not in least part to the fact that FET clauses vary considerably and individual clauses make an explicit reference to customary international law. 45 Article 5 § 1 of the US Model BIT of 2004 calls for ‘treatment in accordance with customary international law, including fair and equitable treatment.’60 In most BITs, FET is not limited in its wording. Due to the different wording of the clauses, one can convincingly differentiate between the freestanding clauses that do not further limit FET, and such clauses that connect FET with customary international law. In the first case, FET must be understood as an independent standard. In contrast, in the scope of the NAFTA61 and US Model BIT, FET has to be understood as a part of customary international law, due to the unambiguous wording. 46 This view has now become accepted, although arbitration tribunals admit that the distinction between freestanding FET obligations and FET clauses with a link to customary international law does not matter for the normative content in a particular case.62 The arbitration tribunals no longer differentiate between the two types of clauses. It has developed into a largely uniform standard. 44

b) Influence of Customary International Law?

A further question is whether FET, which is so widely included in IIAs, has now attained customary international legal applicability. 48 That conclusion would be precluded by the fact that FET is a very broad general clause. State parties that have included this clause in IIAs have, thereby, left the concretisation of FET and its normative content in the hands of the arbitrators. Given the absence of clear normative content, the clause cannot have a fundamentally norm-creating character and is, therefore, as established by the ICJ, not suited to be elevated to customary international law. 49 That the FET cannot be a part of customary international law is evidenced by the fact that investment arbitration case law includes the protection of legitimate expectations. Protection of legitimate expectations of individuals is not a protected area of the international protection minimum standard, but rather goes beyond the customary international legal protection.63 47

60 This wording is derived from the formulation in NAFTA Art. 1105 para. 1 (emphasis added). 61 Cf. contribution of Andrea Bjorklund, ‘NAFTA’s Contributions to Investor-State Dispute Settlement’, ch. 4.III.B., 261–282. 62 See Saluka v. Czech Republic (n. 59) para. 291. 63 See also Hussein Haeri, ‘A Tale of Two Standards: “Fair and Equitable Treatment” and the Minimum Standard in International Law – The Gillis Wetter Prize’ (2011) 27 Arb. Int’l 27– 45; Christoph Schreuer, ‘Fair and Equitable Treatment (FET): Interactions with other Standards’ (2007) 5 TDM, 1–26, 17; Catherine Yannaca-Small, ‘Fair and Equitable Treatment Standard in International Investment Law’ in OECD Working papers on international investment 3/2004, available at http://dx.doi.org/10.1787/675702255435, last access in September

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E. Conclusion and Outlook

An investment law that goes beyond the international minimum standard and 50 independently goes beyond customary international investment law cannot easily be won from the many BITs. The individual BIT clauses are too varied to evolve themselves in toto into customary international law. Moreover, the individual clauses lack the ‘fundamentally norm-creating character’, required by the ICJ. Such a character can only be assumed when the particular interest of the contracting States indicates that the provision is of general validity. In the field of international investment law, such interest is lacking. Rather, IIAs are dominated by quid pro quo negotiations and interests. In that regard, neither the IIAs in toto nor the individual clauses examined provide an adequate basis for the emergence of new customary international law. If one retains the traditional requirements of State practice and opinio juris 51 for the formation of customary international law, then there are many arguments against BITs having an impact on the development of custom.64 Nevertheless, arbitral tribunals have recognised that BITs may have had just such influence on the international minimum standard. In this context, thus, BITs cannot be completely ignored. How this tendency will be reconciled with the traditional view to the formation of customary international law remains unclear. Furthermore, the content and scope of the international minimum standard re- 52 main equally unclear. Sornarajah has stated that it is true that, ‘[o]ne knows that there is such a standard but what the standard contains and what its modern limits are, are unclear.’65 The same is true when defining the content and scope of the future development of the international minimum standard.

2012, 37. Contra Tilman M. Dralle, ‘Der Fair and Equitable Treatment-Standard im Investitionsschutzrecht am Beispiel des Schiedsspruchs Glamis Gold v. United States’ (2011) 115 Beiträge zum transnationalen Wirtschaftsrecht 21 et seq. 64 For the possibility that the traditional prerequisites of State practice and opinio juris have possibly been overtaken, see Andreas Lowenfeld (n. 31) 128–130. 65 Muthucumaraswamy Sornarajah (n. 30) 346.

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Chapter 3: State Contracts and the Relevance of Investment Contract Arbitration I. Investor-State Contracts in the Context of International Investment Law

André von Walter* A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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B. Investor-State Contracts between National and International Law . . . . . .

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C. Internationalisation of Investor-State Contracts through Arbitral Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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D. Protection of Investor-State Contracts through Contractual Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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E. Protection of Investor-State Contracts through International Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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F. Tentative Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26

Literature: Chittharanjan Amerasinghe, ‘States Breaches of Contracts with Alien and International Law’ (1964) 58 AJIL 881–915; Klaus Peter Berger, ‘Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators’ (2003) 36 Vand. J. Transnat’l L. 1347–1380; Piero Bernardini, ‘Les arbitrages pétroliers et le droit appliquée par les arbitres (1987) 1 Euro-Arab Arbitration 282–297; Piero Bernardini, ‘The Renegotiation of the Investment Contract’ (1998) 13 ICSID Rev.–FILJ 411–425; Piero Bernardini, ‘Stabilization and Adaptation in Oil and Gas Investments’ (2008) 1 JWELB 98– 112; Karl-Heinz Böckstiegel, Der Staat als Vertragspartner ausländischer Privatunternehmen (Athenäum, 1971); Derek W. Bowett, ‘State Contracts with Aliens: Cotemporary Developments on Compensation for Termination or Breach’ (1988) 59 BYIL 49–74; Geneviève Burdeau, ‘Droit international et contrats d’Etats. La sentence Aminoil/Koweït du 23 mars 1982 (1982) AFDI 454–470; Syamal Kumar Chatterjee, ‘The Stabilization Clause Myth in Investment Agreements’ (1988) 5 J. Int’l Arb. 97–111; Margarita T. B. Coale, ‘Stabilization Clauses in International Petroleum Transactions’ (2002) 30 Denv. J. Int’l L. & Pol’y 217–238; Nicolas David, ‘Les clauses de stabilité dans les contrats pétroliers. Questions d’un praticien’ (1986) JDI 79–107; Georges R. Delaume, ‘State Contracts and Transnational Arbitration’ (1981) 75 AJIL 784–819; Georges R. Delaume, ‘The Proper Law of State Contracts Revisited’ (1997) 12 ICSID Rev.–FILJ 1–28; Ahmed Sadek El-Kosheri and Tarek F. Riad, ‘The Changing Roles in the Arbitration Process (With Regard to the Applicable Law governing the New Generations of the Petroleum Agreements)’ (1987) 1 Euro-Arab Arbitration 253–281; Abdullah Faruque, ‘Validity and Efficacy of Stabilisation Clauses – Legal Protection vs. Functional Value’ (2006) J. Int’l Arb. 317–336; John Y. Gotanda, ‘Renegotiation and Adaptation Clauses in Investment Contracts’ (2003) 36 Vand. J. Transnat’l L. 1461–1473; Christopher Greenwood, ‘State Contracts in International Law – The Libyan Oil Arbitrations’ (1982) 53 BYIL 27–81; James N. Hyde, ‘Economic Development Agreements’ (1962) 105 RC 270–374; Robert Y. Jennings, ‘State Contracts in International Law’ (1961) 37 BYIL 156–182; Eduardo Jiménez de Aréchaga, ‘International Law in the Past Third of a Century’ (1978) 159 RC 1–343;

* The views expressed are exclusively those of the author and in particular may not in any circumstances be regarded as stating a position of the European Commission.

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A. Introduction

The legal regime applicable to contracts concluded between States and for- 1 eign investors has attracted considerable attention in academic literature and arbitral case law, especially in times which preceded the boom of investment arbitration based on international investment protection treaties. Indeed, investorState contracts relating to foreign investments have been a part of international André von Walter

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economic relations for centuries. Early international concession contracts, not very different from currently prevailing contract practices, can be traced back as far as the beginning of the 16th century1 and arbitral awards rendered between States and foreign investors with regard to such agreements have been reported as early as in the 19th century.2 Yet, the most important doctrinal and judicial developments in this field of international economic law have taken place between the 1950s and 1980s, when several arbitral rulings prompted the international legal community to reflect on the legal foundations of what are commonly referred to as ‘State contracts’. 2 Contracts between States and foreign nationals can cover a variety of economic areas, such as trade, debt, finance or investments. Even though much attention has been paid to contracts relating to foreign debt and financial issues,3 the most prominent legal developments have focussed on trans-border investment contracts, which require the immobilisation of private resources abroad for a long-time period. It is in this particular context that the potential tensions between the interests of the parties to such contracts have become particularly visible. On the one hand, investors seek stability and the observance of the contractual commitments which have formed the basis of their decision to invest and ensure the long-term economic viability of their investments. On the other hand, the investments’ host States may change their policy towards foreign investors in general, or simply adapt their domestic legislation in order to take into account new domestic policy objectives. 3 Against this background, one of the fundamental questions which has emerged was whether those contracts shall be governed by the national law of the investment’s host State – subject to possible changes of the host State’s policies –, or whether it would be possible to subject those contracts to another legal order, preferably to the international legal order, which could not be unilaterally modified by one of the parties. Numerous arbitrators and scholars who have addressed this question have come to innovative but also diverging solutions and the question is not unanimously resolved as of today. Another related question was whether it was possible for a State, through a special contractual commitment, to renounce its right to amend its legislation during the lifespan of a particular investment. Finally, in the current context of proliferation of intergovernmental investment protection agreements, investors also commonly claim the respect of contractual commitments on the basis of such treaties, but the exact scope of this additional protection for contractual rights also remains subject to debate. 1 For examples of early State contracts, see Charles Leben, ‘La théorie du contrat d’Etat et l’évolution du droit international des investissements (2003) 302 RC 197–368, 213–215. 2 See, e.g., the award rendered on 6 July 1864 by emperor Napoléon III between M. de Lesseps and the Vice-King of Egypt with regard to a concession contract relating to the construction of the Suez Canal, reprinted in Albert Geouffre de Lapradelle and Nicolas Politis, Recueil des arbitrages internationaux, vol. 2 (Pedone, 1856–1872) 362–373. 3 See, e.g. Frederick A. Mann, ‘The Law Governing State Contracts’ (1944) BYIL 11–33.

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It is not possible to address all the legal questions relating to investor-State 4 contracts within this short introductory contribution. The aim of this sub-chapter is solely to give a short and selective overview of the impressive doctrinal and arbitral developments which have emerged from the conclusion of trans-border investment contracts since the beginning of the second half of the 20th century. For more detailed information, an abundant body of literature is available.4 The next sub-chapter of this volume also addresses some of these questions in a more detailed way from a practitioner’s point of view. B. Investor-State Contracts between National and International Law

As mentioned earlier, one of the fundamental questions which arose in the 5 context of disputes relating to investor-State contracts was whether those contracts shall be governed by the national law of the investment’s host State, or whether such contracts could be subject to rules and principles of international law, which are out of the reach of the host State’s legislative powers. The answer given to this question by the classic rules of public international 6 law was straightforward: according to the Permanent Court of International Justice’s decision in the Serbian Loans case, ‘[a]ny contract which is not a contract between States in their capacity as subjects of international law is based on the municipal law of some country’.5 The applicable municipal law, so the Permanent Court continued, must be determined by ‘that branch of law which is at the present day usually described as private international law or the “doctrine of the conflict of laws”’.6 Hence, because foreign investors are not subjects of international law, contracts entered into between individuals and States could not be governed by international law according to the classic rules of public international law. The applicable law to those contractual relations would necessarily be ‘national’ law, and, more concretely, the national law determined by the applicable rules of conflict of laws. And indeed, in the absence of an explicit choice of law to the contrary by the parties, the applicable municipal law determined by the rules of conflict of law would generally be the investment’s host

4 For some of the most influential writings see, inter alia, Arnold McNair, ‘The General Principles of Law Recognized by Civilized Nations’ (1957) BYIL 1–19; Alfred Verdross, ‘Protection of Private Property under Quasi-International Agreements’ (1959) Nederlands Tijdschrift voor Internationaal Recht 355–362; Robert Y. Jennings, ‘State Contracts in International Law’ (1961) BYIL 156–182; James N. Hyde, ‘Economic Development Agreements’(1962) 105 RC 270–374; Prosper Weil, ‘Problèmes relatifs aux contrats passés entre un Etat et un particulier’ (1969) 128 RC 94–240; Karl-Heinz Böckstiegel, Der Staat als Vertragspartner ausländischer Privatunternehmen (Athenäum, 1971); Jean-Flavien Lalive, ‘Contrats entre Etats ou entreprises étatiques et personnes privées. Développements récents’ (1983) 181 RC 9–283; Pierre Mayer, ‘La neutralisation du pouvoir normatif de l’Etat en matière des contrats d’Etat’ (1986) 5 JDI 5– 78; Charles Leben (n. 1) 197–386. 5 Serbian Loans case (France v. Serb-Croate-Slovene State), PCIJ Judgment of 12 July 1929, (1929) PCIJ (Ser. A) No. 20, 41. 6 Id.

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State’s municipal law, as the law with which the contract is the most closely connected.7 7 This application of classic rules of international law should not, however, lead to the conclusion that public international law could not require the respect of contracts entered into between States and foreign investors. An impressive amount of diplomatic exchanges and State-to-State dispute settlement procedures shows indeed that the non-respect of contracts entered into with foreign nationals can, in principle, be considered as being contrary to rules and principles of public international law and give rise to the international responsibility of the State party to the contract.8 However, in such situations, not every disregard of contractual commitments would automatically be considered as constituting an internationally wrongful act. In order to rise to the level of an internationally wrongful act under public international law, a breach of contract would need to be contrary to generally accepted rules concerning the treatment of aliens, i.e., for example, being confiscatory, arbitrary or constitutive of an abuse of right.9 8 As a consequence, the application of classic rules of public international law to investor-State contracts does not transform the contract itself into an international legal act. It is only in the case of an additional breach of public international law, such as the customary international law rules concerning the treatment of aliens, that a breach of contract would trigger the international responsibility of the contracting State in its relations with the home State of the investor who would be entitled to exercise diplomatic protection and to refer the dispute to agreed forums of State-to-State dispute settlement. In the relations between the investor and the investment’s host State, national law would be applicable and, in the absence of another agreed dispute settlement mechanism, the host State’s national tribunals would normally be competent to rule on disputes relating to the observance of the contractual commitments.10

7 See, e.g., Article 4 of the Rome Convention on the Law Applicable to Contractual Obligations, as well as Article 4(4) of Regulation (EC) 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I). See also, the judgment of the Permanent Court of International Justice in the Brazilian Loans case (France v. Brazil), PCIJ Judgment of 12 July 1929, (1929) PCIJ (Ser. A) No. 21, 121, according to which a sovereign State: ‘(…) cannot be presumed to have made the substance of its debt and the validity of the obligations accepted by it in respect thereof, subject to any law other than its own.’ 8 See, e.g., the memorial submitted on behalf of the Hellenic Government before the International Court of Justice on 30 August 1951 in the Ambatielos case (Greece v. United Kingdom), ICJ Judgment of 19 May 1953, ICJ Rep. 1951, 71, and the memorial submitted on behalf of the Swiss Confederation before the Permanent Court of International Justice on 7 January 1936 in the Losinger case (Switzerland v. Yugoslavia), (1936) PCIJ (Ser. C) No. 78, 32. See also the statements of Secretary of State Marshall of 23 September 1800 quoted in John B. Moore, A Digest of International Law (Government Printing Office, 1906), vol. VI, 754. 9 See, e.g., Ian Brownlie, Principles of Public International Law (Clarendon Press, 1990) 548– 549; Chittharanjan F. Amerasinghe, ‘State Breaches of Contracts with Aliens and International Law (1964) 58 AJIL 881–915; American Law Institute, Restatement of the Law, Foreign Relations of the United States (1986), § 712.

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This classic dichotomy between, on the one hand, the application of interna- 9 tional law within the State-to-State relations and, on the other hand, the application of municipal law within the investor-State relations became somehow blurred when investor-State contracts started to include arbitration clauses conferring upon international arbitral tribunals the power to resolve disputes arising under the contracts. In addition, many investor-State contracts concluded throughout the 20th century contained sometimes unclear choice of law clauses which did not seem to exclusively refer to the national law of the investment’s host State. In this new context, international arbitral tribunals called upon to rule on investment contract disputes had to decide on the proper substantive law applicable to the contractual relations between States and foreign investors. C. Internationalisation of Investor-State Contracts through Arbitral Practice

From the investor’s perspective, the advantages of submitting investment con- 10 tracts to rules and principles of international law are evident: the national law of its investment’s host State may be unilaterally modified by its contracting partner and, under most national legal systems, promises given by one government or legislator may also be revoked by the same or a successive government or legislator (cujus est condere legem, ejus est abrogare). Under the rules of international law, however, the principles of pacta sunt servanda and of Article 27 of the Vienna Convention on the Law of Treaties11 would render inoperative unilateral changes to internationally contracted commitments through the national law of either party. As a consequence, the application of international law to investor-State contracts would place both contracting parties on an equal footing from a legal perspective, as opposed to what is common for relations between States and individuals under many domestic legal systems.12 The first arbitral tribunals who referred to principles of international law for 11 the resolution of investor-State contract disputes did not, however, explicitly justify their reasoning by the need to protect the investor against unilateral changes of the law by the investment’s host State. In its award rendered in the 1930 Lena Goldfields Arbitration,13 the tribunal simply applied the concept of ‘unjust enrichment’ as part of general principles of law, without further justifying its démarche. In the 1951 Abu Dhabi Arbitration,14 the declared reason for apply10 See also the ruling of the Permanent Court of Justice in the Panevezys-Saldutiskis Railway case (Estonia v. Lithuania), PCIJ Judgment, (1939) PCIJ (Ser. A/B) No. 76, 18 (‘In principle, the property rights and the contractual rights of individuals depend in every State on municipal law and fall therefore more particularly within the jurisdiction of municipal tribunals.’). 11 Article 27 of the Vienna Convention on the Law of Treaties reads: ‘A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.’ 12 See, e.g., the French notion of ‘contrat administratif’, which allows for unilateral changes of the contract by the public party in certain circumstances. 13 Lena Goldfields Arbitration, Award of 2 September 1930. For an analysis and excerpts of the award see Arthur Nussbaum, ‘The Arbitration between the Lena Goldfields Ltd. And the Soviet Government’ (1950–1951) Cornell L. Q. 31–53.

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ing general principles of law was that the law of Abu Dhabi did not contain ‘any settled body of legal principles applicable to the construction of modern commercial instruments’. A similar reason was given by the arbitrator deciding in Ruler of Qatar v. International Marine Oil Company,15 where, in addition, the tribunal noted that the application of the municipal Islamic law could render invalid several parts of the agreement. 12 The objective of protecting the investor against changes to, or shortcomings in, the normally applicable national law was however clearly expressed in the 1958 Aramco Arbitration.16 After having designated the law of Saudi Arabia as being the applicable law to the concession contract, the tribunal nevertheless held that this law must be ‘interpreted or supplemented by the general principles of law, by the custom and practice in the oil business and by pure jurisprudence, in particular whenever certain private rights (…) would not be secured in an unquestionable manner by the law in force in Saudi Arabia’.17 13 Even more explicitly, the sole arbitrator ruling in Sapphire v. Iran18 found that the particularities of an oil concession contract, which involve considerable investments and risks, would prevent the application of the national law of the State party to the contract, as this law would not ensure sufficient legal security to the foreign investor. In the view of this tribunal, [u]nder the present agreement, the foreign company was bringing financial and technical assistance to Iran, which involved it in investments, responsibilities, and considerable risks. It therefore seems natural that they should be protected against any legislative changes which might alter the character of the contract, and that they should be assured of some legal security. This could not be guaranteed to them by the outright application of Iranian law, which is within the power of the Iranian State to change.19

The arbitrator found support for this reasoning in the presence of the arbitration clause and in the reference to the concepts of good faith and goodwill in the concession contract, which, according to the tribunal, called for the application of general principles of law, thus giving the contract a ‘quasi-international character which releases it from the sovereignty of a particular legal system’.20

14 Abu Dhabi Arbitration (Petroleum Development Ltd. v. Sheikh of Abu Dhabi), Award of September 1951, (1951) 18 Int’l L. Reporter 144–161. 15 Ruler of Qatar v. International Marine Oil Company, Award of June 1953, (1953) 20 Int’l L. Reporter 534–547. 16 Aramco Arbitration (Saudi Arabia v. Arabian American Oil Company), Award of 23 August 1958, (1963) 27 Int’l L. Reporter 117–233. 17 Id., at 169. 18 Sapphire International Petroleums Ltd. v. National Iranian Oil Company, Award of 15 March 1963, (1967) 35 Int’l L. Reporter 136–192. 19 Id., at 171. 20 Id., at 173.

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The three arbitral tribunals who had to rule on the nationalisations of several 14 oil concessions by the Libyan government between 1971 and 197421 all had to interpret the same choice of law clause which called for the application of (…) the principles of law of Libya common to the principles of international law and in the absence of such common principles then by and in accordance with the general principles of law, including such of those principles as may have been applied by international tribunals.22

It is not possible, within this sub-chapter, to examine in detail the different analyses and reasoning adopted by these three tribunals which have attracted considerable attention and commentaries from legal scholars.23 It can be noted, however, that all three tribunals accepted to resort to the application of general principles of law in case of the non-conformity of Libyan law with international law. In the award Texaco-Calasiatic v. Libya,24 arbitrator R.-J. Dupuy emphasised that the recourse to general principles of law is to be explained not only by the lack of adequate legislation in the State concerned (…). It is also justified by the need for the private contracting party to be protected against unilateral and abrupt modifications of the legislation in the contracting State; it plays, therefore, an important role in the contractual equilibrium intended by the parties.25

Numerous other arbitral awards rendered in the context of long-term invest- 15 ment contracts, such as for example Aminoil v. Kuwait,26 Elf Aquitaine v. NIOC,27 AGIP v. Congo,28 or Mobil Oil v. Iran29 have accepted, although with sometimes diverging reasoning and terminologies, that principles of internation21 BP Exploration Company (Libya) Ltd. v. Libya, Awards of 10 October 1973 and 1 August 1974, (1979) 53 Int’l L. Reporter 297; Texaco Overseas Petroleum Company & California Asiatic Oil Company (Topco-Calasiatic) v. Libya, Awards of 27 November 1975 and 19 January 1977, (1979) 53 Int’l L. Reporter 389; Libyan American Oil Company (Liamco) v. Libya, Award of 12 April 1977, (1981) 20 ILM 1. 22 See, e.g., BP Exploration Company (Libya) Ltd. v. Libya (n. 21) 298. 23 See, among others, Brigitte Stern, ‘Trois arbitrages, un même problème, trois solutions. Les nationalisations pétrolières libyennes devant l’arbitre international’ (1980) Rev. Arb. 3–34; Robert B. von Mehren and P. Nicholas Kourides, ‘International Arbitration between States and Foreign Private Parties: The Libyan Nationalization Cases’ (1981) 75 AJIL 476–522; Robin C. A. White, ‘Expropriation of the Libyan Concessions – Two conflicting International Arbitrations’ (1981) 30 ICLQ 1–19; Christopher Greenwood, ‘State Contracts in International Law – The Libyan Oil Arbitrations’ (1982) 35 BYIL 27–81; Ahmed Sadek El-Kosheri and Tarek F. Riad, ‘The Changing Roles in the Arbitration Process (With Regard to the Applicable Law governing the New Generations of the Petroleum Agreements)’ (1987) 1 Euro-Arab Arbitration 253–281; André von Walter, ‘Arbitration on Oil Concession Disputes’ in: Rüdiger Wolfrum (ed), Max-Planck Encyclopedia of Public International Law (Oxford University Press, 2008). 24 Texaco Overseas Petroleum Company & California Asiatic Oil Company (Topco-Calasiatic) v. Libya (n. 21), Awards of 27 November 1975 and 19 January 1977, (1979) 53 Int’l L. Reporter 389. 25 Id., para. 42. 26 Aminoil Arbitration (Government of Kuwait v. American Independent Oil Company), 24 March 1982, (1982) 21 ILM 976. 27 Elf Aquitaine Iran (France) v. National Iranian Oil Company, Preliminary Award of 14 January 1982, (1994) 96 Int’l L. Reporter 251. 28 AGIP SPA v. Congo, Award of 30 November 1979, 1 ICSID Rep. 306. 29 Mobil Oil et al v. Iran, Award of 14 July 1987, 16 Iran–US CTR 3.

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al law could be applied to the interpretation and application of contracts concluded between States and foreign investors. At the same time, prominent scholars have put forward impressive doctrinal analyses which aim at justifying, again with sometimes different reasoning, the recourse to some elements of international law in the context of long-term international investment agreements.30 16 It is noteworthy, however, that most of the abovementioned arbitral rulings have equally emphasised the applicability of the investment’s host State’s law as the law determined by the principles of private international law, whereas international law often only played a corrective or supplemental function. It is equally noteworthy that most of those arbitral tribunals have justified the recourse to international law by reference to specific clauses contained within the concessions contracts. Such clauses have either been explicit choice of law clauses, as in the Libyan oil disputes, or clauses relating to the interpretation and application of the contracts referring to general principles of law such as good faith. The presence of clauses submitting disputes between the contracting parties to international arbitration has also often been considered as a relevant factor for the application of international law.31 17 Given the differences in the reasoning of arbitral tribunals and the variety of opinions expressed in legal scholarship, it cannot be assumed today that every investor-State contract would automatically fall under the ambit and protection of international law. As a consequence, the concrete terms of each contract remain of fundamental importance for the contractual equilibrium of long-term investor-State contracts. D. Protection of Investor-State Contracts through Contractual Commitments 18

The specific content of each Investor-State contract can indeed be of utmost relevance in deciding whether the contract will be governed by the domestic law of the investment’s host State alone, or whether some additional international law principles will contribute to ensure the stability of the contractual arrangements. Contracts which simply refer to the national law of the host State without any further qualifications will most commonly be governed by that domestic law alone, whereas contracts containing clauses which also refer to international law, principles of international law, or international means for the settlement of investment disputes may arguably benefit from an additional protection derived from the realm of international law.

30 See, notably, Arnold McNair (n. 4) 1–19; Alfred Verdross (n. 4) 355; Prosper Weil (n. 4) 94– 240; Pierre Mayer (n. 4) 5–78. 31 See, e.g., Texaco Overseas Petroleum Company & California Asiatic Oil Company (TopcoCalasiatic) v. Libya (n. 21) 389, para. 44; Sapphire International Petroleums Ltd. v. National Iranian Oil Company (n. 18) 136–192, 172.

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Another technique which aims at ensuring stability in the contractual relations 19 between investors and States is the inclusion, within investor-State contracts, of so-called ‘stabilisation clauses’, by which the investor’s host State commits itself not to alter the legal framework applicable to the contract during a certain period of time. Such clauses can foresee the application of the host State’s legislation as it exists at a certain date, prohibit subsequent changes of the legal framework without the investor’s consent, or provide that such changes would not be applicable to the contract in question. It is not possible to analyse in detail within this short contribution all these different techniques, or to even cursorily present the manifold doctrinal and arbitral developments which have been prompted by the use of this contractual technique. An abundant body of literature32 and the following sub-chapter are available for more detailed analyses. It can be noted, however, that the question of the validity of such stabilisation 20 commitments seems once again to be closely related to the question of the legal order in which investor-State contracts operate. In many domestic legal systems, a promise given by the legislator not to exercise its legislative powers during a certain period of time would not be legally valid. As a consequence, it may be argued that stabilisation clauses will only be effective, if the law applicable to the relations between the State and the investor is international law or, at the least, a legal order which is distinct from the domestic law of the investor’s host State. Hence, scholars and arbitral tribunals have interpreted stabilisation commitments as being one of the factors which lead to the internationalisation of State contracts,33 or concluded that contracts containing stabilisation clauses must be governed by international law in order to give effect to such clauses.34 Nevertheless, the legal validity and exact scope of so-called stabilisation 21 clauses remains subject to debate.35 An interesting application of a stabilisation 32 See, inter alia, Prosper Weil, ‘Les clauses de stabilisation ou d’intangibilité insérées dans les accords de développement économique’ in Mélanges offerts à Charles Rousseau (Pedone, 1974) 301–328; Esa Paasivirta, ‘Internationalization and Stabilization of Contracts versus State Sovereignty’ (1989) 60 BYIL 315–350; Nicolas David, ‘Les clauses de stabilité dans les contrats pétroliers. Questions d’un praticien (1986) JDI 79–107; Syamal Kumar Chatterjee, ‘The Stabilization Clause Myth in Investment Agreements (1988) J. Int’l Arb. 97–111; Thomas Wälde and George Ndi, ‘Stabilizing International Investment Commitments: International Law versus Contract Interpretation (1996) 31 Tex. Int’l L. J. 215–267; Margarita T. B. Coale, ‘Stabilization Clauses in International Petroleum Transactions’ (2002) 30 Denv. J. Int’l L. & Pol’y 217–238; Abdullah Faruque, ‘Validity and Efficacy of Stabilisation Clauses – Legal Protection vs. Functional Value’ (2006) J. Int’l Arb. 317–336. 33 Texaco Overseas Petroleum Company & California Asiatic Oil Company (Topco-Calasiatic) v. Libya (n. 21) 389, para. 45. 34 Pierre Mayer (n. 4) 5–78. 35 For views in favour of the validity of such stabilisation commitments, see, e.g., Prosper Weil (n. 4) 94–240, as well as the arbitral awards rendered in Texaco Overseas Petroleum Company & California Asiatic Oil Company (Topco-Calasiatic) v. Libya (n. 21) 350–389, 371, para. 71; Libyan American Oil Company (Liamco) v. Libya (n. 21) 1–87, 60; and AGIP SPA v. Congo (n. 28) 306–329, 327, para. 86. For critical views, see, inter alia, Eduardo Jiménez de Aréchaga, ‘International Law in the Past Third of a Century’ (1978) 159 RC 1–343; Muthucumaraswamy Sornarajah, ‘The Myth of International Contract Law’ (1981) 15 JWTL 187– 217.

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commitment included in an oil concession contract can be found in the wellknown Aminoil arbitration award.36 While accepting the validity of stabilisation clauses in principle, the majority of this tribunal found that such undertakings must be explicit and limited in time37 and, in the particular case, only took the clause into account in the context of determining the compensation due to the foreign investor.38 This approach has been positively commented upon in legal literature,39 but it seems as if a clear-cut and unanimous view on the validity and functioning of such clauses still needs to emerge. 22 In any event, the more recent practice relating to long-term investment contracts frequently complements or replaces stabilisation commitments by socalled adaptation or renegotiation clauses, which allow for adaptations of the contractual equilibrium during the lifespan of the investment.40 Such clauses, which are also sometimes called ‘economic equilibrium clauses’, will be addressed in detail within the next sub-chapter of this volume.41 E. Protection of Investor-State Contracts through International Investment Agreements 23

In the current context with around 3,000 intergovernmental investment protection treaties in force, foreign investors often rely upon such international investment agreements (IIAs) for resolving disputes which relate to contracts entered into with the investment’s host State. A prominent feature of such IIAs is 36 Aminoil Arbitration (Government of Kuwait v. American Independent Oil Company) (n. 26) 976 et seq. 37 Id., at 1023, para. 95. 38 Id., at 1023, para. 96. See, however, also the separate opinion of judge Fitzmaurice at p. 1053. 39 See, inter alia, Philippe Kahn, ‘Contrats d’Etat et nationalisation: les apports de la sentence arbitrale du 24 mars 1982’ (1982) 109 JDI 844–909, 868; Geneviève Burdeau, ‘Droit international et contrats d’Etats. La sentence Aminoil c. Koweït du 24 mars 1982 (1982) AFDI 454– 470, 470; Ahmed Sadek El-Kosheri and Tarek F. Riad (n. 23) 253–281, 277. 40 See, e.g., Jan Paulsson, ‘L’adaptation du contrat’ (1984) Rev. Arb. 249–257; Wolfgang Peter, Arbitration and Renegotiation of International Investment: A Study with particular reference to means of conflict avoidance under natural resources investment agreements (Nijhoff, 1986); Nagla Nassar, Sanctity of contracts revisited: a study in the theory and practice of long-term international commercial transactions (Nijhoff, 1995); Piero Bernardini, ‘The Renegotiation of the Investment Contract’ (1998) 13 ICSID Rev.–FILJ 411–425; Abba Kolo and Thomas Wälde, ‘Renegotiation and Contract Adaptation in International Investment Projects’ (2000) 1 JWI 5–58; Jeswald W. Salacuse, ‘Renegotiating International Business Transactions: the Continuing Struggle of Life Against Form’ (2001) 35 Int’l Law. 1507–1541; Jeswald W. Salacuse, ‘Renegotiating International Project Agreements’ (2001) 24 Fordham Int’l L. J. 1319–1370; Klaus Peter Berger, ‘Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators’ (2003) 36 Vand. J. Transnat’l L. 1347–1380; John Y. Gotanda, ‘Renegotiation and Adaptation Clauses in Investment Contracts’ (2003) 36 Vand. J. Transnat’l L. 1461–1473; Stefan Kröll, ‘The Renegotiation and Adaptation on Investment Contracts’ in Norbert Horn (ed), Arbitrating Foreign Investment Disputes (Kluwer, 2004) 425–470; Piero Bernardini, ‘Stabilization and Adaptation in Oil and Gas Investments’ (2008) 1 JWELB 98–112. 41 See contribution of Morris Besch, ‘Typical Questions Arising within Negotiations’, ch. 3.II., 93–152.

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that they allow investors to resort to international arbitration for the settlement of investment disputes, even when the contracts concluded between the investors and the host States do not foresee international means of dispute resolution. Treaty-based investment arbitration also allows the investor to rely on additional substantive international law standards, such as the prohibition of expropriation or the standard of fair and equitable treatment, and many IIAs explicitly call for the application of rules and principles of international law for the resolution of investment disputes.42 As a consequence, in this context, contracts entered into between foreign investors and States can arguably be analysed through the lens of public international law concepts such as arbitrariness, fair and equitable treatment, respect of acquired rights, or good faith. Nevertheless, it should be noted that the legal foundations of such claims will 24 be the substantial international law standards and principles which are included or incorporated into the intergovernmental investment protection agreements. Hence, it is not the respect or non-respect of particular clauses contained in the underlying investment contracts which will be subject of international dispute settlement, but the overall behaviour of the investment’s host State in its relations towards the foreign investor.43 The purely ‘contractual’ aspects of the dispute will normally remain subject to the dispute settlement procedures foreseen within the investment contract or, in the absence of any choice of forum in the contract, to the domestic courts of the investment’s host State. Hence, at least from a conceptual point of view, the situation remains similar to the classic approach described above under which the breach of a contract entered into with a foreign investor would only amount to a breach of international law if it is contrary to the internationally accepted standards of treatment of aliens. One attempt to overcome this classical dichotomy between contractual and 25 international law commitments is the inclusion, within intergovernmental investment protection treaties, of so called ‘umbrella clauses’, by which the contracting State commits itself to respect contractual obligations entered into with foreign investors.44 The interpretation and application of such clauses in the context of international investment disputes will be described in detail in another chapter of this book.45 For the purpose of these cursory remarks on State contracts, it is 42 See, for example, the 2004 Canadian model bilateral investment protection agreement which directs tribunals to decide the issues in dispute ‘in accordance with this Agreement and applicable rules of international law’ (article 40-1). In the absence of an explicit choice of law, article 42 of the Convention establishing the International Centre for Settlement of Investment Disputes calls for the application of the law of the contracting State party to the dispute and ‘such rules of international law as may be applicable’. 43 Investment tribunals usually distinguish between so-called ‘treaty claims’ (which claim the non-respect of a provision of an applicable intergovernmental investment protection agreement) and so-called ‘contract claims’ (which claim the non-respect of purely contractual commitments), in particular since the decision on annulment in Compañía de Aguas del Aconquija, SA & Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Decision on Annulment, 3 July 2002, 41 ILM 1135. 44 Such clauses are sometimes also named ‘mirror clauses’, ‘elevator clauses’, ‘respect of undertakings clauses’, or ‘pacta sunt servanda clauses’.

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however interesting to note that some arbitrators have been reluctant to give full effect to such clauses, as the consequences would be ‘destructive of the distinction between national legal orders and the international legal order’.46 F. Tentative Conclusions

It is difficult to conclude on the exact role and legal nature of investor-State contracts in the current context of international investment law. It is a fact that many international investment operations require sometimes complex contractual arrangements between foreign investors and the public authorities of the investment’s host State. Different drafting techniques are available to foreign investors in order to ensure the stability and predictability of such contractual commitments. These techniques will be described in detail within the next subchapter from a practitioner’s perspective. But governments will also need to carefully reflect on the contractual balance to be found between, on the one hand, ensuring the necessary stability for the operation of long-term investment projects, and, on the other hand, the possibility to adapt their legal framework in line with evolving public policy objectives. The precise role to be given to the national judiciary in the resolution of foreign investment disputes should also be carefully considered. 27 From a more theoretical point of view, it appears that investor-State contracts still seem to somehow oscillate between national and international law. Many efforts have been made to equate breaches of investor-State contracts to breaches of international law, such as through contract drafting techniques, arbitral and doctrinal developments, or the inclusion of umbrella clauses in international investment protection agreements. Yet, such efforts have not always been completely effective, as demonstrated by the diverging positions expressed in arbitral case law on the functioning of the umbrella clause. At the same time, many governments have been reluctant to include umbrella clauses within their international investment protection agreements. Many of such agreements also point to international law alone as the law applicable to international investment disputes, while domestic remedies remain available for other claims. 28 It therefore seems as if there is still no clear consensus on the precise position of investor-State contracts within the broader field of international investment law. Despite numerous attempts to equate such contracts with public international law instruments, there also seems to remain some appetite for maintaining a distinction between, on the one hand, the law governing investment contracts and, on the other hand, the international law governing foreign investment. 26

45 See contribution of Anthony Sinclair, ‘Umbrella Clause’, ch. 8.VII., 887–958. 46 El Paso Energy International Company v. Argentina, ICSID Case No. ARB/03/15, Decision on Jurisdiction, 27 April 2006, para. 82. See also SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003, (2003) 43 ILM 1290 et seq., para. 167.

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Morris Besch A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Choice of Law Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Importance of Explicit Choice of Law in State Contracts . . . . . . . . . . . 2. Exclusive Selection of Non-National Rules . . . . . . . . . . . . . . . . . . . . . . . . . . a) Admissibility of the Selection of a Non-National Law . . . . . . . . . . . . b) Selectable Non-National Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Selection of International Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Selection of General Legal Principles . . . . . . . . . . . . . . . . . . . . . . . . (3) Selection of a Lex Mercatoria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Trends in Modern State Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exclusive Application of the National Law of the Host State . . . . b) Combination of Non-National Law with National Law . . . . . . . . . .

4 5 9 11 12 13 17 20 25 26 30

C. Stabilisation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The Concept of Stabilisation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Stabilisation Techniques. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Freezing Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Non-Application Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Clauses of Non-Intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Economic Equilibrium Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Scope of Stabilisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Full Stabilisation Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Limited Stabilisation Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Restriction of Stabilisation to Specific Statutes . . . . . . . . . . . . . . (2) Restriction of Stabilisation to Specific Legal Areas. . . . . . . . . . (3) Stabilisation of the Stabilisation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Advantages and Disadvantages of a Limited Stabilisation Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) ‘Qualified’ Stabilisation Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Inconsistency Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Non-Discrimination Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Time-Limited Stabilisation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Limitation on the Duration of the Investment Project . . . . . . . (2) Limitation on Certain Phases of the Investment Project. . . . . 4. Hybrid Stabilisation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Stabilisation Clauses in State Contracts with State Enterprises . . . . . 6. Validity of Stabilisation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) No Breach of International Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) No Invalidity due to Restriction on Legislative Sovereignty . . . . . c) Validity According to Lex Causae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Binding Effect of the Stabilisation Clause on the Host State. . . . . . . . a) Binding Effect in Case of Application of National Law . . . . . . . . . . b) Binding Effect in Case of the Application of International Law 8. Legal Effects of Stabilisation Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Explicit Agreement on Legal Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Restitutio in Integrum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Compensation for Non-Performance. . . . . . . . . . . . . . . . . . . . . . . . . . (3) Contractual Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Legal Effects in the Absence of Express Agreement on Legal Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Legal Consequences under National Law . . . . . . . . . . . . . . . . . . . . (2) Legal Consequences under Non-National Regulations . . . . . .

35 36 38 39 41 43 45 48 49 52 56 58 60 62 65 66 68 71 72 74 76 77 80 81 83 86 88 89 92 97 98 101 104 106 108 110 113

D. ‘Dynamic’ and ‘Flexible’ Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 1. The Concept of Dynamic and Flexible Clauses . . . . . . . . . . . . . . . . . . . . . . 115

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Chapter 3: State Contracts and the Relevance of Investment Contract Arbitration 2. Renegotiation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Stipulation of the Trigger Events for Renegotiation . . . . . . . . . . . . . . (1) Renegotiation Clauses without Specific Trigger Events . . . . . (2) Renegotiation Clauses with General Trigger Events . . . . . . . . (3) Detailed list of Trigger Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Renegotiation Clauses with Backup Provision . . . . . . . . . . . . . . . b) Stipulation of the Scope of Renegotiation . . . . . . . . . . . . . . . . . . . . . . . . . (1) Renegotiation Clauses without Restrictions . . . . . . . . . . . . . . . . . . (2) Partial Renegotiation Obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Objective of Renegotiation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Obligations of the Parties and the Legal Effects of Renegotiation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) General Negotiation Obligations of the Parties. . . . . . . . . . . . . . (2) Right to Agreement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Amendment of Contract through Arbitration . . . . . . . . . . . . . . . . . e) Combination of Dynamic Clauses and Stabilisation Clauses . . . .

118 120 122 124 126 130 132 133 135 137

E. Dispute Resolution Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Advantages of Arbitration Compared to National Courts. . . . . . . . b) Arbitration as binding on the Host State . . . . . . . . . . . . . . . . . . . . . . . . . . c) Ad Hoc Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Institutional Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Alternative Dispute Resolution Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Mediation or Conciliation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Concept of Mediation or Conciliation . . . . . . . . . . . . . . . . . . . . . . . . (2) Mediation or Conciliation Clauses in a State Contract . . . . . (3) UNCITRAL Conciliation Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Institutional Mediation/Conciliation Rules . . . . . . . . . . . . . . . . . . . b) Expert Proceeding Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Dispute Review Boards Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Hybrid Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

158 160 161 166 168 173 178 180 180 181 183 185 188 193 196

138 139 142 151 156

F. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

Literature: Adebayo Adaralegbe, ‘Methods of Dispute Settlement for State Contracts in the Nigerian Petroleum Sector’ (2003) 69 (4) J. Chartered Inst. Arb. 265–271; Amazu A. Asouzu, International Commercial Arbitration and African States: Practice, Participation and Institutional Development (Cambridge University Press, 2001); Ellis Baker and Anthony Lavers, ‘The Expert in Dispute Resolution: A Common Law Perspective’ (2004) 70 (1) J. Chartered Inst. Arb. 9–18; Martin Bartels, Contractual Adaptation and Conflict Resolution. Based on venture contracts for mining projects in developing countries (Kluwer, 1985); Jürgen F. Baur and Stephan Hobe (eds), Rechtsprobleme von Auslandsinvestitionen. Konzessionen, Vertragsanpassung, Vergabeverfahren (Nomos, 2003); Klaus Peter Berger, ‘Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators’ (2003) 36 Vand. J. Transnat’l L. 1347–1380; Klaus Peter Berger (ed), The Practice of Transnational Law (Kluwer Law International, 2001); Klaus Peter Berger, Private Dispute Resolution in International Business: Negotiation, Mediation, Arbitration. vol. II: Handbook (Kluwer Law International, 2009); Piero Bernardini, ‘The Renegotiation of the Investment Contract’ (1998) 13 (2) ICSID Rev.–FILJ 411–425; Piero Bernardini, ‘Stabilization and adaptation in oil and gas investments’ (2008) 1 (1) JWELB 98–112; Morris Besch, Schutz von Auslandsinvestitionen – Risikovorsorge durch Investitionsverträge (Verlag Recht und Wirtschaft, 2008); R. Doak Bishop, James Crawford and Michael W. Reisman, Foreign Investment Disputes: Cases, Materials and Commentary (Kluwer Law International, 2005); Nigel Blackaby, David M. Lindsey and Alessandro Spinillo (eds), International Arbitration in Latin America (Kluwer Law International, 2002); John P. Bowman, ‘Dispute Resolution Plan-

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II. Typical Questions Arising within Negotiations ning for the Oil and Gas Industry’ (2001) 16 (2) ICSID Rev.–FILJ 332–407; Michael A. G. Bunter, The promotion and licensing of petroleum prospective acreage (Kluwer Law International, 2002); Margarita T.B. Coale, ‘Stabilisation clauses in international petroleum transactions’ (2002) 30 (2) Denv. J. Int’l L. & Pol’y 217–237; John Collier and Vaughan Lowe, The settlement of disputes in International Law. Institutions and Procedures (Oxford University Press, 2000); Lorenzo Cotula, Investment contracts and sustainable development: How to make contracts for fairer and more sustainable natural resource investments (International Institute for Environment and Developments, 2010); Bernardo M. Cremades and David J. A. Cairns, ‘The Brave New World of Global Arbitration’ (2002) 3 (2) JWI 173–209; Georges R. Delaume, ‘The Proper Law of State Contracts Revisited’ (1997) 12 ICSID Rev.–FILJ 1–28; Abdullah Faruque, ‘Validity and Efficacy of Stabilisation Clauses. Legal Protection vs. Functional Value’ (2006) 23 (4) J. Int’l Arb. 317–336; Mohamed Al Faruque, ‘Typologies, Efficacy and Political Economy of Stabilization Clauses: A Critical Appraisal’, (2007) 5 TDM 31– 33; Patrick Fiedler, Stabilisierungsklauseln und materielle Verweisung im internationalen Vertragsrecht (Peter Lang, 2001); Pierre Michel Genton, ‘The Role of the DRB in Long-term Contracts’ (2002) 18 (1) Constr. L. J. 8–19; John Y. Gotanda, ‘Renegotiation and Adaptation Clauses in Investment Contracts, Revisited.’ (2003) 36 Vand. J. Transnat’l L. 1461–1473; Horacio A. Grigera-Naón, ‘The settlement of investment disputes between states and private parties: an overview from the perspective of the ICC’ (2000) 1 (1) JWI 59–103; Sam Foster Halabi, ‘Efficient Contracting between Foreign Investors and Host States: Evidence from Stabilization Clauses’, (2011) 31 Nw. J. Int’l L. & Bus. 261–313; Norbert Horn and Stefan Kröll (eds), Arbitrating Foreign Investment Disputes (Kluwer Law International, 2004); Dyalá Jiménez-Figueres, ‘Amicable Means to Resolve Disputes: How the ICC ADR Rules Work’ (2004) 21 (1) J. Int’l Arb. 91–101; Stefan M. Kröll, Die Ergänzung und Anpassung von Verträgen durch Schiedsgerichte. Eine Untersuchung zum deutschen und englischen Recht (Heymanns, 1998); Julian D. M. Lew, Loukas A. Mistelis and Stefan M. Kröll, Comparative International Commercial Arbitration (Kluwer Law International, 2003); Munir Maniruzzaman, ‘Internationalization of Foreign Investment Agreements: Some Fundamental Issues of International Law’ (2000) 1 JWI 293–320; Howard Mann, ‘Stabilization in investment contracts: Rethinking the context, reformulating the result’ (2011) 1 (2) ITN 6–8; Thomas Markert, Rohstoffkonzessionen in der internationalen Schiedsgerichtsbarkeit (Nomos, 1989); Hanno Merkt, Investitionsschutz durch Stabilisierungsklauseln. Zur intertemporalen Rechtswahl in State Contracts (Verlag Recht und Wirtschaft, 1990); Nagla Nassar, Sanctity of Contracts Revisited: A Study in the Theory and Practice of Long-Term International Commercial Transactions (Nijhoff, 1995); Andreas Nelle, Neuverhandlungspflichten – Neuverhandlungen zur Vertragsanpassung und Vertragsergänzung als Gegenstand von Pflichten und Obliegenheiten (Beck, 1993); Sangwani Ng’ambi, ‘Stabilisation Clauses and the Zambian Windfall Tax’ (2011) 1 (1) Zambia Social Science Journal 107–117; Ucheora Onwuamaegbu, ‘The Role of ADR in Investor-State Dispute Settlement: The ICSID Experience’ (2005) 22 (2) News from ICSID 12–14; Esa Paasivirta, Participation of States in International Contracts and Arbitral Settlement of Disputes (Finnish Lawyer’s Publishing, 1990); Wolfgang Peter, Arbitration and Renegotiation of International Investment Agreements, Second Revised and Enlarged Edition (Kluwer Law International, 1995); Mauro Rubino-Sammartano, International Arbitration Law and Practice (Kluwer Law International, 2001); Giorgio Sacerdoti, ‘Investment Arbitration under ICSID and UNCITRAL Rules: Prerequisites, Applicable Law, Review of Awards’ (2004) 19 (1) ICSID Rev.–FILJ 1–48; Jeswald W. Salacuse, ‘Renegotiating International Project Agreements’ (2001) 24 Fordham Int’l L. J. 1317–1370; Jeswald W. Salacuse, ‘Renegotiating International Business Transactions: The Continuing Struggle of Life Against Form’ (2001) 35 Int’l Law. 1507–1588; Stephen M. Schwebel, International Arbitration: Three Salient Problems (Grotius, 1987); Muthucumaraswamy Sornarajah, The Settlement of Foreign Investment Disputes (Kluwer Law International, 2000); Muthucumaraswamy Sornarajah,

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A. Introduction

In making foreign investments, private investors are subject to many risks. Apart from financial risks these are above all political risks which decisively influence both the contract negotiations between the host State and the investor but also the investment decision itself. 2 Since the host State functions simultaneously both as the contractual partner and the legislator, there is particularly the risk that once most of the investment is made the host State will subsequently change investment conditions and the legislative framework for the investment. In addition, in politically unstable States the foreign investor must always expect arbitrary, legal or discriminating acts of governments, e.g. confiscation and breach of contract by the host State or a corrupt administration apparatus rendering successful investments considerably more difficult or even impossible.1 Moreover in the event of any such arbitrary act of the host State, the investor often cannot rely on impartial and just proceedings before national courts of the host State and effective legal protection.2 1

1 See on these political risks Morris Besch, Schutz von Auslandsinvestitionen – Risikovorsorge durch Investitionsverträge (Verlag Recht und Wirtschaft, 2008) 5 et seq.; Margarita T. B. Coale, ‘Stabilisation clauses in international petroleum transactions’ (2002) 30 (2) Denv. J. Int’l L. & Pol’y 217–237, 221 et seq.; Muthucumaraswamy Sornarajah, The Settlement of Foreign Investment Disputes (Kluwer Law International, 2000) 14; Abdullah Faruque, ‘Validity and Efficacy of Stabilisation Clauses. Legal Protection vs. Functional Value’ (2006) 23 (4) J. Int’l Arb. 317– 336, 317; Sam Foster Halabi, ‘Efficient Contracting between Foreign Investors and Host States: Evidence from Stabilization Clauses’ (2011) 31 Nw. J. Int’l L. & Bus. 261–313, 267 et seq.; Peter D. Cameron, Stabilisation in Investment Contracts and Changes of Rules in Host Countries: Tools for Oil & Gas Investors, AIPN Final Report, 5 July 2006, 12, available at http:// www.rmmlf.org/Istanbul/4-Stabilisation-Paper.pdf; Lorenzo Cotula, ‘Rethinking investor-state contracts through a sustainable development lens’ (2011) 1 (2) ITN 4–5, 5. 2 Amazu A. Asouzu, International Commercial Arbitration and African States: Practice, Participation and Institutional Development (Cambridge University Press, 2001) 34 et seq.; JeanFlavien Lalive, ‘Contrats entre Etats ou entreprises étatiques et personnes privées’ (1983-III) 181 RC 9–283, 64; Jan Paulsson, ‘Third World Participation in International Investment Arbitration’ (1987) 2 ICSID Rev.–FILJ 19–65, 44 et seq.

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Private foreign investors therefore endeavour to include precautions in their 3 State contracts against such risks and to insist on contractual clauses which secure the investment project independently of any existing bilateral or multilateral investment protection treaties. Contract clauses which typically arise in this context in the course of contract negotiations with a host State are namely choice of law clauses (B. below), stabilisation clauses (C. below), dynamic and flexible clauses (D. below) and dispute resolution clauses (E. below). B. Choice of Law Clauses

To maximise protection for the investment project, private foreign investors 4 usually agree in their State contracts on explicit choice of law clauses. In a choice of law clause, the investor and the host State stipulate the substantive law applicable to the investment agreement and to disputes out of or in connection therewith. 1. Importance of Explicit Choice of Law in State Contracts

Choice of law clauses are not a phenomenon exclusive to State contracts. 5 They are adequately known and usual in international contracts between purely private parties. With a choice of law clause, the parties – whether private or State – aim at avoiding primarily legal uncertainty by specifying the applicable law and also by selecting the legal jurisdiction most suitable for them. In State contracts however a choice of law clause has an additional function with particular importance: choice of law clauses are often deliberately used by private investors to minimise the risk of unilateral intervention of the host State in the investment project.3 The reason for this is the particular position of the host State which is not on- 6 ly the contractual partner of the private foreign investor, but at the same time the legislator. Without an explicit choice of law agreement the national law of the host State would usually apply in accordance with the applicable national conflict of law rules, since a dispute about an investment project being conducted in the host State will usually have the closest connection to the law of the host State.4 If the national law of the host State applies exclusively to the State contract, the host State would have the possibility to amend the law applicable to

3 See on the function of choice of law clauses in State contracts Julian D. M. Lew, Loukas A. Mistelis and Stefan M. Kröll, Comparative International Commercial Arbitration (Kluwer Law International, 2003) 451 et seq.; Morris Besch (n. 1) 85 et seq. 4 See Morris Besch (n. 1) 119 et seq.; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 429; Horacio Grigera-Naón, Choice-of-Law Problems in International Commercial Arbitration (Mohr Siebeck, 1992) 41; Wolfgang Peter, Arbitration and Renegotiation of International Investment Agreements (Kluwer Law International, 1995) 136; Mauro Rubino-Sammartano, International Arbitration Law and Practice (Kluwer Law International, 2001) 429; Heleni Theodorou, Investitionsschutzverträge vor Schiedsgerichten (Duncker & Humblot, 2001) 350 et seq.

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the State contract unilaterally after the conclusion thereof in the course of the long-term investment projects in a manner unfavourable to the investor. The host State could thereby de facto dictate subsequently to the investor the rules by which the State contract is to be interpreted and by which the legality of State intervention in the investment project is to be assessed.5 7 Foreign private investors therefore developed contractual mechanisms in their State contracts intended to prevent such a unilateral right of intervention of the host State in the investment project and the associated risk of abuse. These mechanisms include – apart from the agreement on a stabilisation clause (see C. below) – in particular the choice of an applicable law other than the law of the host State, e.g. the application of the rules of international law, a lex mercatoria or general legal principles. 8 The protection of such a choice of law clause is – at least theoretically – thinkable with the help of two kinds of choice of law clauses: the agreement of exclusive application of non-national legal provisions (2. below) or the agreement of the application of non-national legal provisions in addition to the national foreign law (3. below). 2. Exclusive Selection of Non-National Rules

Mainly in older State contracts, choice of law clauses are found which provide for the exclusive application of non-national rules. The protection intended by such internationalisation of the State contract is based on a relatively simple idea: the national law of the host State should not apply to the State contract from the outset because it is subject to manipulation. If the national law of the host State does not apply – that is at least the fundamental idea6 – it cannot be unilaterally amended by the host State. 10 This concept is however not watertight. The exclusive choice of non-national rules while legally admissible, cannot completely exclude the application of national law of the host State. In addition, it is also in practice usually linked to certain difficulties and rarely can be insisted upon in the contract negotiations with the host State. In modern State contracts, therefore, such clauses are rarely found today. 9

5 Matthias Herdegen, ‘Rechtsprobleme des internationalen Konzessionswesens – insbesondere aus völkerrechtlicher Sicht’ in Jürgen F. Baur and Stephan Hobe (eds), Rechtsprobleme von Auslandsinvestitionen. Konzessionen, Vertragsanpassung, Vergabeverfahren (Nomos, 2003) 13–35, 17; A. F. Munir Maniruzzaman, ‘Stabilisation in Investment Contracts and Change of Rules in Host Countries: Tools for O&G Investors’, Association of International Petroleum Negotiators (2007); Wolfgang Peter (n. 4) 144. 6 See on the idea of internationalisation of State contracts Prosper Weil, ‘The State, the Foreign Investor, and International Law: The No Longer Stormy Relationship of a Ménage À Trois’ (2000) 15 ICSID Rev.–FILJ 401–416, 404 et seq.; Karl-Heinz Böckstiegel, Der Staat als Vertragspartner ausländischer Privatunternehmen (Athenäum Verlag, 1971) 85; Frederic-Alexander Mann, ‘The Proper Law of Contracts Concluded by International Persons’ (1959) 35 BYIL 34–57, 46; Rainer Velten, Die Anwendung des Völkerrechts auf State Contracts in der internationalen Schiedsgerichtsbarkeit (Duncker & Humblot, 1987) 28.

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a) Admissibility of the Selection of a Non-National Law

The choice of law usually is made with the support of a conflict of laws refer- 11 ence to the applicable substantive law. Unlike in a mere substantive law reference in which the parties incorporate certain rules into the State contract and thereby integrate them as content of the contract, in a conflict of laws reference the parties submit their contract to a national or non-national jurisdiction entirely. In this manner, it is possible for the parties to exclude not only the discretionary but also the mandatory provisions of local law – with the exception of any overriding mandatory and conflict of law provisions of the host State’s law.7 In State contracts a conflict of laws reference to non-national rules is in the overwhelming view regarded as admissible.8 A conflict of laws reference to non-national regulations is admitted also by many modern national rules of arbitration, especially rules based on the UNCITRAL model law, and by institutional rules of arbitration (cf. only Art. 42(1) of the ICSID Convention and Art. 21(1) of the International Chamber of Commerce (ICC) Rules of Arbitration). An arbitration tribunal is bound by this choice of law. b) Selectable Non-National Rules

In order to remove the State contract from the national law of the host State, 12 the selection of international law, the general legal principles or transnational law or a lex mercatoria may be considered.9 However, if selected alone, all of these available alternatives cause certain dogmatic and above all practical difficulties and therefore are not necessarily suitable for a State contract.

7 Patrick Fiedler, Stabilisierungsklauseln und materielle Verweisung im internationalen Vertragsrecht (Lang, 2001) 52; Abdullah Faruque (n. 1) 334; Giuditta Cordero Moss, ‘Lectures on International Commercial Law’ (2003) 92 CEPMLP Internet J., 1, 14; A. F. Munir Maniruzzaman, ‘International Arbitrator and Mandatory Public Law Rules in the Context of State Contracts: An Overview’ (1990) 7 J. Int’l Arb. 53–64, 53 et seq. 8 See Hercules Booysen, ‘Völkerrecht als Vertragsstatut internationaler privater Verträge’ (1995) 59 RabelsZ 245–257, 247 et seq.; Frederic-Alexander Mann, ‘The Theoretical Approach Towards The Law Governing Contracts Between States and Private Persons’ (1975) 11 R.B.D.I. 562–567, 562 et seq.; Giorgio Sacerdoti, ‘Investment Arbitration under ICSID and UNCITRAL Rules: Prerequisites, Applicable Law, Review of Awards’ (2004) 19 (1) ICSID Rev.–FILJ 1–48, 16; Guido Santiago Tawil, ‘Applicable Law’ in UNCTAD (ed), Dispute Settlement. International Centre for Settlement of Investment Disputes (United Nations, 2003) 7; other view: Jutta Stoll, Vereinbarungen zwischen Staat und ausländischen Investoren (Springer, 1982) 79; Heleni Theodorou (n. 4) 372, accepting only a mere substantive law reference. 9 See in detail e.g. Ahmed Z. El Chiati, ‘Protection of Investment in the Context of Petroleum Agreements’ (1987-IV) 204 RC 9–169, 121 et seq.; Juha Kuusi, The Host State and the Transnational Corporation. An Analysis of Legal Relationships (Saxon House, 1979) 59 et seq.; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 451 et seq.; Jean-Pierre Regli, Contrats d’Etat et arbitrage entre Etats et personnes privées (Georg, 1983) 115 et seq.; Erich Schanze, Investitionsverträge im internationalen Wirtschaftsrecht (Metzner, 1986) 111 et seq.; Jutta Stoll (n. 8) 67 et seq.

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(1) Selection of International Law

The selection of international law has at first glance the advantage that it is the only jurisdiction which exists independently of national State law. With the selection of international law it can be excluded that – with the exception of overriding mandatory and conflict of law provisions of the host State – the applicable substantive law will be unilaterally amended unfavourably to the private contractual party.10 14 Nevertheless the exclusive selection of international law is mostly seen in older State contracts.11 In modern State contracts the exclusive selection of international law is on the contrary seldom encountered.12 This has – apart from the general trend to renationalisation of State contracts (see 3. below) – a number of reasons: 15 Firstly the selection of international law causes certain dogmatic difficulties. In particular, it is disputed in the literature whether and to what extent private investors can be fully or partially subjects of international law, e.g. of the provisions of the Vienna Convention on the Law of Treaties13 or whether rules of international law can at least be applied to private persons analogously.14 This is 13

10 Karl-Heinz Böckstiegel (n. 6) 99; Frederic-Alexander Mann (n. 6) 565; Robert B. von Mehren and P. Nicholas Kourides, ‘International Arbitrations between States and Foreign Private Parties: the Libyan Nationalisation Cases‘ (1981) 75 AJIL 476–552, 511 et seq.; Ivars Mēkons, ‘State Contracts: The True and Unparallelled Reaches of Their Binding Force. Reflections on Public and Private International Law’ (2011), available at http://ssrn.com/abstract=1887724, p. 28 et seq. 11 Arghyris A. Fatouros, ‘International Law and the Internationalized Contract’ (1980) 74 AJIL 134–141, 135; Thomas Markert, Rohstoffkonzessionen in der internationalen Schiedsgerichtsbarkeit (Nomos, 1989) 118; Jean-Pierre Regli (n. 9) 13. E.g. in Art. 29.1. of the State Contract between P.T. Indonesian Nickel Development Co., Ltd. and Indonesia dated 2nd April 1969 it is stated: ‘Any such dispute referred for settlement by arbitration (…) shall be decided in accordance with such rules of international law (…)’, cited in Martin Bartels, Contractual Adaptation and Conflict Resolution. Based on venture contracts for mining projects in developing countries (Kluwer, 1985) 110, n. 136 (emphasis added). 12 Abdullah Faruque (n. 1) 333; Martin Bartels (n. 11) 109 et seq.; Theodor Schweisfurth, Völkerrecht (Mohr Siebeck, 2006) mn. 170. 13 Affirmative (partially subject of international law) inter alia: Karl-Heinz Böckstiegel (n. 6) 184, 344; Georg Dahm, Jost Delbrück and Rüdiger Wolfrum, Völkerrecht, vol. I/2, Der Staat und andere Völkerrechtssubjekte; Räume unter internationaler Verwaltung (de Gruyter, 2002) 257; negative: Albert Bleckmann, Völkerrecht (Nomos, 2001) 48; Alexander Catranis, ‘Probleme der Nationalisierung ausländischer Unternehmen vor internationalen Schiedsgerichten’ (1982) 28 RIW 19–27, 23; Karl Doehring, Völkerrecht (Müller, 2004) 174 et seq.; Ole Lando, ‘Renegotiation and Revision of International Contracts’ (1980) 23 GYIL 37–58, 39; Muthucumaraswamy Sornarajah, ‘The Myth of International Contract Law‘ (1981) 15 JWTL 187– 217, 207; Stephen J. Toope, Mixed International Arbitration – Studies in Arbitration Between States and Private Persons (Grotius, 1990), 85 et seq. 14 Affirmative (inter alia): Herrmann Mosler and Finn Seyersted, ‘Les accords entre un Etat et une personne privée étrangère‘ (1980-II) 58 Annuaire 42–103, 64, 74 et seq.; Hercules Booysen (n. 8) 250; negative (inter alia): Jiménez E. de Aréchaga, ‘International Law in the Past Third of a Century‘ (1978-I) 159 RC 1–343, 308; Karl Doehring (n. 13) 175; Otto Sandrock, ‘Choice of Law and Choice of Forum in Civil Law Jurisdictions’ in Kolo Yelpaala, Mauro Rubino-Sammartano and Dennis Campbell, Drafting and Enforcing Contracts in Civil and Common Law Jurisdictions (Kluwer Law and Taxation Publishing, 1986) 145–194, 167.

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not the place to go into this primarily academic dispute again. For details, the references stated can be referred to. It remains to be stated here however, that the investor selecting international law as proper law, can expect to be met with such dogmatic objections of the host States in the event of a legal dispute. Secondly, it is questionable whether international law is suitable at all to satis- 16 factorily regulate a State contract. International law rules have been developed to deal with the legal relations between sovereign States. They therefore include very few provisions appropriate for the resolution of investment disputes with private parties.15 International law regulations may be in some areas (e.g. in the law on confiscation and the law on the environment) more developed and may contain provisions which are more favourable for the private investor than the regulations of many national jurisdictions.16 In these areas at least the additional reliance on international regulations can be useful. International law does not however cover the entire range of legal questions arising in State contracts. (2) Selection of General Legal Principles

The same applies to the exclusive selection of general legal principles. ‘Gen- 17 eral Legal Principles’ are the legal principles accepted by all or at least most national jurisdictions and are therefore regarded as the expression of the common legal philosophy.17 They are part of international law according to Art. 38(1)(c) of the Statute of the International Court of Justice. In the context of investment disputes, the principles of estoppel (venire contra factum proprium), pacta sunt servanda, clausula rebus sic stantibus and unjustified enrichment are relevant as general legal principles. The general legal principles are even less appropriate as the exclusive law ap- 18 plicable to a State contract than international law as a whole. Like international law in general, the general legal principles as part of international law are not suitable to adequately regulate an investment relationship between private investors and a host State. Due to their general or transnational application, general legal principles necessarily have a high degree of triviality.18 With regard to 15 Guido Santiago Tawil (n. 8) 8; Patrick Fiedler (n. 7) 211; Munir Maniruzzaman (n. 5) 34 et seq.; Esa Paasivirta, Participation of States in International Contracts and Arbitral Settlement of Disputes (Finnish Lawyer’s Publishing, 1990) 61; Alan Redfern, ‘The Arbitration between the Government of Kuwait and Aminoil’ (1984) 55 BYIL 65–110, 80 et seq.; Heleni Theodorou (n. 4) 371 et seq. 16 Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 465 et seq. See on the application of international law on confiscation to State contracts Uwe Kischel, State Contracts: Völker-, schieds- und internationalprivatrechtliche Aspekte des anwendbaren Rechts (Boorberg, 1992) 339 et seq.; Hanno Merkt, Investitionsschutz durch Stabilisierungsklauseln. Zur intertemporalen Rechtswahl in State Contracts (Verlag Recht und Wirtschaft, 1990). 17 See Guido Santiago Tawil (n. 8) 20 et seq.; John O’Brien, International Law (Cavendish Publishing, 2002) 85 et seq.; Ivars Mēkons (n. 10) 24 et seq. 18 Philippe Leboulanger, Les contrats entre Etats et entreprises étrangères (Economica, 1985) 220; Thomas Markert (n. 11) 126; Hanno Merkt (n. 16) 127 et seq.; Jutta Stoll (n. 8) 38; Stephen Toope (n. 13) 71; John Collier and Vaughan Lowe, The settlement of disputes in International Law. Institutions and Procedures (Oxford University Press, 2000) 245; Christoph

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their precise application, they are often not capable of being adequately specified, allowing an arbitration tribunal under general legal principles to justify any result, and in that connection be subject to the suspicion of having exceeded its jurisdiction as amiables compositeurs. In this context, considerable difficulties can arise in the recognition and execution of arbitration awards issued on the basis only of the general legal principles.19 19 For the above reasons, the exclusive selection of general legal principles is seldom found in modern State contracts. At most, the supplementary selection of general legal principles with the national law of the host State may be considered (cf. 3.b). (3) Selection of a Lex Mercatoria

Moreover, it is discussed whether the private investor can protect himself against subsequent legal amendments of a host State by agreeing with the host State on the application of a lex mercatoria (or a transnational law) to the State contract.20 21 This lex mercatoria is intended to constitute a third autonomous legal jurisdiction together with national law and international law. Lex mercatoria is said to include all rules which are applied uniformly and unanimously by the ‘transnational community’ or the ‘international business community’, e.g. international trade customs, arbitration practice, international legislation or resolutions of international organisations.21 Sometimes, only legal regulations from sources not clearly attributable to a specific State law or international law are included in the foundations of a lex mercatoria.22 22 This approach has a certain charm at first glance: with the application of a ‘third’ jurisdiction independent of international law and national law – that is at least the basic idea – the investor is protected from future legislative measures of the host State. The classic understanding of international law would thereby – contrary to the case of the selection of international law (see above) – not be breached. Moreover, the application of uniformly applied rules of business people seems to be at first view more adequate in international investment business20

19 20

21 22

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H. Schreuer, ‘Commentary on the ICSID Convention: Article 25’ (1996) 11 (2) ICSID Rev.– FILJ 318–492, 414 et seq. Hanno Merkt (n. 16) 129. See inter alia Georges R. Delaume, ‘The Myth of the Lex Mercatoria and State Contracts’ in Thomas E. Carbonneau, (ed), Lex Mercatoria and Arbitration: A Discussion of the New Law Merchant (Juris Pub., 1998), 111–132; Yves Fortier, ‘New Trends in Governing Law: The New, New Lex Mercatoria, or, Back to the Future’ (2001) 16 (1) ICSID Rev.–FILJ 10–19 with further references. See in detail Ursula Stein, Lex Mercatoria. Realität und Theorie (Klostermann, 1995) 184 et seq.; Felix Dasser, Internationale Schiedsgerichtsbarkeit und lex mercatoria (Schulthess Polygraphischer Verlag, 1989) 43 et seq. So e.g. Jan Paulsson, ‘La lex mercatoria dans l’arbitrage CCI’ (1990) Rev. Arb. 55–100, 69 et seq.; Bernhard Goldman, ‘Nouvelles réflexions sur la lex mercatoria’ in Christian Dominicé, Robert Patry and Claude Reymond, Etudes De Droit International en l’Honneur de Pierre Lalive (Helbing & Lichtenhahn, 1993) 241–255, 241 et seq.

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es than the application of State law.23 However, unlike in purely private international contracts, the selection of a lex mercatoria plays only a very subordinate role in State contracts for a number of reasons: it is firstly doubted that in the area of foreign investments there actually exists a ‘transnational community’ or a ‘community of business people’, which conduct their investment projects consciously in accordance with uniform rules recognised in practice. Investment projects of foreign private investors are not in the least standardised. They can, depending on the industry, region and the nature and duration of the investment project be very different. In addition, there has been a dispute for decades between developing and industrial countries with relation to very significant questions of international investment law, e.g. the long-term binding to State contracts. Against this background it appears to be utopian to assume that there is – not to mention generally trivial legal principles – a source of generally accepted rules of investment law which could resolve investment disputes comprehensively and in a foreseeable manner and form.24 Secondly, apart from the lack of clarity about the existence, the content, and 23 the scope of a lex mercatoria, the selection of a lex mercatoria as the proper law vis-à-vis the host State is hardly enforceable in contract negotiations for another reason. The host State is bound to law and statutes and regards itself accordingly, primarily bound to national and international law. If the rules of a lex mercatoria agree with those of national law or international law, the application of the lex mercatoria is not critical. Problems arise if the rules of a lex mercatoria contradict the rules of national law or international law. In that case, the host State can hardly adopt a position contrary to its own national law or international law in favour of a third jurisdiction, the existence of which is not clarified and which has not been created or at least approved in a regulated democratic legislative process. Otherwise, the government of the host State would be subject in its own country to the suspicion of subjecting itself to the rules and practices of foreign private investors instead of the written law and statutes.25 Accordingly, the application of a lex mercatoria is very rarely agreed upon in 24 international contracts and if so, then at most as supplement to the applicable national law of the host State (see below). 3. Trends in Modern State Contracts

In modern contracts an increasing trend to ‘renationalisation’ of State con- 25 tracts is to be observed.26 In modern State contracts, choice of law clauses with 23 Ursula Stein (n. 21) 212 et seq.; Klaus Peter Berger, ‘The new law merchant and the global market place’ in Klaus Peter Berger (ed), The Practice of Transnational Law (Kluwer Law International, 2001) 1–21, 2 et seq. 24 Yves Fortier (n. 20) 11 et seq.; Morris Besch (n. 1) 108 et seq.; Heleni Theodorou (n. 4) 341; Keith Highet, ‘The Enigma of the Lex Mercatoria’ in Thomas E. Carbonneau (ed), Lex Mercatoria and Arbitration: A Discussion of the New Law Merchant (Juris Pub., 1998) 133–142, 139. 25 Morris Besch (n. 1) 110.

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an exclusive choice of a non-national law are very rarely met. Host States and investors increasingly tend to agree that the national law of the host State is exclusively applicable to their State contracts (cf. a) or at least agree on a compromise – the application of non-national rules in addition to the national law (cf. b). a) Exclusive Application of the National Law of the Host State 26

Host States increasingly succeed in their State contracts by imposing the exclusive choice of their national law as the proper law.27 Many host States already provide in their standard State contracts the sole application of their national law. In Article 32.1 of the Bid Round Deep Water Model Production Sharing Contract of Trinidad and Tobago it is stated e.g.: The validity, interpretation and implementation of this Contract shall be governed by the laws of the Republic of Trinidad and Tobago.28

Similar standard clauses are found e.g. in the standard State contracts of Cyprus,29 Bangladesh,30 Tanzania31 and India.32 28 This increasing ‘renationalisation’ of State contracts which is clearly discernable from the early 1970s, is due not only to the practical and dogmatic difficulties linked to the exclusive selection of non-national rules as proper law, but to a considerably stronger political self-confidence of many developing States most 27

26 See Georges R. Delaume, ‘The Proper Law of State Contracts Revisited’ (1997) 12 ICSID Rev.–FILJ 1–28, 1 et seq.; Ahmed El-Kosheri and Tarek Riad, ‘The Law Governing a New Generation of Petroleum Agreements: Changes in the Arbitration Process’ (1986) 1 ICSID Rev.–FILJ 257–288, 258 et seq.; Matthias Herdegen (n. 5) 20; Juha Kuusi (n. 9) 16 et seq.; Wolfgang Peter (n. 4) 142; Muthucumaraswamy Sornarajah, ‘Supremacy of the Renegotiation Clause in International Contracts’ (1988) 5 J. Int’l Arb. 61–114, 99 et seq.; Heleni Theodorou (n. 4) 323 et seq. 27 Guido Santiago Tawil (n. 8) 7; Georges R. Delaume, ‘State Contracts and Transnational Arbitration’ (1981) 75 AJIL 784–819, 796; Esa Paasivirta (n. 15) 57 et seq.; Munir Maniruzzaman, ‘Internationalization of Foreign Investment Agreements: Some Fundamental Issues of International Law’ (2000) 1 JWI 293–320, 293 et seq. 28 Available at http://www.energy.gov.tt/wp-content/uploads/2013/11/Deep_Water_Depth_PSC. pdf. 29 Art. 35.1 of the Model PSC of Cyprus (2012): ‘This Contract and the Hydrocarbons Operations carried out under said Contract shall be governed by the legislation at any time in force in the Republic of Cyprus’, available at http://www.mcit.gov.cy/mcit/mcit.nsf/all/2300DDB36D859732C22579AA002BDE09/$file/Model%20PSC.pdf?openelement (emphasis added). 30 Art. 29 of the Model PSC of Bangladesh (2012): ‘The validity, interpretation and implementation of this Contract shall be governed by the law of the People’s Republic of Bangladesh’, available at http://www.petrobangla.org.bd/offshore-bidding-round-2012/Model_PSC_2012. pdf (emphasis added). 31 Art. 29 of the Model Production Sharing Contract of the United Republic of Tanzania (2013), ‘This Agreement shall be governed by, interpreted and construed in accordance with the Laws of the United Republic of Tanzania.’available at http://www.tpdc-tz.com/Model%20Production%20Sharing%20Agreement%20(2013).pdf. 32 Art. 32.1 of the Model Production Sharing Contract of India (2010): ‘This Contract shall be governed and interpreted in accordance with the laws of India.’ Available at http:// petroleum.nic.in/nelp93.pdf (emphasis added).

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recently at the end of the 1960s and beginning of the 1970s in connection with the demand for a new world economic system, increasingly resisting an ‘internationalisation’ of their State contracts and increasingly insisting on the application of their own national laws.33 Many host States passed in recent years investment acts accordingly providing for the mandatory application of national law.34 In addition, the international competition for foreign private investment and 29 the associated creation of investor-friendly legal environments and liberal and modern legal systems in many developing countries, has clearly strengthened the confidence of investors in the national law of many States and at the same time reduced the urgent necessity of investors to choose non-national rules.35 b) Combination of Non-National Law with National Law

However, the confidence of foreign private investors in such an investor- 30 friendly legal environment can be deceiving. No private investor has a guarantee that an initially investor-friendly legal environment continues to be so in the course of a long-term investment project. Changes of government, political turbulences or changes in attitude toward foreign private investment can rapidly and unexpectedly lead to subsequent changes in the legal environment to the disadvantage of investors or even to direct intervention of the host State in the investment project.36 A foreign private investor should therefore establish at least a minimum of 31 protection against such risks in the choice of law clause. Since host States on the above grounds are usually not willing to waive the application of their national law, the private investors can offer as ‘compromise’ a combination of national law and non-national rules (e.g. principles of international law and/or general legal principles). Such combined clauses offer certain advantages both for the host State and also the investor. By the primary application of the national law it is usually ensured – unlike in 32 the case of the sole choice of non-national rules – that a legal system is provided which is at least appropriate to regulate legal questions arising in the course of an investment project adequately. The primary application of the national law also takes account of the close connection of the investment project to the law of the host State. 33 Muthucumaraswamy Sornarajah (n. 1) 27 et seq.; Muthucumaraswamy Sornarajah (n. 13) 206 et seq.; Thomas Wälde, ‘Revision of Transnational Investment Agreements: Contractual Flexibility in Natural Resources Development’ (1978) 10 Law. Am., 265–298, 265 et seq.; Heleni Theodorou (n. 4) 317 et seq. 34 E.g. see Art. 12(1) of the Investment Law of Senegal (2004), further examples cited in Munir Maniruzzaman (n. 27) 294, fn. 5; Hanno Merkt (n. 16) 154. 35 Georges R. Delaume (n. 26) 2; Matthias Herdegen (n. 5) 20. 36 Lorenzo Cotula, ‘Regulatory Takings, Stabilization Clauses and Sustainable Development’, OECD Global Forum on International Investment VII, 27–28 March 2008, available at http:// www.oecd.org/dataoecd/45/8/40311122.pdf, 12; Peter Cameron (n. 1) 20 et seq. See e.g. to the nationalisation of many international energy groups in Bolivia in 2006, UNCTAD World Investment Report 2006 (United Nations, 2006) 76.

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For the host State, such a combined clause has the attraction that the host State can show itself to be investor-friendly by the cumulative or secondary acceptance of non-national rules without, however, completely giving up the application of its own national law. For the investor, such a combined clause – depending on its drafting – permits at least a certain minimum protection by way of quality control of the national host State’s law. Interventions of the host State in the investment will be assessed according to the combined choice of law clause not only according to national law but also to international standards of protection which present greater demands on the legality of any State intervention (with regard to the nature and the amount of compensation) and which in addition cannot be manipulated by the host State subsequently.37 34 In order to ensure such a quality control, it must be observed in the negotiation of the choice of law clause that in the clause itself the relationship between national and non-national law is explicitly determined. For example, it can be agreed that the national law only applies if it is reconcilable with the generally recognised international law standards.38 In the absence of an explicit condition on the relationship between national and non-national law, considerable difficulties of interpretation can arise in a court proceeding or arbitration and therefore a certain legal uncertainty.39 This is e.g. illustrated by the lively discussion in the literature and arbitration practice of the actual interpretation of Art. 42(1), (2) of the ICSID Convention which – in the absence of a choice of law – specifies the application of national law and international rules without determining the concrete relationship between them.40 33

C. Stabilisation Clauses 35

Investor-friendly legal environments in a host State only have real value for the investor if they remain investor-friendly throughout the long period of the investment project and if the host State does not endanger the financial success of the investment project by arbitrary measures. Private foreign investors should therefore above all in countries of risk take precautions in the State contract against such subsequent unfavourable amendments of national law. The classic

37 Nigel Rawding, ‘Protecting Investments Under State Contracts: Some Legal and Ethical Issues’ (1995) 11 (4) Arb. Int’l 341–372, 351; Morris Besch (n. 1) 115 et seq. 38 See e.g. Art. 29.5 of the oil concession of 6 November 1990 between the Oil & Gas Development Corp., Texaco Exploration Pakistan Inc. and Pakistan: ‘This Agreement shall be governed and interpreted in accordance with and shall be given effect under the laws of Pakistan to the extent that such laws and interpretations are consistent with generally accepted standards of International Law including principles as may have been applied by international tribunals.’, cited in R. Doak Bishop, James Crawford and Michael Reisman, Foreign Investment Disputes: Cases, Materials and Commentary (Kluwer, 2005) 256. 39 Esa Paasivirta (n. 15) 63 et seq., Nigel Rawding (n. 37) 35; Georges R. Delaume (n. 26) 2; Georges R. Delaume (n. 20) 116. 40 See in detail with further references Guido Santiago Tawil (n. 8) 17 et seq.; Morris Besch (n. 1) 126 et seq.

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instrument for this – apart from the choice of non-national rules as quality control of the national law (cf. B.3.b) above) – is the agreement of a stabilisation clause in the State contract. 1. The Concept of Stabilisation

The term stabilisation clause refers to agreements in State contracts having 36 the function of protecting the legal position of the foreign investor against subsequent amendments to national host State’s law. By stabilisation clauses, the State contract is intended to be insulated against subsequent legal amendments. At least a reasonable financial compensation shall be ensured in the event of subsequent unfavourable legal amendments.41 At the same time stabilisation clauses are used by the host States to give confidence to investors at the initial stage of the investment and to present itself as investor-friendly in order to encourage foreign investment. Hence for the host State stabilisation clauses have also a certain promotional function.42 In practice lenders often view stabilisation clauses as essential to the bankability of an investment project, particularly in emerging markets.43 In particular with regard to the nature of the stabilisation technique (see 2. be- 37 low) and the scope of the national law to be stabilised (see 3. below), there is a wide range of types of stabilisation clauses. 2. Stabilisation Techniques

In order to protect the investor from subsequent legal amendments in the host 38 State, a number of different stabilisation techniques have been developed in contractual practice. a) Freezing Clauses

One of the classic stabilisation techniques is the freezing technique. In freez- 39 ing clauses, the law of the host State, if applicable to the contract, is fixed by the parties at a particular point of time. The parties agree that only the law of a par41 On the concept of stabilisation clauses see inter alia Margarita Coale (n. 1) 222; Patrick Fiedler (n. 7) 55 et seq.; Hanno Merkt (n. 16) 35 et seq.; Nagla Nassar, Sanctity of Contracts Revisited: A Study in the Theory and Practice of Long-Term International Commercial Transactions (Nijhoff, 1995) 121; Muthucumaraswamy Sornarajah (n. 1) 50; Abdullah Faruque (n. 1) 317 et seq., 321; Bertrand Montembault, ‘The Stabilisation of State Contracts Using the Example of Oil Contracts: A Return of the Gods of Olympia?’ (2003) 6 IBLJ 593–643, 599; Lorenzo Cotula (n. 36) 5 et seq.; Piero Bernardini, ‘Stabilization and adaptation in oil and gas investments’ (2008) 1 (1) JWELB 98–112, 100; Ivars Mēkons (n. 10) 21 et seq.; Thomas W. Wälde and George K. Ndi, ‘Stabilising international investment commitments’ (1996) 31 Tex. Int’l L. J. 215–268, 216; Andrea Shemberg, ‘Stabilization Clauses and Human Rights’ (11 March 2008), available at http://www.ifc.org, p. 4. 42 Howard Mann, ‘Stabilization in investment contracts: Rethinking the context, reformulating the result’ (2011) 1 (2) ITN 6–8, 6; Lorenzo Cotula (n. 36) 2; Abdullah Faruque (n. 1) 322 et seq.; Andrea Shemberg (n. 41) 5. 43 Andrea Shemberg (n. 41) 5.

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ticular date applies to the State contract.44 Quite common is an agreement that the national law is fixed at the time of the conclusion45 or at the time of coming into effect of the State contract.46 40 The stabilisation concept of a freezing clause is in principle very simple: the freezing has the effect that the host State can subsequently change its national law without breaching the stabilisation clause. However, the subsequent amendment does not apply to the State contract, since only the law valid at the time the State contract is concluded or comes into effect applies to it. If the host State nevertheless applies the subsequently amended law to the investor in spite of the agreed freezing clause, the host State acts under the State contract without any legislative basis and therefore in breach of contract47 (as to the legal consequences see 7. below). b) Non-Application Clauses 41

Non-application clauses are very similar to freezing clauses with regard to the stabilisation technique and the legal effects. In a non-application clause, the freezing is merely described in negative form:48 quite common is an agreement that subsequent legal amendments do not apply to the State contract or are not intended to have any effect on the State contract.49 The same effect can be achieved by agreements giving the contract priority over subsequent legislation.50 44 On freezing clauses see Margarita Coale (n. 1) 223; Morris Besch (n. 1) 137; Patrick Fiedler (n. 7) 59 et seq.; Munir Maniruzzaman (n. 5) 25 et seq.; Hanno Merkt (n. 16) 41 et seq.; Abdullah Faruque (n. 1) 319; Lorenzo Cotula (n. 36) 6; Guido Santiago Tawil (n. 8) 15; Sam Foster Halabi (n. 1) 292 et seq.; Peter Cameron (n. 1) 28 et seq.; Ivars Mēkons (n. 10) 30; Andrea Shemberg (n. 41) 5 et seq. 45 E.g. Article 33 of the State contract between Texas Pacific Ghana Inc. and Ghana of 1979: ‘This Agreement shall be governed by and construed in accordance with the Laws of Ghana existing of the date of this Agreement (…).’, (emphasis added) cited in Hanno Merkt (n. 16) 42, fn. 46; see also ICSID Model Clause 10, which suggests the insertion of the words ‘as in force on the date on which this agreement is signed’, (1997) 4 ICSID Rep. 364. 46 E.g. Art. 30.5 of the Model Petroleum Concession Agreement for Onshore Area of Pakistan (2013): ‘All the rules, laws, regulations in effect on the Effective Date, including the Workers’ Welfare Fund Ordinance, 1971 and the Companies Profits (Workers’ participation) Act, 1968 shall apply to this Agreement, throughout its terms, whether or not subsequently amended or revised.’ (emphasis added), available at http://www.ppisonline.com/PEPC2013/Downloads/MCA2013.pdf. 47 Hanno Merkt (n. 16) 223; Pierre-Yves Tschanz, ‘Contrats d’Etat et mesures unilatérales de l’Etat devant l’arbitre international’ (1985) 74 RCDIP 47–84, 61; Abdullah Faruque (n. 1) 319. 48 Patrick Fiedler (n. 7) 65 et seq.; Morris Besch (n. 1) 137 et seq.; Thomas Markert (n. 11) 201; Hanno Merkt (n. 16) 43 et seq.; Abdullah Faruque (n. 1) 319; Guido Santiago Tawil (n. 8) 15; Piero Bernardini (n. 41) 100. 49 E.g.: ‘The (…) Laws and Decrees which may in the future impose higher rates or more progressive rates of [tax] or would otherwise impose a greater (…) tax liability than that anticipated under Section (…) of the Upstream Project Agreement shall not apply to the Company.’ (emphasis added), cited in Andrea Shemberg (n. 41) 6. 50 E.g. Sec. 9 of a 2000s Sub-Saharan extractive agreement: ‘In the event of any conflict between this Agreement or the rights, obligations and duties of a Party under this Agreement,

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The legal effects of the non-application clause correspond to those of the 42 freezing clause. With the agreement of a non-application clause the host State is not prevented from amending its national law after the conclusion of the contract. The host State may not, however, apply the amended law to the State contract. The host State can e.g. in spite of the stabilisation of tax law subsequently amend originally investor-friendly tax law in the course of the investment project without breaching the non-application clause. A breach of contract arises only if the State in spite of the non-application clause charges the investor more under the amended law as would have been possible under the original tax law (see 7. below). c) Clauses of Non-Intervention

Clauses of non-intervention are based on a completely different stabilisation 43 technique than freezing clauses and non-application clauses. Clauses of non-intervention are not limited to the mere non-application of subsequent legal amendments but are rather directed at preventing the passing of legal amendments.51 However, by clauses of non-intervention, the host State is usually not prevented from amending its law at all. Such a clause would hardly be accepted by a host State with regard to its sovereignty and legislative competence. Therefore in most cases the parties agree to exclude only such subsequent legal amendments which affect the State contract or the investor itself. In Article 30.1(e) of the Model Production Sharing Contract of Mozambique (2001) it was stated e.g. that [t]he Government will not without the agreement of the Contractor exercise its legislative authority to amend or modify the provisions of this Agreement and will not take or permit any of its political subdivisions, agencies and instrumentalities to take any administrative or other action to prevent or hinder the Contractor from enjoying the rights accorded to it hereunder.52

The State therefore does not breach the non-intervention clause by passing 44 new legislation but only if it includes the investor or the contract in the application of the new legislation. In contrast to freezing and non-application clauses, the host State directly breaches the prohibition stated in the non-intervention clause by passing legislation as soon as it does not exclude the investor or the State contract from its application.53

and any other Law, including administrative rules and procedures and matters relating to procedure, and applicable international law, then this Agreement shall govern the rights, obligations and duties of the Parties.’ (emphasis added), cited in Andrea Shemberg (n. 41) 6, fn. 14. 51 See Andreas Bucher, ‘Droit international privé suisse’, tome I/2: Partie générale – Droit applicable (Helbing & Lichtenhahn, 1995) mn. 240; Margarita Coale (n. 1) 223; Patrick Fiedler (n. 7) 62 et seq.; Uwe Kischel (n. 16) 75; Hanno Merkt (n. 16) 44 et seq.; Esa Paasivirta (n. 15) 162; Heleni Theodorou (n. 4) 458. 52 Cited in Peter Cameron (n. 1) 29. 53 Richard W. Bentham, ‘The Law of Development: International Contracts’ (1990) 32 GYIL 418–434, 426 et seq.; Hanno Merkt (n. 16) 227 et seq.

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d) Economic Equilibrium Clauses

Economic equilibrium clauses are often found in modern State contracts.54 These clauses are not aimed at protecting the investor against subsequent legal amendments or even preventing the host State from amending its law unfavourably for foreign investors but rather at protecting the investor against financial disadvantages arising from a subsequent legal amendment.55 The host State is free to subsequently amend its national law and to apply the new law to the State contract. The host State undertakes, however, to compensate any losses which are thereby suffered in order to re-establish financial parity.56 46 Instead of a financial compensation the economic equilibrium clause can also state an obligation to renegotiate the State contract with the objective of maintaining or re-establishing the original yield for the investor. By this stabilisation clause and renegotiation clause (see on this D.2.a)(3) below) are combined.57 45

54 See on the regional and sectoral usage of economic equilibrium clauses Sam Foster Halabi (n. 1) 297 et seq.; Peter Cameron (n. 1) 31 et seq.; Andrea Shemberg (n. 41) 7 et seq. 55 On economic equilibrium clauses see Peter Cameron (n. 1) 31 et seq.; Abdullah Faruque (n. 1) 320 et seq., 331 et seq.; Lorenzo Cotula (n. 36) 6; Mohamed Al Faruque, ‘Typologies, Efficacy and Political Economy of Stabilization Clauses: A Critical Appraisal’, (2007) 4 TDM 31– 33, 31 et seq.; Sam Foster Halabi (n. 1) 297 et seq.; Piero Bernardini (n. 41) 102; Ivars Mēkons (n. 10) 31 et seq.; Andrea Shemberg (n. 41) 7 et seq. 56 E.g.: ‘In the event of the occurrence of a Change in Law (including a Change in Law that becomes applicable to the Company because of damage to and the restoration of the Plant) that requires a material modification or a material capital addition to the plant, which is completed by the Company, or in lieu thereof or in addition thereto, an increase or decrease in operating costs including the use or quality of fuel or consumables by the Plant, and this Agreement is not terminated by (…) pursuant to Article (…), the Company will be entitled to receive Recovery Allowance payments under (…) from (…) to recover fully the costs of complying with the Change in Law, including the costs of any material modifications or material capital additions to the Plant that are necessary for the Company to come into compliance with the Change in Law. The amount of any Recovery Allowance due under this Article shall be determined pursuant to Article (…).’, cited in Andrea Shemberg (n. 41) 7. 57 E.g. Article XIX of the Concession Agreement of 2002 for Petroleum Exploration & Exploitation between ARE and The Egyptian General Petroleum Corporation & Dover Investments Limited: ‘In case of changes in existing legislation or regulations applicable to the conduct of Exploration, Development and production of Petroleum, which take place after the Effective Date, and which significantly affect the economic interest of this Agreement to the detriment of CONTRACTOR or which imposes on CONTRACTOR an obligation to remit to the A.R.E. (Arab Republic of Egypt) the proceeds from sales of CONTRACTOR’s Petroleum, CONTRACTOR shall notify EGPC (the NOC) of the subject legislative or regulatory measure. In such case, the Parties shall negotiate possible modifications to this Agreement designed to restore the economic balance thereof which existed on the Effective Date. The parties shall use their best efforts to agree on amendments to this Agreement within ninety (90) days from aforesaid notice. These amendments to this Agreement shall not in any event diminish or increase the rights or obligations of CONTRACTOR as these were agreed on Effective Date. Failing Agreement between the Parties during the period referred to above in this Article XIX, the dispute may be submitted to arbitration, as provided in Article (…) of this Agreement’ (emphasis added), cited in Peter Cameron (n. 1) 31. See on economic equilibrium clauses with contractual duties to negotiate adjustments also Sam Foster Halabi (n. 1) 300; Thomas J. Pate, ‘Evaluating Stabilization Clauses in Venezuela’s Strategic Association Agreements for Heavy-Crude Extraction in the Orinoco Belt: The Return of a Forgotten Contractual Risk Reduction Mechanism for the Petroleum Industry’ (2009) 40 U. Miami Inter-Am. L. Rev. 347– 412, 374 et seq.

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The reason for the popularity of economic equilibrium clauses is that they do 47 not seek to prevent the host State from enacting subsequent legislation, but tries to mitigate its adverse impact on the economic equilibrium of the State contract. Therefore they provide a good compromise for both parties by accepting the host State’s legislative freedom and giving to the host State more flexibility on the one hand and satisfying the investor in his need for economic planning reliability on the other.58 3. Scope of Stabilisation

Stabilisation clauses may vary considerably not only with regard to the stabil- 48 isation technique but also as to the extent of the right to stabilisation. a) Full Stabilisation Clauses

Full stabilisation clauses are clauses which aim at comprehensive protection 49 against subsequent amendments of national law without any restrictions on the rules to be stabilised. Full freezing clauses,59 full non-application clauses60 and full non-interven- 50 tion clauses61 become rare in modern State contracts. Host States seldom accept such unrestricted stabilisation clauses. In particular, a full non-intervention clause would usually be seen by the host State as irreconcilable with its legislative freedom and therefore rejected by the host State. Such full stabilisation clauses are found today only occasionally in the extractive sector in State contracts with developing countries, e.g. in Sub-Saharan Africa, North Africa and the Middle East or East Asia. In State contracts of European States and OECD countries, full freezing, non-application and non-intervention clauses are, on the contrary, rather unusual.62 Full economic equilibrium clauses are encountered in modern State contracts 51 much more frequently.63 This has good reasons: the agreement of a full economic equilibrium clause has the advantage for the host State that it can, by accepting such a clause, appear to be very investor-friendly but is not thereby directly restricted in its legislative power – contrary to the case of the agreement of a full clause of non-intervention. In addition, the government of the host State is – contrary to full freezing and full non-application clauses – not exposed internally to the accusation that a foreign investor is not obliged to comply with State law due to an agreement with the government of the host State.

58 Abdullah Faruque (n. 1) 321, 331; Lorenzo Cotula (n. 36) 7; Piero Bernardini (n. 41) 102 et seq. 59 See the example clauses cited under C.2.a) above. 60 See the second example clause cited unter C.2.b). 61 See the example clauses cited under C.2.c) above. 62 See on the regional, sectoral and asset-specific usage of such full stabilisation clauses in practice Sam Foster Halabi (n. 1) 294 et seq.; Andrea Shemberg (n. 41) 19 et seq. 63 See Andrea Shemberg (n. 41) 24 et seq.

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b) Limited Stabilisation Clauses

In contract negotiations host States usually endeavour – depending on their negotiating power – to restrict the material application of the stabilisation clause as far as possible. This has good reasons: 53 even if the host State succeeds in avoiding full freezing, non-application or non-intervention clauses but agreeing to a full economic equilibrium clause, this would have a significant indirect influence on the later legislation of the host State. While the host State would not then be prevented from passing new statutes and applying these to the investor, with every legislative measure the host State would, however, have the financial consequences for the investor in the back of its mind. The host State would therefore, while not directly, be indirectly restricted in its freedom to pass intended new legislation.64 54 The usually very difficult manageability of a full stabilisation clause is an additional factor. In particular, if the host State in various State contracts has agreed stabilisation clauses with various investors with different effective dates, the State must consider in the course of every single legal amendment the application to or financial consequences of the new provisions on the relevant private investors. In addition, the authorities must, with considerable administrative effort, reconstruct for each investment project the entire host State’s law for the effective date applicable to each individual investor and apply the old laws to the investors in each case.65 55 The agreement of such a full stabilisation clause is therefore not acceptable in particular for such host States in which the political risk is not particularly high for the foreign private investor. In order to at least secure partial protection against subsequent legal amendments, the agreement of a limited stabilisation clause is available to the foreign investor in these cases. In a limited stabilisation clause, not the entire law of the host State will be stabilised. There is a wide range of possibilities as to how a restriction of stabilisation can technically be achieved. 52

(1) Restriction of Stabilisation to Specific Statutes 56

It is thinkable and in practice quite usual to restrict the stabilisation to actual statutes.66 These statutes are then either specifically named in the stabilisation clause or even repeated in full in an annex to the contract. In the identical stabilisation clauses (Art. 16.2) in the contracts on which the three well-known Libyan nationalisation cases were based it is stated, e.g. that [t]his Concession shall throughout the period of its validity be construed in accordance with the Petroleum Law and Regulations in force on the date of execution of the agreement of amendment by which this paragraph (2) was incorporated into this concession agreement. Any amendment to or

64 Howard Mann (n. 42) 6; Morris Besch (n. 1) 139. 65 Morris Besch (n. 1) 139. 66 Abdullah Faruque (n. 1) 318; Sam Foster Halabi (n. 1) 293, 301 et seq.; Andrea Shemberg (n. 41) 6.

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Likewise it is possible to declare specific legislation generally to be inapplica- 57 ble thereby also excluding the application of later amendments to such legislation. (2) Restriction of Stabilisation to Specific Legal Areas

Instead of individual statutes, in practice stabilisation of individual legal areas 58 of particular significance for the investor is often agreed.68 The investor usually agrees on at least the stabilisation of the financially extremely important fiscal and tax law (‘tax freezing’).69 In modern State contracts, there are further clauses which, e.g., provide for stabilisation of the law of property,70 foreign currency law,71 import and export law72 or the entire foreign trade law. If many legal areas are stabilised, it may be indicated from the contractual 59 point of view to proceed in reverse and only to specify the non-stabilised areas. In this context in recent years particularly the stabilisation or non-stabilisation of human rights or environmental standards plays an important role. Unlimited stabilisation clauses trigger certain tensions between a host State’s international obligation to comply with evolving new international human rights or environmental standards on the one hand and the host State’s obligation to honour the contractual commitment on the other hand. There is uncertainty as to whether or not stabilisation clauses implicitly include a kind of ‘compliance with international law’ exception which allows the host State to comply with its internation67 Cited in (1979) 53 ILR 297 et seq., 322 (emphasis added). 68 Abdullah Faruque (n. 1) 318; Peter Cameron (n. 1) 30; Howard Mann (n. 42) 6; Andrea Shemberg (n. 41) 6. 69 See e.g. Art. 16.11 of the model State contract Kazakhstan of 1997: ‘The tax regime established by the Contract shall be in effect without alterations until the termination of the Contract’s validity. Any amendments in the Tax Legislation made after the Contract was signed must not influence the tax obligations of the Contractor.’ (emphasis added), cited in R. Doak Bishop, James Crawford and Michael Reisman (n. 38) 298. 70 E.g. Art. 17b of the Project Contract between Bougainville Copper Pty. Ltd. und Papua Neu Guinea of 2 October 1967: ‘(…) the Administration (…) shall not resume or expropriate or permit the resumption or expropriation of any asset (whether movable or not) of the Company used in connection with any of its operations under this Agreement, any of the products (whether processed or otherwise) resulting from such operations, the business of the Company, or any shares held or owned by any person in the Company.’, cited in Wolfgang Peter (n. 4) 218 et seq. 71 E.g. Art. 17.5. of the State Contract between UTAH/ARCO and the Perusohaan Negara Tambang Batubara (an Indonesian State enterprise) of 5 February 1981: ‘Der Gaststaat garantiert dem Investor für die Laufzeit des Vertrags das Recht, Zahlungen unbeschränkt in das Ausland und in ausländischen Währungen zu leisten’, cited and translated in Hanno Merkt (n. 16) 323. 72 E.g. Art. XIV of the State Contract between Indonesia and the investors of the Asahan Hydroelectric and Aluminium Project of 7 July 1975: ‘During the term of this Agreement as provided in Article (…), the Company, its contractors and subcontractors may import into and use in Indonesia free of duties, sales taxes and other levies by any route and by any means of transport, having due regard to existing procedures in accordance with prevailing laws and regulations (…).’, cited in Wolfgang Peter (n. 4) 220.

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al obligations despite the unlimited stabilisation clause.73 To avoid such uncertainty, an explicit agreement in the State contract is advisable, e.g. stating that amendments have been enacted in order to comply with international standards.74 (3) Stabilisation of the Stabilisation

For the foreign private investor it is advisable not only to work towards the stabilisation of various legal areas of material importance to him, but also towards the stabilisation of the conflict of law rules of the host State, in particular the principle of party autonomy, the stabilisation of legislation which relates to the admissibility and legal effect of stabilisation clauses and the binding of the host State to the stabilisation clause (‘stabilisation of the stabilisation’).75 61 By a stabilisation of the stabilisation it can – depending on the content of the stabilisation clause – be ensured that the host State does not declare the inadmissibility of the agreement of a stabilisation clause in State contracts, cancel or restrict the principle of party autonomy, cancel its adherence to the stabilisation clause or amend the legal consequences of breach of the stabilisation clause in its favour by subsequent amendments of law with retrospective effect. 60

(4) Advantages and Disadvantages of a Limited Stabilisation Clause 62

If a full stabilisation clause cannot be insisted upon vis-à-vis the host State, the agreement on a limited stabilisation clause presents a reasonable compromise between the host State and foreign private investors. The investor can, by the stabilisation of targeted areas of particular significance for the financial security of his investment, e.g. tax law or financial administration law, cover a considerable part of his actual risk. Legal areas which are – possibly – of subordinate significance for the investor, but possibly of great value to the host State (e.g. labour and social law) are, on the contrary, excluded from the stabilisation. 73 See on this discussion Lorenzo Cotula (n. 36) 9 et seq.; Ivars Mēkons (n. 10) 52; Howard Mann (n. 42) 7 et seq.; Andrea Shemberg, ‘Principles for responsible contracts: integrating the management of human rights risks into investor-state contract negotiations’ (2011) 1 (2) ITN 9–10; Andrea Shemberg (n. 41) 10 et seq., 35 et seq. 74 Lorenzo Cotula (n. 36) 15; Sam Foster Halabi (n. 1) 293; Andrea Shemberg (n. 41) 26; Kyla Tienhaara, ‘Foreign Investment Contracts in the Oil & Gas Sector: A Survey of Environmentally Relevant Clauses’ (2011) 1 (2) ITN 12–15, 12. E.g.: ‘Notwithstanding the generality of the foregoing or anything to the contrary, the Parties acknowledge that the provisions of [the economic equilibrium clause] shall not apply if (…) the new law or decree has been enacted by the Government [state] with the intent of protecting health, safety, the environment, [human rights] or security, and is generally applicable to all ventures having the same general purpose as does the Project.’, cited in Sam Foster Halabi (n. 1) 293 (supplement [human rights] added by author). 75 See e.g. Art. 17 III of the State contract of 16 December 1974 between Bong Mining Company Inc. and Liberia: ‘(…) The Arbitral Tribunal shall apply the law of the Republic of Liberia (including its rules on the conflict of law and its treaties and other rules of international law as may be applicable), excluding, however, any enactment passed or brought into force in the Republic of Liberia before or after the date of this Concession Agreement which is inconsistent with or contrary to the express terms hereof (…)’, cited in Erich Schanze (n. 9) 207.

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It will be easier for the host State to accept a stabilisation clause which does not, either directly or indirectly, restrict its legislative power in legal areas of considerable internal political importance.76 Limited stabilisation clauses are, however, – apart from their limited scope of 63 application – subject to the disadvantage and risk that in a later dispute uncertainties could arise regarding the question of what has and what has not been stabilised. Individual legal areas are not always capable of being clearly distinguished from each other. The borders between individual legal areas are often fluid. It can therefore be difficult in some cases to assess whether new legislation passed by a host State is attributable to the stabilised or non-stabilised legal areas. There is therefore the risk that the host State would attempt to escape its contractual obligations by availing itself of the fluid borders between legal areas with skilful drafting of its legislation. This could, e.g., occur when new legislation in a stabilised legal area is passed in the guise of a legislative package on a non-stabilised legal area. In addition legal amendments in non-stabilised areas could indirectly affect stabilised areas. If in State contracts, e.g., property law but not tax law is stabilised, subsequent amendments to tax law (e.g. excessive tax liability for foreign investors) could have the effect that the economic use of property becomes simply impossible.77 This risk of demarcation when agreeing on a limited stabilisation clause can- 64 not be fully excluded from the point of view of the investor. It can – insofar as the negotiation power of the investor allows – at most be reduced by expressly including the legal areas related to the primarily stabilised legal area or which would affect the stabilised legal areas in the scope of application of the stabilisation clause. Also thinkable is a clarifying provision that requires new legislation attributable to a stabilised legal area or legislation, but located by the host State formally in a non-stabilised law or legal area, also be covered by the stabilisation clause. c) ‘Qualified’ Stabilisation Clauses

Stabilisation clauses may be restricted not only with regard to their substan- 65 tive area of application but also by a certain restriction of their application (‘qualified stabilisation clauses’). Qualified stabilisation clauses are clauses, which affect only such subsequent legal amendments which have specific effects.78

76 Morris Besch (n. 1) 139 et seq. 77 Philippe Kahn, ‘Les investissements étrangers dans les pays en voie de développement’ (1971) 80 Revue de droit des pays d’Afrique, 115–126, 163–213, 333–356, 190; Morris Besch (n. 1) 141. 78 See Philippe Leboulanger (n. 18) 93 et seq.; Hanno Merkt (n. 16) 54 et seq.; Prosper Weil (n. 6) 311.

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(1) Inconsistency Clauses

The most usual form in practice are inconsistency clauses.79 These provide that only those legal amendments which are irreconcilable with the provisions of the State contract or in conflict therewith are affected by the stabilisation clause.80 The agreement on such an inconsistency clause is an appropriate approach to balance the interests of both parties. The host State could hardly agree that it may not make subsequent legal amendments which do not in any way touch the investor and provisions of the State contract. Such subsequent legal amendments would not have any adverse influence on the investor and would not have any legal consequences either (cf. below 7.). On the other hand inconsistency clauses – as well as non-discrimination clauses (see below (2)) – make sure that only unfavourable legal amendments do not apply to the State contract, but the investor can participate in favourable legal amendments after conclusion of the State contract. 67 As with the limited stabilisation clauses, difficulties can arise in the practical implementation of the clause. It can be difficult to decide whether a new statute is irreconcilable with the provisions of the contract or not. A problematic question arises as to whether, for the application of the inconsistency clauses, even indirect effects on the State contract suffice or whether legal amendments which are directly in conflict with the contractual provisions are necessary. Clarification in the State contract is advisable on this point. 66

(2) Non-Discrimination Clauses 68

The scope of application of the stabilisation clause can further be restricted by the agreement of non-discrimination clauses.81 These provide that only such subsequent legal amendments are intended to be covered by the protection of the stabilisation clause which operate as ‘discriminatory’ against the investor or worsen his position, e.g.: The Sultan agrees that no discriminatory laws or decrees affecting the SUN GROUP or its operations will be enacted.82

69

Non-discrimination clauses are also usually associated with certain difficulties of interpretation which could further restrict the protection of the investor.83 79 See Lorenzo Cotula (n. 36) 6; Morris Besch (n. 1) 141; Ivars Mēkons (n. 10) 30 et seq. 80 See e.g. Art. 18.1 of the State contract between Dublin International Petroleum (Damascus) Ltd. and Syria of 2004: ‘CONTRACTOR and the Operating Company shall be subject to all laws and regulations of local application in force in the S.A.R. (Syrian Arab Republic) provided that CONTRACTOR or the Operating Company shall not be subject to any laws, regulations or modifications thereof which are contrary to or inconsistent with the provisions of this Contract and which are in effect at any time from the Effective Date and throughout the Term of this Contract.’ (emphasis added), cited in Munir Maniruzzaman (n. 5) 19. 81 See Hanno Merkt (n. 16) 55; Morris Besch (n. 1) 141 et seq.; Sam Foster Halabi (n. 1) 303; Andrea Shemberg (n. 41) 32. 82 Art. 22.3 of the State contract between the SUN GROUP and Oman of 4 February 1973 (emphasis added), cited in Hanno Merkt (n. 16) 45, fn. 65.

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Whether a legal amendment worsens the position of the investor or not can usually be reliably ascertained. Difficulties can arise, however, with new provisions unfavourable to the investor on one point but favourable on another in compensation. A dispute could arise between the State and the investor as to whether the investor can rely on a new provision favourable to him without at the same time being bound by an unfavourable provision. Cherry-picking between favourable and unfavourable legal amendments will usually be regarded by the host State as a breach of good faith. Here, too, clarification in the State contract can be beneficial. Additionally, the question of whether a certain subsequent legal amendment 70 ‘discriminates’ against the investor can involve considerable difficulties. With a very general non-discrimination clause as quoted above, it is not quite clear what comparable group should be used to assess discrimination. A comparison with other foreign investors, with nationals, with national or foreign investors in the same industry etc. may be considered. It is advisable to clarify this in the non-discrimination clause, but even if a comparison group is fixed, it can be quite difficult for the investor to prove actual discrimination in court. The agreement of a non-discrimination clause is therefore linked with considerable legal uncertainties for the investor. d) Time-Limited Stabilisation Clauses

Not only the material application but also the duration of the application of a 71 stabilisation clause can be limited. (1) Limitation on the Duration of the Investment Project

Host States will at least demand in contract negotiations that the stabilisation 72 of its law shall be limited to the duration of the investment project. Such a provision is at first sight reasonable because no host State can be obliged to stabilise its national law forever. Difficulties can arise however, if the host State is constitutionally permitted to 73 pass laws after the ending of the investment project with retrospective effect to the time of the investment project. In order to exclude this risk from the outset, it may be beneficial for the investor to exclude either retrospective legislative amendments from the time restriction or agree to an express time limitation on an inconsistency clause. With the agreement of an inconsistency clause the investor achieves that only such subsequent legal amendments are covered by the stabilisation clause which are irreconcilable with the provisions of the State contract or in conflict with it. By this means, a time limit can in fact, be achieved because subsequent legal amendments can no longer be irreconcilable with the State contract if the State contract has already ended or has ceased to have effect. The inconsistency clause therefore ensures that the host State must not sta83 Morris Besch (n. 1) 142.

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bilise its law forever. At the same time, the clause guards against the risk of retrospective effects. The inconsistency clause would also apply if, after the ending of the State contract, legal amendments with retrospective effect are passed. (2) Limitation on Certain Phases of the Investment Project

If the host State resists the inclusion of a stabilisation clause, the clause can possibly be made more appealing for the host State by restricting the time of its application to certain phases of the overall duration of the investment project, e.g. to the particularly critical commencement phase or the yield and profit phases of the project.84 75 Such a clause does not offer comprehensive protection against subsequent legal amendments. For example, it is hardly foreseeable at the time of the conclusion of the State contract, what time periods in the possibly years or decades of the investment project, will render stabilisation of the national law particularly necessary and which will not. Such a clause can, however, represent a certain minimum compromise in difficult contract negotiations. 74

4. Hybrid Stabilisation Clauses 76

Stabilisation clauses can – as has been shown – provide for different stabilisation techniques and different material and time application conditions. In practice, the various alternatives are often combined with each other depending on the negotiating power of the parties in order to find a balance between the interests of both parties, taking into account the interest of the investor with the greatest possible protection against subsequent legal amendments and also the interest of the host State in restricting its legislative power only to the extent necessary. The various alternatives can be flexibly used. In particular, time restrictions as well as qualitative and material restrictions of the stabilisation clause, permit the investor to increase the acceptance of the stabilisation clause for the host State and therefore at least ensure the stabilisation of particularly critical legal areas within particularly critical phases of the investment project.85 5. Stabilisation Clauses in State Contracts with State Enterprises

77

In modern State contracts, the foreign investor is often dealing not directly with the government of the host State itself but with a State enterprise. In these cases, there is the obvious risk that the State intervenes in the State contract with legislation in favour of its own State enterprise and to the detriment of the foreign private investor. Since, between the host State and the investor, there is no direct contractual privity and a separate contract with the foreign government is 84 Georges R. Delaume, ‘Transnational Contracts. Applicable Law and Settlement of Disputes. A Study in Conflict Avoidance’ (loose leaf collection) vol. I, booklet 3 (Oceana, Dezember 1989), § 2.07, p. 26; Morris Besch (n. 1) 144. 85 See on hybrid stabilisation clauses Hanno Merkt (n. 16) 61 et seq.; Sam Foster Halabi (n. 1) 298; Andrea Shemberg (n. 41) 8, 26 et seq.

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only rarely achievable, this risk cannot usually be covered with the agreement of a stabilisation clause with the host State itself.86 It is therefore often agreed in modern contracts with State entities that the 78 State enterprise is liable for the financial loss, incurred by the foreign private investor through unilateral intervention of the host State in the investment. Such clauses are quite similar to economic equilibrium clauses in State contracts. Such an apportionment of risk is appropriate to the balance of interests because the State enterprise is closer to the source of the risk than the investor. Financially, the same result is thereby achieved as in the cases in which the host State does not act in the investment project through a State enterprise controlled by it but is itself the contractual partner of the foreign investment.87 In order to maintain or re-establish the economic equilibrium similar to eco- 79 nomic equilibrium clauses in State contracts, the investor and the State enterprise can alternatively agree on an obligation to renegotiate the contract in case of interventions of the host State in the investment project. 6. Validity of Stabilisation Clauses

Stabilisation clauses are widely recognised as effective both in the literature88 80 and in arbitration practice.89 The occasional doubts about the validity of stabilisation clauses, usually expressed by authors from developing countries, have not been echoed in the remainder of the literature or in arbitration practice. Significantly, the ICSID arbitration tribunal in the case CMS v. Argentina in its arbitration award of 12 May 2005 assumed the validity of the stabilisation clause agreed in the licence between CMS Gas Transmission Company and Argentina without further ado.90

86 Thomas Wälde and George Ndi (n. 41) 18; Morris Besch (n. 1) 145. 87 Thomas Wälde and George Ndi (n. 41) 18; Piero Bernardini (n. 41) 103; Morris Besch (n. 1) 145. 88 Abdullah Faruque (n. 1) 323 et seq.; Lorenzo Cotula (n. 36) 7 et seq.; Morris Besch (n. 1) 149 et seq.; Moshe Hirsch, ‘The Arbitration Mechanism of the International Centre for the Settlement of Investment Disputes’ (Nijhoff, 1993) 143; Thomas Markert (n. 11) 202; Wolfgang Peter (n. 4) 222; Thomas Wälde and George Ndi (n. 41) 17. 89 See Anglo Iranian Oil Company v. Iran, Award, 22 July 1952, ICJ Rep. 1952, 90; Saudi Arabia v. Arabian American Oil Company (ARAMCO), ad hoc arbitration Award, 23 August 1958, (1963) 27 ILR 117–233, 168; Texaco Overseas Petroleum Company, California Asiatic Oil Company v. Libya, ad hoc Award, 19 January 1977, (1978) 27 ILM 1 et seq., 71; Libyan American Oil Company (LIAMCO) v. Libya, Award, 12 April 1977, (1980) Rev. Arb. 132– 191, 136; Kuwait v. American Independent Oil Company (AMINOIL), Award, 24 May 1982, (1982) 21 ILM 976 et seq., 1020 et seq., 90 (2); AGIP v. Kongo, ICSID Case No. ARB/77/1, Award, 30 November 1979, (1982) 21 ILM 726 et seq., 735 et seq.; Liberian Eastern Timber Corp. (LETCO) v. Liberia, ICSID Case No. ARB/83/2, Award, 31 March 1986, (1987) 26 ILM 647 et seq., 666. 90 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para. 302 et seq.

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a) No Breach of International Law

Particularly, stabilisation clauses, contrary to the view of some authors,91 do not constitute a breach of principles of international law, in particular they do not breach the principle of ‘permanent sovereignty of the state over its natural resources’ established by UN Resolution No. 1803.92 It is already doubtful whether the principle established in said UN Resolution has at all achieved the status of a binding rule of international law. A UN resolution is not, according to Article 10f. together with article 13f. of the UN Charter, binding in principle. It acquires the status of an international rule at most if States put it almost unanimously into effect.93 This cannot be said to be the case with regard to the agreement of stabilisation clauses. On the contrary, for decades, host States all over the world have agreed on stabilisation clauses in their State contracts and usually admit the agreement of such stabilisation clauses in their investment legislation. There is no State practice directed at the invalidity of stabilisation clauses.94 82 Even if one would suppose that the above UN Resolution were binding, no prohibition on host States to bind themselves contractually in a stabilisation clause can be derived therefrom. The principle of ‘permanent sovereignty over natural resources’ has neither priority nor the effect of restricting the equally fundamental right of a State to conclude contractual obligations.95 81

b) No Invalidity due to Restriction on Legislative Sovereignty

Contrary to the minority opinion of some authors,96 stabilisation clauses are not invalid because of an inadmissible intervention in the legislative jurisdiction of the host State, i.e. its sovereign right to pass legislation within its own territory: 84 freezing, non-application and economic equilibrium clauses do not, as has already been stated, present a direct intervention in the legislative jurisdiction of the host State. The host State can freely continue to amend its laws without 83

91 Mohammed Bedjaoui and Ali Mebroukine, ‘Le nouveau droit de l’arbitrage international en Algérie’ in (1993) 120(2) Clunet 873–912, 63 et seq.; Ahmed El Chiati (n. 9) 163; Muthucumaraswamy Sornarajah (n. 13) 210; Muthucumaraswamy Sornarajah (n. 26) 103. See also the argumentation of the government of Kuwait in the AMINOIL case (n. 89) (1982) 21 ILM 976 et seq., 1021. 92 UN Res. 1803 on Permanent Sovereignty over Natural Resources dated 14 February 1962, GA Res. 1803, 17 UN GAOR Annexes, vol. I, agenda item no. 39, p. 59, (1963) 57 AJIL 710–712. 93 Albert Bleckmann (n. 13) 85 et seq.; Karl Doehring (n. 13) 135 et seq. 94 Munir Maniruzzaman (n. 5) 66 et seq.; Morris Besch (n. 1) 150 et seq.; Thomas Markert (n. 11) 203. 95 Wolfgang Peter (n. 4) 222; Heleni Theodorou (n. 4) 462 et seq.; Abdullah Faruque (n. 1) 324; Munir Maniruzzaman (n. 5) 78 et seq. 96 Muthucumaraswamy Sornarajah (n. 1) 50; Henri Batiffol and Ignaz Seidl-Hohenveldern bei Georges van Hecke, ‘Les accords entre un Etat et une personne privée étrangère’ (1977-I) 57 Annuaire 192–265, 214 and 233; David Flint, ‘Foreign investment and the new international economic order’ in Kamal Hossain and Subrata Roy Chowdhury (eds), Permanent sovereignty over natural resources in international law (Pinter, 1984) 144–185, 162.

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breaching these clauses. The host State’s sovereignty to pass legislation is not directly affected.97 At most, the agreement of a non-intervention clause may be considered as a direct intervention in the legislative jurisdiction because it obliges the host State to exclude the investor or the investment project from the material and personal application of new legislation unfavourable for the investor.98 It is also at least theoretically thinkable that the indirect effects of a freezing, non-application and economic equilibrium clause on the legislative freedom of the host State legislator can be seen as a restriction of the legislative sovereignty of the host State. However, in arbitration practice, direct and indirect restrictions on the legis- 85 lative jurisdiction arising from the agreement of the stabilisation clause are generally regarded as unproblematic.99 With the agreement of a stabilisation clause, it is not the sovereignty of the host State which is restricted – on the contrary, the sovereignty of the host State is precisely manifested in its capacity to agree such contractual obligations.100 In other words, the sovereignty of the host State includes its right to partially restrict its own sovereignty contractually. If a State, due to its sovereignty – perhaps for a number of decades – agrees a stabilisation clause in its State contracts, it cannot subsequently plead that precisely the stabilisation clause restricts its sovereignty. c) Validity According to Lex Causae

In the literature, the question of the validity of a stabilisation clause is often 86 neither generally affirmed nor rejected but assessed under lex causae at the time of agreement of the stabilisation clause.101 Since, in modern State contracts, usually exclusively or primarily the national law of the host State is chosen (see B. 3. above), the question of the validity of the stabilisation clause according to this view is adjudicated in most cases according to national host State’s law. If the national host State’s law – as in almost all modern investment statutes – 87 admits stabilisation clauses – then stabilisation clauses are to be viewed as valid. 97 Hanno Merkt (n. 16) 239; Morris Besch (n. 1) 151 et seq.; Thomas Wälde, ‘Contract stability: Adaptation and conflict resolution’ in United Nations (ed), Legal and Institutional Arrangements in Minerals Development (Mining Journal Books, 1982) 166 et seq.; Munir Maniruzzaman (n. 5) 21 et seq. 98 Martin Bartels (n. 11) 22; Hanno Merkt (n. 16) 239; Matthias Herdegen (n. 5) 23. 99 Saudi Arabia v. ARAMCO (n. 89) 168; Revere Copper & Brass, Inc. v. Overseas Private Investment Corp. (OPIC), Award, 24 August 1978, (1978) ILM 17, 1321 et seq., 1342. 100 See Saudi Arabia v. ARAMCO (n. 89): ‘Nothing can prevent a State, in the exercise of its sovereignty, from binding itself irrevocably by the provisions of a concession and from granting to the concessionaire irretractable rights’, (1963) 27 ILR 117 et seq., 168. Affirmative inter alia: Jean-Flavien Lalive (n. 2) 112; Sangwani Ng’ambi, ‘Stabilisation Clauses and the Zambian Windfall Tax’ (2011) 1 (1) Zambia Social Science Journal 107–117, 113; Matthias Herdegen (n. 5) 23; negative (holding the view that non-intervention clauses in general affect the legal sovereignty of the host State): cf. n. 96. 101 Martin Bartels (n. 11) 22 et seq.; Hanno Merkt (n. 16) 240 et seq.; Morris Besch (n. 1) 153; Esa Paasivirta (n. 15) 171; Heleni Theodorou (n. 4) 463; Thomas Wälde and George Ndi (n. 41) 17.

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Then because of the principal of venire contra factum proprium the host State can hardly, after the conclusion of the contract, invoke an inadmissible restriction on its legislative sovereignty.102 Not even a subsequent amendment to the investment legislation helps the host State in this respect. According to the cited overwhelming opinion in the literature, only the legal position at the time of the agreement of a stabilisation clause is decisive.103 Subsequent legal amendments are therefore irrelevant. Even if one wishes to regard subsequent retrospective legal amendments as relevant for the question of the validity of stabilisation clauses, it would have to be taken into account that such retrospective legislation would be admissible only within the limits of the constitutional law of the host State. The remaining risk can be covered by the investor with a contractual stabilisation of the stabilisation (cf. C.b)(3) above). 7. Binding Effect of the Stabilisation Clause on the Host State 88

The question of the validity of the stabilisation clause must be distinguished from the question of whether host States in fact in every case are bound throughout the entire period of the State contract to the stabilisation clause. On this question, doubt could arise in particular if the investment project is set up for a period of many decades and the political and financial situation in the host State has considerably changed since the conclusion of the investment project. States will seek to use the argument against the binding effect of stabilisation clauses in such cases that the foreign investor at the conclusion of the State contract could not in all seriousness have assumed that the State would leave its legislation unchanged for 30, 40 or more years for the foreign investor. Whether this objection of the host State is justified is again to be decided according to the law applicable to the State contract.104 a) Binding Effect in Case of Application of National Law

If the law of the host State – as in most modern State contracts – applies to the State contract, the binding effect on the host State of the stabilisation clauses will be adjudicated under its national law. 90 National legal systems usually contain legal principles similar to pacta sunt servanda according to which the parties are bound in principle to their contractual obligations, as well as certain exceptions which admit release from contractual duties or renegotiation of the contract in the course of its duration. In the civil law States – e.g., according to the principle of ‘Störung der Geschäftsgrundlage’ of German law or in French law the ‘imprévision’ doctrine – a con89

102 Hanno Merkt (n. 16) 240 et seq.; Morris Besch (n. 1) 153; Heleni Theodorou (n. 4) 467; Abdullah Faruque (n. 1) 323 et seq.; restrictive: Lorenzo Cotula (n. 36) 8 (no legal validity in case of unconstitutional stabilisation commitments, e.g. regarding the constitutional principle on the separation of powers). 103 See n. 101; Peter Cameron (n. 1) 50. 104 Martin Bartels (n. 11) 22 et seq.; Morris Besch (n. 1) 156 et seq.; Nagla Nassar (n. 41) 139.

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tractual amendment or renegotiation of the contract is thinkable as an exception if during its performance difficulties and unforeseen changes occur which affect the contractual basis of the parties and would render it unreasonable for one of the parties to continue the unchanged contract.105 In the common law States, release from the principle of the ‘sanctity of contract’ under the English ‘doctrine of frustration’ is available only in very narrowly defined cases in which the financial objective of the State contract can no longer be achieved due to changed circumstances.106 The foreign private investor should therefore, prior to agreeing to a stabilisa- 91 tion clause, review the possibilities of achieving release from its contractual obligations granted to the host State by national law. The investor should deal with the risk that the host State could amend its national law during the investment project in its own favour by extending the material application of the stabilisation clause to national law on the binding effect of contractual obligations on the host State (stabilisation of the stabilisation, cf. 3.b)(3) above). b) Binding Effect in Case of the Application of International Law

If the parties agree to the application of international law rules to the State 92 contract, the principle pacta sunt servanda, anchored in Art. 26 of the Vienna Convention on the Law of Treaties, applies – the host State is in principle bound to its contractual obligations for the entire duration of the State contract. Problems arise – as also in the case of the application of national law (see above a)) – only with the question of under what circumstances this principle can be dispensed with. In international law, the principle of rebus sic stantibus anchored in Art. 62 of the Vienna Convention on the Law of Treaties permits release from the original contractual agreements only under narrow conditions. Release from the principle of pacta sunt servanda is thinkable only if the circumstances which formed the fundamental basis for the conclusion of the contract have so fundamentally changed in the course of the term of the contract that the extent of the obligations still to be satisfied on the basis of the contract would be fundamentally altered.107

105 See Nagla Nassar (n. 41) 196 et seq.; Wolfgang Peter (n. 4) 189 et seq.; Ole Lando (n. 13) 48 et seq.; Thomas W. Wälde and Abba Kolo, ‘Renegotiation and Contract Adaptation in the International Investment Projects: Applicable Legal Principles & Industry Practices’ (2003) 2 OGEL 2, available at http://www.ogel.org/article.asp?key=135. 106 Stefan M. Kröll, Die Ergänzung und Anpassung von Verträgen durch Schiedsgerichte. Eine Untersuchung zum deutschen und englischen Recht (Heymanns, 1998) 135 et seq.; Stefan M. Kröll, ‘The Renegotiation and Adaptation of Investment Contracts’ in Norbert Horn and Stefan M. Kröll (eds) Arbitrating Foreign Investment Disputes (Kluwer Law International, 2004) 461 et seq. 107 See ICJ, Gabčikovo-Nagymaros case (Hungary v. Slovakia), ICJ Judgment, 25 September 1997, (1998) 37 ILM 162 et seq., 201 et seq.; ICC Arbitration Award No. 1512 (1971), (1976) YCA I, 128. See also Martin Bartels (n. 11) 56 et seq.; Thomas Markert (n. 11) 178 et seq.; Munir Maniruzzaman (n. 5) 95 et seq.; Nagla Nassar (n. 41) 200 et seq.; Wolfgang Peter (n. 4) 194 et seq.; Thomas Wälde and Abba Kolo (n. 105) 3 et seq.

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In arbitration and in the literature, the extent to which the host State can, in spite of having agreed to a stabilisation clause, rely on the principle of rebus sic stantibus is disputed: in arbitration practice and in the literature is sometimes expressed the view that a host State, having agreed to a stabilisation clause, is strictly bound to the principle pacta sunt servanda and cannot even in exceptional cases invoke the principle of rebus sic stantibus.108 By agreeing to a stabilisation clause the host State itself assumed the risk of not making any legal amendments affecting the State contract or not applying them to the State contract even in the case of future financial, political and social changes. The host State must therefore adhere to this risk apportionment.109 94 Probably the overwhelming view in the literature and in arbitration practice rejects an absolute bond of a host State to stabilisation clauses which are not, according to this view, to be adjudicated strictly and absolutely in accordance with the contractual text, but always relatively in the light of the development of the contractual relationship.110 A foreign investor cannot therefore expect to remain protected over decades against major financial, political or international transformations.111 Hence, in arbitration practice is expressed the opinion that stabilisation clauses can have only a protective effect subject to certain time limits. In the well-known AMINOIL proceedings, the arbitration tribunal decided, e.g., that stabilisation clauses could not protect the investor over a particularly long period – in the AMINOIL case 35 years – from nationalisation by the host State if in that period the contractual relationship or the nature of the contract and the legal environment had so fundamentally changed in an unforeseeable manner that it was no longer equitable for a foreign investor to rely on the original contractual conditions, which had long been overtaken by the development of the State contract.112 95 For the private investor this arbitration practice constitutes a certain legal uncertainty as to what period is referred to as a ‘particularly long period’ between the conclusion of the contract and subsequent legal amendments and from when the State contract has in that period completed a ‘metamorphosis’ comparable to the AMINOIL case by which the State contract has lost its original absolute character. In the MOBIL OIL case a period of 20 years was e.g. regarded as an ad93

108 See LETCO v. Liberia (n. 89) 666; AGIP v. Kongo (n. 89) 86. 109 Nagla Nassar (n. 41) 134 et seq. 110 Alexander Catranis (n. 13) 25; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 450; Thomas Markert (n. 11) 210; Nagla Nassar (n. 41) 135; Wolfgang Peter (n. 4) 224; Nigel Rawding (n. 37) 350; Heleni Theodorou (n. 4) 473 et seq.; Lorenzo Cotula (n. 36) 16 et seq. 111 Georges R. Delaume (n. 84) 23; Rainer Geiger, ‘The Unilateral Change of Economic Development Agreements’ (1974) 23 ICLQ 73–104, 104; Heleni Theodorou (n. 4) 474. 112 Kuwait v. AMINOIL (n. 89) 1020 et seq., para. 90(2). Cf. on this issue inter alia Martin Hunter and Anthony C. Sinclair, ‘Aminoil Revisited: Reflections on a Story of Changing Circumstances’ in Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005) 347–381, 347 et seq.; Geoffrey Marston, ‘The Aminoil-Kuwait Arbitration’ (1983) 17 JWTL 177, 182; Alan Redfern (n. 15) 65 et seq.; Abdullah Faruque (n. 1) 326; Lorenzo Cotula (n. 36) 17; Ivars Mēkons (n. 10) 35.

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missible period since the State contract had not gone through any such metamorphosis in that phase.113 In the KHEMCO case 35 years was regarded on the other hand as a ‘particularly long period’.114 In order to not simply negate the risk apportionment established contractually 96 originally in the stabilisation clause in the course of the investment project at the expense of the investor, a very restrictive treatment of the principles established in the AMINOIL case is necessary. Only in the most obvious exceptional cases comparable to the AMINOIL case should the host State be able to escape from the stabilisation clause. It is not sufficient that between the conclusion of the contract and subsequent legal amendments a number of decades passed. In fact, the investment relationship must, in the course of the long duration of the contract, have changed so seriously and in a manner unforeseeable at the conclusion of the contract that the foreign investor cannot any longer equitably insist on the stabilisation clause.115 8. Legal Effects of Stabilisation Clauses

The legal effects of a stabilisation clause are determined primarily by the con- 97 tractual agreement between the host State and the foreign investor. If there is no such express agreement, the legal effects are determined by the law applicable to the State contract. a) Explicit Agreement on Legal Effects

In order to avoid from the outset legal uncertainties with regard to the legal 98 effects of stabilisation clauses, the investor and the host State should expressly agree on what legal consequences follow from breaches of the obligations set down in the stabilisation clauses.116 If the State contract contains an economic equilibrium clause, this clause al- 99 ready provides for the legal consequences of a subsequent legal amendment by the host State which is – depending on the content of the clause – obliged to renegotiate the contract or compensate the investor for the financial disadvantages suffered by the investor by the application of the legal amendment to the investment project. In the case of an obligation of the host State to renegotiate, the additional question of whether an obligation to agree exists and what legal consequences result from a breach of the obligation to renegotiate must be provided for. If the State contract contains a freezing, non-application or non-intervention 100 clause, the investor should provide explicitly in the State contract what actual le113 Iran–U.S. Claims Tribunal, MOBIL OIL Iran Inc., et al. v. Iran, National Iranian Oil Company (NIOC), Arbitration Award, 14. July 1987, (1987-III) Iran–U.S. CTR 16, 3–75. 114 Iran–U.S. Claims Tribunal, AMOCO International Finance Corp. v. Iran et al., Award, 14 July 1987, (1987-II) Iran–U.S. CTR 15, 189 et seq., 243, obiter dictum. 115 Morris Besch (n. 1) 167. 116 Ivars Mēkons (n. 10) 37; Munir Maniruzzaman (n. 5) 167 et seq.

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gal consequences follow from a breach by the host State of the contractual provisions. Legal uncertainty (see b) below) can thereby be minimised from the outset. The range of drafting possibilities on this issue is wide: (1) Restitutio in Integrum

Firstly, it is thinkable that the host State is obliged, in the case of any breaches, to reinstate the status which existed prior to the breach (restitutio in integrum). 102 If, in spite of the agreed freezing or non-application clause, the host State applies subsequent legal amendments to the State contract, the reinstatement of the previous position could, e.g., consist of the host State remedying the actual consequences of the application of the new legislation on the investment project – e.g., by restitution of confiscated property. If the host State, e.g., imposes additional taxes on the investor under a new statute, which were not provided for by a statute at the time of the conclusion of the State contract, the host State must, in the case of such a legal consequences agreement, refund the additional taxes charged including interest thereon. 103 The situation is more complicated in the case of breach of a non-intervention clause. Since, under a non-intervention clause even the passing of a new statute applicable to the investor would be a breach of contract, a reinstatement of the previous situation would then mean that the host State would have to again retrospectively exclude the State contract from the application of the new statute. While the State could with its sovereignty enter into such a contractual obligation it would not, however, be enforceable. Legislation is usually passed in a constitutional legislative process. Because of the sovereignty of every State in this respect, no arbitration tribunal and no executing authority could force the State to pass certain statutes. If the host State, in spite of agreeing to a non-intervention clause, decides on a subsequent legal amendment, this cannot be prevented due to the ‘de facto’ power of the State nor can it be reversed without the cooperation of the State.117 This too is a significant reason why foreign private investors have increasingly tended in modern contractual practice to agree on an economic equilibrium clause which from the outset is directed at financial compensation for the investor rather than the non-intervention clause which is ultimately practically unenforceable. 101

(2) Compensation for Non-Performance 104

If the parties make a legal consequences agreement in a State contract, they will usually agree a contractual penalty (cf. (3) below) or compensation for non-

117 BP Exploration Company (Libya) v. Libya, Arbitration Award, 10 October 1973, (1979) 53 ILR 297 et seq., 354); Abdullah Faruque (n. 1) 334; Peter Cameron (n. 1) 13, 49; Ivars Mēkons (n. 10) 37.

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performance in the event of breach of contract – depending on the negotiating strength of each of the parties. In the latter case, the parties should define in the State contract if possible, the 105 actual method of calculating compensation. In particular, in State contracts to which international law applies exclusively or in addition, considerable legal uncertainty can arise on this issue in a later dispute without the matter having been clarified in the contract b)(2). If the parties can already agree on the legal consequences at the time of the conclusion of the State contract, it should be stated in particular what amount of compensation is payable (e.g. full compensation including loss of profit or only partial compensation). (3) Contractual Penalties

If the negotiating power of the foreign private investor permits, it may be 106 more advantageous for him to oblige the host State in the event of a breach of contract not to pay compensation but rather to pay a contractual penalty. It is, of course, clear that this functions only if and to the extent the law applicable to the State contract at all admits the agreement of a contractual penalty. The agreement of a contractual penalty establishes a certain legal certainty for 107 the foreign private investor with regard to the amount to be paid by the host State in compensation. It relieves the investor of having to prove actual loss, causality between the breach and the loss and – depending on the drafting of the contractual penalty – fault on the part of the host State. In order not to be in a worse position with the agreement of a contractual penalty than a compensation obligation, it should be agreed at the same time that claims for losses exceeding the contractual penalty remain unaffected by the agreement of a contractual penalty. b) Legal Effects in the Absence of Express Agreement on Legal Consequences

State contracts often contain no actual legal consequences clause. This may 108 be because the host State does not accept such provision or the parties deliberately exclude this subject in the contractual negotiations in order not to burden the beginning investment relationship, by discussions of the hypothetical case of a future contractual breach by the host State even prior to the conclusion of the State contract. In the absence of an express legal consequences agreement, the investor is not 109 unprotected against any contractual breach of the host State. The legal consequences of a contractual breach will be addressed in that case under the law applicable to the State contract. The legal consequences derived from the applicable law could, however, be less effective than what the investor imagined and/or may be associated with considerable legal uncertainties regarding the actual quantity of compensation.

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(1) Legal Consequences under National Law

The national law of the host State is often applicable to State contracts under the agreed choice of law clause or according to the applicable conflict of law rules. Host States’ law usually provides a claim for performance of contractual obligations and compensation for non-performance.118 111 No matter how the national law was at the time of the conclusion of the contract: there is a risk for the foreign investor that the host State amends the relevant national law retrospectively to the disadvantage of the investor. If such a retrospective provision is admissible under the constitutional law of the host State, the host State has the long-term effectiveness of a stabilisation clause in its own hands by amending the statutory legal consequences provisions. 112 The investor can anticipate this risk by including the law of the host State on the individual legal consequences of stabilisation clauses and breaches of contract in the substantive application of the stabilisation clause. For the legal consequences of a stabilisation clause then, the statutory provisions at the time of the conclusion or the coming into effect of the State contract apply. 110

(2) Legal Consequences under Non-National Regulations

The situation is more complicated if, instead of or together with the national State law, non-national rules, in particular international law is applicable to the State contract and must be consulted on the question of the legal consequences of the stabilisation clauses. 114 In arbitration practice and in the literature there is today almost unanimity that the investor has no right to restitutio in integrum under international law principles.119 The foreign investor therefore cannot claim under international law that the host State reverses a subsequent statute. There is at most unanimity that the stabilisation clause has at least a financially protective effect under international law and the foreign investor can claim compensation for breaches by the host State.120 The question of how such compensation is to be calculated has been the subject of a lively dispute for many decades. The range of alternatives in arbitration practice and the literature range from ‘prompt, adequate and effect113

118 Günther Jaenicke, ‘Consequences of a Breach of an Investment Agreement Governed by International Law, by General Principles of Law, or by Domestic Law of the Host State’ in Detlev Christian Dicke (ed), Foreign Investment in the Present and a New International Economic Order (University Press, 1987) 177–193, 177 et seq.; Ignaz Seidl-Hohenveldern, ‘L’évaluation des dommages dans les arbitrages transnationaux’ (1987) 23 Annuaire 1–31, 1 et seq. 119 See LIAMCO v. Libya (n. 89) (1981) 20 ILM 1–87, 62 et seq.; BP v. Libya (n. 117) 351 et seq.; Amco Asia v. Indonesia, ICSID Case No. ARB/81/1, Award, 21 November 1984, (1985) 24 ILM 1022 et seq., 1032; LETCO v. Liberia (n. 89) (1987) 26 ILM 647 et seq., 668; Alexander Catranis (n. 13) 26; Christopher Greenwood, ‘State Contracts in International Law – The Libyan Oil Arbitrations’ (1982) 53 BYIL 27–81, 77. 120 So also Kuwait v. AMINOIL (n. 89) 1020; Jiménez de Aréchaga (n. 14) 307; Benjamin Görs, Internationales Investitionsrecht (Verlag Recht und Wirtschaft, 2005) 48 et seq.; Munir Maniruzzaman (n. 5) 93; Abdullah Faruque (n. 1) 325 et seq.

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ive compensation’ (the Hull Doctrine)121 or ‘appropriate compensation’,122 full compensation including loss of profit123 through partial compensation to the view held by many developing countries that every State is entitled to freely determine the amount of compensation and the method of payment.124 Partly it is held that the existence of a stabilisation clause in the State contract and the regarding legitimate expectations of the investor, justify a higher amount of compensation in the case of interventions of the host State in the investment project.125 This is not the place to outline all details of this dispute. It must be said, however, that with the application of non-national law, considerable legal uncertainties with regard to the legal consequences of any breach by the State against the provisions of the State contract arise. In particular, in the case of fully or partially internationalised investment agreements it is therefore advisable to make an explicit agreement in the State contract on the legal consequences of a stabilisation clause. D. ‘Dynamic’ and ‘Flexible’ Clauses 1. The Concept of Dynamic and Flexible Clauses

With the agreement of choice of law and stabilisation clauses the investment 115 protection sought with a State contract is by no means complete. In the course of an investment extending over many years, situations can arise in which a strong bond of the parties to the original agreement is advantageous neither for the host State nor for the foreign investor. This can in particular be the case if the financial, political or social conditions in the host State or on the world market change significantly and destroy the contractual equilibrium in favour of one 121 See Reinhard Patzina, Rechtlicher Schutz ausländischer Privatinvestoren gegen Enteignungsrisiken in Entwicklungsländern (Decker, 1981) 60 et seq.; Martin Schäfer, Entschädigungsstandard und Unternehmensbewertung bei Enteignungen im allgemeinen Völkerrecht (Verlag Recht und Wirtschaft, 1997) 52 et seq. 122 Oscar Schachter, ‘Compensation for expropriation’ (1984) 78 AJIL 121–130, 123 et seq.; John A. Westberg, ‘Compensation in Cases of Expropriation and Nationalization: Awards of the Iran–United States Claims Tribunal’ (1990) 5 ICSID Rev.–FILJ 256–291 258 et seq.; see particularly the decisions of the Iran–US Claims Tribunal in the cases Sedco, Iran–US CTR 10 (1) (1984), 182 et seq., 187; Ebrahimi, (1995) YCA XX 404 et seq., 413; Kuwait v. AMINOIL (n. 89) 1037 and LIAMCO v. Libya (n. 89) (1981) 62 ILR 140 et seq., 210 (‘equitable compensation’). 123 So the arbitrators in the cases AGIP v. Kongo (n. 89) (1982) 21 ILM 726 et seq., 737 et seq.; S.A.R.L. Benvenuti & Bonfant v. Congo, ICSID Case No. ARB/77/2, Award, 15 August 1980, (1982) 21 ILM 740 et seq., 758 et seq.; LETCO v. Liberia (n. 89) (1987) 26 ILM 647 et seq., 670. 124 See in detail Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Springer, 1985) 282 et seq.; Matthias Herdegen, Internationales Wirtschaftsrecht, 235 et seq.; Gudrun Zagel, Auslandsinvestitionen in Lateinamerika (Duncker & Humblot, 1999) 203 et seq.; Peter Cameron (n. 1) 49; Ivars Mēkons (n. 10) 37 et seq. 125 See Kuwait v. AMINOIL (n. 89) (1982) 21 ILM 976 et seq., 1037; Morris Besch (n. 1) 175 et seq.; Abdullah Faruque (n. 1) 330; Lorenzo Cotula (n. 36) 8; Ivars Mēkons (n. 10) 37; Munir Maniruzzaman (n. 5) 164.

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party and to the disadvantage of the other party. Natural catastrophes, civil wars, unexpected changes in raw material prices on the world market or the development of new cost-efficient technologies may be among such conditions. 116 Such circumstances unforeseeable at the time of conclusion of the contract can have the consequence that the contractual provisions of the State contract are no longer acceptable for one of the parties. If the host State is unilaterally disadvantaged by unforeseeable changes of the external circumstances of the investment project, it is unlikely to be advisable for the investor to insist for the remaining duration of the State contract strictly on the agreed provisions.126 Insisting on the original conditions considerably increases the risk of serious confrontation with the host State and of a unilateral intervention of the host State in the contract. Above all in politically unstable States, the government – possibly due to internal political pressure – will attempt, by means of its sovereignty, to compensate its disadvantage directly (e.g. by unilateral contract amendments, contract dissolution, etc.) or indirectly (e.g. by creeping confiscation, harassment, tax increases, etc.).127 117 Therefore, in modern contract practice, it is now usual that in addition to stabilisation clauses, flexible solutions are provided for the abovementioned exceptional cases. The object of these flexible or dynamic clauses is to leave the State contract in the condition which is favourable for both sides until the objectives of the investment project have been achieved both for the host State and for the investor. Conflicts arising and unilateral arbitrary measures of the host State are intended to be prevented from the start. Linked to the agreement of such flexible clauses is the psychological advantage that both parties are less conflict-oriented at the time of the conclusion of the contract but rather accommodating and flexible. Flexible clauses are therefore also a means of creating a harmonious investment environment in the course of the negotiations and securing it for the duration of the investment project.128 In practice, various forms of flexible and dynamic clauses have been developed. Apart from force majeure clauses129 and au126 Klaus Peter Berger, ‘Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators’ (2003) 36 Vand. J. Transnat’l L. 1347–1380, 1348 et seq.; Stefan Kröll (n. 106) 425 et seq.; Nagla Nassar (n. 41) 170; Thomas Wälde and Abba Kolo (n. 105) 8. 127 Muthucumaraswamy Sornarajah (n. 26) 106 et seq.; Muthucumaraswamy Sornarajah (n. 13) 214 et seq.; William A. Stoever, Renegotiation in International Business Transactions: The process of dispute-resolution between multinational investors and host societies (Lexington Books, 1981) 315; Thomas Wälde (n. 33) 279. 128 Samuel K. B. Asante, ‘Stability of Contractual Relations in the Transnational Investment Process’ (1979) 28 ICLQ 401–423, 407; Piero Bernardini, ‘The Renegotiation of the Investment contract’ (1998) 13 (2) ICSID Rev.–FILJ 411–425, 416 et seq.; Georges R. Delaume (n. 26) 3; John Y. Gotanda, ‘Renegotiation and Adaptation Clauses in Investment Contracts, Revisited.’ (2003) 36 Vand. J. Transnat’l L. 1461–1473, 1469; Morris Besch (n. 1) 178 et seq.; Matthias Herdegen (n. 5) 28 et seq.; Hanno Merkt (n. 16) 28; Nagla Nassar (n. 41) 237; Jeswald J. Salacuse, ‘Renegotiating International Project Agreements’ (2001) 24 Fordham Int’l L. J. 1317–1370, 1318; Thomas Wälde (n. 33) 267 et seq.; Thomas Wälde (n. 197) 101. 129 See Michael A. G. Bunter, The promotion and licensing of petroleum prospective acreage (Kluwer Law International, 2002) 306 et seq.; Norbert Horn, ‘Standard Clauses on Contract

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tomatic adjustment clauses130 the most frequently encountered clauses in State contracts are renegotiation clauses. 2. Renegotiation Clauses

Renegotiation clauses are clauses which oblige the parties to the State con- 118 tract to negotiate after a certain time or on the happening of significant changes on an amendment to the contract or a part thereof.131 The purpose of the renegotiation is to grant the parties the opportunity to react flexibly to the changed circumstances and to re-establish the contractual equilibrium which has been destroyed. Renegotiation clauses can be drafted in many different forms, particularly 119 with regard to the definition of the trigger events requiring the renegotiation (a), the extent of the renegotiation obligation (b), the criteria applicable to the renegotiation (c) and the legal consequences of the non-performance of the contractual renegotiation obligations (d). a) Stipulation of the Trigger Events for Renegotiation

The specification of the events triggering the renegotiation (‘trigger events’) 120 is of a special importance within the negotiation of the renegotiation clause. The objective of the foreign private investor should be on the one hand to achieve the widest possible application for the renegotiation clause, and on the other hand to define the trigger events so specifically that in the case of a dispute, no interpretation or subsumption difficulties arise and the right to renegotiation can ultimately be enforced against the host State. Not all renegotiation clauses encountered in practice ensure the achievement 121 of these objectives. This applies in particular for renegotiation clauses which are too general (1) and detailed renegotiation clauses which excessively limit the application of the renegotiation clause (2). In practice, clauses have proven of value which either in addition to the detailed agreement of individual trigger events include also a backup clause or which provide a general renegotiation obligation with a non-exclusive list of actual trigger events (3).

Adaptation in International Commerce’ in Norbert Horn (ed), Adaptation and Renegotiation of Contracts in International Trade and Finance (Kluwer, 1985) 111–140, 131; Wolfgang Peter (n. 4) 235; Heleni Theodorou (n. 4) 418. 130 On the different types of adjustment clauses see Martin Bartels (n. 11) 34 et seq.; Paul Fresle, ‘Variation and Escalation Clauses’ in Norbert Horn (ed), Adaptation and Renegotiation of Contracts in International Trade and Finance (Kluwer, 1985) 149 et seq.; Norbert Horn (n. 129) 122 et seq. 131 John Gotanda (n. 128) 1462; Norbert Horn (n. 129) 129; Andreas Nelle, Neuverhandlungspflichten – Neuverhandlungen zur Vertragsanpassung und Vertragsergänzung als Gegenstand von Pflichten und Obliegenheiten (Beck, 1993) 65.

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(1) Renegotiation Clauses without Specific Trigger Events 122

Particularly in older State contracts there are renegotiation clauses without any trigger events being defined. In Article 42.1 of the Concession Agreement between Papua New Guinea and the Dampier Mining Company Limited of 22 March 1976 it is, e.g., provided: The parties may from time to time by agreement in writing add to, substitute for, cancel or vary all or any of the provisions of this Agreement (…).132

123

Such clauses are not an appropriate basis for enforceable renegotiation rights of the foreign private investor. They contain no clearly defined obligation of the parties to renegotiate. They manifest ultimately only the good will of the parties to renegotiate and merely clarify that renegotiation of the contract is possible if both parties agree thereon. An agreed renegotiation of the contract is, however, possible at all times even without such clauses. The above quoted clause may help as an argument for renegotiation efforts of one party if the other party blocks an agreed renegotiation. A renegotiation, however, would not be enforceable in court on the basis of this clause.133 (2) Renegotiation Clauses with General Trigger Events

124

Likewise very rare in practice are renegotiation clauses which only generally refer to trigger events. In Article 47(b) of the 1974 Oil Exploration Agreement between Ghana and Shell Exploration and Production Company of Ghana Limited it was agreed: If during the term of this Agreement there should occur such changes in the financial and economic circumstances relating to the petroleum industry, operating conditions in Ghana and marketing conditions generally as to materially affect the fundamental economic and financial basis of this Agreement, then the provisions of this Agreement may be reviewed or renegotiated (…).134

125

On the one hand such clauses have the advantage that they, due to their general approach, cover a broad scope of trigger events and therefore do not limit the right of negotiation to narrowly defined risks. On the other hand such clauses contain no precise and concrete trigger events for a renegotiation. Interpretation difficulties on the question of what amendments in fact affect the ‘fundamental economic and financial basis’ of the agreement and which do not, are preprogrammed. (3) Detailed list of Trigger Events

126

In many renegotiation clauses the trigger events are precisely defined. For the foreign private investor and the host State, many factors arise which may justify renegotiation.135 Common in practice is, e.g., linking the renegotiation to a cer132 133 134 135

132

Cited in Nagla Nassar (n. 41) 175 et seq. See Martin Bartels (n. 11) 59; Nagla Nassar (n. 41) 176 et seq. Cited in Samuel Asante (n. 128) 417. Piero Bernardini (n. 41) 104.

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tain time after the start of production (e.g. five, seven, or ten years),136 the time at which the investor has recovered a certain proportion of its costs,137 changes to world market prices, change of ownership or control within the foreign investor, tax increases, new international investment treaties or changed investment conditions in another country comparable to the present State or unexpectedly high profits of the investor. It is also thinkable to define – in the context of an economic equilibrium clause (see C.2.d) above) – new national legislation or regulations of the host State which adversely affect the interest of the foreign investor, as trigger events.138 A subcategory of renegotiation clauses is formed by the hardship clauses, in 127 which renegotiation of the contract is prescribed if during the time of the contract events occur which render the performance for one of the parties financially unreasonable.139 Such unreasonableness will usually only be assumed if, in the course of the investment, events occur which were unforeseeable at the time of the conclusion of the contract and which so fundamentally change the contractual equilibrium that the financial losses of one of the parties considerably exceed what is reasonable and the affected party had not accepted this risk in the contract.140 In comparison to general renegotiation clauses, such detailed renegotiation 128 clauses have the advantage that they specify the trigger events and therefore minimise any interpretation or subsumption difficulties from the outset. A conclusive listing of trigger events, however, does have the disadvantage 129 that the right of renegotiation is limited to very specific and more or less narrowly defined risks. Circumstances not considered by the parties at the conclusion of the contract or those not foreseeable at the time of the conclusion of the contract are therefore frequently not covered. Because of the conclusive listing of trigger events, it will then be very difficult for the foreign private investor to argue, that even other events not included establish a renegotiation obligation. In 136 E.g. Art. 31.2 of the Model Mineral Development Agreement of Liberia (November 2008): ‘Five Year Review: This Agreement shall be subject to periodic review once every five (5) years after the date of the start of Production for the purpose of good faith discussions to effect such modifications to this Agreement as may be necessary or desirable in the light of any substantial changes in circumstances which may have occurred during the previous five years.’, available at http://www.molme.gov.lr/doc/MDA.pdf. 137 See e.g. Art. Q of the State Contract between Haiti und HIDECA (1976): ‘The contract will be open to renegotiation on the later of the two dates: (1) Seven years after the year of the contractor has been able to recover its costs out of the 40% cost recovery position of revenues, or (2) Ten years after the first commercial production.’ (emphasis added), cited in Wolfgang Peter (n. 4) 243. 138 See the second example clause cited under C.2.d) above. 139 Karl-Heinz Böckstiegel, ‘Hardship, Force Majeure and Special Risks Clauses in International Contracts’ in Norbert Horn (ed), Adaptation and Renegotiation of Contracts in International Trade and Finance (Kluwer, 1985) 159–169, 159; Ivars Mēkons (n. 10) 42 et seq. 140 See Art. 6.2.2. (Definition of Hardship) of the UNIDROIT Principles of International Commercial Contracts, in UNIDROIT (ed), Principles of International Commercial Contracts (Unidroit, 1994) 146 et seq. See also Clive M. Schmitthoff, ‘Hardship and Intervener Clauses’ (1980) 17 J. Bus. L. 82–91, 85.

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international business, it can be assumed that the parties with their assumed professional competence would have provided for possible risks in the renegotiation clause if they had intended to do so.141 (4) Renegotiation Clauses with Backup Provision

In order on the one hand not to excessively limit renegotiation clauses from the outset and on the other hand to ensure that concrete trigger events particularly important for the foreign private investor are covered by the renegotiation clause, it is advisable for the foreign private investor to combine a general clause with a detailed list of individual trigger events. 131 In practice, this can be achieved by two techniques: firstly, it is possible to agree to a general renegotiation clause and to add examples in a non-exclusive list of individual important trigger events, which in the view of the parties should be subsumed under the general renegotiation clause. In reverse, it is equally possible to add to the list of individual specific trigger events a backup clause granting the investor the possibility of subsuming later events not considered or not foreseeable at the time of the conclusion of the contract under the renegotiation clause. 130

b) Stipulation of the Scope of Renegotiation 132

A further important issue in the negotiation of renegotiation clauses is the question of the extent to which the State contract is subject to renegotiation on the happening of defined trigger events. Renegotiation clauses which provide for the renegotiation of the entire State contract on the happening of trigger events are thinkable. In practice, however, renegotiation clauses which contain restrictions on this issue are common. (1) Renegotiation Clauses without Restrictions

If a renegotiation clause contains no restrictions on the scope of the renegotiation, the party affected by a trigger event is entitled to renegotiate the entire State contract. 134 Such an unrestricted renegotiation right has the advantage for the affected party that it offers more flexibility in the renegotiation of the State contract. The parties need not on the conclusion of the contract specify which actual parts of the contract are subject to renegotiation and which are not. 133

(2) Partial Renegotiation Obligation 135

In State contracts renegotiation clauses are often found which admit only renegotiation of certain key points in the contract. The parties restrict themselves from the outset to renegotiation of parts of the contract which in their view have 141 See also Klaus Peter Berger, The Creeping Codification of the Lex Mercatoria (Kluwer Law International, 1999) 301; Klaus Peter Berger (n. 126) 1355, 1363.

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special significance for the contractual equilibrium of the parties. Typical of such clauses are those which provide only further renegotiation of the tax and financial provisions.142 Likewise thinkable is, e.g., the restriction of renegotiation to the price, employment issues or procedure provisions.143 Even the subsequent correction of an adjustment or renegotiation clause itself 136 can be the subject of a renegotiation clause. This is appropriate, e.g., in the event that an adjustment clause is unenforceable due to changed circumstances.144 c) Objective of Renegotiation

Furthermore renegotiation clauses in general determine the objective and 137 therefore the extent of the renegotiation. The parties of the State contract can refer to subjective standards, e.g. with renegotiation clauses which aim at ‘removing the unfairness’ or ‘adopting an equitable revision’. Thinkable are also objective standards which protect both parties (e.g. ‘restoring the original contractual equilibrium’) or only the private party (e.g. by making sure that the investor will obtain ‘the economic results anticipated under the terms and conditions of this Agreement’).145 Sometimes renegotiation clauses expressly provide that contract changes shall have no retroactive effect.146 d) Obligations of the Parties and the Legal Effects of Renegotiation Clauses

Few State contracts contain actual provisions as to the legal obligations for 138 the parties linked to such a renegotiation clause and the legal consequences in the event of breach of those obligations. However, even general renegotiation clauses without explicit provisions on this issue create certain obligations of the parties and link certain legal consequences to the breach of these obligations. (1) General Negotiation Obligations of the Parties

With the agreement of a renegotiation clause, the parties to the State contract 139 undertake at least to cooperate in the renegotiation in an efficient manner, i.e. aimed at successful negotiation. It is therefore to be expected from the parties that they seriously endeavour over a reasonable period to reach agreement, approach the negotiations flexibly, take appropriate account of the interests of the other party, make concrete and reasonable proposals and, in the case of difficult and complex negotiations, if necessary, obtain expert advice.147 The principle of fairness and of good faith immanent in the renegotiation clause, results in the 142 See e.g. Art. 6 of the ‘Rochelios’ Bauxite (suppl.) Agreement between Haiti and Reynolds Mining Corporation of 14 April 1971: ‘The State and the Concessionaire agree to have new negotiations in order to establish new minimum payments covering the corporate tax and the royalties in 1974 (…).’, cited in Wolfgang Peter (n. 4) 245. 143 See the overview in Martin Bartels (n. 11) 58 et seq.; Wolfgang Peter (n. 4) 244 et seq.; Thomas Wälde (n. 33) 283 et seq. 144 Norbert Horn, ‘Neuverhandlungspflicht’ (1981) 181 AcP 255–288, 258. 145 Piero Bernardini (n. 41) 105 with corresponding cited model clauses. 146 See Piero Bernardini (n. 41) 104 with an example clause.

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obligation of the parties to provide each other with information within reason which is relevant to the amendment, not to delay renegotiation in bad faith and not to place the other party unnecessarily before a fait accompli.148 These obligations apply to the parties mutually. If one party makes no effort to advance the negotiations, the requirement of the other party to negotiate is reduced correspondingly.149 140 In State contracts, the general principle of fairness and of good faith is sometimes expressly recorded in the renegotiation clause. In Article 34.12 of the model Exploration and Production Sharing Agreement of Qatar of 1994 it is, e.g., stated: Both Parties shall enter into negotiations in good faith in order to reach an equitable solution that maintains the economic equilibrium of this Agreement.150

141

The obligations resulting from the general principle of good faith in the renegotiation clause can of course also be specified by listing them. In order not to unnecessarily limit the obligations, the list should not, however, be conclusive, but only agreed as examples of the exercise of the principle of good faith. (2) Right to Agreement?

In the literature, the question of whether over and above the abovementioned general negotiation obligations the parties are subject to an enforceable obligation to in fact agree is extremely controversial. 143 Such a right to agreement is affirmed by some opinions, since otherwise a renegotiation clause would be futile. The party favoured by the changed circumstances would have it within its control to prevent any amendment by negotiating, but ultimately not agreeing to an amendment. A right to agreement would at least arise if the amendment criteria and the objective of the amendment are adequately specified.151 144 The majority opinion in the literature, however, rejects such a right to agreement.152 The actual content of a right to agreement simply cannot be specified. A renegotiation clause – unlike, e.g., automatic amendment clauses – does not 142

147 See in detail Klaus Peter Berger, Private Dispute Resolution in International Business: Negotiation, Mediation, Arbitration. Vol. II: Handbook, (Kluwer Law International, 2009), mn. 2–77 et seq.; Stefan Kröll (n. 106) 446 et seq.; Andreas Nelle (n. 131) 272 et seq.; Wolfgang Peter (n. 4) 246 et seq. See also Kuwait v. AMINOIL (n. 89) (1982) 21 ILM 976 et seq., 1014; Wintershall AG et. al. v. Qatar, Award, 31 May 1988, (1989) 28 ILM 795 et seq., 814 et seq. 148 Norbert Horn (n. 144) 284; Andreas Nelle (n. 131) 274 et seq., 286 et seq.; Ernst Steindorff, ‘Vorvertrag zur Vertragsänderung’ (1983) BB 1127–1131, 1130. 149 Klaus Peter Berger, ‘Internationale Investitionsverträge und Schiedsgerichtsbarkeit: Äquivalenzstörungen, Neuverhandlungsklauseln und Vertragsanpassung’ (2003) 102 ZVglRWiss 1–32, 18 et seq.; Stefan Kröll (n. 106) 447. 150 Cited in Piero Bernardini (n. 128) 416. Further examples cited in Nagla Nassar (n. 41) 178; Wolfgang Peter (n. 4) 245. 151 See e.g. Norbert Horn (n. 144) 283 et seq.; Stefan Kröll (n. 106) 154; Gino Lörcher, ‘Die Anpassung langfristiger Verträge an veränderte Umstände’ (1996) DB 1269–1273, 1270 et seq.

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provide for concrete results and concrete amendment alternatives. In fact, the result of a renegotiation is always open.153 In view of the innumerable contractual formulation possibilities, a court or arbitration decision on a new wording of the contract and a corresponding enforcement against the contractual partner are practically difficult. Even if a specific new wording of the contract could be enforced, such a uni- 145 lateral imposition of a contractual amendment would not correspond to the purpose and meaning of the renegotiation clause but, in fact, contradict it. The objective of a renegotiation clause is to secure harmonious continuation of the investment up to the successful conclusion of the investment project by means of agreed amendment of the contract appropriate to changed circumstances. This objective cannot, however, be achieved if amendment of the contract is imposed on one of the parties against its will.154 This would then not be an agreed solution which could be the basis for further harmonious cooperation. For this reason it is not necessarily advisable to include such a right to agree- 146 ment in the renegotiation clause. Such a right can hardly be enforced and would not be appropriate to sustainably resolve conflicts between the parties. Without such a right to agreement, the renegotiation clause is not superfluous. It obliges the parties to conduct negotiations according to the above described criteria and therefore establishes contractual obligations primarily procedurally rather than success-oriented.155 Since – unless the parties agree otherwise – there is no obligation on the par- 147 ties to reach agreement, the failure of renegotiation does not, in principle, result in any penalty for the parties. The opposite would be the case only if the failure of the negotiations could be proved to be based on a breach by one party of the general renegotiation obligation derived from the principle of good faith as described. This is, e.g., the case if one party delays the renegotiation without good reason, deliberately hinders it or even deceives or threatens the other.156 However, in litigation against the party blocking the renegotiation, the causality of

152 Accordingly e.g. Klaus Peter Berger (n. 147) mn. 2–81; Klaus Peter Berger (n. 126) 1367 et seq.; Piero Bernardini (n. 128) 419; Nagla Nassar (n. 41) 180 et seq.; Andreas Nelle (n. 131) 17; Wolfgang Peter (n. 4) 247; Heleni Theodorou (n. 4) 419; Thomas Wälde and Abba Kolo (n. 105) 6; Ivars Mēkons (n. 10) 31; Piero Bernardini (n. 41) 105. See also Kuwait v. AMINOIL (n. 89) (1982) 21 ILM 976 et seq., 1004: ‘An obligation to negotiate is not an obligation to agree.’; Wintershall v. Qatar (n. 147) 1989 ILM 795 et seq., 814: ‘(…) it is clear that such a duty [to negotiate] do not include an obligation (…) to reach agreement (…).’ 153 Klaus Peter Berger, ‘Power of arbitrators to fill gaps and revise contracts to make sense’ in Ian F. Fletcher, Loukas A. Mistelis and M. Cremona (eds), Foundations and Perspectives of International Trade Law (Sweet & Maxwell, 2001) 269–285, 281; Klaus Peter Berger (n. 126) 1368. 154 Morris Besch (n. 1) 188. 155 Andreas Nelle (n. 131) 17; Klaus Peter Berger (n. 147) mn. 2–81; Klaus Peter Berger (n. 126) 1368. 156 Klaus Peter Berger (n. 149) 21; Norbert Horn (n. 144) 283, 287; Nagla Nassar (n. 41) 182; Wolfgang Peter (n. 4) 247.

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the breach for the failure to reach agreement as well as the culpability therefore will often be difficult to prove.157 148 A breach causal for non-agreement results in a claim by the party affected for compensation. This claim is not, however, for damages for non-performance. Therefore the affected party will not be so placed as if agreement had been reached.158 There is no obligation between the parties to agree so that it cannot be assumed that with the performance of the general negotiation obligation agreement would have come about. In addition, an objective assessment of the results of the renegotiation is usually excluded for the reasons stated. 149 The claim of the affected party for compensation is usually limited to the loss arising due to the postponement of amendment and for reimbursement of costs incurred in confidence that the negotiations would be successful and which therefore were expended in vain due to the breach of the other party.159 150 In view of the difficulties to exactly quantify the loss in the case of such a breach, it may be advisable to include an amount for liquidated damages in the renegotiation clause.160 (3) Amendment of Contract through Arbitration

The fact that a renegotiation – unless otherwise agreed – establishes no obligation to agree and the disadvantaged party, even in the case of breach of the general negotiation obligation, is not placed in a position as if agreement had been reached, there is considerable doubt as to the effectiveness of the renegotiation clause. In cases in which the parties cannot agree on a contract amendment, there is the danger that the renegotiation clause is reduced to the status of a ‘toothless tiger’. 152 Against this background, foreign investors usually endeavour to include a mechanism in the State contract which provides practical solutions for the case of the failure to reach agreement. For example, an agreement is thinkable by which, in the event of failure of the renegotiation, a neutral third party, e.g. an arbitration tribunal, decides on the amendment of the contract. In the Sierra Leone Tonkilli–Iron Ore Agreement between Sierra Leone and Sierra Leone Development Company Limited e.g. the following clause is agreed: 151

If either the Government or the Company shall request a revision under paragraphs (a) or (b) of this Clause and the two parties shall be unable to agree as and to the extent of revision, the question shall be submitted to arbitration.161

157 Klaus Peter Berger (n. 126) 1369; Pascal Durand-Barthez, ‘La durée des accords de coopération et les clauses gouvernant leur adaptation’ (1984) DPCI 357 et seq., 372. 158 Andreas Nelle (n. 131) 328. 159 Norbert Horn (n. 144) 287; Andreas Nelle (n. 131) 322, 328. 160 Klaus Peter Berger (n. 126) 1369; Norbert Horn (n. 144) 287. 161 Cited in David N. Smith and Louis T. Jr. Wells, Negotiating Third World Mineral Agreements: Promises as Prologue (Ballinger, 1975) 123 (emphasis added).

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Such delegation of the contractual amendment to a third party must, however, 153 be carefully considered. A State contract is usually the result of prolonged negotiations. It usually constitutes a compromise between the various party interests with a balance of gains and risks. It is usually unacceptable for the parties to place the State contract and therefore the further fate of the investment project completely in the hands of a third party on whom the parties have no direct influence. Against this background, such express transfer of jurisdiction to third parties or to an arbitration tribunal is only seldom encountered in investment agreements. If the parties nevertheless decide for such a method, it is advisable to precisely define the events in which the arbitration tribunal is called upon and to provide the arbitration tribunal with clear guidelines for its decision.162 If there is no express transfer of jurisdiction in this sense, a contract amend- 154 ment by a third party is excluded. A general arbitration clause does not contain any such transfer of jurisdiction to an arbitration tribunal.163 In the case of an express clause in the above sense, the actual amendment of 155 the State contract by the arbitration tribunal is also only admissible if, at the same time, the law applicable to the State contract permits amendments by third parties164 and the arbitrator is procedurally entitled under the applicable law to make such a decision.165 e) Combination of Dynamic Clauses and Stabilisation Clauses

In contractual practice, it is quite usual to combine the abovementioned dy- 156 namic clauses with stabilisation clauses. The agreement of static stabilisation clauses on the one hand and dynamic clauses on the other are not mutually exclusive.166 By agreeing to an economic equilibrium clause with a duty to renegotiate (see C.2.d) above) the parties can even combine stabilisation clause and dynamic clause in one clause. But also outside the scope of such direct combinations stabilisation clauses and dynamic clauses can complement each other excellently in their protective effect: due to the agreed dynamic clause there is an incentive for the host State to refrain from legislative intervention in the contract in the event of changed circumstances because the changed circumstances have 162 Klaus Peter Berger (n. 153) 276; Piero Bernardini (n. 41) 106 et seq.; Piero Bernardini (n. 128) 421; John Gotanda (n. 128) 1466. 163 Piero Bernardini (n. 128) 421; Klaus Peter Berger (n. 149) 30 et seq.; Stefan Kröll (n. 106) 103; Thomas Markert (n. 11) 184; Heleni Theodorou (n. 4) 421; Kuwait v. AMINOIL (n. 89) (1982) ILM 976 et seq., 1016. 164 See Klaus Peter Berger (n. 153) 280; Piero Bernardini (n. 41) 107 et seq. 165 Piero Bernardini (n. 41) 107. See on the competences of ICSID arbitrators to adapt contractual terms Piero Bernardini (n. 41) 109 et seq.; Ivars Mēkons (n. 10) 32. 166 Morris Besch (n. 1) 212 et seq.; Piero Bernardini (n. 41) 98 et seq.; Lorenzo Cotula, Investment contracts and sustainable development: How to make contracts for fairer and more sustainable natural resource investments (International Institute for Environment and Developments, 2010), 73; John Gotanda (n. 128) 1469; Jeswald W. Salacuse, ‘Renegotiating International Business Transactions: The Continuing Struggle of Life Against Form’ (2001) 35 Int’l Law. 1507–1588, 1513 et seq.; Thomas Wälde (n. 97) 167; other view: Muthucumaraswamy Sornarajah (n. 26) 108, fn. 49.

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already been taken into account in the agreed renegotiation or adjustment.167 On the contrary, the existence of a stabilisation clause can also be of use in the renegotiation process. If the host State, based on the stabilisation clause, is not in a position to make an amendment to its national law unilaterally interfering in the contract or if it is liable for financial compensation in that event, the host State may be rather willing to agree to an amicable adjustment of the contract.168 157 Due to this complementary effect between stabilisation clauses and dynamic clauses, in practice for a long time already a combination of both types of clauses has been quite usual.169 E. Dispute Resolution Clauses

Choice of law, stabilisation and dynamic clauses are intended to prevent that the host State unilaterally intervenes in the investment project in a manner unfavourable to the investor. In the event that the host State cannot be prevented by contractual agreements and penalty clauses from taking arbitrary measures in a breach of contract, an additional contractual system is required to ensure the effective enforcement of compensation claims of the investor. For this purpose, dispute resolution clauses are usually agreed to in modern State contracts. These clauses provide the form in which disputes between the investor and a host State in connection with the investment project are to be resolved. In this instance the dispute resolution clauses have a dual function: firstly, they should provide effective legal protection. Secondly, they should prevent disputes and provide mechanisms preventing an escalation of disputes from the outset. 159 Modern State contracts usually contain arbitration clauses (1.) and/or alternative dispute resolution (ADR) clauses (2.) which are agreed to in practice often in combination with each other (3.). 158

1. Arbitration Clauses 160

Modern State contracts usually contain arbitration clauses. These are clauses providing for dispute resolution by an international arbitration tribunal and thereby simultaneously exclude decisions of a State court on the same matter. a) Advantages of Arbitration Compared to National Courts

161

Arbitration clauses are not specific to State contracts. In fact, they are also quite usual in international contracts between purely private persons. The advantages attributed to arbitration in comparison to national courts are, however, par167 John Gotanda (n. 128) 1469; Jeswald Salacuse (n. 166) 1513 et seq.; Thomas Wälde (n. 97) 167. 168 Morris Besch (n. 1) 213 et seq. 169 See e.g. Art. 17 of the AMINOIL Concession Agreement between Aminoil and Kuwait and the Renegotiation Clause agreed in Art. 9 of the Supplement Agreement of 1973, cited in (1982) 21 ILM 976 et seq., 992.

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ticularly relevant in the case of disputes concerning State contracts: by agreeing to an arbitration clause, it is possible for a foreign private investor to exclude the jurisdiction of national courts of the host State for future investment disputes. Instead of the national courts, an arbitration tribunal selected by the parties themselves, and thereby a neutral forum, decides the dispute.170 In this manner, the investor can prevent that the host State itself decides on the interpretation and performance of the State contract and thereby de facto would be the judge in its own case. Above all, in host States in which doubt about the impartiality of the State courts and an effective legal system exists, the creation of a private arbitration tribunal by the parties is an inestimable advantage.171 The right of the parties to select themselves the arbitrators usually contained 162 in an arbitration clause, has an even greater advantage in the case of investment disputes. Because of the complexity of an investment project and the extremely complex and disputed investment law, the demands of such a case often exceed the capacity of local courts, which often lack the competence, the experience and the means to satisfactorily resolve such international investment disputes.172 By agreeing to an arbitration clause, the parties can select specialists in investment law or specialists in the actual industry concerned in order to ensure an adequately expert decision. In addition, arbitration provides both parties with a considerably higher de- 163 gree of secrecy and/or confidentiality than national court proceedings. The arbitration is neither public nor are its decisions published unless otherwise agreed by the parties. The confidentiality of the proceedings benefits both parties. For the host State, it is of particular importance when political or financial questions or even national security issues are concerned. But the private foreign investor, too, will also be very reluctant to reveal technical, contractual and strategic details of its investment project in public.173 Both the host State and the investor must, however, be aware that this strict 164 confidentiality of the arbitration is not always greeted favourably by the public when major investment projects are involved. Above all, opponents of globalisation and non-governmental organisations (NGOs) fear that the apparently allpowerful multinational companies attempt to enforce their interests by means of

170 Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) mn. 1–23 et seq.; Anna K. Myrvang, ‘An Illustration of how traditional arbitration is being changed by modern international investment law: Investor-State Arbitration under NAFTA Chapter XI and the Energy Charter Treaty’ (2003) 13 (11) CEPMLP Internet J. 6. 171 See Amazu Asouzu (n. 2) 34 et seq.; Jean-Flavien Lalive (n. 2) 64; Jan Paulsson (n. 2) 44 et seq. and the authors in n. 170. 172 Adebayo Adaralegbe, ‘Methods of Dispute Settlement for State Contracts in the Nigerian Petroleum Sector’ (2003) 69 (4) J. Chartered Inst. Arb. 265–271, 267; Morris Besch (n. 1) 14; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 8. 173 Hans Bagner, ‘Confidentiality – A Fundamental Principle in International Commercial Arbitration’ (2001) 18 (2) J. Int’l Arb. 243–249, 243 et seq.; Richard Garnett, Henry Gabriel, Jeff Waincymer and Jeff Epstein, A Practical Guide to International Commercial Arbitration (Oceana, 2000) 14; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 8.

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a secret and private arbitration against governments without any public and democratic discussion and without any political resistance in order to circumvent delicate and fundamental questions of, e.g., environmental protection, public health or security.174 Moreover the taxpayers, too, wish to be informed why the State may be obliged to pay several million dollars in compensation to a foreign investor. The foreign private investor is also subject to similar information demands from shareholders, insurers and lenders.175 This public discussion has not yet, however, led to a serious restriction of the principle of confidentiality in international arbitration.176 165 A further advantage of arbitration are the considerably better chances of enforcement for the private investor. An international arbitration award can be much more readily enforced against a host State than a national court judgement. The basis for the execution of arbitration awards against host States is the New York Convention with 147 member States as of September 2011, in which the member States undertake to enforce arbitration agreements and arbitration awards.177 b) Arbitration as binding on the Host State 166

Both in international arbitration and litigation practice178 as well as in international literature179 it is recognised that host States are bound to an arbitration agreement. Particularly, the host States cannot release themselves from the con174 See Jeffery Atik, ‘Legitimacy, Transparency and NGO Participation in the NAFTA Chapter 11 Process’ in Todd Weiler (ed), NAFTA – Investment Law and Arbitration: Past Issues, Current Practice, Future Prospects (Transnational, 2004), 135–150, 149 et seq.; Bernardo M. Cremades and David J. A. Cairns, ‘The Brave New World of Global Arbitration’ (2002) 3 (2) JWI 173–209, 179; Susan D. Franck, ‘The legitimacy crisis in Investment Treaty Arbitration: Privatizing public international law through inconsistent decisions’ (2005) 73 Fordham L. Rev. 1521–1625, 1544, fn. 87 with further references. 175 Nigel Blackaby, ‘Public Interest and Investment Treaty Arbitration’ in Gabrielle KaufmannKohler and Blaise Stucki (ed), Investment Treaties and Arbitration. ASA Swiss Arbitration Association Conference in Zürich of January 25, 2002 (Swiss Arbitration Association, 2002) 146 et seq. 176 Morris Besch (n. 1) 17 et seq.; Nigel Blackaby (n. 175) 146 et seq. 177 See on the recognition and enforcement of arbitration awards in detail Richard Garnett, Henry Gabriel, Jeff Waincymer and Jeff Epstein (n. 173) 101 et seq.; Georgios Petrochilos, Procedural Law in International Arbitration (Oxford 2004) mn. 7.01. et seq. 178 See e.g. Société KFTIC v. Société Icori Estero et autres, Cour d’Appel de Paris, Decision, 13 June 1996, (1997) Rev. Arb. 251; Gatoil International Inc. v. National Iranian Oil Company, High Court of Justice, Queen’s Bench Division, Decision, 21 Dezember 1988, (1992) XVII YCA 587 et seq., 591 et seq.; (1990) ICC Award No. 6162, (1992) XVII YCA 153 et seq., 158 et seq.; (1994) ICC Award No. 7263, (1997) XXII YCA 92, 100. 179 See inter alia Karl-Heinz Böckstiegel, Arbitration and State Enterprises – A Survey on National and International Law and Practice (Kluwer Law and Taxation Publishing, 1984) 25 et seq.; Georges R. Delaume, ‘Reflections on the Effectiveness of International Arbitral Awards’ (1995) 12 (1) J. Int’l Arb. 5–19, 14 et seq.; Yves Derains, ‘Transnational Law in ICC Arbitration’ in Klaus Peter Berger (ed), The Practice of Transnational Law (Kluwer Law International, 2001) 43–51, 50 et seq.; Jan Paulsson, ‘May a State invoke its Internal Law to Repudiate Consent to International Commercial Arbitration?’ (1986) 2 Arb. Int’l 90– 103, 97; Wolfgang Peter (n. 4) 273.

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tractual bond by arguing that the host State is in fact not entitled under its own law to conclude an arbitration agreement with a foreign private investor. The host State would breach the principle of venire contra factum proprium if it initially, in spite of internal statutory restrictions, concluded an arbitration agreement with a foreign private investor who acts in good faith and then later when conflict arises invoked the invalidity of the arbitration clause.180 Also the objection of some host States that they are not bound to arbitration 167 agreements because of their sovereignty is not usually successful before arbitration tribunals since it breaches the generally accepted principle of pacta sunt servanda and the State would also behave contradictorily in the meaning of venire contra factum proprium if it first freely – as an expression of its sovereignty – concludes an arbitration agreement with a private investor and then, when conflict arises, due to its sovereignty no longer feels itself bound by the agreement.181 c) Ad Hoc Arbitration Clauses

The parties have a wide range of possibilities when drafting the arbitration 168 clause. A first major decision of the parties is to decide in favour of an institutional arbitration (see below d) or an ad hoc arbitration tribunal. Ad hoc arbitration tribunals are tribunals organised for the particular case not bound to any institution. The proceedings are not governed by the rules of any institution. The formation of an ad hoc arbitration tribunal has the advantage for the par- 169 ties that they can frame their own rules flexibly not bound by institutional arbitration rules. In addition, no extra charge for the administration of the arbitration by an arbitration institution is incurred.182 These aspects, which on first sight appear to be advantageous, can rapidly 170 turn out to have considerable disadvantages. If the parties do not resort to institutional rules of arbitration which have been tested in practice and are generally accepted, they must themselves draft the rules of arbitration – unless they wish 180 Hilmar Raeschke-Kessler and Klaus Peter Berger, Recht und Praxis des Schiedsverfahrens, (RWS-Verlag, 2006) 53; Stephen M. Schwebel, International Arbitration: Three Salient Problems (Cambridge University Press, 1987) 68 et seq.; Jean-Pierre Regli (n. 9) 43. See also Art. 5 of the Santiago de Compostela Resolution of the Institut de Droit International of 1989, cited in (1991) XVI YCA 233 et seq., 238 and the express legal provision under Art. 177(2) of the Swiss Federal Code on Private International Law, Art. 2(2) of the new Spanish Arbitration Law, cited in (2004) 43 ILM 480 et seq., 493; Art. 2 of the Organization for the Harmonization of Business Law in Africa (OHADA) Uniform Act on Arbitration (1999), which serves many African States as model law, see on this Amazu Asouzu (n. 2) 148 et seq. 181 Société de Grands Travaux de Marseille (S.G.T.M.) v. East Pakistan Industrial Development Corporation (E.P.I.D.C.), ICC Award No. 1803/1972, excerpts cited in (1980) V YCA, 179 et seq.; BP v. Libya (n. 117), (1979) 53 ILR 297 et seq.; TEXACO v. Libya (n. 89) (1978) 27 ILM 1 et seq.; LIAMCO v. Libya (n. 89) (1981) 20 ILM 1 et seq.; Alcoa Minerals of Jamaica, Inc. v. Jamaica, ICSID Case No. ARB/74/2, Decision on Jurisdiction and Competence, 6. July 1975, (1979) IV YCA 206 et seq., 207 et seq. 182 Morris Besch (n. 1) 37.

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to rely on the national arbitration statutes which may be applicable. This can, at the time of the contract negotiation at which there is usually still an intact business relationship between the parties, become quite a difficult task. It will be difficult for the parties prior to the beginning of the investment project to enter into negotiation on detailed rules for the hypothetical and unwanted situation of a later dispute. On the other hand, such detailed rules are necessary to ensure the effective conduct of an arbitration in the absence or inadequacy of statutory arbitration rules.183 171 If the parties, nevertheless, decide to draft the rules of the arbitration themselves, they should make rules on the absence of one of the parties, on appeal, costs, confidentiality and the language of the proceedings in addition to those on the composition of the arbitration tribunal and the nomination of arbitrators.184 172 If the parties do not wish to negotiate the procedural rules in detail but nevertheless do not wish to subject themselves to the rules of an international arbitration institution, they can – as a compromise solution – resort to precedent rules for their own ad hoc arbitration. Here the UNCITRAL arbitration rules185 may be considered. These rules were prepared by the UN Commission on International Trade Law for the conduct of international arbitration. Their application was recommended by the General Assembly of the United Nations. They therefore enjoy wide-ranging acceptance not only in the industrial States but also in the developing States. They contain all aspects of the arbitration from the establishment of the arbitration tribunal up to the writing of an arbitration award.186 They can be adopted by the parties by a simple clause in the State contract referring to the UNCITRAL rules. The following clause e.g. may be used: Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity hereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules. (a) The appointing authority shall be... [name of institution or person];(b) The number of arbitrators shall be... [one or three];(c) The place of arbitration shall be... [town and country];(d) The language to be used in the arbitral proceedings shall be [...].187

d) Institutional Arbitration Clauses 173

Instead of an ad hoc arbitration, the parties can proceed in accordance with the rules of a specific arbitration institution. The arbitration institutions them-

183 Karl-Heinz Böckstiegel (n. 179) 285. 184 See in detail Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 165 et seq.; Wolfgang Peter (n. 4) 279 et seq.; Paul A. Gèlinas, ‘Arbitration Clauses: Achieving Effectiveness’ in Albert Jan van den Berg (ed), Improving the Efficiency of Arbitration and Awards: 40 Years of Application of the New York Convention (Kluwer Law International, 1999) 47–66, 53 et seq. 185 Cited in (1976) 15 ILM 701 et seq. 186 See to the UNCITRAL arbitration rules inter alia Giorgio Sacerdoti (n. 8) 1 et seq.; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) mn. 2–34 et seq.; Pieter Sanders, The Work of UNCITRAL on Arbitration and Conciliation (Kluwer Law International, 2004). 187 Annex to the UNCITRAL Arbitration Rules (2013), available at http://www.uncitral.org/pdf /english/texts/arbitration/arb-rules-2013/UNCITRAL-Arbitration-Rules-2013-e.pdf, p. 29.

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selves do not provide judicial activity but provide rules of procedure and fulfil administrative tasks. This procedure has the advantage that the parties have access to tried and test- 174 ed arbitration rules and the support of an experienced arbitration institution in the conduct of the arbitration.188 Recourse to established institutional arbitration rules at the same time increases the degree of legal certainty because the course of the proceedings is for both parties considerably more transparent and predictable. In addition, with the involvement of an internationally recognised arbitration institution, the probability that host States will voluntarily comply with arbitration awards issued is increased.189 Within the institutional resolution of investment disputes, the International 175 Centre for Settlement of Investment Disputes (ICSID) is of special significance. ICSID is a special arbitration institution tailored to investment disputes between States and foreign private investors. Because the World Bank is behind ICSID, ICSID enjoys considerable acceptance both among investors and also host States throughout the world and embodies a certain authority.190 Foreign investors therefore often succeed in entering into State contracts with 176 an ICSID arbitration clause. Correspondingly many host States provide in their model State contracts ICSID arbitration clauses.191 In order to establish the jurisdiction of ICSID for disputes in connection with the State contract, the agreement of a standard ICSID clause in the State contract which, e.g., could be as follows, suffices: The [Government]/[name of constituent subdivision or agency] of name of Contracting State (hereinafter the ‘Host State’) and name of investor (hereinafter the ‘Investor’) hereby consent to submit to the International Centre for Settlement of Investment Disputes (hereinafter the ‘Centre’) any dispute arising out of or relating to this agreement for settlement by arbitration pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (hereinafter the ‘Convention’).192

Apart from ICSID, also other arbitration institutions, e.g. the International 177 Chamber of Commerce (ICC),193 the American Arbitration Association (AAA), the London Court of International Arbitration (LCIA),194 the Arbitration Insti188 Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 36 et seq.; Wolfgang Peter (n. 4) 277; Jan Paulsson, Nigel Rawding, Lucy Reed and Eric Schwartz, The Freshfields Guide to Arbitration and ADR. Clauses in International Contracts (Kluwer Law International, 2010) 51. 189 Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 36 et seq.; Wolfgang Peter (n. 4) 277. 190 Amazu Asouzu (n. 2) 225 et seq.; Georges R. Delaume, ‘ICSID Arbitration’ in Julian D M. Lew (ed), Contemporary Problems in International Arbitration (Nijhoff, 1987) 23–39, 23; Kathirgamar V. S. K. Nathan, ICSID Convention: The Law of the International Centre for Settlement of Investment Disputes (Juris, 2000) 52 et seq. 191 E.g. Art. 28.1 of the Model Petroleum Concession Agreement For Onshore Area of Pakistan (2009) (n. 46), Art. 22.2 of the Model Production Sharing Contract of Cyprus (2007) (n. 29), Art. 26.1.2 of the Model Production Sharing Contract of Equatorial Guinea (2006) (n. 31). 192 This and other ICSID model clauses available at http://icsid.worldbank.org/ICSID/StaticFiles/model-clauses-en/main-eng.htm. 193 See John Collier and Vaughan Lowe (n. 18) 47 et seq.; Horacio A. Grigera-Naón, ‘The settlement of investment disputes between states and private parties: an overview from the perspective of the ICC’ (2000) 1 (1) JWI 59–103, 59 et seq. See e.g. the ICC clause in Sec. XII

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tute of the Stockholm Chamber of Commerce (SCC) as well as the Permanent Court of Arbitration in The Hague may be considered for investment disputes.195 For US American investors in Iran, the Iran–US Claims Tribunal established in 1981 is relevant.196 2. Alternative Dispute Resolution Clauses

The agreement to an arbitration clause in a State contract provides the investor with the possibility to obtain a binding arbitration award against the host State before an international arbitration tribunal in the event of a dispute. However, the primary objective of any foreign investor must be to prevent an escalation of disputes and the necessity of arbitration from the outset. In many cases the conduct of an arbitration proceeding also means the end of the investment relationship between the host State and the foreign investor. For many investors and host States, if they have been opponents in arbitration, it is unthinkable that they will after a short period again consider an investment project together. If a harmonious investment relationship can no longer be created, the successful conclusion of the investment project is also unlikely. If the investment relationship is once destroyed, every host State has enough possibilities to openly or covertly prevent a trouble-free and profitable investment of the foreign investor. Even if the parties succeed in creating a harmonious investment relationship after the conclusion of the arbitration, valuable investment years will have already been lost.197 Therefore, in contractual practice, alternatives to arbitration or litigation have been developed to prevent an escalation of disputes from the outset – alternative dispute resolution methods (ADR). 179 Alternative dispute resolution methods include – apart from negotiations between the parties which are possible at all stages of a dispute without any ex178

194

195

196

197

146

of the State contract between Libyan National Oil Corp. and Occidental (1974), cited in (1975) 14 ILM 645 et seq. See e.g. Article 42.1 (c) of the Model Production Sharing Contract of Kurdistan 2007: ‘If the dispute is not settled by mediation in accordance with Article 42.1 (b) within sixty (60) days of the appointment of the mediator, or such further period as the Parties to the Dispute may otherwise agree in writing, any party to the Dispute may refer the Dispute to, and seek final resolution by arbitration under the LCIA Rules, which Rules shall be deemed to be incorporated by reference into this Article.’, available at http://www.krg.org/pdf/ 3_krg_model_psc.pdf. See on these institutions R. Doak Bishop, James Crawford and Michael Reisman (n. 38) 428 et seq.; R. Doak Bishop, Sashe D. Dimitroff and Craig S. Miles, ‘Strategic Options Available When Catastrophe Strikes the Major International Energy Project’ (2001) 36 (4) Tex. Int’l L. J. 635–688, 658 et seq.; Michael Bunter (n. 129) 320 et seq.; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 38 et seq. See on the Iran–US Claims Tribunal e.g. Charles N. Brower and Jason D. Brueschke, The Iran–United States Claims Tribunal (Nijhoff, 1998) 1 et seq.; David D. Caron and John R. Crook, The Iran–United States Claims Tribunal and the process of international claims resolution: A study by the Panel on State Responsibility of the American Society of International Law (Ardsley, 2000); Georgios Petrochilos (n. 177) 228 et seq. Thomas W. Wälde, ‘Pro-active Mediation of International Business and Investment Disputes Involving Long-Term Contracts: from Zero-sum Litigation to Efficient Dispute Management’ (2004) 5 (1) Bus. L. Int’l 99–109, 100 et seq.; Morris Besch (n. 1) 71.

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press agreement198 – particularly mediation or conciliation (a), expert decisions (b) and the establishment of a permanent Dispute Review Board (DRB) (c). This is not the place to consider all details of the individual ADR methods. A short review of the methods most important for State contracts and their contractual structure is at this point sufficient. a) Mediation or Conciliation Clauses (1) Concept of Mediation or Conciliation

If the parties cannot resolve a dispute by negotiation, there remains the possi- 180 bility of calling on an independent third party, namely a mediator or conciliator, to help settling the dispute.199 A mediator or conciliator has the task of guiding the negotiation, listening to both parties, making recommendations and supporting the parties in finding an agreed solution with which both are satisfied and which does not mean that one of the parties is shown to be the loser (‘win-win situation’). A mediator or conciliator attempts to direct the view of the parties away from their alleged ‘legal’ rights towards their actual interests and to propose a solution advantageous to both parties.200 Unlike in arbitration, the mediator or conciliator usually does not issue a binding and executable decision. In fact, the agreement reached only becomes binding on the conclusion of a settlement between the parties.201 This does not however mean, that the mediation is less effective than an arbitration. On the contrary, there is often even a higher 198 Christian Bühring-Uhle, Arbitration and Mediation in international business: Designing procedures for effective conflict management (Kluwer Law International, 1996) 157 et seq.; John P. Bowman, ‘Dispute Resolution Planning for the Oil and Gas Industry’ (2001) 16 (2) ICSID Rev.–FILJ 332–407, 404; John Collier and Vaughan Lowe (n. 18) 20 et seq.; Luc Demeyere, ‘About Dispute Resolution and Conflict Management’ (2003) 19 (3) Arb. Int’l 313– 331, 318; Peter Fischer, Die internationale Konzession (Springer, 1974) 412 et seq.; Margaret Wang, ‘Are Alternative Dispute Resolution Methods Superior to Litigation in Resolving Disputes in International Commerce?’ (2000) 16 (2) Arb. Int’l 189–211, 191. 199 The terms ‘mediation’ and ‘conciliation’ are partly used synonymously, see e.g. Luc Demeyere (n. 198) 321; Hilmar Raeschke-Kessler and Klaus Peter Berger (n. 180) 23 et seq.; Pieter Sanders, Quo Vadis Arbitration? Sixty Years of Arbitration Practice (Kluwer Law International, 1999), chapter VI; some authors hold the view that a conciliator plays a more active role providing concrete proposals for a settlement to the parties; e. g. Jan Paulsson, Nigel Rawding, Lucy Reed and Eric Schwartz (n. 188) 109 et seq.; other authors view exactly contrary the ‘mediator’ as more active than a ‘conciliator’, see e.g. Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 13 et seq. In the following both terms are used synonymously. 200 On mediation and the role of the mediator see Christian Bühring-Uhle (n. 198) 272 et seq.; Luc Demeyere (n. 198) 319 et seq.; Richard H. Kreindler, Jan K. Schäfer and Reinmar Wolff, Schiedsgerichtsbarkeit. Kompendium für die Praxis (Verlag Recht und Wirtschaft, 2006) 23 et seq. Thomas W. Wälde, ‘Efficient Management of Transnational Disputes: Mutual Gain by Mediation or Joint Loss in Litigation’ (2006) 22 (2) Arb. Int’l 205–232, 211 et seq.; Thomas Wälde (n. 197) 101 et seq.; Margaret Wang (n. 198) 192. 201 Klaus Peter Berger, ‘Integration of Mediation Elements into Arbitration. “Hybrid” Procedures and “Intuitive” Mediation by International Arbitrators’ (2003) 19 (3) Arb. Int’l 387– 403, 391; Margaret Wang (n. 198) 193. However, the parties can grant the mediator or conciliator an even more active role in the finding of a fair solution and instruct him to propose a settlement.

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probability that the parties voluntarily adhere to the agreement arrived at in the course of mediation because it is a solution developed by themselves, guided more strongly by the interests of the parties.202 (2) Mediation or Conciliation Clauses in a State Contract

The parties can at any time if a dispute arises conclude an ad hoc mediation agreement. This is appropriate if there is a readiness between the parties to compromise although they cannot reach an agreement without the help of a neutral third party. It is however thinkable that a meditation agreement is already included in the State contract.203 Such a mediation clause in the State contract has the advantage that it compels the parties to first exhaust all possibilities of reaching an amicable agreement before commencing arbitration or litigation. This advantage would be converted into a disadvantage only if the parties were not prepared to compromise on the dispute and therefore mediation is condemned to fail from the outset. In that case, the compulsion to mediate leads only to unnecessary delay or can even be abused by one of the parties as a delaying tactic.204 Such a delaying tactic can at most be resisted with the agreement of certain reasonable time limits in the mediation agreement.205 182 A mediation agreement in the State contract can also contain provisions for the appointment of the mediator, the procedure and course of the mediation, confidentiality of the parties and the mediator and use of the knowledge achieved in the mediation in any subsequent arbitration or litigation. These detailed provisions can however – in order not to overload the State contract with details – be left to a separate mediation agreement with the later mediator. 181

(3) UNCITRAL Conciliation Rules 183

In order not to have to include the details of the mediation/conciliation proceedings in the State contract, the parties – as in the arbitration clauses (cf. above) – can resort to precedent conciliation rules. For example, the UNCITRAL Conciliation Rules are recommended by the UN General Assembly206 and are therefore accepted by industrial and developing States. They con202 Horacio Falcão and Francisco J. Sánchez, ‘Mediation – An Emerging ADR Mechanism in Latin America’ in Nigel Blackaby, David M. Lindsey and Alessandro Spinillo (eds), International Arbitration in Latin America (Kluwer Law International, 2002) 415–438, 418; Margaret Wang (n. 198) 206. 203 See e.g. Art. 13.01.a. of the State contract between Jamaica and Kaiser Bauxit: ‘Any dispute (…) shall, unless settled by mutual agreement of the parties or by conciliation (…) be referred to Jamaican courts.’, cited in Martin Bartels (n. 11) 80 with further examples. 204 Morris Besch (n. 1) 77. 205 See e.g. Art. 41.3 of the Model Production Sharing Contract of Kurdistan (2007): ‘If the dispute is not settled by mediation within thirty (30) days of the commencement of the mediation, or such further period as the Parties shall agree in writing, the dispute shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules shall be deemed to be incorporated by reference into this Article.’ (n. 194). 206 UNCITRAL CR, Official Protocol of the UN General Assembly (1981) 20 ILM 300 et seq. On the UNCITRAL Model Law on International Commercial Conciliation (2002)

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tain comprehensive provisions on the conduct of a conciliation process.207 In the State contract, the parties can agree the precedent clause according to Art. 20 of the UNCITRAL Conciliation Rules.208 Alternatively, the parties can also provide for a binding conciliation under the 184 UNCITRAL Conciliation Rules. The precedent clause itself does not contain such a binding mechanism. It says rather only that in the event that the parties wish to conduct conciliation, it shall take place according to the UNCITRAL rules. (4) Institutional Mediation/Conciliation Rules

Most international arbitration institutions also offer their services for media- 185 tion/conciliation. In investment disputes, e.g. the settlement procedure under the ICSID settlement rules or the ICC Mediation Rules are provided. Art. 28 to 35 of the ICSID Convention and the Rules of Procedure for Concil- 186 iation Proceedings (ICSID Conciliation Rules) contain detailed provisions for the conduct of a settlement proceeding. The ICSID conciliation proceeding is not, unlike arbitration, directed at a binding decision. In accordance with Art. 34 of the ICSID Convention it is rather a matter for the settlement commission to clarify the dispute between the parties and to endeavour to create a solution acceptable for both parties.209 Since 1 January 2014 the ICC Mediation Rules and the non-binding Media- 187 tion Guidance Notes210 apply which replace the ICC ADR Rules that have been used for amicable dispute resolution worldwide since 2001. Like the ICSID settlement procedure, the ICC Mediation procedure does not aim at an executable decision but at an amicable agreement of the parties with the help of a neutral third party.211

207

208

209

210 211

(U.N.Doc. A/CN.9/WG.II/WP.108) see Eric van Ginkel, ‘The UNCITRAL Model Law on International Commercial Conciliation: A Critical Appraisal’ (2004) 21 (1) J. Int’l Arb. 1– 65, 1 et seq. See in detail Frédéric Eisemann, ‘Conciliation as a Means of Settlement of International Business Disputes: The UNCITRAL Rules as Compared with the ICC System’ in: Jan Schultsz and Albert Jan van den Berg (eds) The Art of Arbitration. Essays on international arbitration. Liber Amicorum Pieter Sanders (Kluwer, 1982), 121–128, 124. ‘Where, in the event of a dispute arising out of or relating to this contract, the parties wish to seek an amicable settlement of that dispute by conciliation, the conciliation shall take place in accordance with the UNCITRAL Conciliation Rules as at present in force.’, model clause available at http://www.uncitral.org/pdf/english/texts/arbitration/conc-rules/concrules-e.pdf. On ICSID conciliation see in detail James C. Baker, Foreign Direct Investment in Less Developed Countries. The Role of ICSID and MIGA (Quorum Books, 1999) 56 et seq.; Ucheora Onwuamaegbu, ‘The Role of ADR in Investor-State Dispute Settlement: The ICSID Experience’ (2005) 22 (2) News from ICSID 12–14, 13 et seq.; Nassib Ziadé, ‘ICSID Conciliation’ (1996) 13 (2) News from ICSID 3–8, 4 et seq. ICC Mediation Rules and Mediation Guidance Notes, available at http://www.iccwbo.org/ products-and-services/arbitration-and-adr/mediation/rules/. See on the new ICC Mediation Rules Ben Hornan, ‘ICC launches new mediation rules’ (2013) 9(1) Global Arbitration Review.

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b) Expert Proceeding Clauses 188

189

190

191

192

Investment disputes may be of a purely technical and business nature. In these cases, it can be appropriate instead of an arbitration, to involve individual experts or a group of experts for the resolution of the disputes. The competences of the experts can be stated in various ways. It is thinkable that the experts are only instructed to contribute their expertise in the quest for an amicable agreement, to issue recommendations or to monitor certain measures without making binding proposals or decisions themselves.212 Alternatively, experts can be involved in making binding decisions (‘Expert Determination’).213 The involvement of experts is often included in a staged system of various dispute resolution methods. Such a staged system including a binding expert decision is e.g. provided in Art. 33 of the Model Production Sharing Contract of India.214 The conduct of such expert proceedings has the advantage compared to arbitration that it is usually considerably cheaper and more expeditious. Contrary to arbitration, the expert can e.g. undertake his own investigations without being dependent on information from the parties or having to wait for this.215 The instruction of an expert has also the psychological advantage that no official dispute proceeding is commenced.216 The conduct of an expert procedure is therefore less burdensome on the investment relationship between the host State and the foreign investor. Unlike arbitration awards of an international arbitration tribunal, the decision of the expert cannot, however, be executed under the New York Convention. The decision is rather only contractually binding. If one party refuses to implement the decision, an execution procedure before national courts is required.217 c) Dispute Review Boards Clauses

193

Precisely in the context of a very prolonged investment project, it can be appropriate to involve experts not only in case of dispute but also as a permanent expert committee (dispute review board). A dispute review board is involved in the project from the beginning, meets regularly and attempts to ensure that irregularities are avoided and disputes prevented from arising.218 212 See Martin Bartels (n. 11) 102 et seq.; Marc Blessing, ‘Drafting an Arbitration Clause’ in Marc Blessing (ed), The Arbitration Agreement – Its Multifold Critical Aspects (Swiss Arbitration Association, 1994) 32–77, 66; Richard Garnett, Henry Gabriel, Jeff Waincymer and Jeff Epstein (n. 173) 16. 213 See Ellis Baker and Anthony Lavers, ‘The Expert in Dispute Resolution: A Common Law Perspective’ (2004) 70 (1) J. Chartered Inst. Arb. 9–18, 9 et seq.; Marc Blessing, Introduction to Arbitration – Swiss and International Perspectives (Helbing & Lichtenhahn, 1999) 308 et seq.; Michael Bunter (n. 129) 318 et seq.; Peter Fischer (n. 198) 415 et seq.; Paul Gèlinas (n. 184) 53 et seq.; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 10 et seq. 214 See n. 32. 215 Michael Bunter (n. 129) 284 et seq., 319. 216 Stefan Kröll (n. 106) 276. 217 Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 10 (mn. 1–34).

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The members of the board are from the beginning very intensively involved 194 in the project and have therefore – unlike an arbitrator or mediator – background knowledge on the project and the interests of the parties. The competences of the experts but also their close relationship to the investment project and to the parties increase the probability that the host State and the foreign private investor voluntarily accept the experts’ decision. The parties can draft the rules, procedure and competence of a dispute resolu- 195 tion board in the State contract in detail or resort to an institutional dispute review board procedure, e.g. the ICC Dispute Board Rules.219 In the State contract, it can be stated whether the decision of the committee is binding or nonbinding, provisional or final.220 If the decision is not binding, the State contract can also provide that the opinion of the board can be used as evidence in a possible subsequent litigation or arbitration.221 3. Hybrid Clauses

In modern State contracts, the dispute resolution methods are usually com- 196 bined with each other and it is attempted to avail of the advantages of each method for the parties. Usual and quite useful is the agreement to a staged dispute resolution system.222 At the first stage, when disputes arise, the mildest form of dispute resolution – 197 amicable agreement by the parties without the involvement of a third party – is usually provided for. Most day-to-day differences of opinion can already be resolved by this method. If technical or business questions are concerned – as they often are in complex investment projects – a specially created internal expert committee can be consulted. In the event that the parties do not reach an amicable solution, the involve- 198 ment of third parties is usually agreed on at the second stage. In order to avoid burdening the investment relationship with arbitration or litigation, a mediation/ conciliation procedure or an expert procedure is often inserted. Only for the case

218 See in detail Marc Blessing (n. 213) 306 et seq.; Christian Bühring-Uhle (n. 198) 323; Anthony Connerty, ‘The Role of ADR in the Resolution of International Business Disputes’, (1996) 12 (1) Arb. Int’l 47–55, 53; Pierre Michel Genton, ‘The Role of the DRB in Longterm Contracts’ (2002) 18 (1) Constr. L. J. 8–19, 8 et seq.; Kathleen M. J. Harmon ‘Effectiveness of Dispute Review Boards’ (2003) 129 (6) J. Constr. Engin. & Mgmt 674–679, 674 et seq.; Anton van Langelaar, ‘Dispute Boards as an Alternative Dispute Resolution Mechanism on Construction Projects in Southern Africa’ (2004) 70 (2) J. Chartered Inst. Arb. 99– 102, 9 et seq. 219 See Caroll S. Dorgan, ‘The ICC’s New Dispute Board Rules’ (2005) 22 (2) ICLR 142–150, 142 et seq.; Ragnar Harbst and Volker Mahnken, ‘ICC Dispute Board Rules: the Civil Law Perspective’ (2006) 72 (4) J. Chartered Inst. Arb. 310–319, 310 et seq. 220 Martin Bartels (n. 11) 105; Marc Blessing (n. 213) 307; Christian Bühring-Uhle (n. 198) 323. 221 Christian Bühring-Uhle (n. 198) 325. 222 Klaus Peter Berger (n. 147) mn. 2–71; Christian Bühring-Uhle (n. 198) 323 et seq.; Horacia Falcão and Francisco Sánchez (n. 202) 432 et seq.

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that all attempts at an amicable solution fail, the last step as ultima ratio will be the conduct of arbitration or litigation.223 F. Summary

There are a number of contractual mechanisms available to foreign private investors to protect them against unilateral intervention of the host State in the investment project. 200 Some clauses, namely dynamic clauses and ADR clauses are intended to prevent disputes arising with the host State in the course of the investment project from escalating and to enable an amicable agreement to be found between the parties facilitating the successful continuation of the project. Preventative effect is also available from choice of law and stabilisation clauses. The financial consequences linked to these clauses may discipline the host State with regard to unilateral amendments of host State’s law or arbitrary interventions in the State contract at the expense of the investor. 201 If the host State, in spite of agreed choice of law, stabilisation and dynamic clauses, is not deterred from arbitrarily amending legislation and thus intervening in the investment project, arbitration clauses in the State contracts ensure that the investor can effectively enforce compensation claims resulting from the choice of law or stabilisation clauses against the host State. 202 The purely contractual protection of the investor can be improved by bilateral or multilateral investment treaties of the host State penalising the breach of the State contract by the host State at international law level and enabling the investor, on the basis of such protection provisions in treaties, to enforce both contractual claims and also treaty claims directly against the host State for any breach by the host State. 199

223 See e.g. Art. 33 of the Model Production Sharing Contract of India (n. 32).

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Chapter 4: International Investment Agreements – History, Approaches, Schools I. The Evolution of the Regime of International Investment Agreements: History, Economics and Politics

Chester Brown A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. International Investment Law in the Era before BITs . . . . . . . . . . . . . . . . . . . . 1. Bilateral Friendship, Commerce and Navigation Treaties . . . . . . . . . . . 2. Uncertainties in the Customary International Law of Investment Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 3

C. Multilateral Efforts for the Promotion and Protection of Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Early Multilateral Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. International Convention for the Mutual Protection of Private Property Rights in Foreign Countries (1957) . . . . . . . . . . . . . . . . . . . . . . . . . a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Standards of Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Settlement of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Abs–Shawcross Draft Convention on Investments Abroad (1959) a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Standards of Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Settlement of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens (1961) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) General Principles and Scope of Application . . . . . . . . . . . . . . . . . . . . . c) Standards of Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Settlement of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. OECD Draft Convention on the Protection of Foreign Property (1962) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Standards of Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Settlement of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Convention on the Settlement of Investment Disputes between States and Nationals of other States (1965). . . . . . . . . . . . . . . . . . . . . . . . . . . a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Jurisdiction of ICSID. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Procedural Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7 14 14 17 17 18 19 21 21 22 24 27 33 33 35 36 37 41 41 42 44 48 55 55 56 58

D. The Emergence of Bilateral Investment Treaty Programmes . . . . . . . . . . . . 1. The First BIT: The Germany–Pakistan BIT (1959) . . . . . . . . . . . . . . . . . . 2. Development of States’ BIT Programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Content and Characteristics of BITs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60 60 65 72

E. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78

Literature: Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013); Jeswald Salacuse, The Law of Investment Treaties (Oxford University Press, 2010); Ignaz Seidl-Hohenveldern, ‘The Abs–Shawcross Draft Convention to Chester Brown

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A. Introduction

It is well-known that the first modern bilateral investment treaty (BIT) was the Germany–Pakistan BIT which was signed on 25 November 1959 and entered into force in 1961.1 In subsequent years, other developed States commenced their own programmes of BIT negotiations, including France (in 1960), Switzerland (1960), the Netherlands (1963), Italy (1964), the Belgo–Luxembourg Economic Union (1964), Sweden (1965), Denmark (1965), Norway (1966), the United Kingdom (1975), Austria (1976), Japan (1977), and the United States (1977).2 By the end of 2011, UNCTAD reported that there were 2,833 BITs in existence.3 But the Germany–Pakistan BIT of 1959, and the subsequent efforts by States to negotiate these BITs did not, as Professor Salacuse has aptly put it, ‘arise suddenly and miraculously the way Athena sprang from the head of Zeus.’4 Nor did investment treaties fill a space that was a vacuum devoid of any applicable rules. Rather, the negotiation of BITs and other modern-day international investment agreements (IIAs) was inspired by the diverse economic interests of nations and also built on important foundations of pre-existing international law governing the protection of foreigners and their investments.5 The negotiation of BITs was predated by several initiatives by non-governmental organisations to foster international investment flows, and various multilateral efforts to reach agreement on the protection of investments. The purpose of this chapter is to examine those progenitors of the Germany–Pakistan BIT of 1959, provide a historical overview of the evolution of the regime of international investment agreements, and consider the development of BITs since 1959. 2 Part B reviews the development of the international law rules on the protection of aliens in the era before BITs were negotiated, focussing on the instrument 1

1 Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments, signed 25 November 1959, Bundesgesetzblatt II, No. 33 (6 July 1961) 793. 2 See, e.g., Kenneth Vandevelde, Bilateral Investment Treaties (Oxford University Press, 2010) 55; Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer, 2009) 42–44. 3 UNCTAD, ‘Latest Developments in Investor-State Dispute Settlement’, IIA Issues Note: No 1 (April 2012) 1, available at http://unctad.org/en/PublicationsLibrary/webdiaeia2012d10_en.pdf. 4 Jeswald Salacuse, The Law of Investment Treaties (Oxford University Press, 2010) 37. 5 Ibid., at 37.

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which is widely considered to be the precursor to the BIT, the bilateral friendship, commerce and navigation treaty (FCN treaty), but also addressing uncertainties in the substantive rules of customary international law. Part C then turns to a consideration of multilateral efforts to reach global agreement on the applicable rules for the protection of foreign investments. Following the failure of States to reach multilateral agreement on their substantive obligations, Part D examines the evolution of the IIA regime through the negotiation of BITs, and regional IIAs, and identifies some issues where States are developing the content of such agreements. This chapter concludes that the practice of States in negotiating IIAs has been the principal contributing factor in the development of international investment law, although the precise contours of the rights of investors, and the obligations on States, have been developed in the practice of arbitral tribunals which have been constituted under IIAs to determine investment disputes; in this sense, arbitral tribunals have also made a major contribution to the development of the international investment regime. B. International Investment Law in the Era before BITs 1. Bilateral Friendship, Commerce and Navigation Treaties

Prior to the early 1800s, the amount of world trade was ‘modest’; Kenneth 3 Vandevelde reports that in 1820, only about one per cent of the world’s goods moved in international trade.6 Three events then triggered a process of globalisation that transformed the international economy. These were the end of the Napoleonic Wars in 1815, which heralded a century of relative peace in Europe; the advent of the industrial revolution, which created a demand for imported raw materials; and the emergence of liberal economic theory, which promoted free competitive markets and international trade.7 It was, accordingly, in the early 1800s that European States began entering into bilateral FCN treaties as their commercial activities expanded (although the United States had been concluding FCN treaties since the 1770s; according to Kenneth Vandevelde, the US Model FCN treaty ‘was approved by the Congress in September 1776, a little more than two months after the United States declared independence from Great Britain.’).8 Perhaps the very first such treaty was the Treaty of Amity and Commerce between the United States and France of 6 February 1778;9 and the United States entered into many further treaties for the protection of commercial and trading interests.10 It is difficult, however, to draw a clear line between the prac6 Kenneth Vandevelde (n. 2) 20. 7 Ibid., at 21. 8 Ibid., at 21, fn. 14. For one of the earliest FCN treaties, see the Spain–United States Treaty of Friendship, Limits and Navigation of 1795, signed 27 October 1795, 55 Consolidated Treaties Series 9; see further Kenneth Vandevelde (n. 2) 21–23. 9 Hermann Walker, ‘Provisions on Companies in United States Commercial Treaties’ (1956) 50 AJIL 373, 374.

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tice of States in concluding FCN treaties and State practice in agreeing on protections for private property in other contexts. This is because many treaties concluded at the end of hostilities, including the Treaty of Amity, Commerce and Navigation of 17 November 1794 between Great Britain and the United States (the ‘Jay Treaty’), also made provision for the protection of privately-owned property.11 Even earlier, the British–Spanish Treaty of Peace and Friendship of 1667 had included a general clause for the protection of property,12 and these provisions had also been incorporated into the Treaty of Utrecht of 1713.13 4 The United Kingdom and the United States were leading States in establishing networks of FCN treaties; the United Kingdom entered into around 100 FCN treaties,14 as did the United States.15 Other States which had programmes of negotiating FCN treaties included the Netherlands,16 Colombia,17 Germany,18 Italy,19 Japan,20 Latvia,21 and the Soviet Union.22 Many such FCN treaties are still in force, and have served to provide the basis of jurisdiction of the ICJ in a number of international disputes.23 10 For discussion of United States’ FCN Treaties, see Robert Wilson, ‘Property Protection Provisions in United States Commercial Treaties’ (1951) 45 AJIL 83, 92; Robert Wilson, ‘Accessto-Court Provisions in United States Commercial Treaties’ (1953) 47 AJIL 20–48; Robert Wilson, ‘Natural Resources Provisions in United States Commercial Treaties’ (1954) 48 AJIL 355–379; Hermann Walker, ‘Provisions on Companies in United States Commercial Treaties’ (1956) 50 AJIL 373–393; Hermann Walker, ‘Treaties for the Encouragement and Protection of Foreign Investment: Present United States Practice’ (1956) 5 Am. J. Comp. L. 229–247; Hermann Walker, ‘Modern Treaties of Friendship, Commerce and Navigation’ (1957–58) 42 Minn. L. Rev. 805–824; Kenneth Vandevelde (n. 2) 19–59; Kenneth Vandevelde, United States International Investment Agreements (Oxford University Press, 2009) 19; and Lee Caplan and Jeremy Sharpe, ‘United States’ in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013) 755. 11 Treaty of Amity, Commerce and Navigation, signed 17 November 1794, 8 Stat 116, TS No 105 (Great Britain–United States); see generally Robert Wilson, ‘Property Protection Provisions in United States Commercial Treaties’ (1951) 45 AJIL 83, 91–92. 12 British–Spanish Treaty of Peace and Friendship (1667), Arts. 29, 31, 33–34 (British and Foreign State Papers, vol. I, pt. I, 573–575, 623). 13 Robert Wilson, ‘Property Protection Provisions in United States Commercial Treaties’ (1951) 45 AJIL 83, 94. 14 For a list of the United Kingdom’s FCN treaties (which appears to be incomplete), see the United Kingdom Treaties Library, available at http://www.bailii.org (last accessed 11 March 2012). For further discussion, see, e.g., Kenneth Vandevelde (n. 2) 21; and Georg Schwarzenberger, Foreign Investments and International Law (Praeger, 1969) 23, 91. 15 Hermann Walker, ‘Modern Treaties of Friendship, Commerce and Navigation’ (1958) 42 Minn. L. Rev. 805, 805. 16 See, e.g., Nico Schrijver and Vid Prislan, ‘Netherlands’ in Chester Brown (ed) (n. 10) 535. 17 See, e.g., José Antonio Rivas, ‘Colombia’ in Chester Brown (ed) (n. 10) 183. 18 See, e.g., Rudolf Dolzer and Yun-I Kim, ‘Germany’ in Chester Brown (ed) (n. 10) 289. 19 See, e.g., Federico Ortino, ‘Italy’ in Chester Brown (ed) (n. 10) 321. 20 See,.e.g, Shotaro Hamamoto and Luke Nottage, ‘Japan’ in Chester Brown (ed) (n. 10) 347; see also Shuji Yanase, ‘Bilateral Treaties of Japan and Resolution of Disputes with Respect to Foreign Direct Investment’ in Albert van den Berg (ed), International Commercial Arbitration: Important Contemporary Issues (Kluwer, 2003) 426–443. 21 See, e.g., Martins Paparinskis, ‘Latvia’ in Chester Brown (ed) (n. 10) 425. 22 Kenneth Vandevelde (n. 2) 49. 23 See, e.g., Military and Paramilitary Activities in and against Nicaragua (Nicaragua v. USA), Jurisdiction and Admissibility, ICJ Rep. 1984, 392 et seq., and Military and Paramilitary Ac-

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These general economic treaties typically focussed on ‘the protection of prop- 5 erty rights and the business interests of foreigners’, rather than investments.24 The content of FCN treaties developed over time, but the States usually guaranteed the right of access to the territory of the other State party; the right of access to that State’s courts; the right to protection and security; most favoured nation (MFN) treatment either with respect to taxes, or to trade more generally; and sometimes (although less frequently) national treatment.25 Early FCN treaties typically did not provide for any form of dispute settlement. In the case of some of the early FCN treaties which contemplated the possibility of disputes, it was anticipated that if a negotiated settlement could not be reached, the parties were permitted to go to war,26 although the Jay Treaty of 1794 was an exception, as it provided for the establishment of mixed commissions to hear claims.27 In addition, early FCN treaties did not reflect all of the rules of customary international law that applied to the protection of aliens and foreign property; there was, for instance, typically no recognition in early FCN treaties of the principle of ‘reasonableness’, which is reflected in the obligation on host States not to engage in arbitrary or unreasonable interference with an investment.28 The 19th century saw a great expansion in world trade and foreign investment. 6 But beginning in 1914, a number of events – the First World War (1914–1919), the Great Depression (1930s), and the Russian Revolution of 1917 – caused the international investment regime to collapse.29 These events ‘profoundly challenged the international community’s commitment’ to the principles of access, non-discrimination, and protection and security for foreign-owned property,30 and saw the introduction of protectionist trade policies and large-scale expropriations.31 Professor Vandevelde reports that by 1932, world trade was, remarkably, ‘at only one-third of 1929 levels’.32 The First World War and the Soviet

24 25 26 27

28 29 30 31

tivities in and against Nicaragua (Nicaragua v. USA), Merits, ICJ Rep. 1986, 14 et seq., which was a claim brought under, inter alia, the Nicaragua–United States FCN Treaty of 1956; Elettronica Sicula SpA (USA v. Italy), ICJ Judgment, ICJ Rep. 1989, 15 et seq., which was brought under the Italy–United States FCN Treaty of 1948; and Oil Platforms (Iran v. USA), Preliminary Objection, ICJ Rep. 1996, 803 et seq.; and Oil Platforms (Iran v. USA), Merits, ICJ Rep. 2003, 161 et seq., in which the ICJ’s jurisdiction was based on the Iran–US Treaty of Amity, Economic Relations and Consular Rights, signed on 15 August 1955 (entered into force 16 June 1957); Andrew Newcombe and Lluís Paradell (n. 2) 22–23. Andrew Newcombe and Lluís Paradell (n. 2) 41. Kenneth Vandevelde (n. 2) 21–23; see also Robert Wilson, ‘Property Protection Provisions in United States Commercial Treaties’ (1951) 45 AJIL 83, 92. See, e.g., General Treaty of Amity, Commerce and Consular Privileges (El Salvador–United States), signed 6 December 1870, 18 Stat 725, TS No. 310; cited in Kenneth Vandevelde (n. 2) 25. See, e.g., the Betsey case before the Commission established under Art. VII of the Jay Treaty: John Bassett Moore, History and Digest of the International Arbitrations to which the United States has been a Party (1898), vol. III, 2277, and discussed in Chester Brown, A Common Law of International Adjudication (Oxford University Press, 2007) 61–62. Kenneth Vandevelde (n. 2) 26. Ibid., at 31–35. Ibid., at 34. Ibid., at 34.

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expropriations in particular (as well as nationalisations carried out in a number of Latin American countries), gave rise to a large number of claims for loss of property, some of which were submitted to the Permanent Court of International Justice (PCIJ), and some of which were submitted to mixed claims commissions and mixed arbitral tribunals.33 It is therefore appropriate to consider the content and development of customary international law that was applied in the resolution of these claims. 2. Uncertainties in the Customary International Law of Investment Protection

In light of the global political and economic developments, it is perhaps unsurprising that the customary international law and general principles of law concerning the protection of aliens generated much disagreement among States. A line could be drawn between the views of developed, capital-exporting States on the one hand, and the views of developing, capital-importing States on the other,34 on a range of issues. 8 One such issue was the standard of treatment that States were required to accord to aliens. A number of developed States considered that aliens should be treated in accordance with an ‘international minimum standard’, which was set by international law, rather than the peculiarities of national legal systems. This view was expounded by the US Secretary of State, Elihu Root, as follows: 7

There is a standard of justice, very simple, very fundamental, and of such general acceptance by all civilised countries as to form a part of the international law of the world. The condition upon which any country is entitled to measure the justice due from it to an alien by the justice which it accords to its own citizens is that its system of law and administration shall conform to this general standard. If any country’s system of law and administration does not conform to that standard, although the people of that country may be content or compelled to live under it, no other country can be compelled to accept it as furnishing a satisfactory measure of treatment to its citizens.35

9

For their part, developing States tended to consider that it was sufficient for foreigners to be accorded ‘national treatment’; this view was perhaps most 32 Ibid., at 33. 33 See, e.g., Certain German Interests in Polish Upper Silesia (Germany v. Poland), PCIJ Judgment, (1926) PCIJ (Ser. A) No. 7; see also, e.g., the claims reported in Abraham H. Feller, The Mexican Claims Commissions: 1923–1934 (Macmillan, 1935); and the many decisions of the inter-war mixed arbitral tribunals in the Recueil des Décisions des Tribunaux Arbitraux Mixtes (TAM) series of reports; see further Kenneth Vandevelde (n. 2) 35. 34 Jeswald Salacuse (n. 4) 46. 35 Elihu Root, ‘The Basis of Protection to Citizens Residing Abroad’ (1910) 4 AJIL 517, 521– 522. This view was shared by Lord Palmerston, the British Foreign Secretary, who put his view as follows: ‘We shall be told, perhaps, as we have already been told, that if the people of the country are liable to have heavy stones placed upon their breasts, and police officers to dance upon them; if they are liable to have their heads tied to their knees, and to be left for hours in that state; or to be swung like a pendulum, and to be bastinadoed as they swing, foreigners have no right to be better treated than the natives, and have no business to complain if the same things are practiced upon them. We may be told this, but that is not my opinion, nor do I believe it is the opinion of any reasonable man’: Lord Palmerston’s Address to the House of Commons at the time of the Don Pacifico Affair, extracted in Root, 522.

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prominently put in the writings of the Argentine jurist and Minister for Foreign Affairs, Carlos Calvo.36 As the expansion of Western economic powers became entrenched in the 10 nineteenth and first half of the twentieth centuries, the principle of the international minimum standard became dominant.37 A frequently cited arbitral decision, that of the United States–Mexico Claims Commission in the Neer claim, in 1926, was influential in the acceptance of the international minimum standard.38 Yet disagreement persisted, particularly among Latin American States. In 1933, at the Seventh International Conference of American States, the States present adopted the Convention on the Rights and Duties of States, Article 9 of which provided that: ‘Nationals and foreigners are under the same protection of the law and the national authorities, and the foreigners may not claim rights other or more extensive than those of the nationals.’39 In 1938, in the wake of the Mexican oil nationalisations, the Mexican Minister for Foreign Affairs stated that: [T]he foreigner who voluntarily moves to a country which is not his own, in search of a personal benefit, accepts in advance, together with the advantages he is going to enjoy, the risks to which he may find himself exposed. It would be unjust that he should aspire to a privileged position.40

A second prominent issue on which the views of developed and developing 11 States diverged was the protection under customary international law from expropriation without compensation. International law has always recognised that States have the power to take property (and, indeed, writers argue that a State may not validly bind itself not to exercise this power),41 so long as the taking is accompanied by compensation.42 One disagreement between developed and developing States emerged in relation to the applicable standard of compensation. Developed States advocated use of the ‘Hull formula’, so named after Cordell 36 See especially Carlos Calvo, Le Droit international théorique et pratique (Rousseau, 1896), vols. 1–6; cited in Jeswald Salacuse (n. 4) 49. 37 Jeswald Salacuse (n. 4) 48. 38 L. F. H. Neer and Pauline Neer v. Mexico (1926) 4 RIAA 60, 61. As for the actual test to be applied, the Commission stated that in order to constitute an ‘international delinquency’, the treatment of an alien had to amount to ‘an outrage’, to ‘bad faith’, to ‘wilful neglect of duty’, or to ‘an insufficiency of government action so far short of international standards that every reasonable and impartial man would readily recognise its insufficiency’. See, however, Jan Paulsson and Georgios Petrochilos, ‘Neer-ly Misled?’ (2009) 22 ICSID Rev.–FILJ 242–257, who argue that the United States–Mexico Claims Commission’s decision in the Neer case does not establish the international minimum standard in cases of direct liability (which is provided by the decision of the United States–Mexico Claims Commission in the Roberts case, the test being ‘whether aliens are treated in accordance with ordinary standards of civilisation’: (1926) 4 RIAA 77, 80), but rather that the Neer case only provides the standard of treatment in cases of indirect responsibility, i.e., denial of justice. 39 Convention on the Rights and Duties of States, signed 26 December 1933, 165 LNTS 19, Art. 9; see also Kenneth Vandevelde (n. 2) 36. 40 ‘Official Documents’ (1938) 32 AJIL Suppl. 181, 188; also cited in Edwin Borchard, ‘The “Minimum Standard” of the Treatment of Aliens’ (1939) 33 Am. Soc’y Int’l L. Proc. 51, 51; Jeswald Salacuse (n. 4) 47. 41 Jeswald Salacuse (n. 4) 54. 42 Ibid., at 54–55; Ian Brownlie, Principles of Public International Law (Oxford University Press, 2008) 533–536.

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Hull, the US Secretary of State who asserted this in correspondence with the government of Mexico, which required payment of ‘prompt, adequate and effective compensation’. 43 For its part, Mexico maintained that public international law did not require States to pay compensation if the expropriations were general in nature.44 Other developing States contended that other considerations should be taken into account in determining the standard of compensation, including whether the measure was adopted as part of a broader nationalisation programme, and the State’s ability to pay.45 These debates persisted throughout the 1960s and 1970s in the various resolutions and declarations adopted by the United Nations General Assembly.46 12 A further issue was that under traditional international law, injured aliens had no standing to present claims against the State which was responsible for an internationally wrongful act. This was because only States were subjects of international law and had the capacity to present a claim on the international plane.47 Any individuals whose property had been affected by actions of the host State were required to seek the diplomatic protection of their State of nationality, who would consider espousing their claim and presenting it on the international plane. In doing so, the State would be asserting its own rights, rather than those of its national; for individuals could not bear rights in international law.48 13 The foregoing paragraphs have set out the disagreement among States on the applicable rules of customary international law in relation to the protection of aliens, and the issues arising from the individual’s lack of legal personality in international law. The resultant uncertainty for foreign investors led to various proposals for a multilateral agreement on the obligations that States have when receiving foreign investment; these proposals are considered in Part C.

43 ‘Official Documents’ (1938) 32 AJIL Suppl. 181, 188; also cited in Edwin Borchard (n. 40) 51. 44 Kenneth Vandevelde (n. 2) 36. 45 See, e.g., Ian Brownlie (n. 42) 533–538; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 13–15. 46 The UNGA Resolutions included: the Resolution on Permanent Sovereignty over Natural Resources, GA Res 1803 (XVII), 14 December 1962, UN Doc A/5217; the Declaration on the Establishment of a New International Economic Order, GA Res 3201 (S-VI), 1 May 1974, (1974) 13 ILM 715, in which States declared that they had ‘full permanent sovereignty’ over their natural resources; the Charter of Economic Rights and Duties of States (1974) GA Res 3281 (XXIX), 12 December 1974, (1975) 14 ILM 251, which declared that each State had the right ‘to nationalise, expropriate or transfer ownership of private property, in which case appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State considers pertinent.’ 47 See, e.g., Lassa Oppenheim, International Law (Longmans, Green & Co, 1st ed, 1912) vol. I. 48 See especially Mavrommatis Palestine Concessions (Greece v. Britain), PCIJ Judgment, (1924) PCIJ (Ser. A) No. 2. States did not, of course, always exercise diplomatic protection by instituting judicial or arbitral proceedings. If a State’s nationals suffered injury as a result of an international wrong for which no compensation was paid, States were also known to engage in ‘gunboat diplomacy’, by instituting, for instance, a blockade of the ports of the responsible State: see, e.g., Ian Brownlie (n. 42) 729.

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C. Multilateral Efforts for the Promotion and Protection of Foreign Investment 1. Early Multilateral Initiatives

It has already been observed that States had, beginning in the late 1700s, 14 started entering into bilateral treaties for the protection of economic interests. However, many of these treaties pre-dated the events of the early 1900s which had a devastating impact on international investment and trade flows, and they only went so far in resolving the underlying conflict between developed States and developing States on the content of the international law on the protection of aliens. Non-governmental bodies, and developed States, began to seek agreement on these issues in various multilateral fora. Early diplomatic efforts to conclude multilateral codes for the protection of 15 private foreign investment had, however, routinely come to nought; such efforts included initiatives at the League of Nations in 1928, the Geneva and Havana Conferences of 1947 and 1948, and the Bogota Conference of 1948.49 In 1948, a non-governmental organisation, the International Law Association (ILA), published ‘Draft Statutes of the Arbitral Tribunal for Foreign Investment and the Foreign Investment Court’.50 The following year, in 1949, another non-governmental organisation, the International Chamber of Commerce (ICC), issued a draft document that resembled (and perhaps inspired) a later proposal by the Germany-based ‘Society to Advance the Protection of Foreign Investments’.51 In 1957, the ICC reiterated its proposal, and suggested that the United Nations Economic and Social Council (ECOSOC), as well as the International Bank for Reconstruction and Development (the World Bank) and the International Finance Corporation might convene an international conference to consider the adoption of a draft convention.52 The ICC argued that: Agreements, whether bilateral or multilateral, arising out of a model convention of this kind, would be of inestimable value to capital-importing countries as well as to investors. By making clear in advance in an agreed and binding form under United Nations’ auspices the treatment to be applied to foreign capital in their territories, the former would improve their prospects of attracting capital from overseas. At the same time investors would be in a better position to assess some at least of the non-economic risks involved in a particular area.53

Germany, in particular, had a special interest in securing international agree- 16 ment on the protection of foreign investments; this was partly inspired by the 49 Stanley Metzger, ‘Multilateral Conventions for the Protection of Private Foreign Investment’ (1960) 9 J. Pub. L. 133–146; see also Andrew Newcombe and Lluís Paradell (n. 2) 15–20. 50 UNCTAD, International Investment Agreements: A Compendium, vol. III, 259; Andrew Newcombe and Lluís Paradell (n. 2) 21. 51 ‘International Code of Fair Treatment for Foreign Investments’ (ICC Brochure No. 129, 1949), reprinted in UNCTAD, International Investment Agreements: A Compendium, vol. III, 273; Arthur Miller, ‘Protection of Private Foreign Investment by Multilateral Convention’ (1959) 53 AJIL 371, 371–372; Andrew Newcombe and Lluís Paradell (n. 2) 20–21. 52 Resolution of the 16th Congress of the ICC (May 1957), published in ICC Brochure No. 193; cited in Arthur Miller (n. 51) 372. 53 Cited in Arthur Miller (n. 51) 372.

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fact that Germany had lost the bulk of its foreign investment in settlements agreed after World War II.54 It was therefore no accident that the calls for an international agreement were led by an organisation of German businessmen, the ‘Society to Advance the Protection of Foreign Investments’, led by Mr Hermann Abs, the Director-General of the Deutsche Bank, which in 1957 argued for such a multilateral treaty.55 It was, of course, Germany, that concluded the first BIT with Pakistan in 1959, but it is first convenient to consider more closely these multilateral efforts. 2. International Convention for the Mutual Protection of Private Property Rights in Foreign Countries (1957) a) Introduction 17

Hermann Abs had first broached the idea of a multilateral agreement on the protection of foreign investment at the International Industrial Development Conference in San Francisco in October 1957, calling for a ‘Magna Charta for the Protection of Foreign Property’ in the form of a global treaty.56 The ‘Society to Advance the Protection of Foreign Investments’ then published its draft code, titled the ‘International Convention for the Mutual Protection of Private Property Rights in Foreign Countries’ in November 1957.57 The Convention consisted of 15 provisions, and it sought an agreement which contained not only specific standards of protection, but also the establishment of a permanent arbitral tribunal for the settlement of any disputes.58 b) Standards of Treatment

18

Articles IV through VIII of the International Convention set out the substantive standards of protection. Article IV contained ‘guarantees of the right of free economic or business activity on a non-discriminatory basis as between nationals and non-nationals’, including ‘provisions to protect against measures unduly inhibiting business activity’, such as ‘levying incommensurate taxes’.59 Article V also set forth limited exceptions on the freedom of business activity concerning industry sectors of vital importance to the State (such as public utilities).60 Article VI contained a guarantee that an investment would not be expropriated for a period of 30 years after the making of the investment;61 and when and if an expropriation took place, Article VII required that it would have to be accompa54 Rudolf Dolzer and Christoph Schreuer (n. 45) 18. 55 See, e.g., Arthur Miller (n. 51) 371–372. 56 Rudolf Dolzer and Christoph Schreuer (n. 45) 18; see also Arthur Miller (n. 51) 372. Hermann Abs’s speech to the International Industrial Development Conference is reprinted in (1957) Recht der internationalen Wirtschaft (RIW) 229–230. 57 Arthur Miller (n. 51) 371. 58 Rudolf Dolzer and Christoph Schreuer (n. 45) 18. 59 Arthur Miller (n. 51) 374. 60 Ibid. 61 Ibid.

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nied by compensation.62 Finally, Article VIII confirmed that all of these protections would continue to apply during time of war (including between any of the State parties to the convention), subject only to ‘the right of control of that property during the conflict.’63 c) Settlement of Disputes

Article IX recognised that both the State, and its nationals, were entitled to 19 rights under the Convention.64 For the settlement of any disputes, Article X of the Convention proposed the creation of a permanent international tribunal, the details of which were to be agreed in a separate instrument.65 Article X also envisaged the establishment of a committee to decide questions concerning the adequacy of any compensation due following an expropriation.66 As for the available remedies, Article XI of the Convention contemplated that tribunals would have the power to request cessation of the unlawful act within three months, and if this was not complied with, the tribunal would make a public declaration of the State’s breach of its obligations.67 If this, too, did not have the desired effect, then it would be possible for economic sanctions to be imposed (including, for instance, the withholding of any loans).68 The Convention was, however, regarded as being too ambitious.69 This led to 20 a more modest proposal which was a result of the joint efforts of Hermann Abs and Lord Shawcross, the former Attorney-General of the United Kingdom, namely the Abs–Shawcross Draft Convention on Investments Abroad, which was published in April 1959.70 3. Abs–Shawcross Draft Convention on Investments Abroad (1959) a) Introduction

The Abs–Shawcross Draft Convention, which was issued in April 1959, con- 21 sisted of ten articles, and an Annex on the establishment of an arbitral tribunal. The purpose of the Abs–Shawcross Draft Convention was stated by its authors as being to restate ‘what are believed to be fundamental principles of international law regarding the treatment of the property, rights, and interests of aliens.’71 The authors considered it necessary to record those fundamental prin62 63 64 65 66 67 68 69 70

Ibid. Ibid. Ibid. Ibid. Ibid. Ibid. Ibid. Rudolf Dolzer and Christoph Schreuer (n. 45) 18; Arthur Miller (n. 51) 375–378. ‘Draft Convention on Investments Abroad’ (1960) 9 J. Pub. L. 116–118; see also (1959) RIW 150–151; see also Rudolf Dolzer and Christoph Schreuer (n. 45) 18; Andrew Newcombe and Lluís Paradell (n. 2) 21–22. 71 ‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119.

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ciples, as ‘international trade and commerce cannot thrive and prosper in an atmosphere of doubt and uncertainty’.72 The restatement of the applicable rules of mutual conduct in a convention would ‘assure to the nationals of the participating countries such measure of security and protection of their property, rights, and interests as is indispensable to encourage the flow of foreign investments.’73 b) Scope of Application 22

The Abs–Shawcross Draft Convention protected the ‘property’ of ‘nationals’, and these are the only two defined terms. ‘Property’ was defined as including ‘all property, rights, and interests, whether held directly or indirectly’, and the Draft Convention also stated that ‘a member of a company shall be deemed to have an interest in the property of the company.’74 ‘Nationals’ in relation to a State party were defined as including: (i) companies which under the municipal law of that Party are considered national companies of that Party and (ii) companies in which nationals of that Party have directly or indirectly a controlling interest. ‘Companies’ includes both juridical persons recognised as such by the law of a Party and associations even if they do not possess legal personality.75

23

Two points are noteworthy in relation to the definitions. The first is that both ‘property’ and ‘nationals’ were defined as including directly and indirectly held interests. The second is that the definition of ‘nationals’ did not expressly include natural persons, although it seems to have been assumed that natural persons were included.76 c) Standards of Treatment

24

In Article I of the Draft Convention, the State parties agreed to ensure ‘fair and equitable treatment’ to ‘the property of the nationals of the other Parties’, and also agreed that such property was to be accorded ‘the most constant protection and security within the territories of the other Parties’. Article I also provided that ‘the management, use and enjoyment [of such property] shall not in any way be impaired by unreasonable or discriminatory measures.’77 Article II of the Draft Convention contained an ‘observance of undertakings’ clause, now known 72 Ibid. 73 Ibid. For further discussion, see especially Rudolf Dolzer and Christoph Schreuer (n. 45) 18– 19; Andrew Newcombe and Lluís Paradell (n. 2) 21–22; Stanley Metzger, ‘Multilateral Conventions for the Protection of Private Foreign Investment’ (1960) 9 J. Pub. L. 133–146; Georg Schwarzenberger, ‘The Abs–Shawcross Draft Convention on Investments Abroad: A Critical Commentary’ (1960) 9 J. Pub. L. 147–171; Ignaz Seidl-Hohenveldern, ‘The Abs–Shawcross Draft Convention to Protect Private Foreign Investment: Comments on the Round Table’ (1961) 10 J. Pub. L. 100–112; Georg Schwarzenberger, Foreign Investments and International Law (Praeger, 1969) 109–134. 74 Abs–Shawcross Draft Convention, Art. IX. 75 Ibid. 76 See, e.g., Georg Schwarzenberger, ‘The Abs–Shawcross Draft Convention on Investments Abroad: A Critical Commentary’ (1960) 9 J. Pub. L. 147, 150–152. 77 Abs–Shawcross Draft Convention, Art. I.

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as the ‘umbrella clause’, in which the State parties agreed that they shall ‘at all times ensure the observance of any undertakings which it may have given in relation to investments made by nationals of any other Party.’78 Article III of the Abs–Shawcross Draft Convention contained a protection from expropriation, which provided in part that: ‘No Party shall take any measures against nationals of another Party to deprive them directly or indirectly of their property except under due process of law and provided that such measures are not discriminatory or contrary to undertakings given by that Party and are accompanied by the payment of just and effective compensation.’79 Article IV provided that any breach of the Convention ‘shall entail the obliga- 25 tion to make full reparation.’80 It further provided that the State parties were obliged not to ‘recognise or enforce within their territories any measures conflicting with the principles of [the] Convention and affecting the property of nationals of any of the Parties until reparation is made or secured.’81 Article V established certain exceptions, namely that a State party may not ‘take measures derogating from the present Convention unless it is involved in war, hostilities, or other public emergency which threatens its life; and such measures shall be limited in extent and duration to those strictly required by the exigencies of the situation.’82 The reference in Article V to a public emergency that ‘threatens [the] life’ of a State would appear to be a reference to the defence of necessity in customary international law.83 Article VI, while not containing a substantive standard of treatment per se, 26 provided that the provisions of the Convention ‘shall not prejudice the application of any present or future treaty or municipal law under which more favourable treatment is accorded to nationals of any of the Parties.’84 d) Settlement of Disputes

Article VII of the Abs–Shawcross Draft Convention contained procedures for 27 the settlement of disputes. The authors of the Abs–Shawcross Draft Convention appear to have regarded the dispute settlement machinery as being equally important as the substantive standards of protection. In their commentary, they expressed the view that:

78 79 80 81 82 83

Ibid., Art. II. Ibid., Art. III. Ibid., Art. IV. Ibid., Art. IV. Ibid., Art. V. Ibid. The commentary states that Art. V resembles Art. 15 of the Convention for the Protection of Human Rights and Fundamental Freedoms and Art. 28(1) of the European Convention on Establishment: ‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119, 124. 84 Abs–Shawcross Draft Convention, Art. VI. The commentary indicates that this resembles Art. 25 of the European Convention on Establishment: ‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119, 124.

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Chapter 4: International Investment Agreements – History, Approaches, Schools There must, at the heart of any instrument dedicated to the creation of an atmosphere of confidence, always lie a provision for the effective adjudication by an impartial body of all disputes which may arise. Undertakings without the machinery for determining their content and application cannot achieve the desired end.85

Article VII(1) provided for a procedure for the settlement of inter-State disputes, which was international arbitration ‘with the consent of the interested Parties’ in accordance with the procedures set forth in the Annex to the Draft Convention. In the absence of consent to international arbitration, ‘the dispute may be submitted by either Party to the International Court of Justice.’86 The Annex to the Draft Convention essentially provided that each State party was to appoint one arbitrator, and the third arbitrator (the Umpire) was to be appointed by agreement of the parties; if the parties could not reach agreement, the President of the ICJ was to make the appointment; and if the President failed to make the appointment, the task fell to the Secretary-General of the United Nations.87 It is not clear whether the final sentence of Article VII(1) is a true compromissory clause for the submission of disputes to the ICJ; this seems at least to have been the intention of the authors of the Draft Convention, as they stated in the commentary that ‘provision has been made for the residual compulsory jurisdiction of the International Court of Justice in those cases where the parties to the Draft Convention do not elect to make use either of the machinery of arbitration therein provided or of other specific modes of settlement.’88 29 Turning to Article VII(2), this, interestingly, provided for the settlement of investor-State disputes, although it only contains the conditional consent of the State parties to the Convention. This is noteworthy because the Germany–Pakistan BIT, which was signed in 1959, did not envisage the possibility of investorState dispute settlement. Article VII(2) of the Abs–Shawcross Draft Convention stated that: 28

A national of one of the Parties claiming that he has been injured by measures in breach of this Convention may institute proceedings against the Party responsible for such measures before the Arbitral Tribunal referred to in paragraph 1 of this Article, provided that the Party against which the claim is made has declared that it accepts the jurisdiction of the said Arbitral Tribunal in respect of claims by nationals of one or more Parties, including the Party concerned.89

The commentary to this provision explains that: ‘The notion that an individual may enjoy a right of access directly to an international tribunal is not new’, and that it is ‘no real departure from legal tradition to suggest that similar rights be conferred on individuals in connection with investment matters.’90 31 Article VIII of the Abs–Shawcross Draft Convention provided that if a Party against which a judgment or award was rendered failed to comply with the terms 30

85 86 87 88 89 90

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‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119, 123. Abs–Shawcross Draft Convention, Art. VII(1). Ibid., Annex. ‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119, 123. Abs–Shawcross Draft Convention, Art. VII(2). ‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119, 123.

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of that judgment or award, then the other State parties would be entitled ‘individually or collectively, to take such measures as are strictly required to give effect to that judgment or award.’91 Like the International Convention for the Mutual Protection of Private Prop- 32 erty Rights in Foreign Countries (1957) the Abs–Shawcross Draft Convention did not garner sufficient support to be considered as a basis for a multilateral treaty, although it later proved to be influential in the framing of the OECD Draft Convention on the Protection of Foreign Property (1962) and BITs. 4. Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens (1961) a) Introduction

The next instrument which sought to provide a basis for multilateral agree- 33 ment on the international law on the protection of aliens was the ‘Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens’, which was prepared by Professors Louis Sohn and Richard Baxter of Harvard Law School. This initiative was undertaken at the suggestion of Dr Yuen-li Liang, the then Director of the Codification Division of the Office of Legal Affairs at the United Nations Secretariat.92 The purpose of the Harvard Draft Convention was ‘to codify with some particularity the standards established by international law for the protection of aliens and thereby to obviate, as far as possible, the necessity of looking to customary international law.’93 In preparing the Harvard Draft Convention, Professors Sohn and Baxter had regard to an earlier Draft Convention prepared by Professor Edwin Borchard, also of Harvard Law School, in 1929, titled the ‘Draft Convention on Responsibility of States for Damage Done on Their Territory to the Person or Property of Foreigners’.94 The preparation of the Harvard Draft Convention aimed to complement the International Law Commission’s ongoing work on the ‘Responsibility of States for Internationally Unlawful Acts’, which was then in the hands of Special Rapporteur F. V. García-Amador of Cuba.95 Dr García-Amador submitted six reports during his tenure as Special Rapporteur between 1956 and 1961, but the ILC had failed to make much progress. As James Crawford would remark in 2002, this was largely because: The divisiveness of the general debate in 1957 suggested that there was no agreement as to the way forward. Some sought to limit the topic to diplomatic protection; others thought that the rules of diplomatic protection outmoded. An initial decision was made to limit the topic to ‘civil’ responsibility – not surprisingly since the focus was to be on injuries to aliens. (…) The disagreements were

91 Abs–Shawcross Draft Convention, Art. VIII. 92 Louis Sohn and Richard Baxter, ‘Responsibility of States for Injuries to the Economic Interests of Aliens’ (1961) 55 AJIL 545, 545. 93 Ibid., at 547. 94 (1929) 23 AJIL Special Suppl. 131–239. 95 See especially Louis Sohn and Richard Baxter (n. 92) 545–547.

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In light of the ILC’s torpor on this topic, the Harvard Draft Convention sought to make progress on the applicable rules of international law on injuries to aliens. The Harvard Draft Convention dealt only ‘with such acts and omissions of States as cause an injury to an alien, and it is not concerned with Stateto-State responsibility for other injurious acts or for violations of international treaties or of other rules of international law.’97 b) General Principles and Scope of Application

35

Section A of the Harvard Draft Convention, containing Articles 1 and 2, set forth its ‘General Principles and Scope’. Article 1(1) provided that a State is ‘internationally responsible for an act or omission which, under international law, is wrongful, is attributable to that State, and causes an injury to an alien.’98 Article 1(2) contained requirements relating to the exhaustion of local remedies and nationality.99 Article 2(1) provided that the responsibility of a State was to be determined in accordance with public international law.100 A State was not entitled to avoid international responsibility by invoking its domestic law.101 Article 2(3) contained a ‘without prejudice’ provision that entitled an alien to invoke its rights under municipal law of the State against which a claim is made, if that law was more favourable to him or her than the Harvard Draft Convention.102 c) Standards of Treatment

36

Section B of the Harvard Draft Convention identified categories of ‘wrongful acts and omissions’. Article 3 set forth the ‘general rule’, namely that ‘an act or omission which is attributable to a State and causes an injury to an alien is “wrongful”’, (a) ‘if without sufficient justification, it is intended to cause, or to facilitate the causing of, injury’; (b) ‘if without sufficient justification, it creates an unreasonable risk of injury through a failure to exercise due care’; (c) ‘if it is an act or omission defined in Articles 5 to 12’; or (d) ‘if it violates a treaty.’103 Article 4 gave a detailed definition of what would amount to ‘sufficient justification’. These included, among others, ‘the imposition of punishment for the commission of a crime’; ‘the actual necessity of maintaining public order, health, or morality in accordance with laws enacted for that purpose’, and ‘the valid exercise of belligerent or neutral rights or duties under international law’.104 Subse96 James Crawford, ‘Introduction’ in The International Law Commission’s Articles on State Responsibility (Cambridge University Press, 2002) 1, 1–2. 97 Louis Sohn and Richard Baxter (n. 92) 546. 98 Harvard Draft Convention, Art. 1(1). 99 Ibid., Art. 1(2). 100 Ibid., Art. 2(1). 101 Ibid., Art. 2(2). 102 Ibid., Art. 2(3). 103 Ibid., Art. 3.

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quent provisions in Section B identified particular wrongful acts and omissions relating to: the arrest and detention of an alien (Article 5);105 the denial of access to a tribunal or other administrative authority (Article 6);106 denial of a fair hearing (Article 7);107 adverse decisions or judgments (Article 8);108 the destruction of or damage to property (Article 9);109 the taking and deprivation of use or enjoyment of property (Article 10);110 the deprivation of means of livelihood (Article 11);111 the violation, annulment, and modification of contracts and concessions (Article 12);112 and lack of due diligence in protecting aliens (Article 13).113 d) Settlement of Disputes

The Harvard Draft Convention contemplated that aliens would have the right 37 to present a claim directly against the State alleged to be responsible, and Section F (Articles 20–22) set forth a procedure for the presentation of such claims. Article 20 first provided that ‘[a] claim may be presented (…) by an injured alien or by a person entitled to claim through him.’114 An ‘injured alien’ was defined as including ‘the alien who has suffered an injury’, as well as, in the case of the killing of an alien, an alien who was a spouse of the deceased; a parent of the deceased; a child of the deceased; or a relative by blood or marriage actually dependent on the deceased for support.115 It also included an alien who held shares or an analogous interest in a legal person, and who suffered an injury to that interest through, e.g., the dissolution of that legal person.116 Article 21 contained relevant definitions, e.g., of ‘alien’, ‘person’, and ‘national’ of a State. Article 22 then provided the relevant procedure. Most striking is that Article 38 22 only permits injured aliens to present claims directly against the State which is alleged to be responsible for an unlawful act or omission,117 or directly to an international tribunal which may have jurisdiction;118 it does not provide for the creation of such an international tribunal. Article 22 also contained a number of limitations to the types of claims that might be presented, relating in particular to certain types of injuries identified in Article 14, such as injuries sustained in activities involving a high degree of risk.119 A legal person was not permitted to 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118

Ibid., Art. 4. Ibid., Art. 5. Ibid., Art. 6. Ibid., Art. 7. Ibid., Art. 8. Ibid., Art. 9. Ibid., Art. 10. Ibid., Art. 11. Ibid., Art. 12. Ibid., Art. 13. Ibid., Art. 20. Ibid., Art. 20(2). Ibid., Art. 20(2). Ibid., Art. 22(1). Ibid., Art. 22(2).

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present a claim as an ‘injured alien’ if the controlling interest in that person was in ‘nationals of the State alleged to be responsible or in an organ or agency of that State’,120 and the requirement of continuous nationality on the part of the injured alien was also confirmed.121 39 Article 23 of the Harvard Draft Convention contained the procedure for the espousal and presentation of claims by States under the traditional approach of diplomatic protection.122 Other provisions in the Harvard Draft Convention relevant to the settlement of disputes provided guidance on the requirement of the exhaustion of local remedies;123 the waiver, compromise, or settlement of claims;124 the application of the doctrine of extinctive prescription in the presentation of claims;125 and the content of the obligation to provide reparation,126 including an identification of the categories of damages which could be awarded.127 40 Much of the Harvard Draft Convention reflected customary international law, and various provisions were later included in the ILC’s Articles on State Responsibility. However, like the International Convention for the Mutual Protection of Private Property Rights in Foreign Countries (1957) and the Abs– Shawcross Draft Convention (1959) before it, States did not adopt the Harvard Draft Convention as the basis of a multilateral treaty. 5. OECD Draft Convention on the Protection of Foreign Property (1962) a) Introduction 41

The OECD Draft Convention on the Protection of Foreign Property was prepared by a Committee of the OECD in 1962, and derived from instructions given by the Council of the OECD in April 1960.128 The OECD Convention was reissued, with minor revisions, in 1967, after its adoption by the OECD Council.129 119 120 121 122

123 124 125 126 127 128 129

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Ibid., Art. 22(5)–(6). Ibid., Art. 22(7). Ibid., Art. 22(8). Ibid., Art. 23. The right of the State to present a claim on behalf of one of its nationals was not affected by whether the national had already presented his or her claim under the procedure set forth in Art. 22. Like the procedure for the presentation of claims by individuals, Art. 23 contained similar restrictions, such as requiring the exhaustion of local remedies and continuous nationality. Ibid., Art. 19. Ibid., Arts. 24–25. Ibid., Art. 26. Ibid., Art. 27. Ibid., Arts. 28–36. OECD Draft Convention on the Protection of Foreign Property (1963) 2 ILM 241; see Andrew Newcombe and Lluís Paradell (n. 2) 30–31. OECD Draft Convention on the Protection of Foreign Property (1968) 7 ILM 117; see Andrew Newcombe and Lluís Paradell (n. 2) 30–31. The revisions to the OECD Draft Convention affected Art. 3(ii) (on the conditions applying to the taking of property); Art. 5 (on the consequences of any breach of the Convention, and in particular the deletion of a provision

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b) Scope of Application

Like the Abs–Shawcross Draft Convention (1959), the OECD Draft Conven- 42 tion sought to protect ‘property’ of ‘nationals’. The term ‘property’ was defined in Article 9(c) as meaning ‘all property, rights and interests, whether held directly or indirectly, including the interest which a member of a company is deemed to have in the property of the company.’130 The commentary to the OECD Draft Convention states that ‘property’ was intended to be ‘used in its widest sense which includes, but is not limited to, investments.’131 It also clarifies that the term ‘member’ is used in preference to the term ‘shareholder’, which has a more limited meaning in some legal systems.132 The term ‘nationals’ expressly included both ‘natural persons’ and ‘companies’.133 The term ‘company’ was defined as meaning ‘any entity which, under the law of a Party, either is recognized as a legal person or, as an entity or through its members, has the capacity to dispose of property or to institute legal proceedings.’134 The commentary to Article 1 of the OECD Convention (which contains the 43 States’ obligations on treatment of foreign property) also appears to assume that a condition of legality is included, stating that ‘[g]enerally, to come within the provisions of the Convention, the property must be lawfully acquired or invested by the foreign national or his predecessor in title.’135 Article 11 of the OECD Draft Convention is also relevant to its scope of application, as it provides for the extension of the Convention’s territorial application ‘to any of the territories for whose international relations [a Contracting State] is responsible’.136 This provision has been adopted by, e.g., the United Kingdom in Article 13 of its Model BIT.137 c) Standards of Treatment

The substantive standards of treatment are contained in Articles 1, 2, 3, 4, and 44 6. Article 1 of the OECD Draft Convention, titled ‘Treatment of Foreign Property’, provided in paragraph (a) that the State parties agreed to accord ‘fair and equitable treatment’ to the property of the nationals of other State parties, and also to accord within their territory ‘the most constant protection and security’ to such property. The term ‘fair and equitable treatment’ was explained in the commentary as referring to ‘the standard set by international law for the treatment

130 131 132 133 134 135 136 137

on the non-recognition of wrongful measures in Art. 5(b)); and Art. 6 (on derogations and exceptions), although these amendments are relatively minor. Art. 9(c) also provided for two exceptions: Art. 9(c)(i) and (ii). ‘Notes and Comments to Article 9(c)’ (n. 128) (1963) 2 ILM 241, 264. Ibid. OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 9(a). Ibid., Art. 9(b). ‘Notes and Comments to Article 1’ (n. 128) (1963) 2 ILM 241, 243. OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 11. See, e.g., Chester Brown and Audley Sheppard, ‘United Kingdom’ in Chester Brown (ed) (n. 10) 697.

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due by each State with regard to property of foreign nationals.’138 The obligation to accord ‘most constant protection and security’ was explained as referring to ‘the obligation of each Party to exercise due diligence as regards actions by public authorities as well as others in relation to such property.’139 State parties also agreed not to impair the ‘management, maintenance, use, enjoyment or disposal’ of such property by ‘unreasonable or discriminatory measures’.140 Article 1(b) also provided that: ‘The provisions of this Convention shall not affect the right of any Party to allow or prohibit the acquisition of property or the investment of capital within its territory by nationals of another Party’,141 thus confirming the post-establishment nature of the protections contained in the OECD Draft Convention. 45 Article 2 of the OECD Draft Convention contained an ‘observance of undertakings’ clause, or ‘umbrella clause’, which provided that ‘Each Party shall at all times ensure the observance of undertakings given by it in relation to property of nationals of any other Party.’142 This clause was explained as expressing the general principle of pacta sunt servanda, or ‘the maintenance of the pledged word’.143 As for the nature of the ‘undertaking’ sought to be protected by this provision, the commentary states that ‘[a]n undertaking may be embodied in a contract or in a concession – it is not possible on legal grounds to draw a distinction between the two, and such an undertaking may represent a consensual or a unilateral engagement on the part of the Party concerned. However, it must relate to the property concerned; it is not sufficient if the link is incidental.’144 46 Article 3 provided for the protection against expropriation, stating generally that State parties were not permitted to take any measure depriving a national of another State party of his or her property unless (i) the measures were taken ‘in the public interest and under due process of law’; (ii) the measures were ‘not discriminatory’ which the State party may have given; and (iii) the measures were accompanied by the ‘provision for the payment of just compensation’; this compensation was to represent the ‘genuine value of the property affected’, was to be paid ‘without undue delay’, and was to be transferable to the extent necessary to make it effective for the national entitled to the compensation.145 The commentary to Article 3 observed that this provision restated the conditions that had to be complied with ‘according to recognised rules of international law.’146 47 Article 4 of the OECD Draft Convention made a ‘recommendation’ with respect to free transfer of ‘income from and proceeds upon liquidation of such

138 139 140 141 142 143 144 145 146

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‘Notes and Comments to Article 1’ (n. 128) (1963) 2 ILM 241, 244. Ibid. OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 1(a). Ibid., Art. 1(b). Ibid., Art. 2. ‘Notes and Comments to Article 2’ (n. 128) (1963) 2 ILM 241, 247. Ibid. OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 3. ‘Notes and comments to Article 3’ (n. 128) (1963) 2 ILM 241, 249; (1968) 7 ILM 117, 125.

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property’. It stated that, although the provision did not give rise to any binding obligations, each State party would ‘endeavour to grant the necessary authorisation for such transfers to the country of the residence of that national and in the currency thereof.’147 Article 5 confirmed that any State responsible for a breach of the OECD Convention had the obligation to make full reparation, thus reaffirming the principle recognised by the PCIJ in Factory at Chorzów.148 Article 6 of the OECD Draft Convention contained the exceptions provision, which permitted States to derogate from their obligations ‘only if’ they were ‘involved in war, hostilities or other grave national emergency due to force majeure or provoked by unforeseen circumstances or threatening its essential security interests; or (ii) taken pursuant to decisions of the Security Council of the United Nations or to recommendations of the Security Council or General Assembly of the United Nations relating to the maintenance or restoration of international peace and security.’ Article 6 further provided that ‘[a]ny such measures shall be limited in extent and duration to those strictly required by the exigencies of the situation.’ d) Settlement of Disputes

The OECD Draft Convention also contained a dispute settlement procedure, 48 which was to be found in Article 7. Article 7(1) provided for an inter-State dispute settlement procedure, namely that: Any dispute between Parties as to the interpretation or application of this Convention may be submitted by agreement between them either to an Arbitral Tribunal established in accordance with the provisions of the Annex to this Convention, which shall form an integral part thereof, or to any other international tribunal.149

Article 7(a) further provided that if the parties failed to agree within 60 days 49 of the date on which written notice of an intention to institute proceedings was given, the arbitral tribunal would be constituted in accordance with the Annex to the Draft Convention.150 The commentary to the OECD Draft Convention stated 147 OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 4. 148 Factory at Chorzów (Germany v. Poland), PCIJ Judgment, (1928) PCIJ (Ser. A) No. 17, 47. Art. 5 of the OECD Draft Convention on the Protection of Foreign Property (1962) included an additional paragraph (Art. 5(b)), which obliged Contracting States not to recognise any measures adopted by any State which were taken in breach of Arts. 2 or 3 of the OECD Draft Convention. 149 OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 7(a). 150 Ibid. The Annex to the OECD Draft Convention provided for the constitution of a threemember arbitral tribunal. The arbitral tribunal was to have the power to decide on its jurisdiction, and to determine its procedure. It was obliged to afford all parties a fair hearing, and was permitted to render an award on the default of a party. Interestingly, it also had the express power to permit ‘intervention by a Party which considers that it has an interest of a legal nature which may be affected by the decision in the case’; to ‘consolidate pending proceedings with the agreement, where necessary, of any other Arbitral Tribunal established in accordance with this Annex’; and to ‘stay proceedings if other proceedings arising out of the same facts and raising substantially the same issues are pending before any other international Tribunal or Commission’, provided that no objection was made by any party to the

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that although States should always seek to settle any disputes by diplomatic means, ‘in the case of an instrument dedicated to the creation of an atmosphere of confidence there is a vital need to make also provision for the effective adjudication of such disputes.’151 The commentary to the OECD Draft Convention explained that the default forum for the settlement of any disputes should be an arbitral tribunal, rather than the ICJ.152 However, the State parties to the dispute could of course agree to refer any dispute to the ICJ or any other international tribunal.153 50 Like the Abs–Shawcross Draft Convention (1959), as well as the Harvard Draft Convention (1961), Article 7(b) of the OECD Draft Convention also provided for the possibility of claims by nationals. It provided that: A national of a Party claiming that he has been injured by measures in breach of this Convention may institute proceedings against any other Party responsible for such measures before the Arbitral Tribunal referred to in paragraph (a), provided that: (i) (ii)

the Party against which the claim is made has accepted the jurisdiction of that Arbitral Tribunal by a declaration which covers that claim; and the Party of which he is a national has indicated that it will not institute proceedings under paragraph (a) or, within six months of receiving a written request from its national for the institution of such proceedings, has not instituted them.154

Article 7(c) clarified that a declaration made by a State party may be ‘general or particular’, and that it ‘may be made or revoked at any time’.155 Article 7(d) complemented the rule in Article 7(b)(ii) which sought to eliminate the possibility of parallel proceedings, providing that a State may institute inter-State proceedings after the six-month period referred to in Article 7(b)(ii) had elapsed, but if this occurred, any investor-State proceedings were to be suspended until the inter-State proceedings were terminated.156 52 In the case of a claim made by a national, the same Annex would apply as regards the constitution and powers of the arbitral tribunal, but two additional provisions catered specifically for the possibility of investor-State claims. It provided that in an investor-State claim, the tribunal may, upon an application by the respondent: ‘(i) order that national to give security for costs; or (ii) dismiss 51

151 152

153 154 155 156

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proceedings: ‘Annex Relating to the Statute of the Arbitral Tribunal’ (n. 128) (1963) 2 ILM 241, 266, 267. ‘Notes and Comments to Article 7’ (n. 128) (1963) 2 ILM 241, 258. According to the commentary, the reasons for preferring international arbitration over the ICJ were: ‘(i) the [arbitral tribunal] was a forum more appropriate for disputes, many of which were of a technical nature; (ii) the [arbitral tribunal] was easy to convene and a country in the process of economic development might feel reassured by the possibility of choosing one of its members; (iii) its decision was given in a shorter time and the procedure entailed less cost; and that (iv) countries in the process of economic development might prefer the [arbitral tribunal] because disputes could be determined there without much publicity’: ibid., at 259. Ibid. OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 7(b). Ibid., Art. 7(c). Ibid., Art. 7(d).

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the claim if, from the statements made by that national to the Tribunal, the institution of the proceedings appears frivolous or vexatious.’157 The remainder of the provisions in the OECD Draft Convention were either 53 clarificatory or were in the nature of ‘final provisions’. Article 8 of the OECD Draft Convention, like Article VI of the Abs–Shawcross Draft Convention, clarified that the rights and obligations in the OECD Draft Convention were without prejudice to other more favourable provisions in other international agreements from which the nationals of a State party may benefit.158 The OECD Draft Convention was not concluded by the OECD member 54 States as an international agreement. However, like the Abs–Shawcross Draft Convention (1959) before it, the OECD Draft Convention was influential in providing much of the content for the model BITs of many OECD member States. 6. Convention on the Settlement of Investment Disputes between States and Nationals of other States (1965) a) Introduction

At the time that the OECD Draft Convention was being drafted, considered, 55 and revised by the member States of the OECD, the General Counsel of the World Bank, Mr Aron Broches, had the idea of establishing a facility for the settlement of international investment disputes.159 He had observed the efforts to create a framework convention for the protection of international investment, but he had noticed that these exercises revealed persistent disagreement on the underlying substantive issues. In light of the controversy, Mr Broches considered that it would be more productive to seek to reach multilateral agreement on a procedure for the resolution of investment disputes, rather than trying to agree on the applicable standards of treatment.160 These efforts resulted in the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention), which was opened for signature in 1965 and entered into force in 1966. The ICSID Convention established the International Centre for Settlement of Investment Disputes (ICSID).161 The purpose of ICSID was ‘to provide facilities for conciliation and arbitration of investment disputes between Contracting States and Nationals of other Contracting States in accordance with the provisions of [the] Convention.’162 ICSID itself does not conduct 157 ‘Annex Relating to the Statute of the Arbitral Tribunal’ (n. 128) (1963) 2 ILM 241, 266, 267. 158 OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 8. 159 Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary (Cambridge University Press, 2009) 2. 160 See further Lucy Reed, Jan Paulsson and Nigel Blackaby, Guide to ICSID Arbitration (Kluwer, 2011) 1–2. 161 Convention on the Settlement of Investment Disputes between States and Nationals of other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966) (ICSID Convention). 162 ICSID Convention (n. 161) Art. 1(2).

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arbitration proceedings, but it is an institution which administers their initiation and functioning. Importantly, both developed and developing States have become State parties to the ICSID Convention, which has resulted in the very high level of membership of 147 States.163 b) Jurisdiction of ICSID 56

Article 25 of the ICSID Convention is the key provision that sets out the jurisdiction of the Centre. In the opening paragraph of that article, the Contracting States agree: The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.164

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The types of disputes which were referred to ICSID were, originally, contractual in nature, being disputes arising out of investment contracts, or concession contracts, between an investor and a State, or State agency. However, an arbitral clause in a contract is not the only means by which a dispute can be referred to ICSID arbitration. Another means by which parties can consent to refer a dispute to ICSID is by the host State stating so in a piece of legislation, such as a domestic law on foreign investment.165 Finally, the basis of the consent might be found in a BIT or other IIA. c) Procedural Provisions

58

The remaining provisions of the ICSID Convention deal with the procedures for conciliation proceedings (Articles 28–35); the procedures for arbitration proceedings, including issues such as the constitution of the tribunal, the powers and functions of the tribunal, the award, the availability of post-award procedures, including annulment proceedings, and recognition and enforcement of the award (Articles 36–55); the procedures for the disqualification of conciliators and arbitrators (Articles 56–58); the cost of proceedings (Articles 59–61); the place of proceedings (Articles 62–63); the procedures for inter-State disputes (Article 64); and finally, procedures for amendment and other final provisions (Articles 65–75).166

163 It should be added that three States have decided to withdraw from the ICSID Convention: these States were Bolivia (which denounced the ICSID Convention on 2 May 2007), Ecuador (which did so on 9 July 2009), and Venezuela (which denounced the ICSID Convention on 24 January 2012). With Venezuela’s denunciation taking effect in July 2012, the ICSID Convention has 146 States parties, barring any other changes. 164 ICSID Convention (n. 161) Art. 25. 165 See, e.g., Albania’s Law on Foreign Investment of 1993, which was the basis of the tribunal’s jurisdiction in Tradex Hellas SA v. Albania, ICSID Case No ARB/94/2, Decision on Jurisdiction, 24 December 1996.

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This part has reviewed the various multilateral efforts that were undertaken 59 by non-governmental organisations, international organisations, and States in the 1950s and 1960s to seek agreement on the substantive law on the protection of aliens, as well as to establish procedures to facilitate the settlement of investment disputes. Of those initiatives, the ICSID Convention is the only one to have resulted in an international agreement that attracted sufficient support to enter into force, although the provisions of the Abs–Shawcross Draft Convention (1959), the Harvard Draft Convention (1961) and the OECD Draft Convention (1962) were influential in the negotiation of BITs. Part D of this chapter now turns to the efforts of States to reach bilateral agreement on issues of investment promotion and protection. D. The Emergence of Bilateral Investment Treaty Programmes 1. The First BIT: The Germany–Pakistan BIT (1959)

With remarkable prescience, Germany considered it unlikely that the various 60 multilateral initiatives that have been outlined above would result in agreement on the protection of international investment in the near future, and in 1959, it embarked on a programme of negotiating BITs. Germany signed its first BIT with Pakistan on 25 November 1959, and a few weeks later, on 16 December 1959, Germany signed its second BIT, with the Dominican Republic. The Germany–Dominican Republic BIT was in fact the first BIT to enter into force on 3 June 1960.167 The Germany–Pakistan BIT protected ‘investments’, which were defined in 61 Article 8(1) as comprising ‘capital brought into the territory of the other Party for investment in various forms in the shape of assets such as foreign exchange, goods, property rights, patents and technical knowledge.’168 The term ‘investment’ was also defined as including ‘returns derived from and ploughed back into such “investments”.’ Article 8(1) further provided that: ‘Any partnerships, companies or assets of similar kind, created by the utilisation of the above mentioned assets shall be regarded as “investments”.’169 The substantive obligations on the State parties were contained in Articles 1– 62 7. Article 1 contained provisions on admission, in which the State parties agreed to ‘endeavour to admit’ investments by nationals of the other State party (Article 1(1)), and also agreed not to discriminate against such investments on the grounds of foreign ownership (Article 1(2)), although this obligation was made 166 For a commentary of the relevant provisions in the ICSID Convention, see especially Schreuer et al. (n. 159); and Malcolm Holmes and Chester Brown, The International Arbitration Act 1974: A Commentary (LexisNexis Butterworths, 2011) 241–338. 167 Kenneth Vandevelde (n. 2) 54. 168 Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments, Art. 8(1). 169 Ibid.

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dependent on existing national laws and regulations.170 In Article 2, the State parties also agreed not to subject any activities as regards the ‘effective management, use or enjoyment’ of investments to discriminatory treatment ‘unless specific stipulations are made in the documents of admission of an investment’.171 Article 3 contained further substantive protections. Article 3(1) provided for the obligation to accord ‘protection and security’; Article 3(2) contained the protection from expropriation; and Article 3(3) stated that nationals or companies who suffered the loss of investments due to ‘war, other armed conflict, revolution or revolt’ should be accorded most favoured nation treatment ‘as regards restitution, indemnification, compensation or other considerations’, and that the transfer of any funds resulting from such payments should also benefit from most favoured nation treatment.172 Article 4 guaranteed the free transfer of investments and returns from such investments,173 and Article 5 envisaged the possibility of the subrogation of claims.174 Article 6 set forth specific requirements on the free transfer of funds.175 Article 7 of the Germany–Pakistan BIT was the ‘without prejudice’ provision which was also to be found in Article VI of the Abs–Shawcross Draft Convention (1959), i.e., that if the legislation of either State party or any international obligations between the State parties provide for better treatment than that required by the BIT, then the BIT does not affect the operation of any such legislation or obligations. Article 7 also included the ‘umbrella clause’ as part of the same provision.176 63 Article 11 of the Germany–Pakistan BIT contained the inter-State dispute settlement provision, in which the States agreed that any disputes concerning the interpretation or application of the BIT could be referred to the ICJ, with both parties’ agreement, but if there was no such agreement, then an arbitral tribunal would decide such disputes.177 64 It can be seen that the first-ever BIT contained basic provisions on non-discriminatory treatment, protection and security, protection from expropriation, most favoured nation treatment as regards compensation for losses suffered in the course of civil strife, and the free transfer of funds. On the whole, these provisions are not greatly dissimilar from those which were contained in the more recent FCN treaties. However, it is interesting to note two points. First, the obligation to accord ‘fair and equitable treatment’ was not included in the Germany– Pakistan BIT, even though this obligation had already become part of the ‘international legal landscape’ in the Havana Charter, a treaty dating from 1948, which sought to establish the International Trade Organisation (ITO).178 The 170 171 172 173 174 175 176 177

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Ibid., Art. 1. Ibid., Art. 2. Ibid., Art. 3. Ibid., Art. 4. Ibid., Art. 5. Ibid., Art. 6. Ibid., Art. 7. Ibid., Art. 11(2)(b).

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obligation to accord ‘fair and equitable treatment’ to the capital of nationals and companies of the other State party was also included in the United States’ postSecond World War FCN treaties with Uruguay, Ireland, Germany, and various other countries,179 and the contemporaneous Abs–Shawcross Draft Convention (1959) and the later OECD Draft Convention (1962) included the provision. The second noteworthy issue is that the Germany–Pakistan BIT did not provide for investor-State arbitration; such a provision was not included in a BIT until the late 1960s. 2. Development of States’ BIT Programmes

Shortly after Germany began negotiating BITs, other States followed suit. 65 These countries were France (which commenced negotiating BITs in 1960), Switzerland (1960), the Netherlands (1963), Italy (1964), the Belgo-Luxembourg Economic Union (1964), Sweden (1965), Denmark (1965), and Norway (1966).180 Some of the treaties that were negotiated in this early period were not strictly limited in their scope to issues of investment promotion and protection, but also addressed other issues of economic and technical cooperation. For instance, Article 10 of the Germany–Pakistan BIT (1959) provided that the State parties were to ‘co-operate with the other in furthering the interchange and use of scientific and technical knowledge and development of training facilities particularly in the interest of increasing productivity and improving standards of living in their territories.’181 This was also the case of the early Swiss BITs, which were known ‘treaties of commerce, investment protection, and technical cooperation.’182 Early Netherlands BITs were also referred to as ‘economic cooperation agreements’.183 There were several reasons for the shift to negotiating BITs rather than FCN 66 treaties, but a major factor was the realisation on the part of developed States that issues of trade would be primarily dealt with in the context of the General Agreement on Tariffs and Trade, which had been negotiated and opened for signature in 1947.184 This led to BITs being shorter and more focussed on invest178 Jeswald Salacuse (n. 4) 218. Art. 11(2) of the Havana Charter provided that the ITO had the power to make recommendations for and to promote bilateral and multilateral agreements on measures designed to assure ‘just and equitable treatment for the enterprise, skills, capital, arts and technology brought from one Member country to another.’ 179 Ibid., at 219–220; Rudolf Dolzer and Christoph Schreuer (n. 45) 120. The Germany–United States FCN Treaty (1954) provided, for instance, in Art. I(1) that: ‘Each Party shall at all times accord fair and equitable treatment to the nationals and companies of the other Party and to their property, enterprises, and other interests.’ 180 See, e.g., Kenneth Vandevelde (n. 2) 54–55; Andrew Newcombe and Lluís Paradell (n. 2) 42–43. 181 Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments, Art. 10. 182 Kenneth Vandevelde (n. 2) 55; see also Michael Schmid, ‘Switzerland’ in Chester Brown (ed) (n. 10) 651. 183 Kenneth Vandevelde (n. 2) 55; see also Nico Schrijver and Vid Prislan, ‘Netherlands’ in Chester Brown (ed) (n. 10) 535.

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ment issues, and the absence of non-investment issues also made such treaties easier to negotiate.185 BIT negotiations were typically between a developed State and a developing State; the developed State would be seeking protections for its nationals who wished to invest abroad, and the developing State would be keen to attract foreign investment to assist in its quest for economic development.186 The negotiations usually proceeded on the basis of a ‘model BIT’ that developed States would prepare. The texts of these model BITs were based, to greater or lesser extent, on the OECD Draft Convention for the Protection of Foreign Property (1962), which led to a good deal of consistency in the terms of various BITs. 67 As has already been remarked above, it is noteworthy that the earliest BITs did not contain an investor-State dispute settlement procedure. The first BIT to include such a provision was the Indonesia–Netherlands BIT (1968), although like the Abs–Shawcross Draft Convention (1959) and the OECD Draft Convention (1962), this only provided for investor-State arbitration on the basis that the Contracting State on the territory of which a national of the other Contracting State makes or intends to make an investment ‘shall assent to any demand on the part of such national (…) to submit, for conciliation or arbitration, to [ICSID].’187 This was, therefore, a qualified or imperfect form of consent to investor-State arbitration. The first BIT to include unqualified consent to investorState arbitration would appear to be the Italy–Chad BIT (1969). This provided in Article VII that: Tout différend relatif aux investissements faisant l’object du présent Accord, qui pourrait surgir entre l’une des Parties contractantes (ou l’une quelconque des institutions ou organisations relevant de ladite Partie ou contrôlée par ladite Partie) et une personne physique ou morale ayant la nationalité de l’autre Partie, est soumis à la juridiction du Centre International pour le Règlement des Différends Relatifs aux Investissements, conformément à la Convention Internationale de Washington du 18 mars 1965.188

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The wave of expropriations which took place in the 1970s saw other countries taking up BIT programmes, including the United Kingdom (1975),189 Austria (1976),190 Japan (1977),191 and the United States (1977).192 Even States which 184 General Agreement on Tariffs and Trade, opened for signature 30 October 1947, 55 UNTS 194 (entered into force 1 January 1948); see, e.g., Kenneth Vandevelde (n. 2) 57–58. 185 Kenneth Vandevelde (n. 2) 57. 186 Ibid., at 57–58. 187 Agreement on Economic Cooperation between the Government of the Republic of Indonesia and the Government of the Kingdom of the Netherlands (7 July 1968), Art. 11, as cited in Andrew Newcombe and Lluís Paradell (n. 2) 44–45. This has since been replaced by the Agreement between the Government of the Kingdom of the Netherlands and the Government of the Republic of Indonesia on Promotion and Protection of Investment signed on 6 April 1994, which entered into force on 1 July 1995, in which both States provide their unqualified consent to investor-State arbitration. 188 Accord entre la République du Tchad et la République d’Italie pour protéger et favoriser les investissements du capitaux (1969), Art. VII, cited in Andrew Newcombe and Lluís Paradell (n. 2) 45. 189 Chester Brown and Audley Sheppard, ‘United Kingdom’ in Chester Brown (ed) (n. 10) 697. 190 August Reinisch, ‘Austria’ in Chester Brown (ed) (n. 10) 15.

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had socialist planned economies, such as the Soviet Union, Eastern European countries within the Soviet sphere of influence, and China, began entering into BITs.193 However, some of these States did not wholeheartedly embrace all of the protections typically contained in BITs, such as the national treatment obligation,194 as well as in particular, the investor-State arbitration provision.195 These States would usually agree to investor-State arbitration, but the scope of the provision would be quite narrow.196 For instance, the United Kingdom–China BIT (1986) provides in Article 7(1) that: A dispute between a national or company of one Contracting Party and the other Contracting Party concerning an amount of compensation which has not been amicably settled after a period of six months from written notification of that dispute shall be submitted to international arbitration.197

Such ‘narrow’ investor-State dispute settlement provisions are now less fre- 69 quently agreed; a recent BIT entered into by China, the Germany–China BIT (2003), provides in Article 9 that ‘any dispute concerning investments’ which is not settled by negotiation ‘shall, at the request of the investor (…) be submitted for arbitration.’198 A further impetus in the negotiation of BITs came in the late 1980s and early 70 1990s, in the form of the collapse and fragmentation of the Soviet Union, the emergence of Central and Eastern European States as market economies, and the actions of Latin American countries in seeking to attract foreign investment. As Professor Vandevelde puts it: ‘While fewer than four hundred BITs had been concluded in the thirty years from 1959 to 1989, during the next fifteen years some two thousand BITs would be concluded.’199 During this period, a number of regional multilateral agreements were negotiated which contained investment protection provisions, such as the North American Free Trade Agreement,200 and the Energy Charter Treaty,201 although an OECD-led attempt to negotiate a uni191 Shotaro Hamamoto and Luke Nottage, ‘Japan’ in Chester Brown (ed) (n. 10) 347. 192 Lee Caplan and Jeremy Sharpe, ‘United States’ in Chester Brown (ed) (n. 10) 755; Kenneth Vandevelde (n. 2) 56–57. 193 See, e.g., Sergey Ripinsky, ‘Russia’ in Chester Brown (ed) (n. 10) 593. 194 See, e.g., Norah Gallagher and Wenhua Shan, Chinese Investment Treaties: Policies and Practice (Oxford University Press, 2009) 165–171. 195 August Reinisch, ‘How Narrow are Narrow Dispute Settlement Clauses in Investment Treaties?’ (2011) 2 J. Int’l Disp. Settlement 115, 117. 196 See especially ibid. 197 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China concerning the Promotion and Reciprocal Protection of Investments (15 May 1986), Art. 7(1); see further Eileen Denza and Sheelagh Brooks, ‘Investment Protection Treaties: United Kingdom Experience’ (1987) 36 ICLQ 908–923. 198 Agreement between the Federal Republic of Germany and the People’s Republic of China on the Encouragement and Reciprocal Protection of Investments (2003), Art. 9. 199 Kenneth Vandevelde (n. 2) 64 (footnotes omitted). 200 North American Free Trade Agreement, signed 17 December 1992, 32 ILM 289 (entered into force 1 January 1994). 201 Energy Charter Treaty, opened for signature 17 December 1994, 34 ILM 360 (entered into force 16 April 1998).

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versal investment protection treaty, the Multilateral Agreement on Investment, was abandoned in 1998 in the face of disagreement among developed States on issues of access, and stiff opposition from developing States and non-governmental organisations.202 But this has not prevented other regional multilateral agreements with investment protection provisions from being concluded. Such agreements have included the ASEAN Comprehensive Investment Agreement (which applies to the ASEAN member States, namely Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam), and the ASEAN–Australia–New Zealand Free Trade Agreement.203 Other multilateral investment negotiations are afoot.204 71 Today, the States with the most expansive BIT networks are Germany (with 130 BITs in force), China (having signed 130 BITs, with 101 in force), Switzerland (with 128 BITs signed, and 113 in force), and the United Kingdom (with just over 100 BITs signed, and 95 in force).205 3. Content and Characteristics of BITs 72

As the majority of BITs have largely been based on similar negotiating models, BITs follow, by and large, a relatively predictable pattern, and cover much the same content. It is worth examining the content of a BIT that was concluded relatively early, namely the United Kingdom’s first ever BIT, the United Kingdom–Egypt BIT (1975). This BIT was negotiated based on a model BIT that has remained quite consistent to the present day.206 It includes an obligation to encourage and create favourable conditions for bilateral investment between the two countries, and also imposes an obligation on each State party to admit such investments, subject to each State’s laws.207 It requires the contracting parties to accord fair and equitable treatment to investments of nationals or companies of the other contracting party, and to accord full protection and security to such investments.208 The contracting States are also obliged not to impair the management, maintenance, use, enjoyment or disposal of investments by unreasonable or discriminatory measures;209 and the BIT also contains an ‘umbrella clause’.210 202 Kenneth Vandevelde (n. 2) 69–70. 203 ASEAN Comprehensive Investment Agreement, signed 26 February 2009, available at www.aseansec.org/20632.htm (last accessed 20 March 2012); ASEAN–Australia–New Zealand Free Trade Agreement, signed 27 February 2009, available at www.dfat.gov.au/fta/ aanzfta/index.html (last accessed 20 March 2012). 204 For, e.g., the Trans-Pacific Partnership Agreement. 205 UNCTAD, ‘Recent Developments in International Investment Agreements (2008–June 2009)’, IIA Monitor No 3 (2009) – International Investment Agreements, UN Doc. UNCTAD/WEB/DIAE/IA/2009/8, p. 2; see also Rudolf Dolzer and Yun-I Kim, ‘Germany’ in Chester Brown (ed) (n. 10) 289; Wenhua Shan and Norah Gallagher, ‘China’ in Chester Brown (ed) (n. 10) 131; Michael Schmid, ‘Switzerland’ in Chester Brown (ed) (n. 10) 651; Chester Brown and Audley Sheppard, ‘United Kingdom’ in Chester Brown (ed) (n. 10) 697. 206 Chester Brown and Audley Sheppard, ‘United Kingdom’ in Chester Brown (ed) (n. 10) 697. 207 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Arab Republic of Egypt, Art. 2(1). 208 Ibid., Art. 2(2).

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It further provides that the State parties have the obligation to accord most favoured nation treatment and national treatment to investments of nationals and companies of the other contracting party, as well as to those nationals and companies;211 the obligation to provide compensation for losses caused by civil strife on a most favoured nation or national treatment basis;212 the obligation not to expropriate investments without compensation;213 and the obligation to permit the free transfer of funds.214 The United Kingdom–Egypt BIT also includes provisions on investor-State dispute settlement, and inter-State dispute settlement,215 as well as provisions on other issues such as exceptions, the subrogation of claims, and ‘final provisions’.216 It was characteristic of these early BITs that they did not provide much in the 73 way of detail on the content of the substantive obligations for the benefit of any tribunals which might later be constituted to determine investor-State or interState disputes. The fair and equitable treatment provision in the United Kingdom–Egypt BIT, for instance, states quite simply that: ‘Investments of nationals or companies of either Contracting Party shall at all times be accorded fair and equitable treatment’,217 leaving investor-State tribunals to interpret this provision under the rules set forth in the Vienna Convention on the Law of Treaties, and against the background of existing customary international law.218 However, more recent BITs of a number of States do provide guidance on the 74 interpretation of a number of provisions. For instance, with respect to Article 1105 of the NAFTA, the State parties to that treaty, in the context of the NAFTA’s Free Trade Commission, issued an interpretative declaration in July 2001 on how that provision was to be interpreted and applied. This was done largely in response to the decisions of a number of NAFTA tribunals which had found that the obligation to accord fair and equitable treatment in Article 1105 of NAFTA provided for treatment greater than that required by customary international law.219 The Free Trade Commission clarified in its interpretative declaration that: ‘Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.’220 It also stated that: ‘The 209 210 211 212 213 214 215 216 217 218

Ibid. Ibid. Ibid., Art. 3. Ibid., Art. 4. Ibid., Art. 5. Ibid., Art. 6. Ibid., Arts. 8–9. Ibid., Arts. 7, 10, 11–13. Ibid., Art. 2(2). For an excellent discussion, see especially Martins Paparinskis, ‘Investment Treaty Interpretation and Customary International Law: Preliminary Remarks’ in Chester Brown and Kate Miles (eds), Evolution in Investment Treaty Law and Arbitration (Cambridge University Press, 2011) 65. 219 See, e.g., Pope & Talbot v. Canada, UNCITRAL Arbitration, Award of the Merits of Phase 2, 10 April 2001, paras. 105–118.

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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.’221 Consistent with the NAFTA Free Trade Commission’s interpretative declaration, the US Model BIT (2004) and the Canadian Model BIT (2004) include similar language.222 75 Another issue on which the United States and Canada (and a number of other States) have sought to provide guidance to investment treaty tribunals is the concept of ‘indirect expropriation’. The US Model BIT (2012) contains an ‘Annex B’ on ‘Expropriation’, which confirms that Article 6 on expropriation ‘is intended to reflect customary international law concerning the obligation of States with respect to expropriation’,223 and goes on to state that: 4(a). 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: (i)

(ii) (iii)

76

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; the extent to which the government action interferes with distinct, reasonable investmentbacked expectations; and the character of the government action.224

Annex B of the US Model BIT (2012) adds by way of clarification that: 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.225

77

This clarificatory provision is not included in the BITs of most other States, but it is noteworthy that similar language is also being adopted by other countries, such as Colombia, in its model BIT.226 E. Conclusion

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This chapter has examined the evolution of the IIA regime, and it has revealed that the early efforts to reach multilateral agreement – even though these were largely unsuccessful – were nonetheless influential in the practice of States 220 NAFTA Free Trade Commission, ‘Notes of Interpretation of Certain Chapter 11 Provisions’ (31 July 2001), available at www.international.gc.ca/trade-agreements-accords-commerciaux/disp-diff/nafta-interpr.aspx?lang=en&view=d (last accessed 20 March 2012). 221 Ibid.; see also Andrea Bjorklund, ‘NAFTA Chapter 11’ in Chester Brown (ed) (n. 10) 465. 222 North American Free Trade Agreement, signed 17 December 1992, 32 ILM 289 (entered into force 1 January 1994). See especially Lee Caplan and Jeremy Sharpe, ‘United States’ in Chester Brown (ed) (n. 10) 755; and Céline Lévesque and Andrew Newcombe, ‘Canada’ in Chester Brown (ed) (n. 10) 53. 223 US Model BIT (2012), Annex B, para. 1. 224 US Model BIT (2012), Annex B, para. 4(a). 225 Ibid., para. 4(b). 226 See especially José Antonio Rivas, ‘Colombia’ in Chester Brown (ed) (n. 10) 183.

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in negotiating almost 3,000 BITs which are currently in force. In this sense, the negotiation by States of IIAs has been the principal contributing factor in the development of international investment law. However, many BIT contours of the rights of investors, and the obligations on States, have been developed in the practice of arbitral tribunals which have been constituted under IIAs to determine investment disputes. Arbitral practice has also thrown up systemic problems in the regime of international investment law. These issues are considered in later chapters in the present volume.

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II. Bilateral Approaches A. European Bilateral Approaches

John P. Gaffney and Zeynep Akçay 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. European BITs within the International Legal Order . . . . . . . . . . . . . . . . a) The Genesis and Development of European BITs . . . . . . . . . . . . . . . . . b) Basic Features of European BITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) A Protective Framework for Substantive Rights . . . . . . . . . . . . . (2) An Effective Legal Redress: the Advent of Investor-State Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Comparisons with Other Approaches . . . . . . . . . . . . . . . . . . . . . . . . . (a) Copyrights and Industrial Property Rights . . . . . . . . . . . . . . (b) Fair and Equitable Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (c) Test of Nationality for Companies . . . . . . . . . . . . . . . . . . . . . . . . (d) Claims to Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e) Concessions and Similar Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 3. European BITs within the EU Legal Order . . . . . . . . . . . . . . . . . . . . . . . . . . . a) A Complex Interaction between Intra-EU BITs and EU Law . . . . b) The Potential Conflict of Extra-EU BITs with EU Law. . . . . . . . . . . 4. The Lisbon Treaty – a New Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The EU’s Exclusive Competence for ‘Foreign Direct Investments’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Future of European BITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 4 11 12 15 19 23 24 25 26 27 28 29 40 46 47 53 54

Literature: George Bermann, ‘Navigating EU Law and the Law of International Arbitration’ (2012) Arb. Int’l 397–445; Chester Brown (ed), Commentaries of Selected Model Investment Treaties (Oxford University Press, 2013); Julien Chaisse, ‘Promises and pitfalls of the European Union policy on foreign investment – How will the new EU Competence on FDI affect the emerging global regime?’ (2012) 28 Arb. Int’l 397–445; (2012) J. Int’l Econ. L. 51–84; Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995); Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Kluwer, 2009); Michele Potestà, ‘Bilateral Investment Treaties and the European Union. Recent Developments in Arbitration and before the ECJ’ (2009) 8 LPICT 225–245.

1. Introduction

The purpose of this chapter is to identify typical European traditions and to identify whether and, if so, how bilateral investment treaties (BITs) of a European origin (European BITs) have differed from other important approaches like that of the United States. 2 The chapter reviews the development of European bilateral approaches in the last century, compares those approaches with those in other geographic regions, considers the profound impact that EU membership of European BIT contracting parties is having on European bilateral approaches, and notes the future development of European bilateral approaches. 1

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II.A. European Bilateral Approaches

2. European BITs within the International Legal Order

In this section of the chapter, we briefly examine the development of Euro- 3 pean bilateral approaches in their international context. a) The Genesis and Development of European BITs

During the nineteenth and for a large part of the twentieth century, bilateral economic relations took the form of friendship, commerce and navigation treaties (FCNs) and constituted the forerunners of BITs. FCNs contained provisions on foreign property and aimed mainly at facilitating trade.1 In parallel, after World War II, several attempts were made at establishing a multilateral legal framework for investment. The first initiative took place during the negotiations on the so-called Havana Charter (Havana Charter) for the proposed International Trade Organization (ITO). Thus several articles in earlier drafts of the Havana Charter contained provisions on investment protection with provisions for national treatment, most favoured nation (MFN) treatment and just compensation for expropriation. However, the negotiating parties were unable to reach an agreement on these standards. Consequently, the final draft of the Havana Charter contained only a prohibition on ‘unreasonable or unjustifiable action’. In any case, the Havana Charter never came into force and the ITO was never established. Later, a non-governmental initiative of European origin led to the development of the 1959 Draft Convention on Investments Abroad (the so-called Abs– Shawcross Draft Convention). The Draft Convention was elaborated under the supervision of Hermann Abs, the Director-General of Deutsche Bank, and Lord Shawcross, a former Attorney General of the UK. The main provisions of the Abs–Shawcross Draft Convention were the minimum standard of treatment, i.e., ‘fair and equitable treatment’, protection against ‘unreasonable or discriminatory measures’, observance of undertakings, ‘just and effective’ compensation for expropriation,2 and most importantly the provision for direct investor-State arbitration.3 The Draft Convention never entered into force, but it had a profound influence on the development of European BITs. Germany decided to introduce the Abs–Shawcross Draft Convention to the Organisation for Economic Co-operation and Development (OECD), which in turn published in 1962 a Draft Convention on the Protection of Foreign Property. A few years later, the OECD revised and approved the Draft Convention on the Protection of Foreign Property. The OECD Council Resolution that approved the Draft Convention underlined that it ‘embodies recognized principles relating to the protection of foreign property’ and that it ‘will be a useful docu1 Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995) 3 and 10. 2 Abs–Shawcross Draft Convention on Investments Abroad, April 1959 (1960) 9 J. Pub. L. 115, Arts. I–III. 3 Abs–Shawcross Draft Convention Annex, para. 1.

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ment in the preparation of agreements on the protection of foreign investment’.4 The notion of the minimum standard of treatment enshrined in the draft Convention therein reflected the position of the major capital exporting States: Each Party shall at all times ensure fair and equitable treatment to the property of the nationals of the other Parties. It shall accord within its territory the most constant protection and security to such property and shall not in any way impair the management, maintenance, use, enjoyment or disposal thereof by unreasonable or discriminatory measures. The fact that certain nationals of any State are accorded treatment more favourable than that provided for in this Convention shall not be regarded as discriminatory against nationals of a Party by reason only of the fact that such treatment is not accorded to the latter.’5

Even though the 1967 Draft Convention also never entered into force, its substantive provisions have served as a basis for the development and formulation of future BITs6 that were negotiated by OECD member States, including European States. 8 It was in this context, that the development of European BITs began after World War II, when European countries started negotiating bilateral treaties that dealt exclusively with foreign investment. These countries aimed to create an international framework to govern investments made by nationals of one country in the territory of another. The first BIT was signed between Germany and Pakistan on 25 November 1959.7 Germany proceeded, then, to negotiate similar investment treaties with the developing world and remains one of the leaders in BITs, with over 127 existing BITs.8 9 Other capital-exporting European countries followed Germany’s initiative in concluding BITs.9 Later, with the end of the communist era in the late 1980s, the emerging economies of Eastern and Central Europe started in their turn concluding such treaties. Nowadays, all European countries, with the exception of the Republic of Ireland, are parties to at least one BIT.10

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Resolution of the OECD Council, 12 October 1967 (1968) 7 ILM 117. Art. 1(a) of the Resolution. Rudolf Dolzer and Margrete Stevens (n. 1) 2. The Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments. 8 Germany has concluded 127 treaties as of November 2011. See UNCTAD, Investment Instruments Online, available at http://www.unctadxi.org/templates/DocSearch.aspx?id=779 (last updated 14 November 2011). 9 For example, the Convention between the Government of the Kingdom of the Netherlands and the Government of the Tunisian Republic concerning the Encouragement of Capital Investment and the Protection of Property.of 23 May 1963; the Accord entre la République Italienne et la République de Guinée pour favoriser les investissements de capitaux of 20 February 1964; the Convention entre le Gouvernement de la République française et le Gouvernement de la République tunisienne sur la protection des investissements of 30 June 1972, and the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Arab Republic of Egypt of 11 June 1975. 10 EU member States are party to approximately 1350 BITs at the time of counting per the List of the bilateral investment agreements referred to in Article 4(1) of Regulation (EU) No. 1219/2012 of the European Parliament and of the Council establishing transitional arrangements for bilateral investment agreements between Member States and third countries pub-

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The goals behind the multiplication of BITs are threefold: promotion, protec- 10 tion and liberalisation. Historically, the primary goal has been the promotion of foreign investment in developing countries, which is aimed to reduce poverty and stimulate development. The second goal is the protection of the investment made in developing countries through the creation of a stable international legal framework. The third goal is the liberalisation of the developing country’s economy, which is made possible through the facilitation of the entry of the partner’s investment.11 b) Basic Features of European BITs

BITs provide both substantive protection of foreign investment, in the form of 11 binding guarantees, and procedural protection, in the form of investment dispute resolution, which help to ensure the enforcement of those guarantees. Generally speaking, the structure and the composition of European BITs are relatively uniform. They begin with pre-ambular statements concerning the purpose of the BIT, define the scope of application, enumerate substantive investor protections, and, usually provide for an investor-State dispute settlement. (1) A Protective Framework for Substantive Rights

Generally, European BITs have a broad scope of applications. Thus, in defin- 12 ing what constitutes an ‘investment’, reference is often made to the term ‘every kind of asset’,12 to which is added a list of specific rights,13 which is not exhaustive. There are typically several general standards of treatment contained in a BIT, 13 which can provide for some or all of these standards. These standards are notably the guarantees of fair and equitable treatment, full protection and security, unreasonable or discriminatory measures, international law and contractual obligations. Among European BITs, the fair and equitable treatment is a key standard, in the sense that it protects against a wide range of adverse actions that a host State may take against an investment.14 Traditionally, European BITs have not provided for the protection of other 14 standards such as labour law, environmental law, or human rights, which invariably would limit the scope of investor protections. As we will see later on, a noticeable shift is taking place in relation to this issue, especially as EU law has an

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lished in the Official Journal of the European Union (2013/C 131/02) available at http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2013:131:0002:0098:EN:PDF. Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995). For example, the Treaty between the Federal Republic of Germany and Ceylon for the Promotion and Reciprocal Protection of Investments of 8 November 1963. For example, traditional property rights, rights in companies, monetary claims, copyrights, industrial property rights, etc. Swedish National Board of Trade, Securing High investment Protection for EU Investors (National Board of Trade, 2011).

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increasing impact on investment treaty law and the EU emerges as a significant actor in the area. (2) An Effective Legal Redress: the Advent of Investor-State Arbitration

Investor-State arbitration was a fundamental innovation that was introduced into BITs in the mid-1960s. This provision ensures an effective legal redress against a host country’s violations of an applicable BIT. 16 Until 1968, BITs only provided for State-to-State dispute resolution, notably through the establishment of an arbitral tribunal or the submission of disputes to the International Court of Justice (ICJ). The first BIT that incorporated provisions for investor-State arbitration was the BIT concluded between the Netherlands and Indonesia although this involved the qualified State’s consent to investor-State dispute resolution. A year later, a similar provision, but this time involving unqualified State consent, was to be found in the BIT concluded between Italy and Chad. However, these provisions were not typical – at first only a few treaties provided for State consent to investment arbitration. It was not until the 1970s and 1980s that unqualified State consent to investor-State arbitration in BITs became more common.15 And it was only during the 1990s that investment arbitration actually began to be employed as an international mechanism for the settlement of investment disputes. European BITs gave the impetus to this trend by incorporating provisions on investor-State arbitration. 17 This marks the true beginning of modern BIT practice, since for the first time investors had an effective remedy for unlawful actions that might be committed against investments by host States. Thus investors no longer depended upon ‘gunboat diplomacy’ or on the espousal of their claim by their home State, as was the case previously. Likewise, European BITs do not normally require the investor to exhaust local remedies before resorting to international arbitration (although in some cases investors are obliged to pursue local remedies for a limited period of time, after which the arbitration of the dispute becomes possible). These features have come to be seen as essential in order to attract foreign investors, as a result of their right to bring an action before an international tribunal against a sovereign State in case of a dispute without the necessity of pursuing their claims before domestic State courts. 18 The most common forum chosen for the settlement of investment disputes is the International Centre for Settlement of Investment Disputes (ICSID), which was established in 1965 to resolve disputes between host countries and foreign private investors. The centre assists parties in the initiation of arbitration, the constitution of the tribunal and in helping in the conduct of the proceedings. ICSID arbitration is only available where the host State and the investor’s home State are parties to the ICSID Convention. If only one of the States is party to the Convention, ICSID arbitration is not an option but the ICSID Additional Fa15

15 UNCTAD, Bilateral Investment Treaties in the Mid-1990s (United Nations, 1998) 8–10.

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cility is available. If none of the States are parties to the Convention then investment treaties may also provide for ICSID arbitration, but only pursuant to the Additional Facility Rules. (3) Comparisons with Other Approaches

European BITs were also a source of inspiration for BITs concluded by other countries from other parts of the world, such as the US, which ultimately launched its own BIT programme in 1981. But while initially an inspiration for the US Model BIT, some differences have emerged over the last few decades between the US and European models. While both models aim at the liberalisation of foreign direct investment, the approaches adopted by Europe and the US to the achievement of this objective differ. First, from a formal perspective, European BITs are more concise and therefore offer a more open-ended interpretation, whereas US BITs contain much more detailed provisions. This is not surprising considering that many European countries’ legal systems are based on civil law, which favours a less detailed approach. It may be said, therefore, that the US Model BIT offers a greater degree of legal certainty, but lacks the flexibility inherent in the European model. Second, from a substantive viewpoint, there exists a significant difference between European and US BITs in so far as the admission of the investment is concerned. The admission of the investment refers to the entry of investments of investors of a contracting party into the territory of another contracting party. According to the European model, also called the admission clause, investments of investors of the other contracting party are admitted only if such investments conform to the host country’s legislation. The host country is thus able to determine the conditions on which the investment will be permitted. The investor is only granted post-establishment rights. In contrast, the US model thus confers certain rights – the national treatment and the most favoured nation treatment – to investors of the other contracting party during the pre-establishment phase (so called rights of establishment). The US approach thus provides for a more liberal approach, whereby the investor sees its investment protected even before it is established. Other differences exist as well between US and European BITs, especially those involving continental European States, and these are enumerated in the following sections.

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(a) Copyrights and Industrial Property Rights

French and German BITs cover copyrights, industrial property rights, techni- 23 cal processes, trade names and goodwill. French,16 German17 and UK BITs used 16 Accord entre la République Française et l’Etat des Emirats Arabes Unis sur l’Encouragement et la Protection Réciproques des Investissements of 9 September 1991.

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to express this category of rights in general terms, such as ‘intellectual property rights and goodwill’, but have now expanded the wording to include ‘technical processes and know-how’.18 In contrast, US BITs are considerably more detailed than European BITs: the definition of ‘intellectual property’ includes, ‘inter alia, rights relating to: literary and artistic works, including sound recordings; inventions in all fields of human endeavor; industrial designs; semiconductor mask works; trade secrets, know-how, and confidential business information; and trademarks, service marks, and trade names (…)’.19 Unlike European BITs, US BITs also make express mention of intellectual property rights with respect to national treatment.20 (b) Fair and Equitable Treatment 24

In French, Belgian, Luxembourg BITs, the principle of fair and equitable treatment is given a prominent position, at the beginning of the general treatment clauses. German BITs refer to the standard in the admission clause. In US BITs (as well as in UK BITs), the principle is combined with the provisions on the protection and security of the investment. (c) Test of Nationality for Companies

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In determining the nationality of companies, US BITs (as well as UK BITs) favour the incorporation theory,21 whereas German BITs favour the seat theory22 and Dutch BITs refer to the control theory.23 (d) Claims to Money

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17 Treaty between the Federal Republic of Germany and the Kingdom of Swaziland concerning the Encouragement and Reciprocal Protection of Investments of 5 April 1990. 18 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Argentina for the Promotion and Protection of Investments of 11 December 1990. 19 Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment of 27 August 1993. 20 Treaty between the United States of America and the Arab Republic of Egypt concerning the Reciprocal Encouragement and Protection of Investments of 29 September 1982. 21 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Barbados for the Promotion and Protection of Investments of 7 April 1993. 22 Treaty between the Federal Republic of Germany and the Co-operative Republic of Guyana concerning the Encouragement and Reciprocal Protection of Investments of 6 December 1989. 23 Agreement between the Kingdom of the Netherlands and the Republic of Paraguay on Encouragement and Reciprocal Protection of Investments of 29 October 1992. 24 Accord entre la République Française et la République Fédérative Tchèque et Slovaque sur l’Encouragement et la Protection Réciproques des Investissements of 13 September 1990.

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an economic value’.25 US treaties are worded similarly, but go on to expressly state that such claims must be ‘associated with an investment’.26 The difference may not be that material, since the European BITs seem to indirectly link money claims to the creation of value, which is at least one defining feature of investments. (e) Concessions and Similar Rights

UK BITs expressly refer to ‘business concessions conferred by law or under 27 contract, including concessions to search for, cultivate, extract or exploit natural resources’.27 French and German treaties contain provisions that are similar in this respect to the British definition.28 US BITs are more general: they refer to ‘any right conferred by law and contract, and any licences and permits pursuant to law’.29 3. European BITs within the EU Legal Order

While, as noted in our introduction, some interesting differences have 28 emerged between the approaches to investment protection manifested in European and US BITs, another interesting and potentially far more significant, aspect of any discussion of European bilateral approaches is the profound impact that EU membership will have on European bilateral approaches. a) A Complex Interaction between Intra-EU BITs and EU Law

According to the United Nations Conference on Trade and Development 29 (UNCTAD) there are at present approximately 190 intra-EU BITs.30 This high number is explained by the fact that in the beginning of the 1990s, prior to their accession to the EU, former socialist States, such as Hungary, the Czech Republic or Romania entered into BITs with EU member States in order to attract foreign direct investment to their newly opened market economies.31 As a result of 25 Vertrag zwischen der Bundesrepublik Deutschland und der Argentinischen Republik über die Förderung und den gegenseitigen Schutz von Kapitalanlagen of 9 April 1991. 26 Treaty between the United States of America and the Republic of Bulgaria concerning the Encouragement and Reciprocal Protection of Investment of 23 September 1992. 27 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Co-operative Republic of Guyana for the Promotion and Protection of Investments of 27 October 1989. 28 Accord entre le Gouvernement de la République Française et le Gouvernement de la République Argentine sur l’Encouragement et la Protection Réciproques des Investissements of 3 July 1991; Treaty between the Federal Republic of Germany and the Kingdom of Swaziland concerning the Encouragement and Reciprocal Protection of Investments of 5 April 1990. 29 Treaty between United States of America and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investment of 14 November 1991. 30 The list of BITs entered into by each State is available on UNCTAD’s website at www.unctad.org. 31 Examples: the Accord entre le Gouvernement de la République française et le Gouvernement de la République populaire hongroise sur l’encouragement et la protection réciproques des

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the accession of these States to the EU, their BITs with other EU member States consequently became what are known as ‘intra-EU BITs’. This phenomenon has raised two fundamental questions: the conformity of these BITs with EU law and the admissibility of investor-State arbitrations brought under these treaties.32 The question of conformity is addressed in a note prepared in 2006 by the European Commission’s Directorate General responsible for the Internal Market and Services.33 Three main concerns are raised by the EU Commission. The first relates to the difference in the standards of protection provided pursuant to intra-EU BITs and EU law. As we noted earlier, BITs usually provide enhanced investment protection, such as fair and equitable treatment, national treatment, most favoured nation treatment, protection from expropriation, and full protection and security. In comparison, EU law provides only minimum standards for investment protection. The second concern is that intra-EU BITs may lead to an unequal treatment of investors from different member States. In particular, intra-EU BITs offer one considerable advantage: the possibility of pursuing claims through investment arbitration rather than having to seek redress in the national court systems. The Commission argues that investors not protected under intra-EU BITs will suffer discrimination on grounds of their nationality contrary to Article 18 of the Treaty on the Functioning of the European Union (TFEU).34 The third concern is the possibility that mandatory provisions of EU law might not be interpreted and enforced by arbitral tribunals in line with the jurisprudence of the Court of Justice of the European Union (CJEU) and might, consequently, be removed from the control of this latter. Thus, if a member State grants rights to an investor that are contrary to EU law the approach of the CJEU would be to accord priority to EU law. By contrast, the Commission underlines that the same could not be expected from an investment tribunal established under an intra-EU BIT. investissements of 6 November 1986; Treaty concerning the promotion and reciprocal protection of capital investment (between France and Hungary) of 12 October 1979; Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic of 29 April 1991. 32 See George Bermann, ‘Navigating EU Law and the Law of International Arbitration’ (2012) Arb. Int’l 397–445. 33 The Free Movement of Capital, Note for the Economic and Financial Committee, prepared by the European Commission, Internal Market and Services DG, Nov 2006 (‘The risk remains that arbitration instances, possibly located outside the EU, proceed with investor-to-state dispute settlement procedures without taking into account that most of the provisions of such BITs have been replaced by provisions of Community law. (…) This could lead to arbitration taking place without relevant questions of EC law being submitted to the ECJ, with unequal treatment of investors among Member States as a possible outcome.’) in Eastern Sugar B.V. (Netherlands) v. Czech Republic, SCC Case No. 088/2004, Partial Award, 27 March 2007, para. 126. 34 Article 18 of the TFEU states: ‘Within the scope of application of this Treaty, and without prejudice to any special provisions contained therein, any discrimination on grounds of nationality shall be prohibited.’

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The question of the admissibility of arbitral proceedings brought under intra- 35 EU BITs has been considered in a number of recent cases. It was first addressed in the Eastern Sugar case in 2007.35 In that case, both the respondent, the Czech Republic, and the European Commission, intervening as amicus curiae, argued that intra-EU BITs ceased to be valid upon its accession as a result of the principle of the supremacy of EC law.36 The tribunal rejected that argument and concluded that BITs between EU 36 member States are not automatically superseded by EU law. The tribunal noted that the relationship between the BIT and EU law was addressed neither by the treaties regulating the Czech Republic’s entry into the EU nor by the relevant BIT.37 The tribunal rejected the notion that the intra-EU BIT terminated as a result of its alleged conflict with EU law according to the Vienna Convention on the Law of Treaties (VCLT), in particular with Article 59.38According to Article 59 of the VCLT, one of the two following conditions has to be fulfilled for a treaty to be terminated or suspended: both treaties concern the ‘same subjectmatter’ or there exists an incompatibility between the treaties. In Eastern Sugar, the tribunal noted that the EC Treaty and the intra-EU BIT did not concern the ‘same subject-matter’, given that the former is concerned with cross-border investment and does not cover issues such as investor-State arbitration or fair and equitable treatment. Moreover, the tribunal noted that the Czech Republic was unable to prove that it was intended that the subject-matter should be solely governed by the EC Treaty or that the BIT was ‘incompatible’ with the EC Treaty. The arbitrators concluded instead that both instruments were ‘complementary’.39

35 Eastern Sugar B.V. (Netherlands) v. Czech Republic, SCC Case No. 088/2004, Partial Award, 27 March 2007. 36 In its submissions to the tribunal, the respondent argued: ‘Based on ECJ jurisprudence [former] Article 307 EC is not applicable once all parties of an agreement have become Member States. Consequently, such agreements cannot prevail over Community law. For facts occurring after accession, the BIT is not applicable to matters falling under Community competence. Only certain residual matters, such as diplomatic representation, expropriation and eventually investment promotion, would appear to remain in question. Therefore, where EC Treaty or secondary legislation are in conflict with some of these BITs’ provisions – or should the EU adopt such rules in the future – Community law will automatically prevail over the non-conforming BIT provisions. (…) The Commission therefore takes the view that intra-EU BITs should be terminated in so far as the matters under the agreements fall under Community competence.’ 37 Eastern Sugar v. Czech Republic (n. 19) paras. 142–154. 38 Article 59 of the VCLT entitled ‘Termination or suspension of the operation of a treaty implied by conclusion of a later treaty’, sets forth that: ‘1. A treaty shall be considered as terminated if all the parties to it conclude a later treaty relating to the same subject matter and: (a) it appears from the later treaty or is otherwise established that the parties intended that the matter should be governed by that treaty; or (b) the provisions of the later treaty are so far incompatible with those of the earlier one that the two treaties are not capable of being applied at the same time.’ 39 Eastern Sugar v. Czech Republic (n. 19) para. 169 (Bermann (n. 16) describes this as an ‘accommodation strategy’ 429 et seq.).

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More recently, in Eureko v. The Slovak Republic,40 another tribunal came to the same conclusion as the Eastern Sugar tribunal, that is, that BITs between EU member States are not automatically superseded by EU law and therefore arbitral tribunals derive their jurisdiction from the BIT, which is a treaty governed by public international law. The award on jurisdiction has been contested by Slovakia who filed an application with the Frankfurt Higher Regional Court, challenging the award. However, the court confirmed in its decision dated 10 May 2012 the award of the tribunal. The court reasoned that EU law does not affect the validity of the arbitration clause since Article 344 of the TFEU41 only applies to disputes between EU member States and does not address the situation under scrutiny where a dispute arises between an investor and an EU member State.42 38 In conclusion, the European Commission’s position on intra-EU BITs is clear – it considers them to be discriminatory and contrary to EU law and thus pressures EU member States to terminate their intra-EU BITs.43 Some Central and Eastern European States (notably those States that are dealing with numerous BIT claims, such as the Czech Republic) have already started the process of terminating their BITs with other European countries.44 39 Other EU member States tend to resist the idea of terminating intra-EU BITs, since they share the idea that intra-EU BITs offer an extra layer of protection to investors in addition to the rights they enjoy under EU internal market rules. Given the fact that intra-EU BITs grant higher protection standards to investors, which is in conformity with the purpose of EU law, it seems rather odd that the Commission is not opting for an extension of intra-EU BITs to all European investors, through the adoption of appropriate legislative measures at the European level, rather than calling for their elimination.45 It remains to be seen whether these member States will change their position in the event that infringement proceedings are brought against them by the European Commission before the CJEU. 37

40 Eureko v. Slovakia, PCA Case No 2008–13, Award on Jurisdiction, Arbitrability and Suspension, 26 October 2010. 41 Article 344 of the TFEU states: ‘Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.’ 42 Decision of the Frankfurt Higher Regional Court, 10 May 2012, 26 SchH 11/10, available at http://www.italaw.com/documents/26schh01110.pdf. 43 Luke Peterson, ‘EC Asks Member-States to signal by year’s end whether they will terminate their intra-EU investment treaties; spectre of legal actions loom’, IAR of 23 October 2010. 44 Luke Peterson, ‘Czech Republic terminates investment treaties in such a way as to cast doubt on residual legal protection for existing investments’, IAR of 1 February 2011. 45 See Nikos Lavranos, ‘Bilateral Investment Treaties and EU law’, ESIL Conference 2010, 26– 27.

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b) The Potential Conflict of Extra-EU BITs with EU Law

The EU Commission has identified a number of issues in relation to which BITs concluded with non-EU States, so called extra-EU BITs, may conflict with EU law.46 One of these issues is the free movement of capital. Some pre-accession BITs concluded by some EU member States before their accession to the EU provide for a free transfer of capital. And while free movement of capital between EU member States and between EU member States and third countries is fundamental to the EU order the TFEU permits some restrictions on capital movements that can be imposed by the Council of the EU. While no actual conflicts arose, the European Commission nonetheless initiated infringement proceedings against Austria, Sweden and Finland47 for their failure to take the necessary steps to remove potential incompatibilities between the free transfer provisions of their pre-accession extra-EU BITs48 and the restrictions permitted under EU law. In these three cases the CJEU upheld the Commission’s actions against these States. First, the Court accepted that the free transfer clauses contained in the BITs are, in principle, consistent with EU law. The CJEU thus recognised that according to Article 351(1) of the TFEU (formerly Article 307(1) of the EC) pre-accession treaties entered into by EU member States continue to be applicable regardless of EU law obligations. The Court, however, stressed that Article 307(2) of the EC (now Article 351(2) of the TFEU) imposes on member States an obligation to ‘take all appropriate steps to eliminate the incompatibilities established’. Accordingly, the CJEU concluded in all these cases that the contradiction between the BITs and the relevant EU law provisions concerning the possibility of imposing restrictions constituted an incompatibility within the meaning of Article 351(2) of the TFEU (formerly Article 307(2) of the EC), which was to be eliminated by the EU member States concerned. The Court’s judgment under the second paragraph of Article 351(2) of the TFEU appeared to demonstrate that from an EU perspective, EU law will always be accorded priority within the EU legal order. The CJEU applied a hypothetical incompatibility test according to which EU member States are obligated to eliminate perceived conflicts between their pre-accession BITs and EU law obligations even where no actual conflicts arise. It is also interesting to note that the Court called for mutual assistance between member States in eliminating the incompatibilities rather than requiring 46 Areas in respect of which the Commission has expressed concerns regarding potential conflicts: public policy exceptions in European Commission, Communication of the Commission on certain legal aspects concerning intra-EU investment, OJ C 220, 19 July 2007, 15–18; state aid prohibitions in Commission Decision on the State Aid Award by Hungary through Power Purchase Agreements, C(2008) 2223 final, 4 June 2008 in Case C 41/2005. 47 ECJ, 3.3.2009, Case C-205/06, Commission v. Austria and Case C-249/06, Commission v. Sweden; ECJ, 19.11.2009, Case C-118/07, Commission v. Finland. 48 According to which investors of either party to the BIT enjoy the right to freely transfer, without undue delay, the capital in connection with their investment.

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denunciation of the BITs. The CJEU also called for the Commission to play an active role in the adoption of a common attitude.49 By this the Court meant most likely that the Commission would have to assist member States in renegotiating their BITs with third countries so as to render them fully compatible with EU law. The Commission undertook a similar exercise a few years ago, when it assisted acceding and candidate States in adapting their BITs with the United States, in order to remove all potential incompatibilities between EU law and these BITs through the Memorandum of Understanding and a number of subsequent ‘additional protocols’ amending the BITs.50 44 However, more recently, the CJEU issued a judgment in Case C-264/09, Commission v. Slovakia,51 in which it appeared to alter its position. In this case the international obligation was one covered by Article 351 of the TFEU, i.e., the liberalisation of the electricity market. In 2009, the Commission initiated an infringement proceeding pursuant to Article 258 of the TFEU (formerly Article 226 of the EC) against Slovakia, who refused to terminate contractual priority electricity transmission rights that it granted to a Swiss investor pre-accession. According to the Commission, such priority access was violating non-discrimination obligations52 imposed under the directive concerning common rules for the internal market in electricity.53 The CJEU held that Article 351 of the TFEU recognises the effectiveness of Slovakia’s international obligations in relation to investors’ rights protection under the Swiss–Slovak BIT and, therefore, dismissed the Commission’s action.54 45 The Court justified its reasoning as follows. First, the Court stated that Article 307(1) of the EC (now Article 351 of the TFEU) ‘exists to clarify, in accordance with the principles of international law, (…), with article 30(4)(b) of the Vienna Convention on the law of treaties, that the application of the EC Treaty does not affect the duty of the EU member state to respect the rights of non-EU member States under a prior agreement and to perform its obligations’.55 Then, the Court 49 Ibid. 50 US Department of State, Understanding Concerning Certain U.S. Bilateral Investment Treaties, signed by the U.S., the European Commission, and acceding and candidate countries for accession to the European Union, 22 September 2003, available at http:// www.state.gov/s/l/2003/44366.htm. The additional protocols are available on the US Senate’s webpage at www.senate.gov. 51 ECJ, 15.9.2011, Case C-264/09, Commission v. Slovakia. 52 In Commission v. Slovakia (n. 51) the Court ‘declares that, by failing to grant non-discriminatory access to its transmission system, the Slovak Republic has failed to fulfill its obligations under Articles 20(1) and 9(e) of Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC.’ 53 Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity, OJ L 176, 15 July 2003, 0037– 0056. 54 Commission v. Slovakia (n. 51) paras. 29–30 (it is interesting to note that the Court did not discuss the Energy Charter Treaty (ECT) in this case, because it considered that the BIT was ‘directly relat[ing] to investment protection’). 55 Commission v. Slovakia (n. 51) para. 41.

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noted that ‘in the context of Article 307 EC Treaty, the member States have a choice as to the appropriate steps to be taken to eliminate any incompatibilities existing between a pre-Community convention and the EC Treaty, if a member State encounters difficulties which make adjustment of an agreement impossible, an obligation to denounce that agreement cannot be excluded.’56 Since, the contract at issue did not provide for a denunciation clause,57 the Slovak Republic was not obliged to denounce such an agreement as an ‘appropriate step’ in the context of Article 307 of the EC Treaty with a view to eliminate incompatibilities between an earlier treaty and the EC Treaty. 4. The Lisbon Treaty – a New Era

As may be seen, the actions of the EU Commission have been creating uncer- 46 tainty for investors who have made investments in the EU, whether under intraEU BITs or extra-EU BITs. This uncertainty is likely to continue, as the EU itself emerges as a significant actor in the field of investor protection, thus heralding a new era in European bilateral approaches. As we shall see, however, the EU has taken some steps to provide greater legal certainty in the case of extraEU BITs. a) The EU’s Exclusive Competence for ‘Foreign Direct Investments’

The Lisbon Treaty has introduced (since 1 December 2009) a fundamental 47 change in the Common Commercial Policy (CCP) through Article 207 of the TFEU by bringing ‘foreign direct investments’ within the exclusive competence of the EU. Thus, the EU Commission has been tasked with negotiating and concluding agreements relating to ‘foreign direct investments’ as part of the EU’s CCP. This transfer of competence raises the fundamental question of the status of the existing BITs concluded by the EU member States with third countries pending their replacement by a unique EU instrument. Under public international law, existing European BITs will remain in force until their expiry or termination (and possibly longer because of treaty provisions that may extend the protection extended by the BIT for a further 10 to 20 years after their termination). Nevertheless, under EU law, it was not clear at the time whether existing European BITs would still be applicable and effective. The European Commission clarified this issue in a Regulation (EU) No. 48 1219/2012 ‘establishing transitional arrangements for bilateral investment agreements between member States and third countries’.58 Article 3 of the Regulation provides for maintenance in force of existing EU member State BITs subject only to the member States’ obligation to notify them to the Commission pursuant 56 Commission v. Slovakia (n. 51) para. 44. 57 Commission v. Slovakia (n. 51) para. 46. 58 Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, OJEU L 351/40, 20 December 2012.

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49

50

51

52

to Article 2 of the Regulation, until a BIT between the EU and the same country enters into force.59 The ‘grandfathering rule’, which allows the member States to maintain their BITs in force, conditions the automatic authorisation to the notification of the BITs by the member States. However, pursuant to Article 5 of the Regulation the Commission may review all notified BITs to evaluate whether ‘one or more of their provisions constitute a serious obstacle to the negotiation or conclusion’ by the EU of BITs with third countries. In the event that the Commission establishes that a notified member State BIT constitutes ‘a serious obstacle to the negotiation or conclusion’ by the EU of BITs with third countries, the member State concerned and the Commission are required to consult on ‘with a view to identifying the appropriate actions to resolve the matter.’60 The Commission may later indicate the appropriate measures to be taken by the member State concerned ‘to remove the obstacles’.61 In the event that the Commission orders the termination of a member State BIT, it seems likely that the protections conferred by the BIT would endure for some time after termination, as a result of the ‘survival’ or ‘sunset’ clauses normally laid in these BITs which guarantee protections for existing investments, usually for 10–15 years after termination. The regulation is thus intended to provide legal certainty for European and foreign investors benefiting from investment protection offered in member States’ pre-Lisbon extra-EU BITs (i.e., those which entered into force on or before December 2009). It clarifies the legal status of those agreements under EU laws and confirms that they may be maintained in force until they are replaced by an EU investment agreement. Intra-EU BITs fall outside the scope of the regulation. b) The Future of European BITs

53

As mentioned earlier, the Lisbon Treaty, which entered into force on 1 December 2009, has introduced a fundamental change in the CCP through Article 207(1) of the TFEU62 by integrating ‘foreign direct investments’ within the ex59 However, this authorisation might not be automatic, as demonstrated by the recent judgments against Austria, Sweden and Finland where the CJEU concluded that member States were in breach of their EU law obligations and thus obliged to negotiate with the respective third countries the inclusion of additional clauses. In these cases the incompatibility of capital transfer provision was under scrutiny, but there are other problematic issues of compatibility such as special benefits that are contravening the rules on State aid prohibitions and liberalisation (see e.g., Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19; AES Summit Generation Ltd and AES-Tisza Erömü Kft v Hungary, ICSID Case No. ARB/07/22). 60 Article 6 of the Regulation (Duty of cooperation). 61 Article 6(2) and Article 6(3) of the Regulation. In the original proposal for the Regulation the Commission was authorised to withdraw authorisation of the BIT for lack of conformity with any one of a number of grounds. 62 TFEU Article 207(1): ‘The common commercial policy shall be based on uniform principles, particularly with regard to changes in tariff rates, the conclusion of tariff and trade agreements relating to trade in goods and services, and the commercial aspects of intellectual property,

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clusive competence of the EU. For instance, the EU Commission has engaged in or concluded negotiations with the United States, Canada, India and Singapore on comprehensive trade agreements that would each include an investment chapter. The Council Negotiating Directives of 12 September 201163 concerning these negotiations set forth the EU’s official position concerning investment related issues. It provides that investment chapters should include provisions concerning fair and equitable treatment, full protection and security, national treatment and most favoured nation treatment, as well as guarantees against uncompensated expropriation and an umbrella clause. However, the objectives of the EU investment policy, while gradually developing, still remain unclear.64 Notably, though, it may be gleaned from the Commission’s communications, as part of its ‘Civil Society Dialogue’ that the EU intends to balance a high level of protection for investors with the integration of societal concerns such as environmental protection, upholding labour standards, and the observance by investors of Corporate Social Responsibility principles.65 Additionally, the EU seems likely to introduce a major change to that manifested in the European BITs, according to which the EU BITs would adopt the US model of granting pre-establishment rights to foreign investors.66 5. Conclusion

Having led the way in investment treaty protection, and inspired similar ap- 54 proaches in other regions, European States seem destined in time to cede individual bilateral approaches in favour of a unified EU approach, in which EU policy concerns will likely limit the broad scope of investment protections that have characterised traditional European bilateral approaches.

63 64 65 66

foreign direct investment, the achievement of uniformity in measures of liberalization, export policy and measures to protect trade such as those to be taken in the event of dumping or subsidies. The common commercial policy shall be conducted in the context of the principles and objectives of the Union’s external action.’ Council Negotiating Directives (Canada, India and Singapore) of 12 September 2011; available at http://www.bilaterals.org/spip.php?article20272&lang=en and http://www.s2bnetwork.org/themes/eu-investment-policy/eu-documents/text-of-the-mandates.html. August Reinisch, ‘The EU on the Investment Path – Quo Vadis Europe? The Future of EU BITs and other Investment Agreements, 22 March 2013, available at http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=2236192. EU investment policy State of Play, Civil Society Dialogue, Brussels, April 2013. EU, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Towards a comprehensive European international investment policy, COM(2010) 343 final, Brussels, 7 July 2010: ‘[A] comprehensive common international investment policy needs to better address investor needs from the planning to the profit stage or from the pre- to the post-admission stage. Thus, our trade policy will seek to integrate investment liberalization and investment protection’.

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B. The Americas

Andrew Newcombe 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Mexico. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Post-NAFTA BIT Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Central America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. South America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Lee Caplan and Jeremy Sharpe, ‘The 2004 U.S. Model Bilateral Investment Treaty’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013); Jonathan C. Hamilton, Omar E. García-Bolívar and Hernando Otero (eds), Latin American Investment Protections (Martinus Nijhoff, 2012); Céline Lévesque and Andrew Newcombe, ‘Commentary on the Canadian Model Foreign Investment Promotion and Protection Agreement’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013); Mary H. Mourra (ed), Latin American Investment Treaty Arbitration: The Controversies and Conflicts (Kluwer Law International, 2008); José Antonia Rivas, ‘Colombia’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013); Kenneth J. Vandevelde, U.S. International Investment Agreements (Oxford University Press, 2009); Kenneth J. Vandevelde, ‘A Comparison of the 2004 and 1994 US Model BITs: Rebalancing Investor and Host Country Interests’ (2008–2009) YB Int’l Inv. L. & Pol’y 283–315.

1. Introduction

Bilateral investment agreement (BIT) practice in the Americas has been heavily influenced by the United States’ economic, political and military dominance in the region. Core doctrines in international investment law, including the Hull rule, arose out of economic and political conflicts between the United States (US) and Latin American States. More recently, the Washington Consensus of the early 1990s set the ideological framework within which many Latin American States adopted liberal economic policies. In accordance with the orthodoxy of the time, Latin American States significantly liberalised restrictions on foreign direct investment (FDI) and entered into international investment agreements (IIAs) en masse with provisions that reflected a rejection of the traditional Latin American adherence to the Calvo Doctrine. 2 In 1992, Canada, Mexico and the US concluded the North American Free Trade Agreement (NAFTA), which includes Chapter Eleven (Investment).1 Although the US insisted on the inclusion of investment protections in NAFTA because of the troubled history of American FDI in Mexico, Chapter Eleven resulted in an unexpected number of investor-State claims against the US and Canada. 1

1 See Andrea Bjorklund, ‘NAFTA’s Contributions to Investor-State Dispute Settlement’, ch. 4.III.B., 261–282.

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American and Canadian experience as serial respondents in NAFTA arbitrations has had a formative effect on their BIT and IIA practices. The 2012 US Model BIT (2012 US Model)2 and the 2004 Canadian Model 3 Foreign Investment Promotion and Protection Agreement (2004 Canadian Model)3 incorporate American and Canadian experiences respectively with the NAFTA.4 In contrast to the brief, principles-based approach common in European BIT practice, where the typical BIT is eight to ten pages, American and Canadian practice currently attempts to clarify the scope of substantive and procedural provisions in great legislative detail, resulting in IIAs that can run to over 50 pages long. The proliferation of Latin American BITs in the 1990s provided the breeding 4 ground for a ‘baby boom’5 in investment treaty claims beginning in the early 2000s. Numerous treaty claims along with economic and political upheaval have had a mixed effect on IIA practice. On the one hand, some States, notably Bolivia, Ecuador and Venezuela have adopted socialist and nationalist models of economic development,6 rejected aspects of the existing IIA regime and focused on new bilateral and regional approaches.7 On the other hand, other States, notably Chile, Colombia, Costa Rica and the Dominican Republic, have continued with policies of economic liberalisation. Their IIA practices have been heavily influenced by Chapter Eleven of the NAFTA, the 2004 US Model BIT8 and their 2 2012 US Model Bilateral Investment Treaty, available online: Office of the United States Trade Representative, http://www.ustr.gov/sites/default/files/BIT%20text%20for%20ACIEP%20Meet ing.pdf (last accessed 26 July 2012). 3 Agreement between Canada and [Country] for the Promotion and Protection of Investment, available at Foreign Affairs and International Trade Canada (DFAIT), http://italaw.com/documents/Canadian2004-FIPA-model-en.pdf (2004 Canadian Model BIT) (last accessed 26 July 2012). For commentary on the current Canadian Model BIT and the evolution of Canadian BIT practice, see Céline Lévesque and Andrew Newcombe, ‘Commentary on the Canadian Model Foreign Investment Promotion and Protection Agreement’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013) 53–130. 4 Andrea J. Menaker, ‘Benefitting from Experience: Developments in the United States’ Most Recent Investment Agreements’ (2005) UC Davis J. Int’l L. & Pol’y 121–129 at 123–134; Barton Legum, ‘Lessons Learned from the NAFTA: The New Generation of US Investment Treaty Arbitration Provisions’ (2004) 19 ICSID Rev.–FILJ 344–356. 5 Stanimir A. Alexandrov, ‘The “Baby Boom” of Treaty-Based Arbitrations and the Jurisdiction of ICSID Tribunals: Shareholders as “Investors” and Jurisdiction Ratione Temporis’ (2005) 4 LPICT 19–59. 6 Katia Fach Gomez, ‘Latin America and ICSID: David versus Goliath’ (2011) 17 Law & Bus. Rev. Am. 195–230, 226. 7 The Union of South American Nations (UNASUR) has discussed a regional energy security treaty that would include provisions on investor-State dispute settlement. See Fernando Cabrera Díaz, ‘South American alternative to ICSID in the works as government create an Energy Treaty’, ITN, 6 September 2008. The Bolivarian Alliance for the Americas (Alianza Bolivariana para los Pueblos de Nuestra América (ALBA)) has also made a series of announcements regarding regional alternatives. See Fernando Cabrera Diaz, ‘ALBA moves forward with Plan to Create Regional Investment Alternative to ICSID at 7th Summit’, ITN, November 2009. 8 Treaty between the Government of the United States of America and Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment, available at US State Department, http://www.state.gov/documents/organization/117601.pdf (last accessed 26 July

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free trade agreements (FTAs) with the United States, all of which contain investment chapters that reflect changes in US BIT practice. 5 This chapter provides a broad overview of bilateral approaches in North America (Part 2), Central America and the Caribbean (Part 3) and South America (Part 4). What emerges is a complex story of changing treaty practices. The dynamic nature of IIA practice in the Americas clearly reflects State reaction to the frequency of investor-State treaty claims. As of the end of 2011, States in the Americas are the most frequent respondents in investor treaty claims – indeed six States in the Americas rank in the list of the top ten respondents worldwide: Argentina (51 claims), Venezuela (24 claims), Ecuador (23 claims) and Mexico (19 claims) top the list as the States with the most claims against them. Notably, Canada (17 claims) is in sixth place and the US (14 claims) in tenth place.9 2. North America 6

Current bilateral approaches to IIAs in Canada, Mexico and the US have been shaped by Chapter Eleven (Investment) of the NAFTA. American, Canadian and Mexican BIT practice post-NAFTA reflects both innovations in treaty practice pioneered in the NAFTA and changes to treaty practice as a result of those States’ experiences as respondents in NAFTA arbitrations. This part provides an overview of American, Canadian and Mexican BIT practice. a) United States

7

The US began its BIT programme in 197710 and over the past 35 years has concluded over 45 BITs and 11 free trade agreements (FTAs) with investment chapters based on its successive model BITs.11 Prior to launching its modern BIT programme, the US had entered into Friendship, Commerce and Navigation (FCN) treaties, some dating back to the late 18th century.12 Over the course of its BIT programme, the US has developed seven identifiable model texts, the most recent model dating from April 2012.13

9 10 11

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2012) (2004 US Model BIT). For commentary on the 2004 US Model BIT and the evolution of US BIT practice, see Lee Caplan and Jeremy Sharpe, ‘The 2004 U.S. Model Bilateral Investment Treaty’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013) 755–851. UNCTAD, ‘Latest Developments in Investor-State Dispute Settlement’, IIA Issues Note: No. 1 (April 2012), available at http://unctad.org/en/PublicationsLibrary/webdiaeia2012d10_e n.pdf (last accessed 26 July 2012). For a comprehensive study on US BITs, see Kenneth J. Vandevelde, U.S. International Investment Agreements (Oxford University Press, 2009). For BITs, see US Department of State, United States Bilateral Investment Treaties, available at http://www.state.gov/e/eb/ifd/bit/117402.htm (last accessed 11 July 2012). For FTAs, see Office of the United States Trade Representative, Free Trade Agreements, available at http:// www.ustr.gov/trade-agreements/free-trade-agreements (last accessed, 11 July 2012). Kenneth Vandevelde (n. 10) 11. The first US FCN was with France (1778), Kenneth Vandevelde (n. 10) 19. The six models (1983, 1984, 1992, 1994, 1998 and 2004) are reprinted as annexes in Kenneth Vandevelde (n. 10). See 2012 US Model BIT (n. 2).

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The US BIT programme was spurred by three primary concerns.14 First, US businesses perceived that they were at a competitive disadvantage compared to European investors whose home States had established BIT programmes. Second, US businesses felt vulnerable to the increase in expropriatory acts in the 1970s. Third, minimum standards of treatment and the obligation to compensate for expropriation were increasingly contested in international law, as reflected in the 1974 Charter of Economic Rights and Duties of States.15 A key objective of the US BIT programme was the ‘legal consideration of building a body of state practice in international law in support of protecting foreign investment.’16 In his comprehensive treatise on the US BIT programme, former US BIT negotiator Kenneth Vandevelde identifies three waves of US BITs.17 The first wave of ten BITs (1982–1986) was with developing States, principally in Africa and the Caribbean.18 The small number of BITs concluded during this period can be attributed to the unwillingness of US negotiators to compromise on investment protection for the sake of obtaining an agreement. The US refused to conclude a treaty if the other State was not willing to accept the standards of treatment and the investor-State arbitration provisions in the US model negotiating text.19 The second wave of 35 BITs (1989–1999) was principally with States in transition from communism. BITs of this period reflect policy considerations of supporting and affirming the transition of former socialist and communist States to a market economy.20 US BIT practice with transitional economies generally did not differ significantly from the first wave, other than the addition of a State-enterprise provision to ensure that host States did not use State enterprises to avoid BIT obligations.21 Another important feature of the second wave was the changing view of FDI in States around the world. The period from 1989 to 1999 was characterised by the disintegration of the Soviet Union and the entrenchment of the Washington Consensus – a consensus between the IMF, the World Bank and the US Treasury on the policies for developing States’ economic development and stabilisation. The pillars of the Washington Consensus were fiscal austerity, privatisation and market liberalisation. The original 1989 consensus included the promotion of FDI and the enforcement of property rights. Countries that were previously hostile to foreign investment took a more positive outlook. This turn of events was particularly noticeable in the Caribbean and Latin America. In the first wave of 14 See discussion in Kenneth Vandevelde (n. 10) 25–27. 15 GA Res. 3281, 12 December 1974, (1975) 14 ILM 251. 16 Kenneth Vandevelde (n. 10) 31. This remains one of the basic aims of the US BIT Program. See US Department of State, Bilateral Investment Treaties and Related Agreements, available at http://www.state.gov/e/eb/ifd/bit/index.htm (last accessed 12 July 2012). 17 Kenneth Vandevelde (n. 10) 30. 18 Kenneth Vandevelde (n. 10) 2. 19 Kenneth Vandevelde (n. 10) 32. 20 Kenneth Vandevelde (n. 10) 43–44. 21 Kenneth Vandevelde (n. 10) Section 6.12.

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BITs, the US had concluded BITs with Grenada, Haiti and Panama. In the second wave, it signed BITs with eight Latin American States.22 12 The third wave began in 2004, with the significantly revised 2004 Model BIT, which reflected the United States’ experience as a serial respondent in NAFTA claims and also the FTA negotiating objectives set out in the Bipartisan Trade Promotion Authority Act of 2002 (the TPA).23 As discussed below in the section on post-NAFTA developments in Canada, Mexico and the United States,24 the 2004 US Model and the 2004 Canadian Model, as well as Mexican BIT practice is characterised by a policy of rebalancing and clarifying BIT obligations. As Kenneth Vandevelde cogently explains: In the first wave, the United States assumed the stance of the embattled defender of investor interests against a hostile world of developing and socialist countries (…) In the second wave, the United States was the confident victor who, having won the ideological battle that gave rise to the first wave, was able to conclude BITs with far fewer concessions. In the third wave, the United States acknowledged the unanticipated consequences of its victory: treaty provisions drafted to raise the level of investment protection provided by governments that were historically hostile to foreign investment could be used to challenge regulatory actions by a government that historically provided one of the most secure environments for investment in the world. Thus, in preparing the 2004 model, (…) U.S. BIT negotiators sought to achieve a balance between investor interests and host state regulatory prerogatives.25

13

Although the texts of the seven US model BITs have changed considerably over time, becoming more complex and detailed, from the beginning US BITs have incorporated six principles:26 –

–

–

investors and their ‘covered investments’ are entitled to be treated as favourably as the host State treats its own investors and their investments or investors and investments from any third State, affording the better of national treatment (NT) or most favoured nation (MFN) treatment for the full life cycle of investment, i.e., from its establishment or acquisition, through its management, operation and expansion, to its disposition; there are clear limits on the expropriation of investments and provision for payment of prompt, adequate and effective compensation when expropriation takes place; funds are transferable into and out of the host State without delay using a market rate of exchange;

22 Argentina, Bolivia, Ecuador, El Salvador, Honduras, Jamaica, Nicaragua and Trinidad & Tobago. 23 Public Law 107–210, 6 August 2002, 116 Stat. 993. The TPA facilitated the political process for the US government to enter into FTAs, many of which contained investment chapters based on the US Model BIT. Between 2002 and 2007, the US concluded ten FTAs with investment chapters. Kenneth Vandevelde (n. 10) 3. 24 Infra, Part 2.d. 25 Kenneth Vandevelde (n. 10) 77. 26 See US Department of State, Bilateral Investment Treaties and Related Agreements, available at http://www.state.gov/e/eb/ifd/bit/index.htm (last accessed 12 July 2012), which states that US BITs ‘provide investments with six basic benefits, which we often refer to as the “core” BIT principles’.

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– – –

there are limits on the circumstances in which performance requirements can be imposed; investors have the right to submit an investment dispute with the treaty partner’s government to international arbitration; and investors have the right to engage the top managerial personnel of their choice, regardless of nationality.

As the above principles highlight, from the beginning, US BIT practice dif- 14 fered from typical BIT practices, including the model provided by the 1967 OECD Draft Convention on the Protection of Foreign Property (OECD Draft Convention),27 in three respects. First, the US has always insisted on establishment rights and the requirement that host States not discriminate against foreign investors on the basis of nationality at the time of admission or establishment of an investment. This approach differs from treaty practice elsewhere, including Europe, where BIT obligations typically only apply post-establishment. This does not mean that national treatment obligations are absolute. Existing nonconforming measures as well as some future measures are carved out from BIT obligations through a series of annexes that list any non-conforming measures or sectors to which the obligations do not apply.28 It is important to highlight that establishment rights do not necessarily liberalise the admission of foreign investment. The extent of any liberalisation will depend on the scope of the carveouts. The listing of specific measures and sectors, however, does serve to protect against the host State adopting a more protectionist foreign investment regime in the future. Second, US BITs have always included provisions prohibiting host States 15 from imposing performance requirements. Initially, the prohibitions focused on trade-related performance requirements such as the use of local materials or a requirement to export. Over time, the scope and complexity of the provisions on performance requirements have significantly expanded.29 Third, from the beginning, US BITs have included provisions regarding the 16 hiring of managerial staff. Article 3(ii) of the 1982 US Model referred to ‘the employment of professional, technical and managerial personnel of their choice’.30 The provision in the 2012 US Model focuses on senior management and boards of directors.31 27 OECD Draft Convention on the Protection of Foreign Property (1968) 7 ILM 117. 28 The current US practice is to list non-conforming measures (a negative listing approach). For example, Article 14(1) (Non-Conforming Measures), 2012 US Model BIT, contemplates the listing of non-conforming measures in Annexes I and III. Article 14(2) contemplates the listing of sectors, subsectors and activities in Annex II. National treatment, MFN treatment, the prohibition on performance requirements, and the provisions on senior management and boards of directors do not apply to annexed measures or sectors. 29 The provisions on performance requirements in Article 8, 2012 US Model BIT are very detailed. In addition to trade-related performance requirement, the requirement ‘to transfer a particular technology, a production process, or other proprietary knowledge to a person in its territory’ (Article 8(1)(f)) is also prohibited. For an exhaustive analysis of US BIT practice on this issue, see Kenneth Vandevelde (n. 10) 387–410.

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Three others features of US BIT practice are worth highlighting. First, although the US Department of State refers to a guarantee of treatment in accordance with international law as a ‘basic benefit’ of the US BIT programme,32 US model BITs from 1983 onwards require fair and equitable treatment in accordance with international law. As discussed below, current US BIT practice equates fair and equitable treatment with the customary international law minimum standard of treatment of aliens. The failure to mention a guarantee of international minimum standards as a core benefit of US BIT practice is a notable omission and is likely explained by political sensitivities in acknowledging that foreigners might be entitled to better investment protections than US nationals (as reflected in the negotiating objective in the TPA). Next, US BIT practice has been to include a ‘measures not precluded’ exception to treaty obligations. The scope, meaning and application of this type of provision have proven to be exceedingly controversial in claims brought under the US–Argentina BIT arising out of the Argentine economic crisis.33 Finally, US BIT practice with respect to observance of obligation clauses (so-called ‘umbrella clauses’) has varied over time. Early BIT models include the obligation to observe ‘any obligation’ with respect to investments,34 but post-NAFTA this provision was eliminated due to concerns about its potential scope.35 The 1994 US Model omitted the observance clause and instead provided that investors may submit to arbitration claims arising from an investment agreement or authorisation.36 This approach continues and is reflected in the 2012 US Model.37 b) Canada

18

Canada is a relative latecomer to BIT practice and has been somewhat slow in catching up to other countries.38 Of the G8 countries, only Japan has fewer BITs. 30 See also Article 2(2), 1982 US Model BIT on entry and sojourn of aliens. See Kenneth Vandevelde (n. 10) 361–384. 31 Article 9 (Senior Management and Boards of Directors), US Model BIT. 32 See n. 26. 33 See José Enrique Alvarez and Tegan Brink, ‘Revisiting the Necessity Defense’ (2010–2011) YB Int’l Inv. L. & Pol’y 319–362. 34 The observance of obligations clause in the Argentina–US BIT (Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment) has been the subject of a number of claims. See, for example, CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005; Enron Corporation and Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007; and LG&E v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006. 35 Kenneth Vandevelde (n. 10) 261. 36 Art. 9, 1994 Model BIT, reprinted in Kenneth Vandevelde (n. 10), Appendix G. 37 See Article 24, 2012 US Model BIT and the detailed definitions of ‘investment agreement’ and ‘investment authorization’. 38 This part draws on Céline Lévesque and Andrew Newcombe, ‘Commentary on the Canadian Model Foreign Investment Promotion and Protection Agreement’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013) 53–130.

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Canada signed its first Foreign Investment Promotion and Protection Agreement (FIPA) with the USSR in 1989. As of 1 March 2012, Canada has FIPAs in force with 24 countries. In addition to the NAFTA, Canada also has three FTAs in force that contain investment chapters and provide for investor-State dispute settlement. Three ‘generations’ of FIPAs can be identified. The first five FIPAs were 19 signed with transition economies and Argentina. Although Canada refers to these FIPAs as following the OECD model,39 the OECD Draft Convention and first generation FIPAs differ substantially. First generation FIPAs resemble the 1984 US Model BIT more than the OECD Draft Convention.40 There are 16 second generation FIPAs, which were signed after the NAFTA was concluded and are generally based on the NAFTA model, with some important exceptions, notably the inclusion of general exceptions (modelled on Article XX of the General Agreement on Tariffs and Trade) in the 16 FIPAs. The third generation of FIPAs are those based on the 2004 Canadian Model, which in turn is heavily influenced by Chapter Eleven of the NAFTA and the contemporaneous 2004 US Model BIT. Current Canadian IIA practice mirrors that of the United States in including 20 establishment obligations, prohibiting certain types of performance requirements and including provisions on senior managers and directors. Canadian FIPAs, unlike early US BITs, have never included an observance of undertakings or umbrella clause. Some Canadian FTAs provide a special mechanism for investorState arbitration of ‘juridical stability agreements’41 or ‘legal stability agreements’,42 but a general observance of undertakings clause is not present in Canadian FIPAs. c) Mexico

Mexican IIA practice has been heavily influenced by its relationship with the 21 United States. As is well known to students of international investment law, foreign investment disputes between the United States and Mexico have resulted in influential doctrines and cases, notably the Hull rule with respect to prompt, adequate and effective compensation.43 Disputes between these countries have also generated a body of jurisprudence (notably, the Neer case),44 from the US–Mex39 According to the DFAIT website, ‘Canada began negotiating FIPAs in 1989 to secure investment liberalisation and protection commitments on the basis of a model agreement developed under the auspices of the OECD (Organization for Economic Cooperation and Development).’ DFAIT, Canada's Foreign Investment Promotion and Protection Agreements (FIPAs), available at www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/fipaapie/index.aspx (last accessed 26 July 2012). 40 The 1984 US Model BIT is reproduced in Kenneth Vandevelde (n. 10), Appendix C. 41 See Section D, Investment Chapter, Canada–Colombia FTA. See also Arts 9.20, 9.21, Canada–Panama FTA with respect to investor-State arbitration of certain types of agreement. 42 See Art. 819(2), Canada–Peru FTA. 43 The Hull Rule is named after US Secretary of State Hull, who, in response to the expropriation of American-held oil interests by Mexico in the 1930s, argued that ‘prompt, adequate and

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ican Claims Commission, established in 1923 to adjudicate claims arising out of the political unrest and revolution in Mexico.45 22 Given the troubled history between the US and Mexico on the treatment of US investment in Mexico, one of the primary reasons for the inclusion of investment protections in the NAFTA was to provide greater protection for US investment in Mexico.46 The contemporaneous US Model BIT heavily influenced Chapter Eleven of the NAFTA.47 The acceptance of the NAFTA investment chapter was a significant change of policy for the Mexican government. By agreeing to Chapter Eleven, the government of President Carlos Salinas de Gotari reversed Mexico’s historical commitment to the Calvo Doctrine48 and committed Mexico to significant liberalisation of its investment regime, an acceptance of minimum international standards and binding international arbitration. 23 As of July 2012, Mexico had concluded 28 BITs and 12 FTAs (all concluded post-NAFTA).49 Its first BIT was concluded with Switzerland in 1995.50 Although Mexico does not appear to have a model BIT, from the beginning its BITs have been heavily influenced by the NAFTA.51 For example, its first BIT with Switzerland, although containing elements of the Swiss Model BIT, such as the observance of obligations clauses (Article 10(2)), contains other provisions that take their lineage from NAFTA.52

44 45 46 47 48

49 50 51 52

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effective compensation’ was required under international law. See Andreas Lowenfeld, International Economic Law (Oxford University Press, 2002) 397–403. Neer v. Mexico, 15 October 1926, IV RIAA 60. Abraham H. Feller, The Mexican Claims Commissions, (1933–1934) 19 Iowa L. Rev. 225, 227. Tali Levy, ‘NAFTA’s Provision for Compensation in the Event of Expropriation: A Reassessment of the “Prompt, Adequate and Effective” Standard’ (1995) 31 Stan. J. Int’l L. 423 on US–Mexican foreign investment disputes. Jon Johnson, The North American Free Trade Agreement: A Comprehensive Guide (Aurora: Canada Law Book Inc., 1994) 278. Bernardo Sepulveda Amor, ‘International Law and National Sovereignty: The NAFTA and the Claims of the Mexican Jurisdiction’ (1997) 19 Houston J. Int’l L. 565 and Justine Daly, ‘Has Mexico Crossed the Border on State Responsibility for Economic Injury to Aliens? Foreign Investment and the Calvo Clause in Mexico After the NAFTA’ (1994) 25 St. Mary’s L. J. 1147. Secretaría de Economía, International Trade Negotiations, available at http://www.economia.gob.mx/trade-and-investment/foreign-trade/international-trade-negotiations (last accessed 17 July 2012). ICSID, Investment Promotion and Protection Treaties (Oceana, 1983, last updated August 2011). Francisco González de Cossío, ‘National Report for Mexico’ (2011) in Jan Paulsson (ed), International Handbook on Commercial Arbitration (Kluwer Law International, 1984, last updated September 2011, Supplement No. 66). The Swiss Model is published in Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff, 1995) at 218. For examples, the provision with respect to consolidation of claims (Schedule, Article 6) and the definitions section in the Schedule closely resemble the corresponding NAFTA provisions.

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d) Post-NAFTA BIT Practice

American, Canadian and Mexican BIT practices have been heavily influenced 24 by the architecture of the NAFTA investment chapter and these States’ experiences as serial respondents in NAFTA investor-State claims.53 NAFTA investorState arbitrations gave rise to concerns that the investment promotion and protection function of the IIA regime might unduly fetter a State’s ability to pursue regulation in the public interest. Further, a range of concerns was expressed regarding the legitimacy and transparency of the investor-State arbitration process in the NAFTA.54 US BIT practice was also heavily influenced by the negotiating objectives in 25 the TPA. Of particular note is section 2102(b)(3), which states that: (3)

FOREIGN INVESTMENT. – Recognizing that United States law on the whole provides a high level of protection for investment, consistent with or greater than the level required by international law, the principal negotiating objectives of the United States regarding foreign investment are to reduce or eliminate artificial or trade-distorting barriers to foreign investment, while ensuring that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States, and to secure for investors important rights comparable to those that would be available under United States legal principles and practice (…).

Although this US policy might be characterised as an adoption of the Calvo 26 Doctrine, since it reflects the sentiment that foreigners should not be treated any better than US nationals, current US policy is not – like the Calvo Doctrine – a rejection of the international minimum standard of treatment.55 Rather, there is an assumption that US legal protections are as good or better than international minimum standards. Further, there is a conscious effort to reflect US legal principles and standards in BIT texts. This is explicit in sec. 2102(b)(3)(D) and (E), TPA: (D) (E)

seeking to establish standards for expropriation and compensation for expropriation, consistent with United States legal principles and practice; seeking to establish standards for fair and equitable treatment consistent with United States legal principles and practice, including the principle of due process.

These objectives are reflected in the 2004 and 2012 US Models and current 27 US BIT practice. The 2004 and 2012 US Models equate fair and equitable treatment with the customary international law minimum standard of treatment of aliens and explicitly state that: ‘concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond 53 See Céline Lévesque, ‘Influence on the Canadian FIPA Model and the US Model: NAFTA Chapter 11 and Beyond’ (2006) 44 Can. YBIL 249–298. 54 See Kenneth Vandevelde (n. 10). For book-length treatments, see Gus Van Harten, Investment Treaty Arbitration and Public Law (Oxford University Press, 2007); Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung and Claire Balchin, The Backlash Against Investment Arbitration (Kluwer Law International, 2010); and José Enrique Alvarez, The Public International Law Regime Governing International Investment (The Hague Academy of International Law, 2011). 55 Kenneth Vandevelde (n. 10) 74.

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that which is required by that standard, and do not create additional substantive rights.’56 The 2004 Canadian Model57 and recent Mexican BITs58 take a similar approach using very similar language. 28 Consistent with the TPA objectives, the US 2004 and 2012 Model BITs contain detailed annexes on expropriation, which set out a test for expropriation drawing on US takings jurisprudence:59 (a)

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: (i) 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; (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (iii) the character of the government action.60

The 2004 Canadian Model61 takes a similar approach with almost the same text. In contrast, recent Mexican BITs do not attempt to define expropriation.62 30 With respect to other investment treatment obligations, the 2004 and 2012 US Model BITs and the 2004 Canadian Model draw heavily on the NAFTA and contain similar types of investment protection standards including pre- and postestablishment national and MFN treatment obligations,63 prohibitions on performance requirements,64 and provisions on senior management and boards of directors.65 31 The US and Canadian models also generally follow NAFTA practice with respect to the scope of application.66 The 2004 Canadian Model67 continues with the NAFTA approach of setting out a comprehensive but not open-ended list of categories of investment. In contrast, the 2004 and 2012 US Models moved away from the NAFTA approach and define investment by reference to characteristics, followed by an illustrative list.68 Recent Mexican BITs have used both 29

56 See Art. 5 (Minimum Standard of Treatment), 2012 US Model BIT. 57 Art. 5, 2004 Canadian Model BIT. 58 Art. 5 of the Agreement between the United Mexican States and the Slovak Republic on the Promotion and Reciprocal Protection of Investments (2007); and Art. 5 of the Agreement between the Government of the United Mexican States and the Government of the Republic of India on the Promotion and Protection of Investments (2007). 59 Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978). 60 Annex B, Expropriation, Art. 4(a). 61 Annex B.13(1), Expropriation, 2004 Canadian Model BIT. 62 Art. 8, Mexico–Slovakia BIT (n. 58); and Art. 7, India–Mexico BIT (n. 58). 63 See Arts. 3 and 4, 2004 and 2012 US Model BITs; and Arts. 3 and 4, 2004 Canadian Model BIT. 64 See Art. 8, 2004 and 2012 US Model BITs; and Art. 7, 2004 Canadian Model BIT. 65 See Art. 9, 2004 and 2012 US Model BITs; and Art. 6, 2004 Canadian Model BIT. 66 See definitions of ‘investment’ and ‘investor of a Party’ and Art. 2 (Scope of Application) in the 2004 and 2012 US Model BITs and Art. 7, 2004 Canadian Model BIT. See Art. 9, 2004 and 2012 US Model BITs and Art. 6, 2004 Canadian Model BIT. 67 In contrast, Canada’s first and second generation used the broad, asset-based definition commonly used in many other BITs.

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approaches.69 Both the United States and Canada include so-called ‘denial of benefits’ clauses in their model BITs and their recent IIAs.70 The 2004 and 2012 US Models and the Canadian 2003 Model, as well as 32 Mexican BITs, have also adopted a number of the procedural mechanisms used in the investor-State arbitration mechanism in NAFTA. These include: – –

– –

requiring the submission of a notice of an intent to submit a claim to arbitration;71 preventing concurrent dispute settlement procedures regarding the same measure by requiring that the notice of arbitration be accompanied by a waiver of the right to initiate or continue other dispute resolution procedures;72 requiring claimants to bring a claim within three years; and73 allowing for the consolidation of multiple claims that have a question of law or fact in common.74

The US 2004 Model BIT also introduced a number of changes to implement 33 TPA negotiating objectives,75 including (i) containing mechanisms to eliminate frivolous claims and to deter the filing of frivolous claims;76 (ii) providing for the fullest measure of transparency in the dispute settlement mechanism by ensuring that all proceedings, submissions, findings, and decisions are promptly made public,77 all hearings are open to the public78 and by establishing a mechanism for acceptance of amicus curiae submissions from businesses, unions and non-governmental organisations;79 and (iii) providing for an appellate body or similar mechanism to interpret investment provisions coherently in trade agreements.80 68 The definition of investment in the 2004 and 2012 US Model BITs includes the following chapeau, followed by an illustrative list of investment: 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.’ 69 See definition of ‘investment’, Mexico–Slovakia BIT (n. 58), which follows the NAFTA model, while the definition of ‘investment’, Art. 5, India–Mexico BIT (n. 58) follows the NAFTA approach subject to the asset in question having certain defined characteristics. 70 Art. 17, 2004 US Model BIT; Art. 18, 2004 Canadian Model BIT. Mexican practice varies. 71 Art. 24(2), 2004 and 2012 US Model BITs; Art. 24, 2004 Canadian Model BIT; Art. 13, Mexico–Slovakia BIT (n. 58); and Art. 12, Mexico–India BIT (n. 58). 72 Art 26(2)(b), 2004 US Model BIT, Art 26(1)(e) and 26(2)(e) 2004 Canadian Model BIT; Art. 13, Mexico–Slovakia BIT (n. 58), and Art. 12, Mexico–India BIT (n. 58). 73 Art. 26(1), 2004 and 2014 US Models BIT; Art. 26(1)(c) and 26(2)(c), 2004 Canadian Model BIT; Art. 13, Mexico–Slovakia BIT (n. 58); and Art. 12, Mexico–India BIT (n. 58). 74 Art. 33, 2004 and 2012 US Models BITs, Art. 32, 2004 Canadian Model BIT; Art. 16, Mexico–Slovakia BIT (n. 58). 75 Sec. 2102(b)(3)(G) and (H), TPA. 76 Art. 28(4), 2004 US Model BIT; Art. 37, 2004 Canadian Model BIT. 77 Art. 29(2)–(4), 2004 US Model BIT; Art 38(2)–(8), 2004 Canadian Model BIT. 78 Art. 29(2), 2004 US Model BIT; Art. 38(1), 2004 Canadian Model BIT. 79 Art. 28(3), 2004 US Model BIT; Art. 39, 2004 Canadian Model BIT. 80 Annex D, 2004 US Model BIT.

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The 2004 and 2012 US Models and the 2004 Canadian Model reflect a conscious policy by these States that balances their ‘offensive’ interests in protecting their nationals abroad with their ‘defensive’ interests in maintaining regulatory space. This approach is reflected in the various provisions discussed above and also, more generally, in the preambles. The preamble to the Canadian Model refers specifically to the ‘promotion of sustainable development’. Similarly, the preamble in the US Model refers to the desire ‘to achieve these objectives in a manner consistent with the protection of health, safety, and the environment, and the promotion of internationally recognized labor rights’. 35 Commentators have noted the significant differences between the 2004 US Model BIT and earlier BIT models.81 For example, José Alvarez has argued that compared to the 1987 US Model BIT, the 2004 US Model BIT has ‘dramatically’ shrunk ‘virtually every right originally accorded to foreign investors’.82 Another prominent commentator, Judge Stephen Schwebel, former President of the International Court of Justice (ICJ), has characterised the 2004 US Model as a ‘regressive’ development.83 Other commentators have viewed the changes more charitably. Former US State Department lawyer, Mark Clodfelter, has written that the innovations of recent model BITs ‘reflect the efforts of an increasing number of States to find a new balance between two competing objectives: the promotion and protection of investments and the right to properly regulate for public welfare purposes.’84 36 In addition to the various elements noted above, the ‘balancing’ approach is reflected in the extensive use of reservations and exceptions to obligations,85 including a wide carve-out for taxation measures86 and, in the case of Canada, an 34

81 See Kenneth Vandevelde, ‘A Comparison of the 2004 and 1994 US Model BITs: Rebalancing Investor and Host Country Interests’, (2008–2009) YB Int’l Inv. L. & Pol’y 283–315, 283– 289 and José Alvarez, ‘The Return of the State’ (2011) 20:2 Minn. J. Int’l L. 223–264. 82 José Alvarez (n. 81) 235. Stephen M. Schwebel, ‘The United States 2004 Model BIT and Denial of Justice in International Law’, in Christina Binder, Ursula Kriebaum, August Reinisch, and Stephan Wittich (eds), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (Oxford University Press, 2009) 519–521. 83 Stephen M. Schwebel, ‘The United States 2004 Model Bilateral Investment Treaty: An Exercise in the Regressive Development of International Law’ in Gerald Aksen, Karl-Heinz Böckstiegel, Michael Mustill, Paolo Pantocchi and Anne Marie Whitesell (eds), Global Reflections on International Law, Commerce and Dispute Resolution: Liber Amicorum in Honour of Robert Briner (ICC, 2005) 815–824. 84 Mark A Clodfelter, ‘The Adaptation of States to the Changing World of Investment Protection through Model BITs’ (2009) 24:1 ICSID Rev.–FILJ 165–175, 174. 85 Article 14 (Non-conforming Measures), Article 20 (Financial Services), and Article 21 (Taxation), US 2004 and 2012 Model BITs; Art. 9 (Reservations and Exceptions), Art. 17 (Prudential Measures), Art. 21 (Limitation of Claims with Respect to Financial Institutions), Annex I (Reservations for Existing Measures and Liberalization Commitments) and Annex II (Reservations for Future Measures), 2004 Canadian Model BIT. Canadian FIPAs are unique in their early adoption and continuous use of Article XX, GATT-like general exceptions in its IIAs. All of its International Investment Agreements since 1994 include such a provision. See Andrew Newcombe, ‘General Exceptions in International Investment Agreements’ in MaireClaire Cordonier Segger, Markus Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (Kluwer Law International, 2010) 351–370. 86 Art. 21, 2004 US Model BIT; Art. 16, 2004 Canadian Model BIT.

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exception for measures related to cultural industries.87 The current American and Canadian models both provide for self-judging essential security provisions. They also include provisions that refer to the protection of health, safety and the environment,88 and, in the case of the United States, labour rights.89 The 2012 US Model expands the scope of environmental obligations to include a duty to enforce local environmental laws.90 On 20 April 2012, the US government released its new model BIT. The 2012 37 US Model is a product of review process from an advisory committee made of a diverse group of various stakeholders.91 The official press release notes that: The Administration made several important changes to the BIT text so as to enhance transparency and public participation; sharpen the disciplines that address preferential treatment to state-owned enterprises, including the distortions created by certain indigenous innovation policies; and strengthen protections relating to labor and the environment.92

There are no substantial changes between the 2004 and 2012 US Models, ei- 38 ther with respect to substantive investment protection standards or dispute settlement. Overall, the changes are minor and reflect a rejection of proposals by groups critical of investment treaties to scale back investment protection and avoid investor-State arbitration.93 At the same time, the 2012 US Model also fails to improve on key investment protection standards as recommended by proponents.94 Notable changes include clarifying the application of BIT obligations to State enterprises;95 a new provision on performance requirements prohibiting preferences for use of local technologies;96 new provisions on transparency of regulations of general application and standard setting;97 new provisions on the environment and labour protections that require States to effectively 87 88 89 90 91 92

93

94

95 96 97

See definition of ‘cultural industries’, 2004 Canadian Model BIT. Art. 11, 2004 Canadian Model BIT. Arts. 12 and 13, 2004 US Model BIT. Art. 12, 2012 US Model BIT. See Report of the Subcommittee on Investment of the Advisory Committee on International Economic Policy Regarding the Model Bilateral Investment Treaty, 30 September 2009, available at http://www.state.gov/e/eb/rls/othr/2009/131098.htm (last accessed 26 July 2012). Office of the United States Trade Representative, Press Release April 2012, ‘United States Concludes Review of Model Bilateral Investment Treaty’, available at http://www.ustr.gov/ about-us/press-office/press-releases/2012/april/united-states-concludes-review-model-bilateral-inves (last accessed 15 July 2012). See Institute for Policy Studies, ‘The New U.S. Model Bilateral Investment Treaty: A Public Interest Critique’, available at http://www.ipsdc.org/reports/the_new_us_model_bilateral_investment_treaty_a_public_interest_critique (last accessed 16 July 2012) arguing that the ‘new U.S. model BIT does not go far enough to address the concerns that labor unions and environmental, development, and other nongovernmental organizations have raised consistently for many years’. Those concerns (as well as opposing views) are reflected in the Annex to the Report of the Subcommittee (n. 94). See Emergency Committee for American Trade Press Release, 20 April 2012, ‘ECAT Applauds Obama Administration Commitment to Open Markets and Protect U.S. Investment Through Updated Model BIT and Urges Quick Resumption of Negotiations’, available at http://www.ecattrade.com/#!__press (last accessed 16 July 2012). See footnote 8 to Article 2 (Scope and Coverage). Article 8(h). Article 11.

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enforce environmental and labour laws and not to derogate from core labour rights;98 an expedited arbitral process for certain financial services matters;99 and the removal of Annex D, which appeared in the 2004 US Model, on the possibility of a bilateral appellate mechanism and the requirement to assess whether to establish such a mechanism within three years from the entering into force of the treaty. 39 American, Canadian and Mexican IIA practices now also encompass a series of FTAs with investment chapters. In the case of the US and Canada, these investment chapters are based on the State’s model BIT, with modifications to reflect the legal architecture and particular features of the FTA.100 3. Central America and the Caribbean

Central American States, with the exception of Costa Rica101 and El Salvador,102 were not early BIT adopters.103 Moreover, when they have concluded BITs, these States have generally followed the BIT models of the other State party in question.104 The most significant development in Central American IIA practice is the conclusion of the Dominican Republic–Central America–United States Free Trade Agreement (CAFTA–DR), which includes five Central American States – Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. The text of the CAFTA–DR investment chapter closely follows the 2004 US Model BIT. 41 Likewise, Caribbean States have not been active participants in BIT negotiations and have generally signed BITs based on models of developed, capital exporting States.105 The Caribbean States with the most BITs are Cuba (14), Ja40

98 Article 12 (Investment and Environment) and Article 13 (Investment and Labour). 99 Article 20 (Financial Services). 100 For Canadian FTAs, see online: DFAIT http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/index.aspx?view=d. For US FTAs, see online: Office of the United States Trade Representative http://www.ustr.gov/trade-agreements/free-trade-agreements. For Mexican FTAs, Secretaría de Economía, available at http://www.economia.gob.mx/trade-and-investment/foreign-trade/international-trade-negotiations/international-investment-agreements (last accessed 26 July 2012). 101 Agreement between the Swiss Confederation and the Republic of Costa Rica on the Promotion and Reciprocal Protection of Investments (1965). 102 Convention entre le gouvernment de la République Française et le gouvernement de la République de El Salvador sur l’encouragement et la protection réciproques des investissements (1978). El Salvador was the first Latin American country to ratify the ICSID Convention in 1984. 103 Central American States have signed the following number of BITs: Belize (3), Costa Rica (16), El Salvador (11), Guatemala (7), Honduras (8), Nicaragua (8) and Panama (11). ICSID, Investment Promotion and Protection Treaties (Oceana, 1983, last updated August 2011). 104 For examples, the BITs between the Netherlands and its treaty partners Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama all follow the same (Dutch) model. 105 For example the Treaty between the United States of America and Grenada concerning the Reciprocal Encouragement and Protection of Investment, the Treaty between the United States of America and Jamaica concerning the Reciprocal Encouragement and Protection of Investment, the Agreement between the Government of Canada and the Government of Bar-

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maica (8), and Dominican Republic, Jamaica and Trinidad and Tobago (6 each).106 4. South America

Historically, South American States have displayed significant antipathy to 42 the international law governing foreign investment, in part because of military intervention by European States and the US to protect their nationals’ property and to force the payment of debts.107 The Calvo and Drago Doctrines reflect this opposition to the exercise of various forms of diplomatic protection. Throughout the 1960s and 1970s, South American States maintained their general opposition to investment protection standards and international investment arbitration. In the 1980s, however, Latin American States began liberalising their foreign investment policies. By the 1990s, Latin American States were signing BITs en masse, leaving behind the Calvo Doctrine and opposition to the minimum standard of treatment as well as to international adjudication of investment disputes.108 South American BITs signed in the 1990s tend to be based on the models of 43 developed, capital exporting States.109 There is no evidence during this time of South American States developing their own model BITs. For example, the investment treaties giving rise to the numerous arbitration claims against Argentina, Bolivia, Ecuador and Venezuela110 are based overwhelmingly on the models and treaty practice of France, Germany, Italy, the Netherlands, Spain, the United Kingdom and the United States.111 Some of these BITs have a so-called ‘soft’

106 107 108

109 110

111

bados for the Reciprocal Promotion and Protection of Investments, and the Agreement between the Government of Canada and the Government of the Republic of Trinidad and Tobago for the Reciprocal Promotion and Protection of Investments. ICSID, Investment Promotion and Protection Treaties (Oceana, 1983, last updated August 2011). See Mary Helen Mourra, ‘The Conflicts and Controversies in Latin American Treaty-Based Disputes’ in Mary H. Mourra (ed), Latin American Investment Treaty Arbitration: The Controversies and Conflicts (Kluwer Law International, 2008) 5–68. See Katia Fach Gomez, ‘Latin America and ICSID: David versus Goliath’ (2011) 17 Law & Bus. Rev. Am. 195–230; Mary H. Mourra (ed), Latin American Investment Treaty Arbitration: The Controversies and Conflicts (Kluwer Law International, 2008); Jonathan C. Hamilton, Omar E. García-Bolívar and Hernando Otero, Latin American Investment Protections (Martinus Nijhoff, 2012) and Christian Leathley, International Dispute Resolution in Latin America: An Institutional Overview (Kluwer Law International, 2007). The BITs between the Netherlands and its treaty partners Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama all follow the same (Dutch) model BIT. On 25 June 2012, Global Arbitration Review reported that Venezuela (with 24) has overtaken Argentina (with 23) as the State with the largest number of pending ICSID claims. See Clemmie Spalton, ‘Venezuela edges ahead at ICSID’, 25 June 2012, GAR, available at http://www.globalarbitrationreview.com/news/article/30633/venezuela-edges-ahead-icsid (last accessed 18 July 2012). Although there are some notable exceptions that highlight the rise in developing State-developing State investment treaty practice, such as Tidewater Inc. et al. v. Venezuela, ICSID Case No. ARB/10/5, a claim under the Agreement between the Government of Barbados and the Government of the Republic of Venezuela for the Promotion and Protection of Investments.

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Calvo Clause – a requirement to submit claims to national courts for a set period of time before resorting to international arbitration.112 44 Despite the dominance of developed–developing State BITs based on capital exporting State models,113 there is some limited practice of intra-regional BITs and developing–developing State BITs, with Chile being the most active in this regard.114 45 BIT claims and awards against Latin American States and the renewed interest in nationalising energy industries have led some Latin American States to reconsider their commitment to investor-State arbitration under IIAs. Prominent manifestations of this concern are Bolivia’s, Ecuador’s and Venezuela’s denunciations of the ICSID Convention115 and termination of investment treaties by Bolivia, Ecuador and Venezuela.116 A related development has been the increased interest amongst South American States in creating indigenous investment treaties and dispute settlement mechanisms. Bolivia and Ecuador have taken steps to develop new model agreements.117 46 Although the denunciation of ICSID and termination of BITs has received significant attention, the trend should not be overemphasised. South American States continue to enter into more BITs than they denounce. Further, practice is not consistent. Both Chile and Colombia have active BIT programmes. Chile has signed 49 BITs,118 although not based on a common model.119 In addition to 112 See Bernardo Cremades, ‘Disputes Arising Out of Foreign Direct Investment in Latin America: a New Look at the Calvo Doctrine and Other Jurisdictional Issues’ (2004) 59 Disp. Res. J. 78. 113 Latin America and the Caribbean continued to be the least active region in 2008. In total, the region accounted for 483 agreements or 18 per cent of all BITs. UNCTAD, ‘Recent Developments in International Investment Agreements’, IIA Monitor No. 3 (2009) 4, available at http://unctad.org/en/docs/webdiaeia20098_en.pdf (last accessed 27 January 2014). 114 Argentina, Chile and Bolivia have entered into a series of BITs with other South American States. 115 Bolivia in 2007, Ecuador in 2009 and Venezuela in 2012. See ICSID, available at http:// icsid.worldbank.org/ICSID/Index.jsp. 116 See UNCTAD, ‘Denunciation of the ICSID Convention and BITs: Impact on Investor-State Claims’, UNCTAD IIA Issues Note No. 2, December 2010, available at http:// www.unctad.org/en/docs/webdiaeia20106_en.pdf (last accessed 18 July 2012) and Notice of Termination of the Treaty between the Government of the United States of America and the Government of the Republic of Bolivia concerning the Encouragement and Reciprocal Protection of Investment, 23 May 2012, available at https://www.federalregister.gov/articles/ 2012/05/23/2012-12494/notice-of-termination-of-united-states-bolivia-bilateral-investmenttreaty (last accessed 18 July 2012). 117 See Damon Vis-Dunbar, ‘Analysing Latin America’s New Model Bilateral Investment Treaties’, 17 July 2008, Investment Treaty news online, available at http://www.iisd.org/itn/ 2008/07/17/in-depth-latin-america-s-new-model-bilateral-investment-treaties (last accessed 18 July 2012). See International Institute for Sustainable Development, Annual Forum of Developing Country Investment Negotiators, available at http://www.iisd.org/investment/dci (last accessed 18 July 2012). 118 See listing of BITs on the Chilean Foreign Investment Committee website, available at http://www.inversionextranjera.cl/index.php?option=com_content&view=article&id=230&Itemid=61 (last accessed 14 July 2014). Also see Gonzalo Biggs, ‘Chile’ in Jonathan C. Hamilton, Omar E. García-Bolívar and Hernando Otero (eds), Latin American Investment Protections (Martinus Nijhoff, 2012) 126.

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BITs with developed, capital exporting States, Chile has an extensive network of 16 BITs with Central and South American States.120 Between 2006 and 2012, Colombia negotiated 14 BITs, heavily influenced by successive model BITs121 and has also concluded FTAs with investment chapters.122 Although Colombia’s 2003 Model followed the European model of a short, 47 principle-based agreement, Colombia’s current (2009) model adopts some of the more detailed provisions that appear in the 2004 US Model (and the Colombia– United States FTA, concluded in 2007). These include reference to the minimum characteristics of an investment,123 equating fair and equitable treatment with customary international law standards,124 defining the meaning and scope of expropriation125 and a number of refinements to the investor-State arbitration provisions, such as the requirements to bring claims within three years126 and to have preliminary rulings on competence and admissibility.127 Brazil has generally abstained from entering BITs. Although it negotiated 14 48 BITs in the 1990s, it has not ratified any BITs,128 a reflection of its traditional reluctance to consent to investor-State arbitration. Paradoxically, it remains the largest recipient of FDI in South America. 5. Conclusion

The high rate of IIA claims against States in the Americas has led to signifi- 49 cant changes in BIT practices. NAFTA investor-State arbitration cases have had a decisive effect on treaty practices in North America. The new US and Canadian Model BITs clarify and limit investment protection obligations in an attempt to balance investment protection and regulatory sovereignty. Ironically, it could be argued that China’s current BITs provide greater property rights protections than those of the United States. Although there are significant differences be119 See Gonzalo Biggs (n. 118) 129 and L. Andrés, ‘National Report for Chile’ (2010) in Jan Paulsson (ed), International Handbook on Commercial Arbitration (Kluwer Law International, 1984, last updated May 2010, Supplement No. 59) 1–68. 120 ICSID, Investment Promotion and Protection Treaties (Oceana, 1983, last updated August 2011). 121 See José Antonia Rivas’ commentary on the Colombia Model BIT in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013) describing earlier the 2003 and 2006 models and analysing the 2009 Model in detail. See also Eduardo Zuleta, ‘National Report for Colombia’ (2010) in Jan Paulsson (ed), International Handbook on Commercial Arbitration (Kluwer Law International, 1984, last updated December 2010, Supplement No. 62) 71–80. 122 See Gonzalo Biggs (n. 118) 127. 123 Article I(2.4). 124 Article III(4). 125 Article VI. 126 Article IX(10). 127 Article IX(13). 128 See Pedro Paulo Cristofaro and Luiz Fernanado Teixeira Pinto, ‘Brazil’ in Jonathan C. Hamilton, Omar E. García-Bolívar and Hernando Otero (eds), Latin American Investment Protections (Martinus Nijhoff, 2012) at 91. Also see Jean Kalicki and Suzana Medeiros, ‘Investment Arbitration in Brazil’ (2008) 24(3) Arb. Int’l 423–446.

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tween bilateral approaches in North America, Europe, India and China, a series of ongoing negotiations between States from these regions raise the possibility of converging approaches. For example, both the US and Canada have engaged China and India in BIT negotiations. Canada has also joined the US, Chile and Peru in the negotiations of the Trans-Pacific Partnership (TPP), which is expected to include investment obligations. In addition, Canada and the EU have been negotiating a Comprehensive Economic Trade Agreement (CETA),129 the draft text of which includes an investment chapter. The agreements that come out of these negotiations might well serve as models for future bilateral practice, and eventually a multilateral agreement. Meanwhile, in Latin America, there are two distinct trends – one nationalist and regional and the other internationalist.

129 Foreign Affairs and International Trade Canada, Canada–European Union: Comprehensive Economic and Trade Agreement Negotiations, available at http://www.international.gc.ca/tra de-agreements-accords-commerciaux/agr-acc/eu-ue/negotiations-negociations.aspx?lang=en g&view=d (last accessed 12 July 2012).

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C. Chinese Investment Law1

Marc Bungenberg and Manjiao Chi 1. Introduction – Chinese Investment Policymaking: The Economic Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Instruments of Investment Promotion and Protection: An Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Domestic Instruments in Regard to Foreign Investment. . . . . . . . . . b) Bi- and Multilateral Investment Protection Instruments . . . . . . . . . 3. Development of Chinese Investment Treaty-Making . . . . . . . . . . . . . . . . a) The Different Generations of Chinese BIT Practice . . . . . . . . . . . . . . b) China’s More Recent Treaty-Making Practice Part I: Conclusion of Trade and Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . c) The US–China Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) The China–EU BIT Negotiations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Litigation on the Basis of Chinese Investment Treaties . . . . . . . . . . . . . 5. Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 5 9 11 12 19 29 31 34 39

Literature: Jose Alvarez, ‘The Once and Future Foreign Investment Regime’ in Mahnoush H. Arsanjani, Jacob Cogan, Robert Sloane and Siegfried Wiessner (eds), Looking to the Future: Essays on International Law in Honour of W. Michael Reisman (Martinus Nijhoff, 2011) 607–648; Jose Alvarez, ‘The Return of the State’ (2011) 20(2) Minn. J. Int’l L. 223–264; Axel Berger, ‘Investment Rules in Chinese Preferential Trade and Investment Agreements: Is China following the global trend towards comprehensive agreements?’ (2013) 7 Deutsches Institut für Entwicklungspolitik Discussion Paper 1–31; Axel Berger, ‘The Politics of China’s Investment Treaty-Making Program’ in Tomer Broude, Marc L. Busch and Amelia Porges (eds), The politics of international economic law (Cambridge University Press, 2011) 162– 185; Emmanuel Gaillard, ‘Anti-Arbitration Trends in Latin America’(2008) 108 New York Law Journal 239–254; Norah Gallagher and Wenhua Shan, Chinese Investment Treaties: Policies and Practice (Oxford University Press, 2009); Wenhua Shan, Towards a new legal framework for EU–China Investment Relations (2000) 34 JWT 137–179; Wenhua Shan and Sheng Zhang, ‘The Potential EU–China BIT: Issues and Implications’ in Marc Bungenberg, August Reinisch and Christian Tietje (eds), EU and Investment Agreements: Open Questions and Remaining Challenges (Nomos and Hart, 2013) 87–120; Wei Shen, ‘The Good, the Bad or the Ugly? A Critique of the Decision on Jurisdiction and Competence in Tza Yap Shum v. The Republic of Peru’ (2011) 10(1) Chinese J. Int’l L. 55–95; Catharine Titi, ‘The Arbitrator as a Lawmaker: Jurisgenerative Processes in Investment Arbitration’ (2013) 14(5) JWIT 829– 851; Valentina Vadi, ‘Converging Divergences: The Rise of Chinese Outward Foreign Investment and Its Implications for International (Investment) Law’ (2011–2012) YB Int’l Inv. L. & Pol’y 705–724.

1 This contribution is partly based on Marc Bungenberg and Catharine Titi, ‘The Evolution of EU Investment Law and Future of EU–China Investment Relations’ in Wenhua Shan and Jinyuan Su (eds), International Investment Law and Arbitration: The 20th Anniversary of China in the ICSID (Brill, 2014) (forthcoming).

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1. Introduction – Chinese Investment Policymaking: The Economic Background

China’s investment policymaking has undergone changes.2 In recent decades, China has been receiving high inflows of foreign direct investment,3 and, according to UNCTAD data, in 2011 foreign direct investment flows into China reached an all-time high of USD 124 billion.4 More concretely, in that same year, FDI inflows to China rose by nearly 8 per cent5 and this popularity is corroborated by investment promotion agencies (IPAs) that in 2011 rated China as the ‘most promising investor home economy for FDI in 2012–2014’.6 In this survey, China was selected by more than 60 per cent of IPA respondents as a ‘most promising investor home economy’.7 Although FDI inflows in 2012 declined,8 China has remained at the top of IPA ratings.9 In terms of sectoral distribution of incoming foreign direct investment, recent trends indicate a decline in inflows in manufacturing and an increase in inward investment in services, while FDI inflows to the finance sector are expected to grow, as China continues to open its financial markets and foreign banks (such as HSBC, a UK investor, and Citigroup, a US investor) continue to expand their presence in the country.10 2 At the same time, China has moved from the position of a mere investment importer to also become an important source of foreign investment.11 Despite a decrease in outward FDI levels (in 2011 FDI outflows from China marked a 5.4 per cent decline from 2010),12 China’s outward foreign direct investment has been growing rapidly: from less than USD 5 billion in accumulated outward FDI flows in 1991,13 Chinese FDI outflows reached USD 35 billion in 200214 and stood in 2011 at USD 65 billion.15 1

2 See Wenhua Shan and Sheng Zhang, ‘The Potential EU–China BIT: Issues and Implications’ in Marc Bungenberg, August Reinisch and Christian Tietje (eds), EU and Investment Agreements: Open Questions and Remaining Challenges (Nomos and Hart, 2013) 87–120, 90 et seq.; Valentina Vadi, ‘Converging Divergences: The Rise of Chinese Outward Foreign Investment and Its Implications for International (Investment) Law’ (2011–2012) YB Int’l Inv. L. & Pol’y 705–724. 3 UNCTAD, World Investment Report 2012 – Towards a new Generation of Investment Policies (United Nations, 2012) 44, available at http://www.unctad-docs.org/files/UNCTADWIR2012-Full-en.pdf (accessed 14 March 2014). 4 UNCTAD (n. 3) xvi, 43. 5 UNCTAD (n. 3) 4. 6 UNCTAD (n. 3) 21, incl. Figure I.13. 7 UNCTAD (n. 3) 21, incl. Figure I.13. 8 UNCTAD, World Investment Report 2013 – Global Value Chains: Investment and Trade for Development (United Nations, 2013) passim, available at http://unctad.org/en/publicationslibrary/wir2013_en.pdf (accessed 14 March 2014). 9 UNCTAD (n. 8) 21. 10 UNCTAD (n. 3) 44. 11 Valentina Vadi (n. 2) 705, 707 et seq. 12 UNCTAD (n. 3) 5, 44. 13 UNCTAD, E-Brief – China: an emerging FDI outward investor, 4 December 2003, 2, Figure 2, available at http://unctad.org/sections/dite_fdistat/docs/china_ebrief_en.pdf (accessed 14 March 2014). 14 UNCTAD (n. 13) 2, Figure 2.

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Among developing economies, in 2011 China was the second largest investor 3 in less developed countries and it remained the largest investor in least developed countries (LDCs) (after India), contributing USD 2.8 billion in 20 projects.16 Generally, Chinese outward FDI is focused on countries that share ‘close cultural links’,17 and in its bulk it remains in Asia,18 while, as noted elsewhere Chinese investment in Europe remains low. It is noteworthy that China has tended to include investor-State dispute settlement provisions in its BITs with developing countries,19 which are the main destination of Chinese outbound foreign direct investment.20 2. Instruments of Investment Promotion and Protection: An Overview

The Chinese framework of investment law includes domestic, bilateral and 4 multilateral instruments.21 a) Domestic Instruments in Regard to Foreign Investment

Before the 1970s, China was largely an economically closed and politically 5 isolated country, and had little international investment engagements. China’s foreign investment law began to develop since the end of the 1970s when China adopted the Open Door Policy and launched its economic reform. China’s investment law focuses on laws of enterprises, and is composed of several major laws and a large number of regulations, dealing with a broad range of issues concerning both inbound and outbound investments. Specifically, the three major laws are generally deemed to have laid down the foundation of China’s investment law regime: the Law of Sino-Foreign Equity Joint Ventures,22 the Law of Sino-Foreign Contractual Joint Ventures23 and the Law of Foreign-Owned Enterprises24 (collectively ‘foreign investment laws’). China’s investment law 15 16 17 18 19

20 21 22 23 24

UNCTAD (n. 3) 5, 44. UNCTAD (n. 3) 66. UNCTAD (n. 3) 7 Box I.2. Valentina Vadi (n. 2) 705, 708. Axel Berger, ‘The Politics of China’s Investment Treaty-Making Program’ in Tomer Broude, Marc L. Busch and Amelia Porges (eds), The politics of international economic law (Cambridge University Press, 2011) 162–185, 175–176; Axel Berger, ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’, Paper prepared for the American Society of International Law International Economic Law Interest Group (ASIL IELIG) 2008 biennial conference ‘The Politics of International Economic Law: The Next Four Years’, Washington, D.C., 14–15 November 2008, 11, available at http://www.die-gdi.de/uploads/media/Berger_ChineseBITs.pdf (accessed 14 March 2014). See also Axel Berger, ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ (n. 19) 11. See Wenhua Shan, Towards a new legal framework for EU–China Investment Relations (2000) 34 JWT 137–179, 141. Adopted on 20 September 1983 and amended on 15 January 1986, 21 December 1987 and 22 July 2001. Adopted on 13 April 1988 and amended on 31 October 2000. Adopted on 12 April 1986 and amended on 31 October 2000.

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regime has played a successful role in attracting FDI in the past decades. However, it becomes obsolete and faces various challenges nowadays. 6 Significantly, in terms of FDI promotion measures, China has published ‘Guidelines for Industries of Foreign Investment’ regularly, with the currently valid one issued in 2012.25 In general, these guidelines categorise industries into four major types to which foreign investments are encouraged, restricted and prohibited respectively, and any industries that are not expressly mentioned in the guidelines are deemed as allowed. Based on its economic development situation, China makes necessary revisions on the guidelines every five years. The guidelines are deemed as an important instrument and primary standard for China’s foreign investment regulatory authorities in regulating and approving FDI into China. For instance, the 2012 guidelines encourage foreign investment in strategic nascent industries in energy efficiency, high tech and environmental protection, also in industries in manufacturing and services.26 It appears that these measures are linked to specific lists identifying industries where FDI is encouraged, but equally those where FDI is limited or entirely prohibited.27 7 In the near future, China’s foreign investment law may experience substantive improvements due to its further economic opening. On 29 September 2013, China officially established the Shanghai Pilot Free Trade Zone (Shanghai FTZ).28 The establishment of the Shanghai FTZ is aimed at furthering China’s economic opening up. In order to provide necessary legislative support for the smooth functioning of the Shanghai FTZ, the State Council and various ministries of China as well as the Shanghai municipality have revised various administrative regulations and rules or suspended the application of certain regulations and rules in the FTZ. Most of these regulations and rules concern foreign investment governance in the FTZ, especially the establishment of foreign investment.29 It is hoped that the launch of the Shanghai FTZ could serve as a pioneer for China’s full-round economic reform in the future. Such reform, if carried out, will undoubted bring about fundamental impacts onto China’s foreign investment law. 8 On the whole, China’s economic rise contributes to talk of an ‘Asian’ or a ‘Pacific Century’, encapsulating the concept that economic and political power

25 Accessible at http://www.gov.cn/flfg/2011-12/29/content_2033089.htm (accessed 14 March 2014) (official Chinese version). 26 UNCTAD (n. 3) 78, Box III.3. 27 UNCTAD (n. 3) 82. 28 A Detailed introduction of the Shanghai Free Trade Zone is available at http:// finance.people.com.cn/GB/8215/356561/368338 (accessed 14 March 2014) (in Chinese). 29 A list of such laws and regulations is available at http://www.deloitte.com/view/zh_CN/cn/ services/tax/7b93b359bbab1410VgnVCM3000003456f70aRCRD.htm (accessed 14 March 2014) (in Chinese).

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expands eastwards,30 while escalating Chinese FDI outflows confirm ‘China’s economic rise as an active and influential player in international relations’.31 b) Bi- and Multilateral Investment Protection Instruments

Over the last 30 years, China has built a dense network of BITs as well as a 9 few comprehensive economic cooperation agreements. Of these, as already mentioned, China has concluded over 130 BITs32 and around a dozen FTAs including investment chapters.33 China’s treaty partners cover a wide range of countries, including developed, developing and least developed countries, and covering almost all areas of the world. Interestingly, although the US is one of China’s major trade partners, China has not concluded a BIT with the US up to now. Nowadays, China and the US are still in the process of negotiating their first BIT. Internationally, China is a party to the Convention on the Settlement of In- 10 vestment Disputes between States and Nationals of Other States (ICSID Convention)34 and the Convention of Establishing the Multilateral Investment Guarantee Agency (MIGA Convention).35 In recent years, Chinese investors appear to get gradually used to resorting to ICSID arbitration for protecting their overseas investments. For instance, in the past few years, several ICSID arbitration cases have been initiated by Chinese investors, such as Tza Yap Shum v. Peru36 and Ping An v. Belgium.37 With China’s growing overseas investment, it can be reasonably expected that ICSID arbitration initiated by Chinese investors while relying on Chinese BITs will become more frequently seen in the future.

30 See respectively United States Congress, Senate and Committee on Foreign Relations, Security and Development Assistance: Hearings Before the Committee on Foreign Relations, United States Senate, Ninety-ninth Congress, First Session (U.S. Government, 1985) 541 and Hillary Clinton, America’s Pacific Century, Foreign Policy, November 2011, available at http:// www.foreignpolicy.com/articles/2011/10/11/americas_pacific_century (accessed 14 March 2014); Valentina Vadi (n. 2) 705, 707 incl. fn. 12 and 13. 31 Valentina Vadi (n. 2) 705, 708; see further Wei Shen, ‘The Good, the Bad or the Ugly? A Critique of the Decision on Jurisdiction and Competence in Tza Yap Shum v. The Republic of Peru’ (2011) 10(1) Chinese J. Int’l L. 55–95. 32 An incomplete list of China’s BITs is available at http://tfs.mofcom.gov.cn/aarticle/Nocategory/201111/20111107819474.html (accessed 14 March 2014); a list of (most) bilateral investment agreements concluded by China, 1 June 2013 is available at http://unctad.org/Sections/ dite_pcbb/docs/bits_china.pdf (accessed 14 March 2014). 33 A list of China’s FTAs is available at http://fta.mofcom.gov.cn/english/fta_qianshu.shtml (accessed 14 March 2014). 34 International Centre for Settlement of Investment Disputes, ICSID Convention, Regulation and Rules, available at https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_Englishfinal.pdf (accessed 14 March 2014). 35 Available at http://www.miga.org/documents/miga_convention_november_2010.pdf (accessed 14 March 2014). 36 Tza Yap Shum v. Peru, ICSID Case No. ARB/07/6, available at http://www.italaw.com/cases/ 1126 (accessed 14 March 2014). 37 Ping An v. Belgium, ICSID Case No. ARB/12/29, available at http://www.italaw.com/cases/ 2042 (accessed 14 March 2014).

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3. Development of Chinese Investment Treaty-Making 11

In general, the development of Chinese investment treaty-making is prompted and even motivated by its changing need of economic development. The present section will discuss firstly the different generations of Chinese international investment agreements and then secondly examine in more detail the most recent Chinese investment agreements, and it will briefly consider the US–China negotiations on the conclusion of a new BIT, as well as the ongoing negotiations with the EU. a) The Different Generations of Chinese BIT Practice

There are several ‘generations’ of Chinese BITs38 as is pointed out by various scholars.39 13 The first generation of Chinese BITs starts in the early 1980s with China’s first bilateral investment treaty concluded with Sweden in 198240 and it lasts until the late 1990s.41 Generally, China’s first generation of BITs is conservative and often contains certain basic provisions, such as definitions, expropriation, compensation, and transfer clauses.42 These BITs are characterised by a narrow scope of the investor-State dispute settlement (ISDS) clauses (mainly regarding consent to submit investment disputes to international arbitration). 14 In this timeframe, China negotiated a total of 80 ‘restrictive’43 treaties containing important reservations about substantive as well as procedural protections of foreign investment.44 More particularly, these early BITs did not offer national treatment.45 In reality, although China did begin to consent to some form of international arbitration since 1985, this was limited to determining the amount of compensation due for expropriation and only after exhaustion of local remedies.46 Upon joining the ICSID system in 1993, China filed a notification, in conformity with Article 25(4) of the ICSID Convention, to the effect that ‘the Chinese Government would only consider submitting to the jurisdiction of the 12

38 E.g. Axel Berger, ‘Investment Rules in Chinese Preferential Trade and Investment Agreements: Is China following the global trend towards comprehensive agreements?’ (2013) 7 Deutsches Institut für Entwicklungspolitik Discussion Paper 6 et seq., available at http:// www.die-gdi.de/uploads/media/DP_7.2013.pdf (accessed 14 March 2014); Wenhua Shan and Sheng Zhang (n. 2) 87. 39 See on this Elodie Dulac, ‘The Emerging Third Generation of Chinese Investment Treaties’ (2010) 7(4) TDM 1 et seq.; Norah Gallagher and Wenhua Shan, Chinese Investment Treaties: Policies and Practice (Oxford University Press, 2009) 35–43. 40 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 7; Elodie Dulac (n. 39) 1 et seq. 41 Valentina Vadi (n. 2) 705, 711. 42 Norah Gallagher and Wenhua Shan (n. 39) 36–38. 43 See Axel Berger (n. 38) 7, 10. 44 Wenhua Shan and Sheng Zhang (n. 2) 87, 91. 45 Valentina Vadi (n. 2) 705, 711. 46 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 9; Wenhua Shan and Sheng Zhang (n. 2) 87, 91; Valentina Vadi (n. 2) 705, 711.

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ICSID over compensation resulting from expropriation or nationalization’.47 The legal effect of this notification is highly disputed;48 it is questioned for example whether this notification constitutes a reservation within the meaning of the Vienna Convention on the Law of Treaties or whether, more probable, it does not weigh in this manner against ratification of the ICSID Convention and express consent in an investment treaty.49 It is of interest to note that although first generation Chinese BITs tended to refer to this notification, newer generation agreements do not generally make such mention.50 The prevailing interpretation accepts that where the treaty in question does not reproduce the Chinese government’s notification, as is typically the case in second and third generation Chinese BITs, consent to arbitration is not affected.51 By and large, the confines of China’s consent to dispute settlement in the first 15 generation of its investment treaties inexorably reduce the effectiveness of the investor-State dispute settlement mechanism relegating it to a largely symbolic role.52 First generation Chinese BITs count, among others, the investment agreements with France (1984),53 Denmark (1985),54 Singapore (1985),55 the United Kingdom (1986),56 the Philippines (1992),57 Laos (1993),58 Indonesia (1994)59 47 Wei Shen (n. 31) 55, 82; Valentina Vadi (n. 2) 705, 711. 48 For a discussion of the legal effects of a notification under Article 25(4) of the ICSID Convention in arbitration, see PSEG Global Inc., The North American Coal Corporation, and Konya Ilgin Elektrik Üretimve Ticaret Limited Sirketi v. Turkey, ICSID Case No. ARB/02/5, Decision on Jurisdiction, 4 June 2004, para. 144 et seq., available at http://www.italaw.com/ sites/default/files/case-documents/ita0695.pdf (accessed 14 March 2014). See further Emmanuel Gaillard, ‘Anti-Arbitration Trends in Latin America’ (2008) 239 (108) New York Law Journal, 5 June 2008. 49 Wei Shen (n. 31) 55, 82; see also Elodie Dulac (n. 41) 1, 28; Emmanuel Gaillard (n. 48). 50 Wei Shen (n. 31) 55, 83. 51 Elodie Dulac (n. 39) 1, 28. 52 Axel Berger (n. 19) ’China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 10; Axel Berger (n. 39) 8. 53 Agreement between the Government of the People’s Republic of China and the Government of the Republic of France on the Reciprocal Promotion and Protection of Investments, signed 30 May 1984 (invalidated), re-concluded 26 November 2007 (entry into force 20 August 2010), available at http://unctad.org/sections/dite/iia/docs/bits/france_china_fr.pdf (accessed 14 March 2014). 54 China and Denmark Agreement concerning the Encouragement and Reciprocal Protection of Investments, signed 29 April 1985 (entry into force 29 April 1985), available at http:// unctad.org/sections/dite/iia/docs/bits/china_denmark.pdf (accessed 14 March 2014). 55 Agreement between the Government of the People’s Republic of China and the Government of the Republic of Singapore on the Promotion and Protection on Investments, signed 21 November 1985 (entry into force 7 February 1986), available at http://unctad.org/sections/ dite/iia/docs/bits/china_singapor.pdf (accessed 14 March 2014). 56 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China concerning the Promotion and Reciprocal Protection of Investments, signed 15 May 1986 (entry into force 15 May 1986), available at http://unctad.org/sections/dite/iia/docs/bits/uk_china.pdf (accessed 14 March 2014). 57 Agreement between the Government of the People’s Republic of China and the Government of the Republic of the Philippines concerning the Encouragement and Reciprocal Protection of Investments, signed 20 July 1992 (entry into force 8 September 1995), available at http:// unctad.org/sections/dite/iia/docs/bits/china_philippines.pdf (accessed 14 March 2014).

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and Cambodia (1996).60 It should be noted that some of these BITs, such as the China–France BIT of 1984, have been renegotiated and replaced by new agreements. 16 The second generation of Chinese BITs commences in 1998, with the conclusion of the China–Barbados BIT,61 wherefrom China starts to conclude treaties that contain an ISDS clause comparable to provisions found in treaties of OECD countries.62 In particular from 2000 onwards, China began to include more substantial national treatment provisions63 and offer consent to regular investorState dispute settlement. To take an illustration, the 2001 BIT between the Netherlands and China64 expressly provides for ‘unconditional consent’ to international arbitration.65 17 This second generation of Chinese BITs coincides with China’s encouragement of outward FDI in accordance with the country’s ‘Going Global’ policy66 launched in the late 1990s.67 China’s ‘Going Global’ strategy has set a number of objectives, both macroeconomic and microeconomic, such as improving the global competitiveness of Chinese enterprises through the creation of ‘global champions’ and securing future energy and raw materials supplies.68 At the 58 Agreement between the Government of the People’s Republic of China and the Government of the Lao People’s Democratic Republic concerning the Encouragement and Reciprocal Protection of Investments, signed 31 January 1993 (entry into force 1 June 1993), available at http:// unctad.org/sections/dite/iia/docs/bits/china_laos.pdf (accessed 14 March 2014). 59 Agreement between the Government of the Republic of Indonesia and the Government of the People’s Republic of China on the Promotion and Protection of Investments, signed 18 November 1994 (1 April 1995), available at http://unctad.org/sections/dite/iia/docs/bits/ china_indonesia.pdf (accessed 14 March 2014). 60 Agreement between the Government of the Kingdom of Cambodia and the Government of the People’s Republic of China for the Promotion and Protection of Investment, signed 19 July 1996 (entry into force 1 February 2000), available at http://unctad.org/sections/dite/iia/docs/ bits/china_cambodia.pdf (accessed 14 March 2014). 61 Agreement between the Government of Barbados and the Government of the People’s Republic of China for the Promotion and Protection of Investments, signed 20 July 1998 (entry into force 1 October 1999) (available at http://www.investbarbados.org/docs/BIT%20-%20Republic%20of%20China.PDF (accessed 14 March 2014). 62 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 10; Axel Berger (n. 39) 9; Wenhua Shan and Sheng Zhang (n. 2) 87, 93; Elodie Dulac (n. 41) 1, 24. 63 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 12. 64 Agreement on Encouragement and Reciprocal Protection of Investments between the Government of the People’s Republic of China and the Government of the Kingdom of the Netherlands, signed 26 November 2001 (entry into force 1 August 2004), available at http:// unctad.org/sections/dite/iia/docs/bits/china_netherlands.pdf (accessed 14 March 2014). 65 Article 10(3) of the Netherlands–China BIT (2001) (n. 64). 66 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 6; Elodie Dulac (n. 40) 1; see also Ken Davies, ‘Outward FDI from China and its policy context’ (2010) Columbia FDI Profiles, 18 October 2010. 67 Ken Davies (n. 66) 5. 68 Ken Davies (n. 66) 5; Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 6; Elodie Dulac (n. 39) 1.

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same time, some authors clearly attribute the ‘Going Global’ policy to China’s desire to protect its investors as the country evolves from a mere capital importer to also constituting a source of considerable outbound foreign direct investment.69 It is of interest to remark that since the launch of China’s ‘Going Global’ policy, Chinese BITs with developing countries have endorsed ‘qualified’ national treatment provisions, while Chinese BITs with developed partners generally contain higher investment protection commitments.70 It has also been argued that a third generation of Chinese BITs appears to 18 emerge from 2008.71 These are generally new generation treaties, influenced by more State-friendly provisions in more balanced treaties (e.g. they may contain essential security exceptions and general exceptions modelled after Article XX of the GATT, see below), which are also more detailed.72 For instance, third generation BITs contain lengthier dispute resolution provisions than their precursors, containing specific provisions on tribunal constitution, consolidation, costs, and transparency.73 This third generation of Chinese BITs is the equivalent of the global new generation of international investment agreements, launched with the US74 and Canadian75 model BITs of 2004 and which slowly appear to be gaining over the international investment law landscape.76 A detractor of the trend in this respect is a 2009 BIT concluded with Switzerland,77 which conforms to the traditional (‘old generation’) European model. The opinion has been expressed that this approach only demonstrates China’s flexibility and readiness to adapt to the preferred model of its partner countries.78 b) China’s More Recent Treaty-Making Practice Part I: Conclusion of Trade and Investment Agreements

Following its 2001 accession to the WTO, China has started to negotiate 19 FTAs with investment chapters.79 69 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 7. 70 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 12–13. 71 E.g. Valentina Vadi (n. 2) 705, 711–713; Elodie Dulac (n. 40) 1. 72 Elodie Dulac (n. 39) 1; Jose Alvarez, ‘The Return of the State’ (2011) 20(2) Minn. J. Int’l L. 223–264, 237–238. 73 Elodie Dulac (n. 39) 1. 74 Available at http://www.state.gov/documents/organization/117601.pdf (accessed 14 March 2014). 75 Available at http://italaw.com/documents/Canadian2004-FIPA-model-en.pdf (accessed 14 March 2014). 76 See also Catharine Titi, ‘The Arbitrator as a Lawmaker: Jurisgenerative Processes in Investment Arbitration’ (2013) 14(5) JWIT 829–851. 77 Agreement between the Swiss Federal Council and the Government of the People’s Republic of China on the Promotion and Reciprocal Protection of Investments, signed 27 January 2009 (entry into force 13 April 2010), available at http://unctad.org/sections/dite/iia/docs/bits/ Switzerland_China_new.pdf (accessed 14 March 2014). 78 Axel Berger (n. 38) 11. 79 See Axel Berger (n. 38) 1–2.

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In 2008, China concluded an FTA with Singapore,80 which incorporates the Association of Southeast Asian Nations (ASEAN)–China investment agreement.81 Currently, China is engaged in FTA negotiations with the Gulf Cooperation Council, Australia, Iceland, Norway, and the Southern African Customs Union,82 and also with Japan and South Korea.83 21 Irrespective of its recent approach of also including investment chapters in broader FTAs China continues to conclude standalone BITs as well as plurilateral and regional investment agreements. It is interesting to note that the investment chapters of FTAs and of BITs often appear quite similar, though differences do exist. As an illustration may be mentioned China’s FTAs with Pakistan (2006),84 New Zealand (2008),85 and Peru (2009).86 22 Three of the most recent important investment agreements concluded by China are the investment agreement between China and ASEAN,87 the China– Japan–Korea investment agreement88 and the more recent Canada–China BIT.89 23 The ASEAN–China investment agreement is part of the so-called ASEAN– Plus agreements (another recent agreement involving ASEAN is the agreement with Australia and New Zealand).90 It is important to note that this investment 20

80 China-Singapore Free Trade Agreement, signed 23 October 2008 (entry into force 1 January 2009), available at http://www.fta.gov.sg/fta_csfta.asp?hl=27 (accessed 14 March 2014). 81 Elodie Dulac (n. 39) 1, 2. 82 See http://fta.mofcom.gov.cn/english/fta_tanpan.shtml (accessed 14 March 2014). 83 See UNCTAD (n. 3) 85. Presumably, such FTA negotiations do not involve an investment chapter, given that the parties have concluded the trilateral investment agreement, as discussed elsewhere in this chapter. 84 Agreement on the Early Harvest Program for the Free Trade Agreement between China and Pakistan, signed 24 November 2006 (entry into force 10 October 2009), available at http:// fta.mofcom.gov.cn/pakistanarticle/chpakistan/pakhwmy/200809/467_1.html (accessed 14 March 2014). 85 Free Trade Agreement Between The Government of the People’s Republic of China And The Government of New Zealand, signed 7 April 2008 (entry into force 1 October 2008), available at http://gjs.mofcom.gov.cn/accessory/200804/1208158780064.pdf (accessed 5 March 2014). 86 Free Trade Agreement between the Government of the People’s Republic of China and the Government of the Republic of Peru, signed 28 April 2009 (entry into force 1 March 2010), available at http://fta.mofcom.gov.cn/bilu/annex/bilu_xdwb_en.pdf (accessed 14 March 2014). 87 Agreement on Investment of the Framework Agreement on comprehensive Economic Cooperation between the Association of Southeast Asian Nations and the People’s Republic of China, signed 15 August 2009 (entry into force 1 January 2010), available at http://www.miti.gov.my /storage/documents/46f/com.tms.cms.document.Document_d5b6cac4-c0a81573-5b605b60-f9 19ea54/1/ACFTA%20Investment%20Agreement%20-%20ASEAN%20Version%20%20(19% 20Nov%202008%20clean).pdf (accessed 14 March 2014). 88 Agreement among the Government of Japan, the Government of the Republic of Korea and the Government of the People’s Republic of China for the Promotion, Facilitation and Protection of Investment, signed 13 May 2012 (not in force yet), available at http://www.meti.go.jp/press/ 2012/05/20120513001/20120513001-3.pdf (accessed 14 March 2014). 89 Agreement Between the Government of Canada and the Government of the People’s Republic of China for the Promotion and Reciprocal Protection of Investments, signed 9 September 2012 (not yet in force), available at http://www.international.gc.ca/trade-agreements-accordscommerciaux/agr-acc/fipa-apie/china-text-chine.aspx?lang=eng (accessed 14 March 2014). 90 See UNCTAD (n. 3) 86; Agreement establishing the ASEAN–Australia–New Zealand Free Trade Area, signed 27 February 2009 (entry into force 1 January 2010 for the following coun-

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agreement has not terminated the nine BITs in force between individual ASEAN countries and China.91 One agreement that has marked 2012 is the trilateral China–Japan–Korea in- 24 vestment agreement, which ‘has an economic weight that is not far from that of the North American Free Trade Agreement’.92 It is noted that the three parties to this investment treaty account for one fifth of world population and global GDP.93 It is noteworthy that the agreement reserves host State policy space in respect of specific policy objectives.94 Here again, the new treaty exists in parallel with BITs in force between the signatories, thus guaranteeing investors the most favourable treatment granted under any of these treaties. This trilateral agreement incorporates the WTO TRIMs agreement and be- 25 cause of broadly formulated investor-State dispute settlement clauses introduces the possibility of direct applicability of specific WTO law before international arbitration tribunals. The main reason for this choice of incorporating also the TRIMs agreement is that the TRIMs agreement imposes obligations of national treatment and elimination of quantitative restrictions on host States, which actually prohibit many types of performance requirements on foreign investors and investment.95 Although, by linking WTO law with the investment agreement, the contracting States actually retain some more policy space, it is not clear how an international arbitral tribunal would apply and interpret WTO law and the impacts thereof. 2012 also witnessed the conclusion of the Canada–China BIT, the first BIT 26 between China and a North American country. Nearly twenty years were needed for the conclusion of this bilateral investment agreement: pourparlers had already commenced in 1994, were later suspended until China’s accession to the World Trade Organisation (WTO) and resumed in 2004.96 The Canada–China BIT is an example of the new generation of international investment agreements: close to the Canadian Model BIT, it excludes from its protective provisions cultural industries97 and it contains a general exceptions clause modelled after Article XX of the GATT;98 it further incorporates a provision, typical of Canadian and US BITs negotiated on the basis of these countries’ 2004 (or more

91 92 93 94 95 96 97 98

tries: Australia, Brunei, Myanmar, Malaysia, New Zealand, Singapore, the Philippines, and Viet Nam. The agreement entered into force for Thailand on 12 March 2010 and Lao PDR and Cambodia on 1 and 4 January 2011 respectively. Entry into force for Indonesia: 10 January 2012), available at http://www.dfat.gov.au/fta/aanzfta/contents.html (accessed 14 March 2014). UNCTAD (n. 3) 86. UNCTAD (n. 3) 85. UNCTAD (n. 3) 85. E.g. see Article 18 of the China–Japan–Korea investment agreement (n. 88). Art. 2 of the Agreement on Trade-Related Aspects of Investment Measures, signed 15 April 1994, available at http://www.wto.org/english/res_e/booksp_e/analytic_index_e/trims_01_e.ht m#article2 (accessed 14 March 2014). See Elodie Dulac (n. 39) 1, 3. Article 33(1) of the Canada–China BIT (n. 89). Article 33(2) of the Canada–China BIT (n. 89).

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recent) model treaties, to the effect that ‘except in rare circumstances’, non-discriminatory measures designed and applied to protect public interest objectives, such as health, safety and the environment, do not constitute indirect expropriation.99 27 Nonetheless, it is important to emphasise that the Canada–China BIT is in many respects not an innovation. On the contrary, such more balanced provisions in Chinese BITs, including provisions on the non-lowering of environmental standards, general exceptions clauses modelled after Article XX of the GATT (or the mutatis mutandis incorporation of this article in the BIT) and the provision that general regulatory measures, as described above, do not constitute indirect expropriation, are present in other recent BITs concluded by China; for example, the China–New Zealand FTA100 contains exceptions for the protection of a party’s essential security interests and incorporates Article XX of the GATT in its general exceptions.101 The same agreement comprehends further exceptions for serious balance of payments difficulties,102 prudential103 and taxation measures,104 as well as a special GATT Article XX-like general exception for measures adopted by New Zealand to accord more favourable treatment to Maori in respect of matters covered by the FTA including the fulfilment of New Zealand’s obligations under the Treaty of Waitangi.105 An Annex to the same FTA contains a provision to the effect that, except in rare circumstances, ‘measures taken in the exercise of a state’s regulatory powers as may be reasonably justified in the protection of the public welfare, including public health, safety and the environment, shall not constitute an indirect expropriation’.106 28 Another treaty that has recently attracted some attention is the Cross-Strait investment agreement, concluded in the summer of 2012, and which is reported not to include access to international investor-State arbitration.107 The treaty, that appears not to have been made public at the time of writing, has followed the earlier Cross-Strait Economic Cooperation Framework Agreement,108 which 99 Annex B.10, para. 3 of the Canada–China BIT (n. 89). 100 Free Trade Agreement Between The Government of the People’s Republic of China And The Government of New Zealand, signed 7 April 2008 (entry into force 1 October 2008), available at http://www.chinafta.govt.nz/1-The-agreement/2-Text-of-the-agreement/0-downloads/ NZ-ChinaFTA-Agreement-text.pdf (accessed 14 March 2014). 101 Articles 200 and 201 respectively of the China–New Zealand FTA (n. 100). 102 Article 202 of the China–New Zealand FTA (n. 100). 103 Article 203 of the China–New Zealand FTA (n. 100). 104 Article 204 of the China–New Zealand FTA (n. 100). 105 Article 205 of the China–New Zealand FTA (n. 100). On the Treaty of Waitangi, see the official site of the New Zealand Government at www.treatyofwaitangi.govt.nz (accessed 14 March 2014). 106 Annex 13, para. 5 of the China–New Zealand FTA (n. 100). 107 See the China–Taiwan Bilateral Investment Protection Agreement: dispute resolution mechanisms exclude international arbitration. Herbert Smith Freehills, ‘China-Tawain Bilateral Investment Protection Agreement: dispute resolution mechanisms exclude international Arbitration’ (2012) Dispute Resolution Arbitration Notes, 23 August 2012, available at http://h sf-arbitrationnews.com/2012/08/23/china-taiwan-bilateral-investment-protection-agreementdispute-resolution-mechanisms-exclude-international-arbitration (accessed 14 March 2014).

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provided in its Article 5 on ‘investment’ that the signatories would conduct consultations to reach agreement on an investment protection mechanism, increased transparency, the gradual reduction of restrictions on mutual investment between the parties and investment facilitation. c) The US–China Negotiations

Of particular interest in the context of the present discussion are the negotia- 29 tions between China and the United States on the conclusion of a bilateral investment treaty. The initial opening of negotiations dates to the 1980s, but discussions were later suspended.109 One author comments that the reason China has so far not concluded a BIT with the United States is the US desire to combine investment protection with investment liberalisation, to which China has remained hostile for a long time.110 But the state of play is clearly evolving. The more recent round of US–China negotiations opened within the framework of the US–China Strategic Economic Dialogues in 2008111 and, following a May 2012 decision of the two countries to intensify negotiations, pourparlers resumed in October 2012.112 General agreement appears probable on a number of issues, including on the protection of all investors, including State-owned enterprises, pegging the fair and equitable treatment to the customary international law minimum standard, confining the scope of application of the most favoured nation (MFN) treatment to substantive standards and circumscribing indirect expropriation.113 Among the thorny issues, on which agreement may prove more difficult, are the question of whether the national treatment shall apply to the establishment phase114 and whether the opt-out approach should be adopted. By and large, notwithstanding the initial large discrepancy between the respective goals of the parties, it is remarkable that the third generation of Chinese BITs is on a par with the US Model BIT; in other words, it appears that Chinese and US investment treaty-making practice have converged on a number of crucial issues.115 It seems that for the first time China has during the latest US–China Strategic and Economic Dialogue accepted that the BIT negotiations would cov108 An English translation of the agreement is available at http://www.moea.gov.tw/mns/populace/news/whandnews_file.ashx?news_id=19723&serial_no=6 (accessed 14 March 2014). 109 Warren H. Maruyama, Jonathan T. Stoel and Charles B. Rosenberg, ‘Negotiating the U.S.– China Bilateral Investment Treaty: Investment Issues and Opportunities in the Twenty-First Century’ (2010) 7(4) TDM 1, 8. 110 Axel Berger (n. 38) 6. 111 Jose Alvarez, ‘The Once and Future Foreign Investment Regime’ in Mahnoush H. Arsanjani, Jacob Cogan, Robert Sloane and Siegfried Wiessner (eds), Looking to the Future: Essays on International Law in Honour of W. Michael Reisman (Martinus Nijhoff, 2011) 607– 648, 634; Warren Maruyama, Jonathan Stoel and Charles Rosenberg (n. 109) 8; Karl P. Sauvant and Huiping Chen, ‘A China–US bilateral investment treaty: A template for a multilateral framework for investment?’ (2013) 85 Columbia FDI Perspectives 85. 112 Karl Sauvant and Huiping Chen (n. 111). 113 Karl Sauvant and Huiping Chen (n. 111). 114 Karl Sauvant and Huiping Chen (n. 111). 115 Jose Alvarez (n. 111) 607, 634.

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er all stages of investment and will practically be based on the US Model BIT 2012 as a starting point.116 30 The importance of the outcome of US–China negotiations on a bilateral investment treaty is self-evident. It is further stressed by the launch of negotiations on the EU–US Transatlantic Trade and Investment Partnership,117 and, naturally, the prospect of the EU–China investment agreement. Assuming that negotiations between the three parties will continue separately – if not independently – of one another, the progress of the status of each of the three sets of negotiations, as well as the first of these treaties to be concluded, will doubtlessly influence the provisions and levels of investment protection in the treaties to come between the other parties. d) The China–EU BIT Negotiations 31

China officially started its BIT negotiation with the EU in late 2013. Already in 2003, the EU and China concluded a Framework Agreement for Establishing an Industrial Policy Dialogue118 in order to ‘strengthen and consolidate ties between the two Parties, promote and enhance mutual understanding and awareness of current and forthcoming policy approaches, legislation and related issues in the industrial sector’.119 According to the Framework Agreement, the parties aim to ‘contribute to the improvement of the competitiveness of businesses from both sides, by ensuring a business-friendly level playing field for industry operators’.120 In 2006, the European Commission in its Communication entitled ‘EU – China: Closer partners, growing responsibilities’ identified China’s recent emergence as a major economic and political power.121 In its Communication of 2010, the European Commission identified China as a key partner with which a standalone investment agreement should be considered.122 During an executiveto-executive meeting in April 2010, European Commission President Manuel Barroso and Chinese Premier Wen Jiabao decided that their teams would examine the options for improving bilateral relations between the EU and China, leading to the establishment in the summer of 2010 of a ‘Joint EU–China Invest116 See U.S. Department of the Treasury, ‘U.S. and China Breakthrough Announcement on the Bilateral Investment Treaty Negotiations’, 15 July 2013, available at http://www.treasury.gov/connect/blog/Pages/U.S.-and-China-Breakthrough-Announcement-.aspx (accessed 14 March 2014). 117 See U.S Department of the Treasury (n. 116). 118 Framework Agreement Establishing Industrial Policy Dialogue between the Commission of the European Community and the Government of the People’s Republic of China, signed 30 October 2003, available at http://eeas.europa.eu/china/docs/ipd_291003_en.pdf (accessed 14 March 2014). 119 Framework Agreement Establishing Industrial Policy Dialogue (n. 118) preamble. 120 Framework Agreement Establishing Industrial Policy Dialogue (n. 118) Article II. 121 European Commission, Communication, EU – China: Closer partners, growing responsibilities, COM(2006) 631 final, {COM(2006) 632 final}, Brussels, 24.10.2006, 2, available at http://eur-lex.europa.eu/LexUriServ/site/en/com/2006/com2006_0631en01.pdf (accessed 14 March 2014). 122 European Commission (n. 121) 7.

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ment Task Force’ whose goal was to explore the potential for deeper cooperation on investment, including the potential conclusion of a standalone investment agreement.123 A joint public announcement by the EU and China of their interest in such an agreement was made in the context of the EU–China Summit, which took place on 14 February 2012.124 On the European side the Council adopted on 18 October a mandate for the Commission to negotiate on behalf of the EU an investment agreement with China.125 The negotiating directives foresee an agreement that would deal both with an improved access to the market for investors from the EU and China. The European Parliament, which has to give its consent to the conclusion of a future EU–China BIT, has asked in a first resolution from October 2013126 for various points to be included in such a BIT between China and the EU: transparency obligations especially in regard to sovereign wealth funds (SWF) and State-owned enterprises (SOE),127 provisions on market access and corporate social responsibility, etc. To the exclusion of Ireland, all EU member States, including Croatia as a new 32 EU member State from July 2013, have concluded a BIT with China.128 The Regulation establishing transitional arrangements for investment agreements between Member States and third countries should pave the way for the smooth passage from member State BITs to the new agreements, ensuring the application of the former until the conclusion of the prospective EU–China agreement and thus guaranteeing legal certainty. A standalone EU–China IIA will replace the current EU member States–China BIT system.129 Although it is not impossible to envisage a provision that would guarantee the existence of the 26130 BITs in force in parallel with the new BIT, this is unlikely to result in practice, given 123 European Commission, DG Trade, Summary of contributions to the European Commission’s public consultation on ‘The future investment relationship between the EU and China’, 2011, available at http://trade.ec.europa.eu/doclib/docs/2011/december/tradoc_148394.pdf (accessed 14 March 2014). 124 European Commission, DG Trade, Roadmap of EU–China investment relations, 21 March 2012, available at http://ec.europa.eu/governance/impact/planned_ia/docs/2012_trade_03_ch ina_investment_agreement_en.pdf (accessed 14 March 2014). 125 European Commission, Memo, EU investment negotiations with China and ASEAN, 18 October 2013, available at http://europa.eu/rapid/press-release_MEMO-13-913_en.htm (accessed 14 March 2014). 126 European Parliament Resolution of 9 October 2013 on the EU–China Negotiations for a Bilateral Investment Agreement (2013/2674(RSP)), available at http://www.europarl.europa.eu /sides/getDoc.do?pubRef=-%2F%2FEP%2F%2FTEXT%2BTA%2BP7-TA-2013-0411%2B 0%2BDOC%2BXML%2BV0%2F%2FEN%&language=EN (accessed 14 March 2014). 127 On this Marc Bungenberg, ‘Scope of Application’ in Marc Bungenberg and August Reinisch, The Anatomy of the (invisible) EU Model BIT, JWIT Special Issue 2/2014, 402– 421. 128 See European Commission (n. 125) in conjunction with http://unctad.org/en/Pages/DIAE/Int ernational%20Investment%20Agreements%20%28IIA%29/Country-specific-Lists-of-BITs. aspx (14 March 2014). 129 European Commission (n. 121) 7. See also Article 3 of the Regulation No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, Official Journal 2012/L 351/40, available at http://trade.ec.europa.eu/doclib/docs/2013/ february/tradoc_150494.pdf (accessed 14 March 2014).

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that it would be contrary to the very purpose of the transfer of competence to the EU, which is to replace the patchwork system of individual member State BITs with a uniform system of investment protection. It would be preferable to not have a prospective agreement in force in parallel with older member State BITs. 33 The conclusion of a prospective EU–China IIA offers the two economies the opportunity to upgrade their existing BIT policy to new international standards and best practices and, at the same time, it allows them to improve their bilateral relations. ICSID will cease to be the be-all and end-all of investment arbitration, with all the attendant consequences, such as those related to award enforcement. But as history shows, it is most likely that an improved system of dispute settlement will be – if necessary – also established in future EU–China (and probably US) international investment law. 4. Litigation on the Basis of Chinese Investment Treaties 34

Chinese investment agreements have given rise to very limited litigation,131 while a general presumption exists that such litigation will in fact become more frequent in the future.132 Up to present, there are only four investment arbitration cases relying on Chinese BITs, namely (1) Tza Yap Shum v. the Republic of Peru (Tza v. Peru),133 relying on the China–Peru BIT;134 (2) China Heilongjiang International Economic & Technical Cooperative Corp., Beijing Shougang Mining Investment Company Ltd. and Qinhuangdaoshi Qinlong International Industrial Co. Ltd. v. Mongolia (Heilongjiang et al. v. Mongolia),135 relying on the China– Mongolia BIT,136 (3) Ekran Berhad v. People’s Republic of China (Ekran v. China),137 relying on the China–Malaysia BIT;138 and (4) Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v. Kingdom of Belgium (Ping An v. Belgium),139 relying on the China– 130 The seeming discrepancy in the number (27 member States have an investment treaty with China, but there are 26 BITs in total) is explained by the fact that Belgium and Luxembourg sign their BITs together as part of the Belgium–Luxembourg Economic Union (BLEU). 131 Wei Shen (n. 31) 55, 56; Valentina Vadi (n. 2) 705, 713. 132 See for example Valentina Vadi (n. 2) 705, 713, 717 et seq. 133 Tza Yap Shum v. Peru (n. 36). 134 Agreement between the Government of the People’s Republic of China and the Government of the Republic of Peru concerning the Encouragement and Reciprocal Protection of Investments, signed 9 June 1994 (entry into force 1 February 1995), available at http://unctad.org/ sections/dite/iia/docs/bits/peru_china.pdf (accessed 14 March 2014). 135 China Heilongjiang International Economic & Technical Cooperative Corp., Beijing Shougang Mining Investment Company Ltd. and Qinhuangdaoshi Qinlong International Industrial Co. Ltd. v. Mongolia, UNCITRAL, PCA, available at http://italaw.com/cases/279 (accessed 14 March 2014). This case is administered by the PCA. 136 Agreement between the Government of the People’s Republic of China and the Government of the Mongolian People’s Republic concerning the Encouragement and Reciprocal Protection of Investments, signed 25 August 1991 (entry into force 1 November 1993), available at http://unctad.org/sections/dite/iia/docs/bits/china_mongolia.pdf (accessed 14 March 2014). 137 Ekran Berhad v. People’s Republic of China, ICSID Case No. ARB/11/15. 138 Agreement between the Government of the People’s Republic of China and the Government of Malaysia Concerning the Reciprocal Encouragement and Protection of Investments, signed 21 November 1988 (entry into force 31 March 1990).

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Belgium BIT.140 Among these cases, only the tribunal in Tza v. Peru has rendered a jurisdictional decision, touching upon the investor-State arbitration clause of the China–Peru BIT, among other things. The other three cases are either pending or have been suspended. Therefore, these cases failed to yield any consistent and uniform practice with regard to the eligibility of disputes based on Chinese BITs. Probably the most important factor explaining the absence of litigation are the 35 obstacles imposed on investors regarding access to international arbitration in first generation Chinese BITs.141 As mentioned, three out of the four investment arbitration cases involve the first generation of Chinese BITs, only the most recent Ping An v. Belgium relies on a second generation of Chinese BIT. The dispute settlement provisions in the latter, as described earlier, concerned solely the determination of the amount of compensation in case of expropriation and were often subject to the exhaustion of local remedies. It is also true, however, that this limited litigation activity dovetails with the general scarceness of investorState arbitrations brought by Asian investors,142 while some authors indicate further a desire on the part of Chinese investors to ‘preserve reputation and future business opportunities’.143 Nevertheless, with the newer generations of Chinese investment treaties and 36 China’s increasing importance as a capital importer, traditional perceptions and absence of investment arbitrations are slowly but drastically changing. The Tza Yap Shum v. Peru case, the first known investment dispute to reach investment arbitration under a Chinese BIT,144 is particularly important in this respect. The case was adjudicated on the basis of the China–Peru BIT which provides access to investor-State dispute resolution only in relation to the amount of expropriation that is due in case of expropriation; however, the tribunal called upon to decide the case reasoned that the provision granting it jurisdiction to determine the amount of expropriation could not but imply that it also had jurisdiction to decide whether an expropriation had taken place in the first instance.145 The tribunal found that this ISDS clause of the China–Peru BIT can be interpreted to include both disputes concerning compensation and expropriation, while following the treaty interpretation rules laid down in Arts. 31 and 32 of the Vienna

139 Ping An v. Belgium (n. 37). 140 Agreement between the Belgium–Luxembourg Economic Union and the Government of the People’s Republic of China on the Reciprocal Promotion And Protection Of Investments, signed 6 June 2005 (entry into force 1 December 2009), available at http://unctad.org/ sections/dite/iia/docs/bits/China_belgium.pdf (accessed 14 March 2014). 141 See also Wei Shen (n. 31) 55, 56–57. 142 See Valentina Vadi (n. 2) 705, 714 with further citations. 143 Valentina Vadi (n. 2) 705, 715, 717. 144 Wei Shen (n. 31) 55, 58. 145 Tza Yap Shum v. Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence, 19 June 2009, para. 188, available at http://www.italaw.com/sites/default/files/casedocuments/ita0880.pdf (accessed 14 March 2014).

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Convention on the Law of Treaties (VCLT). To justify its expansive interpretation, the tribunal observed that to give meaning to all the elements of the article, it must be interpreted that the words ‘involving the amount of compensation for expropriation’ includes not only the mere determination of the amount but also any other issues normally inherent to an expropriation, including whether the property was actually expropriated in accordance with the BIT provisions and requirements, as well as the determination of the amount of compensation due, if any.146

The Tza Yap Shum v. Peru award plainly digresses from earlier investment jurisprudence having interpreted similar provisions147 and could have significant ramifications for investors covered under older Chinese BITs (mainly first generation Chinese BITs) that contain similarly restrictive investment arbitration provisions.148 Being the first ICSID case in which a Chinese BIT has been applied, this decision has somehow set up an example for arbitral tribunals to expansively interpret narrow ISDS clauses at least in some first generation Chinese BITs, though in a strict sense ICSID cases do not have the status of precedence. 38 As mentioned, a few more cases brought under Chinese BITs have been decided or are currently pending. The China Heilongjiang International et al. v. Mongolia case brought under UNCITRAL Rules is still pending. According to the ICSID website, the Ekran Berhad v. China, the first ICSID case against China, has already been suspended.149 While regarding the Ping An Life Insurance v. Belgium case, as this case relies on a second generation Chinese BIT with a broad ISDS clause, one may believe that Ping An might encounter less jurisdictional challenges than Tza Yap Shum has met with regards to the consent of submitting disputes to ICSID. 37

5. Outlook 39

Over the past decades, China has gradually developed its foreign investment law framework. This framework is complicated in contents as it is composed of various levels of domestic laws and regulations, BITs, FTAs and a few multilateral conventions, such as the ICSID Convention. The past years also witnessed China’s rapid economic development. Alongside its economic rise, China has become one of the major FDI destinations in the world. More recently, China has shifted its status from a mere FDI importing country to become a major FDI exporting country as well.

146 Tza Yap Shum v. Peru (n. 145) para. 188. 147 E.g. Berschader v. Russia, SCC Case No. 080/2004, Award, 21 April 2006, para. 153, available at http://italaw.com/sites/default/files/case-documents/ita0079_0.pdf (accessed 14 March 2014); Austrian Airlines v. Slovak Republic, UNCITRAL, Final Award, 20 October 2009, available at http://www.italaw.com/sites/default/files/case-documents/ita0048.pdf (accessed 14 March 2014). 148 See also Valentina Vadi (n. 2) 705, 719. 149 See https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&reqFrom=ListCases&caseId=C1600&actionVal=viewCase (accessed 14 March 2014).

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China’s economic development and opening up has exerted and will further 40 exert fundamental impacts on the development and improvement of China’s foreign investment law. Such impacts could be shown on both domestic law making and treaty-making levels. At domestic law making level, China’s existing foreign investment laws 41 mainly serve two purposes: trying to attract and protect foreign investments and also stressing administrative regulation of foreign investments. However, with China’s further economic reform and opening up, it is necessary for China to reform its existing foreign investment laws or to adopt new laws to enhance investment liberalisation. Although it remains premature to conclude whether China’s domestic law making is sufficient to support its ongoing investment liberalisation endeavours, the establishment and operation of the Shanghai FTZ provides a good window to make some observations. At treaty-making level, as mentioned, China has concluded a large number of 42 BITs and various FTAs and is a contracting State to various multilateral conventions. While Chinese BITs have undergone changes over the past decades to serve its economic development, further improvements are still needed. China has already become a major FDI exporting country in the world and a large part of its investments have been channelled to politically unstable and economically underdeveloped countries. Chinese overseas investors are in dire need nowadays to seek treaty protection for their investments in these countries. In light of such background, China needs to adopt a more ‘proactive’ approach in future BIT negotiations. In brief, such approach would mean that, regarding substantive rules, future BITs need to stress more investment liberalisation; regarding procedural rules, future BITs need to provide wider access for investors to ISDS. With the ongoing China–US BIT and China–EU BIT negotiations, one may have reason to believe that China’s future investment treaty-making would become more proactive.

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III. Pluri-/Multilateral and Regional Approaches A. The Energy Charter Treaty

Richard Happ 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) History. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) A Unique Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Investment Protection under the Energy Charter Treaty . . . . . . . . . . . . . a) Scope of Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Article 10(1) of the ECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) First Sentence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Second Sentence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Third Sentence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Fourth Sentence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) Last Sentence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Article 13 of the ECT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Article 17 of the ECT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Requirements to Exercise the Right . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Exercising the Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Effects of Exercising the Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Investment Arbitration under the Energy Charter Treaty . . . . . . . . . . . . 4. Investment Protection under the Energy Charter Treaty after Twenty Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 13 20 21 21 24 25 27 29 31 33 34 36 39 43 47 48 54 63

Literature: Peter D. Cameron, International Energy Investment Law (Oxford University Press, 2010), Graham Coop and Clarisse Ribeiro (eds), Investment Protection and the Energy Charter Treaty (JurisNet, 2008); Graham Coop (ed), Energy Dispute Resolution: Investment Protection, Transit and the Energy Charter Treaty (JurisNet, 2011); Richard Happ, Schiedsverfahren zwischen Staaten und Investoren nach Artikel 26 Energiechartavertrag (Peter Lang, 2000); Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (JurisNet, 2006); Thomas Roe and Matthew Happold, Settlement of Disputes under the Energy Charter Treaty (Cambridge University Press, 2011); Thomas Wälde, The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer, 1996).

1. Introduction 1

The Energy Charter Treaty1 (ECT) is a multilateral treaty with 48 contracting parties. It entered into force on 16 April 1998 and, inter alia, protects investments in the energy sector. More importantly, it allows investors to directly start arbitral proceedings against a contracting party to the ECT if that State has violated any of its obligations on investment protection.

1 Energy Charter Treaty, Annex 1 to the Final Act of the European Energy Charter Treaty Conference, 17 December 1994, reprinted in (1995) 34 ILM 381.

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a) History

The background and the negotiation and conclusion of the ECT are influ- 2 enced by the events of the years 1990–1994.2 In February 1990, in the light of the breakdown in Eastern Europe, then Dutch Prime Minister Ruud Lubbers suggested the cooperation of all European States, including Eastern Europe in a ‘European Energy Community’, which was to be codified in a European Energy Charter. This idea was picked up, negotiations began in July 1991 and the European Energy Charter was signed in The Hague on 17 December 1991. It is not a treaty, but a political declaration of intent. It nevertheless is the basis for the Energy Charter Treaty, as its object and purpose links back to the Charter (see below). As of the time of writing of this Chapter, it had been signed by 61 States.3 Parallel to the negotiation of the European Energy Charter, the idea was de- 3 veloped to complement it by a treaty.4 The negotiations were considerably influenced by two major political events. The first was the first Iraq war: western States became aware that they might need to secure alternative sources for oil and gas. Such sources existed around the Caspian Sea and in Siberia. The second reason was the breakdown of the Soviet Union: exploration and development of the reserves needed considerable investments, and the newly independent States had no adequate legal infrastructure for the protection of these investments. What is more, transporting any oil and gas found to Western Europe was problematic. While formerly the pipeline system had been in the hands of a single operator – Gazprom – and gas had flowed even during the cold war, there were now several States, each with its own national pipeline operator, between the energy sources and the consumers in Western Europe. It thus was considered necessary to create a legal framework allowing for transit of oil and gas through those countries. After three years of intense negotiations, the Energy Charter Treaty was 4 opened for signature in Lisbon on 17 December 1994 and since then has been signed by 52 and ratified by 47 States of Western and Eastern Europe, Asia and the European Communities.5 With the ECT, a treaty was concluded which, on the one hand, should facilitate investments in the newly independent countries, 2 On the background, see Richard Happ, Schiedsverfahren zwischen Staaten und Investoren nach Artikel 26 Energiechartavertrag (Peter Lang, 2000) 115–116; Julia Doré, ‘Negotiating the Energy Charter Treaty’ in Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer, 1996) 137–155; Thomas Wälde, ‘International Investment under the 1994 Energy Charter Treaty’ in Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer, 1996) 251–320. 3 According to the information on the website of the Energy Charter Secretariat (www.encharter.org), the last signatory was Montenegro in 2012. Reportedly, Yemen and Lebanon are expected to sign the Energy Charter in the near future. Also the accession of Jordan is expected in due course. This and further information is available at http://www.encharter.org/index.php? id=639&L=0. 4 Part III of the European Energy Charter explicitly contains the undertaking of the signatories to negotiate ‘in good faith a Basic Agreement and Protocols’. That Basic Agreement is what later became the Energy Charter Treaty.

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strengthen their economy and their ties to Western Europe, thus assisting them in their transition, and on the other hand, should secure access of Western Europe to these alternative energy sources. b) Structure

The ECT has an extremely complex structure, consisting of eight parts, fourteen annexes, five conference decisions integrated into the treaty, and several ‘understandings’ relevant for the interpretation of the treaty as a whole or to certain specific provisions.6 What is more, the ECT must be read in the light of the European Energy Charter. The ECT’s purpose is to create a legal framework which will promote long-term co-operation in the energy field, ‘based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter’ (Art. 2). 6 The ECT is much more than a multilateral investment treaty.7 Its main pillars are provisions on Trade and Transit (Part II), Investment Promotion and Protection (Part III), and Dispute Settlement (Part V). It seems apposite to briefly sketch out these pillars before going into detail of the investment protection provisions. 7 Trade in ‘Energy Materials & Products’ is regulated by the provisions of the ECT as amended by the Trade Amendment of 1998, pursuant to which the provisions of the GATT (meaning both GATT 1947 and GATT 1994) and WTO law apply by reference.8 Thus, WTO law is applicable between contracting parties to the ECT even if one of them is not a WTO member. Art. 5 contains an explicit prohibition of trade-related investment measures. 8 Transit is regulated in Art. 7.9 Transit thus takes place if ‘Energy Materials and Products’10 (e.g. gas or oil) are carried from the ‘Area’11 of State A through 5

5 The current status of the membership is available at the website www.encharter.org. The USA and Canada were heavily involved in the negotiations, but shortly before the end of the negotiations dropped out and did not sign it. 6 For a comprehensive overview of the Treaty, see the Reader’s Guide to the Energy Charter Treaty, published by the Energy Charter Secretariat and available via the Secretariat’s website www.encharter.org. 7 See Graham Coop, ‘The Energy Charter Treaty: More than a MIT’ in Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (JurisNet, 2006) 3–21. 8 Ingrid Frasl, ‘The Trade Rules of GATT and Related Instruments and the Energy Charter Treaty’ in Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer, 1996) 459–496. 9 See also Martha M. Roggenkamp, ‘Transit of Network–bound Energy: The European Experience’ in Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer, 1996) 499–518; Craig Bamberger, ‘Adjudicatory Aspects of Transit Dispute Conciliation Under the Energy Charter Treaty’ (2006) 2 TDM 1; Colin Brown, ‘Transit Disputes, Supply Disputes and the ECT: Towards an East-West Thaw?’ in Graham Coop (ed), Energy Dispute Resolution (Kluwer, 2011) 285–295; Peter Cameron, ‘The Energy Charter Treaty and East-West Transit’ in Graham Coop (ed), Energy Dispute Resolution (Kluwer, 2011) 297–313. 10 Energy Materials and Products are defined in Annex EM to the ECT. 11 Cf. ECT Art. 1(10): ‘Area’ means with respect to a State that is a contracting party: (a) the territory under its sovereignty, it being understood that territory includes land, internal waters

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the ‘Area’ of State B and are destined for the ‘Area’ of State C, or are carried through the ‘Area’ of State B in order to reach again the ‘Area’ of State A (a ‘Uturn’).12 The sixth and seventh paragraph of Art. 7 provide for a conciliation mecha- 9 nism in case of transit disputes. As far as it is known, the transit dispute procedure has neither been used in the 2006 nor in the 2009 gas transit disputes.13 The reasons for that are not entirely clear and subject to speculation. It is possible that the mechanism was not invoked because it was unclear who was responsible for the transit disruption: Russia or Ukraine. Russia considers not to be bound by the ECT. To invoke a dispute settlement mechanism if the real cause of the dispute is unknown and where a potentially responsible party (i.e. Russia) considers not to be bound by the dispute settlement mechanism is hardly effective. The third part of the ECT (Arts. 10–17) contains the substantive obligations 10 on investment promotion and protection. The provisions on investment promotion and protection differentiate between the pre-investment phase and the postinvestment phase. As regards the making of investments, the ECT merely obliges contracting parties to ‘endeavour to accord’ national treatment. According to Art. 10(4), further obligations were to be set out in a supplementary treaty, which however was never concluded. Once an investment is made, the ECT protects it against various forms of political risks, such as discrimination, unfair or inequitable treatment, arbitrary or discriminatory measures (Art. 10) or direct or indirect expropriation without compensation (Art. 13). Arts. 18–25, constituting the fourth part of the ECT, contain miscellaneous 11 provisions on environment, taxes, and the liability of the State for sub-national authorities and State enterprises. The fifth part regulates the settlement of disputes: investor-State disputes (Art. 26), as discussed in more detail below, and disputes between contracting parties (Arts. 27 and 28). It provides for mandatory arbitration but with important caveats. Disputes relating to competition (Art. 6), the environment (Art. 19) or trade-related disputes (Arts. 5 and 29) might not be submitted to mandatory arbitration. As for transit disputes, separate mechanisms exist for these kinds of disputes. The sixth part contains various transitional provisions. The ECT has also created an international organisation known as the Energy Charter Conference (Art. 34) with a permanent Secretariat located in and the territorial sea; and (b) subject to and in accordance with the international law of the sea: the sea, sea-bed and its subsoil with regard to which that contracting party exercises sovereign rights and jurisdiction. 12 It is to be noted that only Canada and the United States, which both have not even signed the ECT, are listed in Annex N which excluded such form of transit. 13 On the 2006 gas transit dispute, see Jonathan Stern, ‘The Russian-Ukrainian gas crisis of January 2006’ (Oxford Institute for Energy Studies (OIES), 2006), available at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2011/01/Jan2006-RussiaUkraineGasCrisisJonathanStern.pdf, (2006) 3 TDM 1–17. On the 2009 dispute, see Simon Pirani, Jonathan Stern and Katja Yafimava, The Russo-Ukrainian gas dispute of January 2009: a comprehensive assessment (OIES, 2009), available at https://www.oxfordenergy.org/2009/02/the-russoukrainian-gas-dispute-of-january-2009-a-comprehensive-assessment.

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Brussels.14 Art. 45 provides that the treaty shall be provisionally applicable15 for each signatory pending its entry into force for such signatory.16 Art. 47 regulates that in case of withdrawal of a party, the obligations towards foreign investors shall nevertheless remain in force for an additional 20 years.17 12 The provisions of the Treaty can be supplemented by Energy Charter Protocols negotiated between its contracting parties. There is only one Protocol currently in force: the ‘Protocol on Energy Efficiency and related Environmental Aspects’ (PEEREA). A Protocol on Energy Transit had been under negotiation since 1999. The contracting parties early on had decided that it was necessary to supplement Art. 7 of the ECT. Its aim would have been to create a legal framework for grid-bound transit through its contracting parties. The Transit Protocol should supplement and expand on Art. 7 of the ECT by providing for provisions on, inter alia, negotiated access to available capacity for transit and transit tariffs. However, negotiations of the Transit Protocol have been fraught with political difficulties and a web of conflicting interests.18 The negotiations stalled in May 2006 mainly due to objections by the European Union and Russia.19 The withdrawal of Russia from the ECT has given the negotiations the final deathblow. Without Russia, a Transit Protocol makes little sense.20 c) A Unique Scope of Application 13 14

There are five factors which determine the scope of application of the ECT. The first factor is the limited sectoral scope of application. While most biand multilateral treaties protect all kinds of investment, the treaty only protects investments ‘associated with an Economic Activity in the Energy Sector’, ECT Article 1(6). ‘Economic Activities in the Energy Sector’ are defined in ECT Art. 1(5) and, if oil is taken as one example, pretty much include everything 14 The Secretariat’s website can be found under www.encharter.org. 15 VCLT Art. 25 provides: ‘(1) A treaty or part of the treaty is applied provisionally pending its entry into force if: (a) the treaty itself so provides; (…).’ 16 On the topic of provisional application, see Yas Banifatemi, ‘Provisional Application of the Energy Charter Treaty, the negotiating history of Art. 45’, in Graham Coop (ed), Energy Dispute Resolution: Investment Protection, Transit and the Energy Charter Treaty (JurisNet, 2011) 191–210; Alexandre de Gramont and Emily Alban, ‘The Sun never Sets: provisional application and the Energy Charter Treaty’, id., at 211–248; and Michael Polkinghorne and Laurent Gouiffès, ‘Provisional Application of the Energy Charter Treaty: the conundrum’, id., at 249–282. 17 This is of pertinence for investors from other contracting parties active in Russia. It is to be noted that in August 2009, Russia has sent to the depository of the ECT, the Government of Portugal, a notice of intention of not becoming a contracting party. With such a notice, Russia terminated the provisional application of the ECT, which it applied until 18 October 2009 inclusive. 18 Cf. the various documents available at www.encharter.org. 19 Cf. Transit Protocol, Background to the Negotiations, available at http://www.encharter.org/ index.php?id=37&L=0. 20 The working relationship with Russia has however improved again, see Urban Rusnak, ‘Modernization of the Energy Charter’, Article from 27 December 2013, available at http:// www.encharter.org/fileadmin/user_upload/document/Modernisation_of_the_Energy_Charter_-_Russia_in_Global_Affairs_-_27_Dec_2013.pdf.

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from the exploration for oil over its production and transportation to the marketing of gasoline (this applies similarly, inter alia, to coal, wood, gas or nuclear energy). The ECT thus creates a specific legal regime for energy-related investments upstream, midstream and downstream – along the whole value-chain. It does so, however, and that is the second factor, on an unprecedented geographic scale. When it was signed, it applied provisionally from Portugal to Japan. Between the Atlantic and the Pacific Ocean, a single unified regime for the protection of foreign investments in the ‘Energy Sector’ came into existence. And even though Russia now has declared that it will never ratify the ECT, thus ending provisional application, the ECT continues to apply in Russia for existing investments for a further 20 years, ECT Art. 45(3)(b). There is no other comparable investment treaty. While NAFTA might come near in terms of geographical scope, NAFTA has only three member States, not 48 contracting parties. The third factor is the interconnectedness of the ‘Energy Sector’ of the economies of the contracting parties. The ECT does not only protect investments made by companies, e.g., from Western Europe in the CIS States. It also protects direct and indirect investments made into those companies, i.e. by shareholders. Many of the major European players in the ‘Energy Sector’ have subsidiaries in other contracting parties and in turn are listed on the stock exchange, with direct and indirect shareholders from Europe and other contracting parties. That is why under the ECT, claims against European States (e.g. against Poland, Hungary, Germany, the Czech Republic, Bulgaria, Croatia, and Spain) have become a reality. The fourth factor is that the ECT protects investors against regulatory measures of the host State if those measures are contrary to the ECT’s investment protection obligations. Regulatory measures such as the fixing of transmission fees, the allocation of emission trading certificates or unexpected collateral clauses in power plant permits of course may be in breach of the ECT. The ECT does not contain a ‘police powers’ exemption – quite to the contrary, Art. 24 of the ECT clarifies that the investment protection provisions of the ECT even apply where measures are taken, e.g. to protect the environment. What is more, under ECT Art. 10(1), the contracting parties are obliged to create ‘stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area.’ It has been considered by tribunals that such obligations lead to the protection of legitimate expectations of the investor. Thus, an unexpected and disadvantageous change of the regulatory framework, but also a discriminatory or unfair application of the existing legal framework, might be considered by a tribunal to be in breach of the ECT. The fifth and final factor is the applicability of the ECT both within the EU and against the EU. All member States of the EU, but also the EU itself, are contracting parties to the ECT. The applicability of the ECT between member States of the EU has not been put in doubt by arbitral tribunals and is well supported by academic literature. However, also the EU itself is a contracting party to the Richard Happ

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ECT. Investors from other contracting parties, including EU member States,21 which are harmed by actions of the EU, might rely on ECT Art. 26 to start an investment arbitration.22 Upon the ECT’s entering into force, the EU issued a statement according to which it will comply with its obligations under the ECT.23 Aggrieved investors may submit the dispute to the ECJ (being the relevant domestic court according to ECT Art. 26(2)(a), see infra) but also to arbitration. 19 The ECT thus creates a sector-specific ‘bill of rights’ for investors in the ‘Energy Sector’ from Portugal to Japan. It is not comparable to any other investment treaty in force. 2. Investment Protection under the Energy Charter Treaty 20

Among the ECT’s various provisions, its investment protection provisions have gained considerable importance. They bestow direct rights on investors and thus make them partial subjects of international law.24 At the time of writing, 43 cases (including 10 arbitrations instituted in 2013 alone) were officially known to have been instituted against various contracting parties.25 The following section briefly discusses the personal and material scope of application, limited by the definitions of ‘Investor’ and ‘Investment’, and the three articles in Part II which so far have gained major practical relevance: ECT Arts. 10, 13, and 17.26 a) Scope of Protection (1) Investment

21

The ECT uses a broad, asset-based definition of the term ‘investment’. Similar definitions also appear in most modern investment treaties. According to

21 Richard Happ, ‘The legal status of the investor vis-à-vis the European Communities: some salient thoughts’ (2007) 10 Int’l Arb. L. Rev. 74–81. This view is not undisputed. 22 See Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, para. 4.166. 23 Statement of 9 March 1998, OJ L 69/115. This statement was issued on the basis of ECT Art. 26(3)(b), pursuant to which certain contracting parties listed in Annex ID (among them the European Communities) do not give their consent that a dispute submitted to their national courts can be resubmitted to arbitration. Cf. Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, paras. 4.135–4.136. 24 See Richard Happ, Schiedsverfahren zwischen Staaten und Investoren nach Artikel 26 Energiechartavertrag (Peter Lang, 2000) 163. 25 The website of the Energy Charter Secretariat provides a respective list. 26 ECT Art. 11 regulates the entry of key personnel and the right of the investor to employ any key person of his choice. ECT Art. 12 obliges contracting parties to compensate an investor for any loss suffered due to war, a national emergency, or other similar event. This obligation has already been part of customary international law in the early 19th century. ECT Art. 14 provides for the right of the investor of the free transfer of his profits in a freely convertible currency. In the light of the payment crisis in Russia and in Argentina, comparable provisions may gain in importance.

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Art. 1(6) of the ECT, ‘Investment’ means every kind of asset, owned or controlled directly or indirectly by an investor and includes: (a) (b)

(c) (d) (e) (f)

tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges; a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise; claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;27 Intellectual Property; Returns; any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.

From the chapeau of Art. 1(6) it is clear that this list is only illustrative. Other 22 assets, insofar as they are directly or indirectly owned or controlled by an investor, may also qualify as investments. Art. 1(6) of the ECT does not explicitly state that an investment must be made in the area of a contracting party. However, this is explicitly required by Art. 26 of the ECT. Thus, only investments in the territory of the respondent contracting party can become the object of an ECT arbitration case. An asset needs to be owned or controlled, directly or indirectly, by an in- 23 vestor. The standard case of indirect ownership of investments is where the investment at issue is owned by a corporation which in turn is owned by another company. If the intermediate company is situated in a non-contracting party but the ultimate owner in a contracting party, the ultimate owner would indirectly own or control the investment and be protected. As regards ‘control’, Understanding No. 3 to the ECT clarifies that ‘control in fact, determined after an examination of the actual circumstances in each situation’ is meant. It prescribes to take all ‘relevant factors’ into consideration but then lists several which only apply for the determination of control over a company. The burden of proving ‘control’ is on the investor, raising the hurdle for unjustified claims. (2) Investor

According to Art. 1(7), an ‘Investor’ of a contracting party is either a natural 24 person having that contracting party’s citizenship or permanently residing in that party, or a company or other organisation organised in accordance with the law applicable in that contracting party. It may be noted that the wording does not require legal personality for such ‘other organizations’. The ECT does not contain rules on investors with potential multiple nationalities. However, Art. 17 (see below) contains a clear rule for companies controlled by third-State nationals. In the light of that rule, it seems debatable whether it is possible to read into 27 According to the tribunal in Petrobart Limited v. Kyrgyzstan, UNCITRAL, Award, 13 February 2003, this encompasses also claims for the contract price under a contract for the sale of gas.

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the ECT further provisions which could have been included by the contracting parties, but were not included. In the three Yukos cases, the tribunals rejected Russia’s arguments that the claimants were no eligible ‘investors’ since they were ultimately owned by Russians. It considered it not possible to read requirements into the ECT going beyond the ‘organized in accordance with the law’ requirement in the host State.28 b) Article 10(1) of the ECT 25

ECT Art. 10(1) reads as follows: Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations. Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.

26

This complex provision contains in every sentence at least one substantive investment protection obligation. They shall now be analysed in their respective order. (1) First Sentence

Contracting parties are obliged to ‘encourage and create stable, equitable, transparent and favourable conditions for Investors of other Contracting Parties’. The ‘conditions’ refer, inter alia, to the legal framework which the State can influence and which the investor, upon making his investment, accepts and accommodates into his plans. This follows from Art. 20 (‘Transparency’) which obliges contracting parties to promptly publish ‘Laws, regulations, judicial decisions and administrative rulings of general application’ so as to enable investors to become acquainted with them. 28 There does not seem to be a comparable provision in other investment treaties (although in the vast universe of 2700+ BITs similar provisions may exist). Many other tribunals have considered that a similar obligation is part of the obligation to provide fair and equitable treatment, not vice versa.29 Nevertheless, 27

28 Yukos Universal Limited (Isle of Man) v. Russia, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 411; Veteran Petroleum Limited (Cyprus) v. Russia, PCA Case No. AA 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 411; Hulley Enterprises Limited (Cyprus) v. Russia, PCA Case No. AA 226, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 411. See also Philippe Pinsolle, ‘The Dispute Resolution Provisions of the Energy Charter Treaty’ (2007) 10 Int’l Arb. L. Rev. 82–91, 85. 29 For a detailed discussion, see Marc Jacob and Stephan Schill, ‘Fair and Equitable Treatment’, ch. 8.I., 700–763.

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ECT tribunals and parties very likely will rely on conclusions and reasonings developed by those other tribunals. It is interesting to note that the interpretation of NAFTA’s provision on transparency given by the Metalclad30 tribunal would fit perfectly under the wording of Art. 10(1). (2) Second Sentence

The wording of the second sentence of Art. 10(1) is a bit unusual: ‘Such con- 29 ditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment.’ However, this does not mean that States are merely obliged to ‘encourage and create’ conditions (Art. 10(1), 1st sentence) which then would include a commitment of fair and equitable treatment. Art. 10(1), 2nd sentence, directly obliges contracting parties to provide fair and equitable treatment.31 Several reasons militate for this: firstly, the further obligations in the 3rd to 5th sentence are formulated unconditional, but are linked to the ‘conditions’ (e.g. 3rd sentence ‘such investments shall also enjoy...’ (emphasis added) and there is no valid reason to differentiate between the individual obligations. Second, if Art. 10(1) was understood to oblige contracting parties only to create conditions which would allow for fair and equitable treatment, contracting parties could act unfair or inequitable without being in breach of the ECT. That would be an absurd result.32 The obligation to provide fair and equitable treatment is potentially of great 30 significance in ECT-based investment disputes. The energy sector is usually heavily regulated and of considerable political importance. While investments such as power plants, pipeline grids or oilfields are based on long-term business plans, politicians tend to think in electoral cycles. A governmental change in energy policy can seriously affect the viability of an energy project. (3) Third Sentence

The obligation to provide most constant protection and security to invest- 31 ments is an obligation found in nearly every investment protection treaty. There is no apparent reason why this obligation should be interpreted differently. Since it relates to ‘investments’, however, and investments also include non-corporal assets such as rights, it seems doubtful whether the provision only obliges con30 Metalclad Corporation v. Mexico, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000, paras. 90–99. 31 Cf. Christoph Schreuer, ‘Fair and Equitable Treatment’ (2007) 4/5 TDM; Thomas Wälde, ‘Energy Charter Treaty-based Investment Arbitration’ (2004) 5 JWIT 373, 384 et seq.; cf. also Petrobart Ltd. v. Kyrgyzstan, SCC Case No. 126/2003, Award, 29 March 2005, 76. 32 A similar view has been adopted by the tribunal in Occidental v. Ecuador. It concluded that the obligation (in tax matters) to ‘strive to accord fairness and equity’ would be no different from the obligation to provide fair and equitable treatment; Occidental Exploration and Production Company v. Ecuador, LCIA Case No. UN 3467, Award, 1 July 2004, para. 70; cf. El Paso Energy International Company v. Argentina, ICSID Case No. ARB/04/15, Award, 27 April 2006, para. 108; Mohammad Ammar Al-Bahloul v. Tajikistan, SCC Case No. V064/2008, Partial Award on Jurisdiction and Liability, 2 September 2009, para. 248.

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tracting parties to provide physical protection to investments.33 ‘Investments’ are also non-physical assets such as rights and patents. How does one physically protect non-physical assets? 32 The prohibition to impair by ‘unreasonable’ or discriminatory measures the use, enjoyment, etc. of investments very likely is also based on comparable provisions in bilateral investment treaties. These are discussed in detail in the contribution on ‘Arbitrary and/or Discriminatory Treatment’ by Kriebaum.34 It has been argued that a formal test according to which ‘[t]he standard of “reasonableness” therefore requires, in this context as well, a showing that the State’s conduct bears a reasonable relationship to some rational policy,’35 would be apposite for Art. 10(1).36 Measures would be unreasonable if they do not serve a reasonable purpose or are unproportional to that purpose.37 (4) Fourth Sentence 33

Art. 10(1), 4th sentence, prohibits contracting parties to treat investments less favourable than required by international law, including treaty obligations.38 This obligation could be understood to make a violation of WTO law, such as the TRIMS Agreement, actionable under the ECT. Interpreting Art. 10(1) in the context of the other provisions of the ECT indicates that this might be a tenable proposition. Art. 5(1) prohibits contracting parties to impose any trade-related investment measure inconsistent with Arts. III or XI of the GATT.39 Art. 10(11) states that any such breach of Art. 5(1) shall be considered a breach of the obligations under Art. 10, thus making a breach of these GATT provisions actionable under Art. 26.40 Whether further provisions of the GATT/WTO law will be 33 See Richard Happ and Noah Rubins, Digest of ICSID Awards and Decisions 2003–2007 (Digest II) (Oxford University Press, 2009) 359–360 and Richard Happ and Noah Rubins, Digest of ICSID awards and decisions 1974-2002 (Digest I) (Oxford University Press, 2012) 354. 34 Ursula Kriebaum, ‘Arbitrary/Unreasonable or Discriminatory Measures’, ch. 8.III., 790–806. 35 Saluka Investments B.V. v. The Czech Republic, PCA–UNCITRAL Arbitration Rules; IIC 210 (2006), Partial Award, 17 March 2006, para. 360; confirmed in Biwater Gauff v. Tanzania, Case No. ARB/05/22, Award, 24 July 2008, para. 692; Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, para. 679. 36 Veijo Heiskanen, ‘“Unreasonable or discriminatory measures” as a cause of action under the Energy Charter Treaty’ (2007) 10 Int. Arb. L. Rev. 104, 109. 37 Cf. Richard Happ, ‘Dispute Settlement under the Energy Charter Treaty’ (2002) GYIL 331, 352. 38 The reference to treaty obligations does not include decisions taken by international organisations, even if binding under international law. Cf. Understanding No. 17 to the ECT. 39 ‘GATT’ is defined as encompassing GATT 1947 and GATT 1994, ECT Art. 1(11)(a, b). Pursuant to Understanding No. 6 to the ECT, nothing can be derived from ECT Art. 5(1) as to whether the TRIMs Agreement is part of GATT Arts. III and XI. 40 This interpretation is strengthened by an e contrario argumentation. Upon the signing of the treaty, Australia had made a declaration with respect to ECT Arts. 5 and 10(11), noting that it would not be appropriate for dispute settlement bodies established under the Treaty to give interpretations of GATT Arts. III and XI in the context of disputes between an investor of a party to the GATT and another party to the GATT. In Australia’s opinion, the only issue that can be considered under Art. 26 is the issuance of arbitral awards in the event that a GATT

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actionable under ECT Art. 26 is unclear, but not very likely. If the contracting parties had wanted to make such a general referral to the GATT, ECT Arts. 10(11) and 5 would be superfluous. However, further treaty obligations might be actionable, if their content is investment-related and is directly applicable to the case. (5) Last Sentence

Art. 10(1), last sentence, reads as follows: ‘Each Contracting Party shall ob- 34 serve any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.’ This is an umbrella clause, making a breach of contractual obligations entered into between investor or its investment and contracting party a breach of the ECT. Clauses of this type are discussed in detail in the contribution ‘Umbrella Clauses’ by Sinclair.41 The wording of this umbrella is special: the clause applies to obligations en- 35 tered into with an investor or its investment. There has been considerable debate in literature and jurisprudence whether other umbrella clauses apply also to contracts entered into between a State and a domestic subsidiary of an investor.42 That discussion has no relevance for the ECT. The wording of Art. 10(1), last sentence, is explicit: obligations entered into with an investment of an investor, e.g. a locally incorporated and controlled company, are covered by Art. 10(1). It has been argued that ECT Art. 22 extends the scope of the umbrella clause also to State enterprises, at least where they act in relation to the sale or provision of goods.43 c) Article 13 of the ECT

Art. 13(1) is a standard expropriation clause, covering both direct and indirect 36 expropriations and making them unlawful except where such expropriation is for a public purpose, not discriminatory, carried out under due process of law, and accompanied by the payment of prompt, adequate and effective compensation. Art. 13(2) gives an affected investor the right ‘to prompt review, under the 37 law of the Contracting Party making the Expropriation, by a judicial or other competent and independent authority of that Contracting Party, of its case, of the valuation of its Investment, and of the payment of compensation, in accordance

panel or WTO dispute settlement body first established that a trade-related investment measure maintained by the contracting party is inconsistent with its obligations under the GATT or the Agreement on Trade-Related Investment Measures. 41 Anthony Sinclair, ‘Umbrella Clauses’, ch. 8.VII., 887–958. 42 See for a general overview Richard Happ and Noah Rubins, Digest II (n. 33) 363; for a specialised discussion of umbrella clauses see Anthony Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’ (2004) 20 Arb. Int’l 411–434. 43 Kaj Hobér and Sophie Nappert, ‘Provisional Application and the Energy Charter Treaty’ (2007) 10 Int’l Arb. L. Rev. 53, 55; see also Michael Feit, ‘Responsibility of the State Under International Law for the Breach of Contract Committed by a State-Owned Entity’ (2010) 28 Berkeley J. Int’l L. 142, 168–176.

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with the principles set out in paragraph (1).’ Making use of this right does not amount to making a choice under Art. 26(2) and thus does not prohibit an investor from later on submitting a dispute to arbitration. The investor has the right to have, inter alia, its ‘case’ reviewed. This also applies to determining whether an expropriation has occurred. As the term ‘expropriation’ is defined in Art. 13(1) as also encompassing indirect expropriations, Art. 13(2) is an interesting tool for an investor to force the State to review a case of indirect expropriation. Difficulties might arise as the right of review can only be exercised ‘under the law of the Contracting Party making the Expropriation’. Whether that domestic law always allows for such a review, and in particular for court actions to determine payment of compensation for indirect expropriations, is unclear.44 38 Art. 13(3) clarifies that the scope of Article 13 of the ECT includes cases where the State expropriates the assets of a locally incorporated company in which an investor has an investment (not limited to shares). As Art. 13(3) does not require that the investor owns or controls the locally incorporated company (Art. 13(3) then would be unnecessary) this paragraph goes beyond the scope of indirect expropriation. d) Article 17 of the ECT 39

Denial of benefit clauses first seem to have surfaced in US treaty practice after the Second World War, e.g. the Japan–US FCN Treaty.45 There had been extreme reluctance before the Second World War even to include corporations into the protection of such treaties, and the denial of benefits clauses might have been included due to the fear of preventing, via the incorporation of a company, ‘free riders’ from third countries to gain protection.46 Such clauses subsequently have been included in nearly all FCN treaties or BITs concluded by the United States. They can also be found in the BITs of other States as well as in Free Trade or Economic Cooperation Agreements.47 They are discussed in more de-

44 As has been set out above, Understanding No. 16 to the ECT sets out that contracting parties are not obliged to incorporate Part III of the ECT into their domestic law. 45 Treaty of Friendship, Commerce, and Navigation between the United States of America and Japan, 9 April 1953 (entry into force 30 October 1953), (1953) 206 UNTS 143, available at http://tcc.export.gov/Trade_Agreements/All_Trade_Agreements/exp_005539.asp. See also Richard Happ, ‘Denial of Benefit Clauses and other Mechanism that Limit the Scope of BITs for Investors’ in ILA, German Branch, Sub-Committee on Investment Law, The Determination of the Nationality of Investors under Investment Treaties (Transnational Economic Law Research Center, 2011) 61–68, available at http://telc.jura.uni-halle.de/sites/default/files/ BeitraegeTWR/Heft%20106.pdf. 46 Herman Walker, ‘Provision on Companies in US Commercial Treaties’ (1956) 50 AJIL 373, 388; see also Loukas Mistelis and Crina Baltag, ‘Denial of Benefits and Article 17 of the Energy Charter Treaty’ (2009) 113 Penn St. L. Rev. (2009) 1301–1321. 47 For example, Article VI (‘Denial of Benefits’) of the ASEAN Framework Agreement on Services of December 1995 provides that ‘[t]he benefits of this Framework Agreement shall be denied to a service supplier who is a natural person of a non-Member State or a juridical person owned or controlled by persons of a non-Member State constituted under the laws of a Member State, but not engaged in substantive business operations in the territory of Member

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tail in the contribution on ‘Denial of Benefits concerning Aspects of Investments’ by Hoffmann.48 Art. 17 has been the object of considerable discussion in academic litera- 40 ture.49 Arts. 17(1) and 17(2) address two different sets of facts. While Art. 17(1) regulates situations where the possible ‘investor’ is controlled by persons not themselves protected by the ECT, Art. 17(2) applies to situations in which the denying contracting party and the ‘third State’ no longer maintain diplomatic relationships with each other or where measures of foreign economic law of the denying contracting party prohibit transactions with investors of such a State or would be circumvented by granting such advantages. This provision serves to avoid conflicts between the ECT and measures of foreign policy adopted by a contracting party in relation to another State. It is not restricted to investments of investors of non-contracting parties, but also applies to investments of investors of contracting parties. It is Art. 17(1), however, which since the Plama Decision on Jurisdiction50 41 has been the object of much discussion in case law and literature. Unfortunately, further tribunals treated Plama as a kind of binding precedent and copied the reasoning without much further review. There are, however, good arguments to consider that the Plama tribunal might have used the wrong reasoning to justify the – presumably – correct result. Metaphorically speaking, the tribunal used a sledgehammer to break a nut. 42 An analysis of Art. 17(1) should start with its wording. Each Contracting Party reserves the right to deny the advantages of this Part to: (1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized; (…).

(1) Requirements to Exercise the Right

The factual preconditions for the application of ECT Art. 17(1) are the fol- 43 lowing: (1.) there must be a legal entity without substantial business activities in the contracting party in which it is organised and (2.) it needs to be owned or controlled by citizens or nationals (3.) of a third State. The term legal entity should be sufficiently clear. It encompasses companies 44 ‘or other organizations’ which would qualify as an investor pursuant to ECT Art. 1(7)(a)(ii). The ECT, however, does not define the term substantial business activities. The plain meaning suggests that the business activities of the company must not merely formally exist in the legal realm, but must have ‘substance’ States(s)’. The full text of this Agreement is available at http://unctad.org/Sections/dite/iia/ docs/compendium/en/88%20volume%204.pdf. 48 Anne Hoffmann, ‘Denial of Benefits’, ch. 6.II.G., 598–613. 49 See, inter alia, Loukas Mistelis and Crina Baltag (n. 46); Stephen Jagusch and Anthony Sinclair, ‘Denial of advantages under Article 17 (1)’ in Graham Coop and Clarisse Ribeiro (eds), Investment Protection and the Energy Charter Treaty (JurisNet, 2008) 17–45. 50 Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005.

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and be present in the ‘real’ physical world.51 The wording further suggests that ‘substantial’ business activities must be more than the ‘minimal’ activities that any company organised in accordance with the law of a certain contracting party may be involved in by the mere fact of their incorporation (such as the payment of taxes) or the basic activities that any company must perform.52 In addition, ‘substantial’ business activities should involve considerably more activities than the activities pro forma required by the company’s articles of association. A company usually is represented by its directors – which must meet and take decisions. The mere formal existence of such meetings and the taking of decisions cannot constitute ‘substantial’ business activities, since, again, otherwise every company not being completely dormant would have such ‘substantial business activities’, depriving this requirement of any meaning. 45 Art. 17(1) requires that the entity is owned or controlled by nationals or citizens of a third State. The ultimate owner or controller is relevant. If an indirect owner or controller sits in a third State, but is ultimately owned or controlled by an investor from a contracting party (different from the host State) then that investor always would indirectly own or control that investment (according to Art. 1(6)) and thus be protected. 46 Art. 17(1) further requires that the nationals or citizens are from a third State. The term ‘third State’ is not defined in the ECT. A non-contracting party to the ECT in any case is a ‘third State’. If the State is not a contracting party, its nationals and citizens are not protected under the ECT, and Art. 17(1) applies to prevent such nationals and citizens from gaining the protection of the ECT via a company without substantial business activities in a contracting party. Art. 7(10) (a)(i) and Art. 17(2) seem to indicate that ‘third State’ may also be a contracting party. While that would make much sense as it would preclude claims where the company is ultimately owned by host State nationals, tribunals consistently have held that the meaning would be limited to non-contracting parties.53 (2) Exercising the Right 47

Contracting parties have the right to deny the advantages of this part to certain legal entities. This clearly requires that the right is exercised.54 The ECT does not specify how the right is to be exercised. The Plama tribunal argued that 51 Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Award, 26 March 2005, para. 69; see also Loukas Mistelis and Crina Baltag (n. 46) 1315. 52 See also Stephen Jagusch and Anthony Sinclair (n. 49) 20. 53 See also Stephen Jagusch and Anthony Sinclair (n. 49) 19; but see Yukos Universal Limited (Isle of Man) v. Russia, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 544; Veteran Petroleum Limited (Cyprus) v. Russia, PCA Case No. AA 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 555; Hulley Enterprises Limited (Cyprus) v. Russia, PCA Case No. AA 226, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 543; Libananco v. Turkey, ICSID Case ARB/06/8, Award, 2 September 2011, paras. 553–556. 54 Plama Consortium v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 28 October 2005, para. 155; see also Herman Walker (n. 46) 388.

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‘a general declaration in a Contracting State’s official gazette could suffice; or a statutory provision in a Contracting State’s investment or other laws; or even an exchange of letters with a particular investor or class of investors.’55 On the basis of that holding, it has been argued that States should exercise their right with a law containing an abstract and general denial of benefits provision.56 That is not convincing. Where the drafters of the ECT wanted the contracting parties to give some general notification, they provided for annexes with which the contracting parties could opt out of some provisions.57 If the drafters had wanted to require such a notification, they could have explicitly provided for it. In addition, the idea of a ‘general’ notification is not practically useful. The exercise of the right under Art. 17 requires an examination of all the facts of a specific case to determine whether a legal entity has substantial business activities. The suggested general provision would not have any legal effect under the treaty as the exercise would not result in the denial of benefits to a specific investor.58 It would be nothing more than a repetition of Art. 17 itself. (3) Effects of Exercising the Right

With the exercise of the right under Art. 17, an investor who might otherwise 48 benefit from the advantages of Part III is denied these advantages. The ‘advantages’ are the rights granted to investors under Part III. The exercise of the right under Art. 17 thus deprives the legal entity of substantive protection granted by Part III of the ECT. Art. 26, which forms the basis of the possible jurisdiction of an ECT tribunal, is not contained in Part III and therefore not affected by the denial of benefits. However, a valid exercise of the right under Art. 17 in relation to a legal entity nevertheless deprives an ECT tribunal of jurisdiction as regards disputes submitted by that entity to arbitration. The consent of contracting parties to submit disputes with investors of other contracting parties to arbitration is limited to disputes concerning an alleged breach of their obligations under Part III of the ECT. Once a contracting party has validly exercised its right under Art. 17 in relation to what is the claimant, the claimant does not have any rights under Part III of the ECT. There are no obligations of a contracting party to that claimant. The facts alleged by the claimants, even if taken to be true, cannot amount to a breach of the respondent contracting party’s obligation under Part III of the ECT. Consequently, a tribunal does not have jurisdiction.59 Contrary to the suggestions by the Plama tribunal,60 this interpretation would 49 not deprive an investor of procedural remedies. It is a generally accepted principle of arbitration law, enshrined in Article 41(1) of the ICSID Convention, that 55 56 57 58 59 60

Plama Consortium v. Bulgaria, id., para. 157. Holger Essig, ‘Balancing Investor’s Interests and State Sovereignty’ (2007) 4 TDM 1, 10. See Annexes ID and IA. See also Loukas Mistelis and Crina Baltag (n. 46) 1319. See also Stephen Jagusch and Anthony Sinclair (n. 49) 44. Plama Consortium v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 28 October 2005, paras. 148–151.

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the ‘Tribunal shall be the judge of its own competence’. A claimant to whom the advantages of Part III have been denied is still free to nevertheless submit a claim to an arbitral tribunal under Art. 26. It then is the task of the tribunal to determine whether the factual preconditions of Art. 17(1) have been fulfilled and whether the contracting party therefore has validly exercised its right or not.61 50 A main point of controversy seems to be whether the exercise of the right in Art. 17(1) has a ‘retrospective’ or a ‘prospective’ effect. This labelling, which has been used by the tribunal in Plama and which has been picked up by other tribunals is very unfortunate. It is based on the implied proposition that with the exercise of the right under Art. 17, the ‘legal entity’ referred to in this provision is deprived of rights it initially had enjoyed. 51 If a contracting party exercises its right of denial under Art. 17(1), a condition already inherent in the legal and factual situation of the legal entity is triggered. If an investor is aware of the ECT at all, it can also be aware of its Art. 17. The main question is whether it merely terminates the existing rights from the moment of declaration on (i.e. a prospective effect) or has a dissolving/resolutory effect, i.e. it dissolves any advantages which the legal entity might have enjoyed under the ECT. Neither the literal meaning nor the wording in its context shed any light on that. The Plama tribunal held that the exercise of the right in Art. 17 could only have a prospective effect such that it could not operate to prevent an investor from bringing a claim and proceeding to the merits.62 This reasoning seems to deprive Art. 17(1) of much of its potential scope of application.63 The premise for this finding has been aptly summarised by the Fraport tribunal: 343. Broadly speaking, there are two types of international investments. The first is comprised of an investment based on or accompanied by some explicit agreement with or unilateral communication from the host state: the second involves an investment in the market of the host state without an accompanying specific agreement between the investor and the government of the host state.64

52

Where there is the first type of investment, the State will be aware of the foreign investor. Such was presumably the situation in Plama, where the dispute

61 Richard Happ (n. 45) 66; Laurence Shore, ‘The jurisdiction problem in Energy Charter Treaty claims’ (2007) 10 Int’l Arb. L. Rev. 58, 63; James Chalker, ‘Making the Energy Charter Treaty Too Investor Friendly: Plama Consortium Limited v. the Republic of Bulgaria’ (2006) 3 TDM 1, 15; cf. Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Award, 26 March 2005, para. 64. 62 Plama Consortium v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 28 October 2005, paras. 161–162; also Loukas Mistelis and Crina Baltag (n. 46) 1319; Yukos Universal Limited (Isle of Man) v. Russia, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 458; Veteran Petroleum Limited (Cyprus) v. Russia, PCA Case No. AA 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 514; Hulley Enterprises Limited (Cyprus) v. Russia, PCA Case No. AA 226, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 457. 63 See also Stephen Jagusch and Anthony Sinclair (n. 49) 40–41; also Anthony Sinclair, ‘The Substance of Foreign Nationality Requirements in Investment Treaty Arbitration’ (2005) 20 ICSID Rev.–FILJ 357, 385. 64 Fraport AG v. The Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007, para. 343.

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arose out of the privatisation of the Plama oil refinery. The tribunal’s holding of a prospective effect was clearly based on this particular set of facts, in which a contracting party might have the possibility to deny benefits once it becomes aware that the preconditions in Art. 17 are met in respect of that foreign investor.65 The tribunal ignored, however, the second type of investments. Unless a State controls each and every foreign investment coming into its territory, which would be incompatible with the stated objective (in the preamble of the ECT) to liberalise investment flows, a State will not be aware of the foreign investor until it is confronted with a notice of arbitration. If the interpretation adopted by the Plama tribunal were apposite, contracting parties in such cases would not be able to effectively exercise their rights under Art. 17 although the preconditions for its exercise are fulfilled. In short, ascribing to the exercise of the right under Art. 17 a merely prospec- 53 tive effect as put forward by the Plama tribunal would severely curtail the scope of application and thus seem contrary to the very object and purpose of this article. 3. Investment Arbitration under the Energy Charter Treaty

This section briefly discusses Art. 26 of the ECT, which allows for direct 54 State-investor dispute settlement.66 Art. 26(1) is the main ‘gateway’ for ECT dispute settlement. Its requirements 55 must be fulfilled before an investor can submit the dispute to arbitration or one of the other fora mentioned in Art. 26(2). There must exist a dispute between a contracting party and an investor of another contracting party. The dispute must relate to an investment of the investor in the ‘Area’67 of the contracting party and must concern an alleged breach of the obligations of the contracting party under Part III of the ECT. The breach need only be ‘alleged’. This is below the standards of substantiation required, e.g., under the so-called ‘Oil Platforms test’.68 The dispute shall be settled, if possible, amicably. As set out in Art. 26(2), this 56 requires that one of the parties (usually the investor) requests amicable settlement by sending a respective letter (a ‘notice of dispute’), to the State. If the dispute cannot be settled amicably within three months after amicable settlement was requested, the investor may choose to submit it (a) to domestic courts or ad65 In Plama, however, Bulgaria even claimed that the claimant had misrepresented its true ownership. In such a case, a State would be forced to distrust foreign investors and make inquiries on its own. 66 For further views, see Juliet Blanch, Andy Moody and Nicholas Lawn, ‘Access to dispute resolution mechanisms under Article 26 of the Energy Charter Treaty’ in Graham Coop and Clarisse Ribeiro (eds), Investment Protection under the Energy Charter Treaty (JurisNet, 2008) 1–16; Adnan Amkhan, ‘Consent to submit Investment Disputes to Arbitration under Article 26 of the Energy Charter Treaty’ (2007) 10 Int’l Arb. L. Rev. 65–73. 67 See the definition in ECT Art. 1(9). 68 Cf. Richard Happ and Noah Rubins, Digest II (n. 33) 332; Oil Platforms (Iran v. USA), ICJ Judgment, 6 November 2003, ICJ Rep. 2003, 161 et seq.

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ministrative tribunals of the contracting party, (b) to any applicable, previously agreed dispute settlement or (c) to arbitration in accordance with Art. 26(3)–(8). It is to be noted that the ‘dispute’ relates to the dispute mentioned in para. 1, i.e. relating to an investment and alleging a breach of the obligations under Part III of the ECT.69 Prudent investors will try to settle, even if seemingly difficult, and wait for the three months period to expire.70 57 Art. 26(3)(a)–(c) provides the consent of contracting parties to submit a dispute to international arbitration. However, the consent is subject to the provisions of sub-paragraphs (b) and (c). Sub-paragraph (b)(i) seems equivalent to an ‘opt-in’ fork in the road clause. Contracting parties listed in Annex ID71 do not give such unconditional consent where the investor had previously submitted the ‘dispute’ to domestic courts or previously agreed dispute settlement mechanisms. For claims against those contracting parties, choosing a forum is final. Consequently, for claims against contracting parties not listed in Annex ID, choosing a forum is not final. The dispute can first be submitted to domestic courts or contractual dispute settlement and subsequent to arbitration.72 Subparagraph (c) provides that contracting parties listed in Annex IA do not give their unconditional consent with respect to disputes arising under the ECT’s umbrella clause. The investor only has the choice to submit to domestic courts (Art. 26(2)(a)) or contractually agreed dispute settlement (Art. 26(2)(b)). 58 Art. 26(4) sets out the three different arbitration venues from which the investor can choose. When the investor chooses to submit a dispute to arbitration, it further has to provide its consent in writing for the dispute to be submitted to one of those venues. It is common practice in investment arbitration to consider the consent of the investor to be implied in a request for arbitration/statement of claim. A prudent investor, however, will write a separate letter providing his consent.73 59 That is because of Art. 26(5). The contracting parties have already given their unconditional consent to such arbitration in Art. 26(3)(a). Together with the written consent of the investor given under Art. 26(4), a written arbitration agreement satisfying the requirements of the New York Convention and the various arbitration rules is deemed to be in existence.74 The arbitration rules of the venue chosen then automatically become part of the arbitration agreement thus concluded. Art. 26(5)(b) is important for those investors who do not submit the dispute to ICSID. It provides, firstly, that any arbitration at the request of any

69 See also Adnan Amkhan (n. 66) 67, who gives further references to the travaux préparatoires. 70 Id., at 71, who argues that it is a jurisdictional requirement. 71 Australia, Azerbaijan, Bulgaria, Croatia, Cyprus, the Czech Republic, the European Communities, Finland, Greece, Hungary, Ireland, Italy, Japan, Kazakhstan, Mongolia, Norway, Poland, Portugal, Romania, Russia, Slovenia, Spain, Sweden, Turkey. 72 Whether it can first be submitted to arbitration and then to domestic courts is a matter of domestic procedural law. 73 Adnan Amkhan (n. 66) 69. 74 ECT Art. 26(5)(a).

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party to the dispute shall be held in a member State of the New York Convention. Secondly, claims submitted to arbitration shall be held to arise out of a commercial relationship or transaction for the purposes of Art. 1 of the New York Convention. Both provisions ensure that a non-ICSID award can be enforced pursuant to the New York Convention. According to Art. 26(6), an arbitral tribunal established under paragraph 4 has 60 to decide the issues in dispute in accordance with the ECT and ‘applicable rules and principles of international law’. This does not give a tribunal leeway to import into the ECT further substantive investment protection provisions. Part III cannot be broadened except due to provisions contained in Part III, such as the MFN obligation. Rather, paragraph 6 is the basis for the tribunal to apply, e.g. the principles of State responsibility. Art. 26(7) needs to be read in conjunction with Art. 25(2)(b) of the ICSID 61 Convention. It provides that an investor ‘other than a natural person’ (i.e. a company or other organisation) having the nationality75 of the contracting party (i.e. being organised in accordance with its laws) which is controlled by investors of another Contracting Party for the purposes of ICSID shall be considered ‘nationals of another contracting state’. Thus, the protection of the ECT is expanded to the companies controlled by investors from other contracting parties.76 It has been suggested that the travaux préparatoires to the ECT indicate this provision applies mutatis mutandis to arbitrations running under UNCITRAL or SCC arbitration rules.77 Art. 26(8) provides that awards shall be final and binding on the parties to the 62 dispute. The second sentence of this paragraph indicates that under the ECT, specific performance is, as a matter of principle, an available remedy. For where the award concerns a measure of a sub-national government or authority, the national government (which is responsible for those actions under international law) might not be able to implement an award ordering specific performance. It is for this reason that the award shall provide that ‘the Contracting Party may pay monetary damages in lieu of any other remedy granted.’ 4. Investment Protection under the Energy Charter Treaty after Twenty Years

The first case under the ECT which finally ended with an award, Nykomb 63 Synergetics Technology Holding AB (Sweden) v. Latvia78 was registered in December 2001. What is the situation after thirteen years? It can safely be said that considerable use has been made of the ECT. 43 cases were known to have been

75 Note that ECT Art. 1(7)(a)(ii) does not use the term ‘nationality’ for companies. That might be an oversight. 76 Philippe Pinsolle (n. 28) 85. 77 Adnan Amkhan (n. 66) 70. 78 Nykomb Synergetics Technology Holding AB (Sweden) v. Latvia, SCC Case No. 118/2001, Award, 16 December 2003.

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filed until November 2011. According to two useful surveys presented at the 4th Energy Charter Treaty Conference in June 2011 in Stockholm,79 the outcome shows that tribunals in general act with due diligence and do not lightly award damages. The ‘success ratio’ for investors is not higher than in non-ECT investment treaty arbitration. So far, 24 awards have been rendered, including four settlement awards by consent. The currently pending and very likely upcoming future cases will lead to awards which further clarify the ECT’s provisions. While the holdings of one tribunal do not bind subsequent tribunals, all those holdings will relate to the same treaty. It is therefore likely that tribunals will consider these holdings as precedents and that lines of consistent jurisprudence will emerge. That, on the one hand, would create legal certainty but, on the other hand, make it difficult to correct ‘bad’ lines of jurisprudence. 64 While between 2002 and 2013, only Afghanistan has acceded to the ECT, the last year has seen a considerable number of States preparing to join the ECT. Montenegro signed the Energy Charter in 2012 and the 2013 Charter Conference in Nikosia endorsed the requests of Yemen and Lebanon to sign the ECT. From the Middle East and North Africa (MENA) region, also Jordan seems to be nearing accession. Morocco, Serbia and Indonesia seem to be interested likewise.80 The next ten years will be even more interesting. Oil might get scarce and renewable energy needs to be invested in. Great potential for renewable energy might lie in the MENA countries (cf. the ‘Desertec’ idea). The situation seems comparable to 1991: new sources of energy are available, but require considerable investments and political stability. This could easily be a field for the ECT. Some of the potential host States are already signatories, and other States in the area have created instruments similar to the ECT.81 65 So let’s wait and see what we can report in ten years.

79 Nils Eliasson, 10 years of Energy Charter Treaty Arbitration, 6 June 2011, available at http:// www.chamber.se/filearchive/4/41105/Report%20Ten%20Years%20of%20ECT%20Arbitratio n,%2030%20June%202011.pdf; Lucy Reed, The Practicalities of Arbitration under the ECT, 9–10 June 2011, available at http://www.sccinstitute.com/filearchive/4/40959/Lucy%20Reed_ presentation.pdf. 80 See Urban Rusnak (n. 20). 81 See the ECOWAS Energy Protocol, A/P4/1/03, 31 January 2003, available at http:// www.comm.ecowas.int/sec/en/protocoles/WA_EC_Protocol_English-_DEFINITIF.pdf.

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Andrea K. Bjorklund 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Treaty-Based Procedural Innovations under NAFTA . . . . . . . . . . . . . . . . a) Binding Interpretations of NAFTA Issued by the Free Trade Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) NAFTA Party Submissions to Tribunals on Issues of Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Practice-Based Procedural Innovations under NAFTA . . . . . . . . . . . . . . a) Transparency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Amicus Curiae Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Jurisprudential Development and Control Mechanisms . . . . . . . . . d) Frivolous Claims Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. NAFTA’s Development of Substantive Protections . . . . . . . . . . . . . . . . . . a) National Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Minimum Standard of Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 7 8 14 19 26 27 31 35 37 40 41 47 49 53

Literature: Henri C. Alvarez, ‘Arbitration Under the North American Free Trade Agreement’ (2000) 16 Arb. Int’l 393–430; T. Leigh Anenson, ‘Defining State Responsibility under NAFTA Chapter Eleven: Measures ‘Relating to’ Foreign Investors’ (2005) 45 Virginia J. Int’l L. 675–735; Jeffrey Atik, ‘Repenser Chapter 11: A Catalogue of Legitimacy Critiques’, (2003) 3 Asper Rev. Int’l Bus. & Tr. L. 215–234; Frédéric Bachand and Emmanuel Gaillard (eds), Fifteen Years of NAFTA Chapter 11 Arbitration (JurisNet, 2011); Andrea K. Bjorklund, ‘NAFTA Chapter 11’, in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013) 465–533; Andrea K. Bjorklund, ‘National Treatment’, in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 28–58; Andrea K. Bjorklund, ‘The Promise and Peril of Arbitral Precedent: The Case of Amici Curiae’, in Anne K. Hoffmann (ed), Protection of Foreign Investments through Modern Treaty Arbitration – Diversity and Harmonisation (Association suisse de l’arbitrage, 2010), 165–187; Charles H Brower II, ‘Why the FTC Notes of Interpretation Constitute a Partial Amendment of NAFTA Article 1105’ (2006) 46 Virginia J. Int’l L. 347–363; Maxwell A. Cameron and Brian W. Tomlin, The Making of NAFTA: How the Deal Was Done (Cornell University Press, 2000); William S. Dodge, ‘National Courts and International Arbitration: Exhaustion of Remedies and Res Judicata Under Chapter Eleven of NAFTA’ (2000) Hastings Int’l & Comp. L. Rev. 357–383; Meg Kinnear, Andrea K. Bjorklund and John F. G. Hannaford, Investment Disputes Under NAFTA: An Annotated Guide to NAFTA Chapter 11 (Kluwer Law International, 2006, updated 2008, 2009); Céline Lévesque, ‘Influences on the Canadian FIPA Model and the US Model BIT: NAFTA Chapter 11 and Beyond’ (2006) Annuaire canadien de Droit international, 249–298; Daniel M. Price, ‘An Overview of the NAFTA Investment Chapter: Substantive Rules and Investor-State Dispute Settlement’ (1993) 27 Int’l Lawyer 727–736; Sergio Puig and Meg Kinnear, ‘NAFTA Chapter Eleven at Fifteen: Contributions to a Systemic Approach in Investment Arbitration’, (2010) 25 ICSID Rev.–FILJ 225–267; Noah Rubins, ‘Loewen v United States: The Burial of an Investor-State Arbitration Claim’ (2005) 21 Arb. Int’l 1–36; Julie A. Soloway, ‘NAFTA’s Chapter 11: The Challenge of Private Party Participation’ (1999) 16(2) J. Int’l Arb. 1–14; J. Christopher Thomas, ‘InvestorState Arbitration under NAFTA Chapter 11’ (1999) Can. YBIL 99–136; J Christopher Thomas, ‘Reflections on Article 1105 of NAFTA: History, State Practice and the Influence of

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1. Introduction

The genesis for NAFTA was the decision by President Carlos Salinas de Gortari and President Bush to commence negotiations for a free trade agreement (FTA) between the United States and Mexico. After some hesitation Canada joined the NAFTA negotiations.1 Canada already had an FTA with the United States (which contained an investment chapter but did not provide for investorState arbitration),2 but feared losing its status as the United States’ leading trade partner if the United States and Mexico negotiated a bilateral agreement. NAFTA included investor-State dispute settlement largely because of perceptions about Mexico’s potential volatility as a destination for foreign investment.3 The single strongest influence on the final form of NAFTA Chapter 11 was existing US treaty practice as the United States had the most developed BIT programme at the time of the negotiations but, as a trilateral agreement, NAFTA is to some degree a compromise reflecting the investment policies of three countries.4 2 NAFTA Chapter 11 is notable both for its innovative investor-State dispute settlement provisions and for spawning changes in subsequent agreements negotiated by the United States and Canadian governments in particular, but also in agreements and in procedural rules outside those two States’ direct sphere of influence. It has also generated a considerable number of cases interpreting three of the major standards of treatment in international investment law: national treatment; the minimum standard of treatment; and the prohibition against unlawful expropriation. 3 NAFTA contains several unusual and sometimes controversial procedural provisions, three of which are of particular note. First, its Article 1131(2) enables the Free Trade Commission, which comprises the trade ministers of the three member States, to issue an interpretation of the Agreement that will be binding on tribunals considering cases under the treaty. Second, it permits the non-disputing State Parties to make submissions on questions of interpretation of the agreement. Third, it has an article governing consolidation of related disputes that removes any decision about consolidation from the parties and places it in the hands of a tribunal convened especially to consider that issue. The first 1

1 Maxwell A. Cameron and Brian W. Tomlin, The Making of NAFTA: How the Deal Was Done (Cornell University Press, 2000) 65–66. 2 Free Trade Agreement between Canada and the United States of America (1988) 27 ILM 281. 3 Jeffrey Atik, ‘Repenser Chapter 11: A Catalogue of Legitimacy Critiques’ (2003) 3 Asper Rev. Int’l Bus. & Tr. L. 215, 216; T. Leigh Anenson, ‘Defining State Responsibility under NAFTA Chapter Eleven: Measures “Relating to” Foreign Investors’ (2005) 45 Virginia J. Int’l L. 675, 677. 4 Meg Kinnear, Andrea K. Bjorklund, and John F. G. Hannaford, Investment Disputes Under NAFTA: An Annotated Guide to NAFTA Chapter 11 (Kluwer Law International, 2006, updated 2008, 2009), General Section 23, 30–36.

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two practices in particular are apt to have an impact on the substance of Chapter 11 disputes as well. The NAFTA Parties notably, and not without criticism, used the Article 1131 interpretation procedure to specify that NAFTA’s Article 1105 offers investments of investors only the customary international law minimum standard of treatment, and not free-standing ‘fair and equitable treatment’. Practice under NAFTA has also highlighted issues that have caused the 4 NAFTA States and others in the investment community to alter their practices. The NAFTA governments have been at the forefront of the movement to bring transparency to investor-State dispute settlement, including the now-common perception that investment arbitral tribunals have the authority to permit amici curiae to participate in investment case, when appropriate. Tribunals deciding cases under NAFTA have developed an extensive and generally public body of ‘case law’ around one particular treaty. Concerns about divergent practice and incorrect decisions prompted the United States to include first in its Free Trade Agreement with Chile a provision requiring those States to consider the desirability of establishing an appellate body to hear cases arising from decisions of first-instance tribunals convened under the investment chapter.5 Subsequent FTAs have had similar provisions, though neither the United States nor its treaty partners have taken any action with respect to the establishment of an appellate body. In addition, the NAFTA Parties were early and vigorous proponents of frivolous claims allegations, a stance that sparked the inclusion in subsequent US and Canadian investment agreements of a mechanism to permit the expeditious dismissal of meritless claims, another innovation that sparked changes in the ICSID rules as well. With respect to substantive provisions, most of the investment law cases in- 5 terpreting national treatment provisions have been based on NAFTA. NAFTA’s international minimum standard of treatment provision has sparked a good deal of interest, both due to the Free Trade Commission’s interpretation of it and to lingering differences of opinion about what the standard actually requires. Finally, several cases have caused tribunals to interpret NAFTA’s expropriation provision and the NAFTA Parties and others have reacted to potentially far-reaching arguments by including in subsequent investment agreements language limiting the reach of indirect expropriation in particular. NAFTA’s influence is magnified not just because of the economic power of 6 the three State parties but because the treaty parties have sought to effect change based specifically on their experiences in early investment arbitrations. In addition, one of its innovations – transparency in tribunal decisions – has had an outsized effect on tribunal practice simply because prior decisions are available for use by counsel and by tribunals and are subject to scrutiny by all those interested in investment arbitration. 5 Chile–United States Free Trade Agreement, entry into force 1 January 2004, available at http:// www.ustr.gov/sites/default/files/uploads/agreements/fta/chile/asset_upload_file1_4004.pdf, Annex 10-H.

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2. Treaty-Based Procedural Innovations under NAFTA 7

The NAFTA Parties included in the Agreement detailed and elaborate provisions governing both the substantive obligations undertaken by the NAFTA Parties and the resolution of investor-State disputes. Three are of particular note. a) Binding Interpretations of NAFTA Issued by the Free Trade Commission

Article 1131 of NAFTA is entitled ‘governing law’ and directs tribunals to ‘decide the issues in dispute in accordance with this Agreement and applicable rules of international law.’6 Article 1131(2) of NAFTA provides: ‘An interpretation by the [Free Trade] Commission of a provision of this Agreement shall be binding on a Tribunal established under this Section.’ The freedom of tribunals to interpret the Agreement in a manner that departs from the direction in an interpretive note is thus curtailed by the explicit language of Article 1131(2). 9 As of July 2014, the NAFTA Free Trade Commission had used its Article 1131(2) power only once. On 31 July 2001, the Commission issued Notes of Interpretation regarding access to documents and regarding Article 1105, which is entitled ‘minimum standard of treatment’ and which requires NAFTA Parties to accord investments of investors ‘treatment in accordance with international law, including fair and equitable treatment and full protection and security.’7 The Article 1105 interpretation has raised a good deal of controversy as to the extent of the Commission’s powers under Article 1131, with a focus on the potential for unfairness inherent in the ability of States that are respondents in a pending case to issue interpretive notes that could work in their favour and on the possibility that the Commission effected an amendment rather than an interpretation.8 10 The note regarding access to documents has aroused virtually no controversy within the Chapter 11 context. It provides in part: ‘Nothing in the NAFTA imposes a general duty of confidentiality on the disputing parties to a Chapter Eleven arbitration, and, subject to the application of Article 1137(4), nothing in the NAFTA precludes the Parties from providing public access to documents submitted to, or issued by, a Chapter Eleven tribunal.’ At first blush one might think it should be even more controversial than the Article 1105 interpretation, given that there is virtually no relevant text to interpret. Yet the NAFTA Parties have embraced transparency, as described further in section 3(a) below, and there is sufficient agreement that access to documents serves the public good that part one of the Notes of Interpretation has not only escaped criticism but has 8

6 North American Free Trade Agreement, entered into force 1 January 1994, 32 ILM 605, 639, Art. 1131(1). 7 NAFTA Free Trade Commission, Notes of Interpretation (31 July 2001), available at http://ww w.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/NAFT A-Interpr.aspx. 8 On the question of amendment, see Charles H. Brower, II, ‘Why the FTC Notes of Interpretation Constitute a Partial Amendment of NAFTA Article 1105’ (2006) 46 Va. J. Int’l L. 347– 363.

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influenced subsequent treaty practice in the United States and Canada in particular.9 In the second of the 2001 notes, the Commission stated its view that the refer- 11 ence to international law in Article 1105 of NAFTA refers to ‘the customary international law minimum standard of treatment of aliens’, and does not establish autonomous obligations of free-standing fair and equitable treatment or full protection and security. The Commission also included a statement to the effect that finding that a State has breached another NAFTA provision or another international law obligation does not establish a violation of Article 1105. Limiting the protection in Article 1105 to the international minimum standard of treatment has been controversial because it is usually seen as imposing less stringent obligations on host governments, and accordingly providing less protection to investors, than an autonomous fair and equitable treatment standard.10 The Notes were issued whilst several cases were pending against the respondent States, and there was some concern that the standard included in the binding note could be outcome-determinative. Though NAFTA undisputedly gives the Commission the right to issue binding notes of interpretation, the question still arises whether it violates due process for a party in a case to use its authority to influence the outcome.11 Moreover, to the extent the ‘interpretation’ could be viewed as an ‘amendment’, arguments against retroactive changes in the law become that much stronger. It is easy to understand why the NAFTA Parties included a binding interpreta- 12 tion mechanism in their agreement. Issues requiring clarification or interpretation can be expected to arise in a treaty of long duration which contains legal obligations that are open textured or that have not been tested in practice. Yet fundamental notions of justice and due process argue against retroactive changes in the law that work to the detriment of either party in an ongoing case; the no9 Both the 2003 Canadian Model FIPA and the 2004 U.S. Model BIT (and the treaties and investment chapters in FTAs based on them, including the 2012 U.S. Model BIT) provide for public access to documents in investor-State arbitrations brought under those agreements. 2004 U.S. Model BIT, available at http://www.ustr.gov/sites/default/files/U.S.%20model %20BIT.pdf, Art. 29; 2012 U.S. Model BIT, available at http://www.ustr.gov/sites/default/ files/BIT%20text%20for%20ACIEP%20Meeting.pdf, Art. 29; 2003 Canadian Model FIPA, available at http://italaw.com/documents/Canadian2004-FIPA-model-en.pdf, Art. 38. 10 See, e.g., Rudolf Dolzer, ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’ (2005) 39 Int’l Lawyer 87; Todd J. Grierson-Weiler and Ian A. Laird, ‘Standards of Treatment’, in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 259–304. See also the commentary in section 4(b) below. 11 The tribunal in Pope & Talbot v. Canada, UNCITRAL (NAFTA) was very exercised by the potential for interference with an on-going case. It was also unhappy that initially the government of Canada had said there was no negotiating history for NAFTA (or at least none that was publicly available), while in another case a series of draft agreements was provided to the tribunal. Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in Respect of Damages, 31 May 2002, paras. 25–42. Ultimately the tribunal concluded that Canada had breached Art 1105 even under the less stringent post-interpretation standard, and thus it did not definitively rule on the extent to which it was bound by the FTC statement. Ibid., paras. 46–47.

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tion that one party can influence the interpretation of the law to the detriment of the other only exacerbates that concern. One way to diminish concerns would be to permit interpretive notes to be applied only prospectively. This result would eliminate the effect on ongoing cases and alleviate concerns about interference with a quasi-judicial mechanism. It could still give rise to controversy given the argument that investors’ rights, on which they might have relied in making an investment, would be curtailed. Yet to the extent investors were accorded individual rights they were always subject to the control by State parties included in Article 1131. So long as the change is indeed an interpretation rather than an amendment, the investors should have little cause for complaint. If it is an amendment, the question becomes more difficult. Certainly States can and do amend treaties; whether and to what extent an investor’s right outlasts the change to the treaty will depend both on the treaty language – many treaties have survival clauses in the event of their termination, but those are not necessarily applicable in the event of amendment – and on one’s conception of the nature of the individual rights under a treaty and when they vest.12 13 An Article 1131(2)-type provision is not the only avenue by which States can influence their obligations; Article 31(3)(b) of the Vienna Convention on the Law of Treaties provides that tribunals interpreting a treaty should take into account, along with the context ‘any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation.’ A. Roberts has persuasively demonstrated the potential for States to influence the interpretation of their treaties in this manner.13 Yet States still have to show a subsequent practice that establishes agreement of the parties. This has not always been easy in practice; in the set-aside petition in Mexico v. Cargill, the Ontario Court of Appeal determined that the submissions of the State parties did not establish agreement on the practice in question in accordance with the Vienna Convention, notwithstanding the fact that the NAFTA Parties themselves argued to the contrary.14 Moreover, even if they establish the practice they would also have to convince the tribunal to take note of it; the directive to ‘take into account’ the practice together with other context imposes much less constraint on a tribunal than a ‘binding’ interpretation. In fact, the existence of Article 1131(2) might make it even harder to show subsequent practice, given the potential for the NAFTA parties to issue binding interpretations; they are vulnerable to an argument that anything short of that procedural mechanism is something less than binding.

12 See generally Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 151–289. 13 Anthea Roberts, ‘Power and Persuasion in Investment Treaty Interpretation: The Dual Role of States’ (2010) 104 AJIL 179–225. 14 Mexico v. Cargill, Inc., 2011 ONCA 622 (4 November 2011), paras. 78–84.

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b) NAFTA Party Submissions to Tribunals on Issues of Interpretation

The State Parties to NAFTA have reserved to themselves another method of influencing arbitral tribunals deciding Chapter 11 cases: Article 1128 gives them the ability to make submissions on issues of interpretation of the agreement after having given written notice of their intention to the disputing parties. This privilege is on the one hand greater than the ability of a non-disputing party to participate in an arbitration as amicus curiae as it is not apparently within the tribunal’s discretion to disallow such participation so long as written notice to the disputing parties is given. On the other hand the State’s submission is supposed to address only issues of interpretation of the agreement and not how the agreement should apply to the facts of the case or how the case should be decided. Limiting the subject matter to issues of interpretation of the NAFTA helps to avoid the concern that a NAFTA Party could essentially espouse its investor’s claim at the same time that the investor was submitting a claim on its own behalf or on behalf of its investment. Of course, it is also possible that a Party’s submission could support the respondent rather than its national. A pro-respondent position is also likely to be adopted by the NAFTA Party that is neither the respondent nor the home State of the investor. As C. Thomas perceptively stated: ‘NAFTA Parties are unlikely to endorse interpretations and theories of recovery that enlarge their own exposure to claims.’15 Article 1128 is usually viewed as giving the Parties a right to make submissions; the actual language says Parties ‘may’ make submissions and does not suggest any discretion on the part of the tribunal as to acceptance. Nonetheless there have been some suggestions that the ability is not unlimited. When NAFTA Parties have attempted to exercise their rights rather late in the proceedings tribunals have accepted the filing while suggesting that they would not do so if a late filing were likely to cause prejudice to the disputing parties.16 The terse language in Article 1128 gives virtually no direction as to its operation. It does not specify whether the non-disputing Parties can make written or oral submissions, or both. In practice NAFTA Parties have usually made written submissions. Oral submissions would most likely take place at hearings, but Article 1128 does not expressly grant the right to non-disputing Parties to attend hearings. Again, in practice attendance at hearings has rarely been a problem because neither tribunal members nor disputing parties have objected to the attendance of NAFTA Party representatives. Should their attendance be questioned, the Parties could argue that in order to effectuate their rights under Article 1128, they need to attend hearings so they are aware of any issues arising during the 15 J. Christopher Thomas, ‘Investor-State Arbitration under NAFTA Chapter 11’ (1999) Can. YBIL 99, 108. 16 Ethyl Corporation v. Canada, UNCITRAL (NAFTA), Award on Jurisdiction, 24 June 1998, para. 48; Marvin Roy Feldman v. Mexico, ICSID ARB(AF)/99/1 (NAFTA), Procedural Order No 3 Concerning the Briefing of Issues on Jurisdiction Raised by the Parties, 17 July 2000, para. 6.

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hearings that they might wish to address. After many years of practice it is quite common for NAFTA Chapter 11 tribunals to issue procedural orders that set forth timing for any 1128 submissions the non-disputing NAFTA Parties wish to make.17 18 An unresolved question is the effect of Article 1128 submissions. Unlike interpretations issued under the authority of Article 1131(2), they are not binding on tribunals. Yet Article 1128 submissions could be used as subsequent agreement or practice of the Parties to the agreement and thus inform the interpretation of it pursuant to Vienna Convention Article 31(3)(b). Like the Ontario Court of Appeal, however, Chapter 11 tribunals have been somewhat reluctant to give too much weight to those submissions. Tribunals are, however, somewhat more likely to defer to non-disputing Party submissions than they are to take into account positions taken in pleadings and memorials due to the clear self-interest of the Party involved in defending the claim.18 c) Consolidation

NAFTA contains an article on consolidation that requires the formation of an UNCITRAL Rules ‘consolidation tribunal’ when requested by a party to a Chapter 11 proceeding who believes that two or more claims have a question of law or fact in common. This is not a class action provision as such; a group of claimants can together submit a claim against a NAFTA Party in the same proceedings, and have done so, most notably in two cases.19 Rather, it comes into play when different investors have submitted separate claims against a single Party. 20 Consolidation is ordinarily available in any case so long as all parties agree; the unusual feature of Article 1126 is that it takes the decision about consolidation out of the hands of the parties and of the existing tribunals to confer authority on a specially formed consolidation tribunal. The limited practice to date suggests that tribunals will take into account parties’ strong preferences against consolidation, but in the end the decision is up to the tribunal.20 19

17 Meg Kinnear, Andrea Bjorklund and John Hannaford (n. 4) Art. 1128.2–1128.3. 18 See Anthea Roberts, ‘Power and Persuasion’ (n. 13) 218–219; Canadian Cattlemen for Fair Trade v. United States, UNCITRAL (NAFTA), Award on Jurisdiction, 28 January 2008, paras. 186–187 (suggesting that agreement among the NAFTA Parties in 1128 submissions was ‘suggestive of something approaching an agreement’ but fell short of a subsequent agreement for Vienna Convention purposes). 19 Bayview Irrigation District et al. v. Mexico, ICSID Case No. ARB(AF)/05/1 (NAFTA), Award, 19 June 2007; Canadian Cattlemen for Fair Trade v United States, UNCITRAL (NAFTA), Award on Jurisdiction, 28 January 2008). 20 In the high fructose corn syrup cases, the claimants vigorously opposed consolidation on the grounds that each had extremely sensitive proprietary business information that it did not want its competitor to see. Corn Products International Inc. v Mexico, ICSID Case No. ARB (AF)/04/1 (NAFTA), Order of the Consolidation Tribunal, 20 May 2005; Archer Daniels Midland Co and Tate & Lyle Ingredients Americas, Inc. v Mexico, ICSID Case No. ARB(AF)/ 04/5 (NAFTA), Order of the Consolidation Tribunal, 20 May 2005.

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Once one of the disputing parties has requested the establishment of a consol- 21 idation tribunal, Article 1126 provides that the Secretary-General of ICSID is to appoint all three members of the tribunal. The presiding arbitrator must be appointed from the ICSID Panel of Arbitrators and must not be a national of any of the NAFTA Parties. The other two arbitrators should be appointed first from the NAFTA roster of arbitrators (which has never been constituted) to the extent available, second from the ICSID Panel of Arbitrators to the extent they are available, and third in the Secretary-General’s discretion. One of those arbitrators should have the nationality of the disputing Party and the other the nationality of the disputing investor(s). Notwithstanding the conferral of authority on the ICSID Secretary-General, in one consolidation case the disputing parties agreed on the composition of the tribunal.21 When a tribunal established under Article 1126 is satisfied that the claims 22 submitted to arbitration under Article 1120 have a question of law or fact in common, and after a hearing involving the disputing parties, the tribunal may: a. b.

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.

Article 1126 provides that the existing tribunals shall stay their actions during 23 the pendency of the consolidation proceedings. It does not explicitly direct the dissolution of the initial tribunals in the event the consolidation tribunal assumes jurisdiction, though that result is implicit. In addition, Article 1126 places no time limit on the request that a consolidation tribunal be constituted. In the 16 years Chapter 11 has been in force only two requests for consolidation have been made; one was granted and one was denied. In the case in which consolidation was permitted the request was made after jurisdictional hearings in one of the cases but before the initial tribunal had issued any decision.22 Consolidation permits a State to defend itself before only one tribunal and 24 avoid the expense and inefficiency involved with multiple proceedings. It is thus mostly likely to be sought by States, though Article 1126 permits either States or claimants to seek consolidation if they view it to be appropriate. In addition to efficiency, consolidating all cases involving similar factual and legal issues avoids the possibility of inconsistent decisions.

21 Corn Products International Inc. v. Mexico, ICSID Case No. ARB(AF)/04/1 (NAFTA), Order of the Consolidation Tribunal, 20 May 2005; Archer Daniels Midland Co and Tate & Lyle Ingredients Americas, Inc. v. Mexico, ICSID Case No. ARB(AF)/04/5 (NAFTA), Order of the Consolidation Tribunal, 20 May 2005. 22 Canfor Corporation v. United States, Tembec et al. v. United States, Terminal Forest Products Ltd v. United States, UNCITRAL (NAFTA), Order of the Consolidation Tribunal, 7 September 2005, para. 20.

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NAFTA’s consolidation provision has what some would consider disadvantages as well. Given that neither party chooses the consolidation tribunal (absent an ad hoc agreement to choose the tribunal’s members), the tribunal’s composition might suit none of the parties, even the party who sought consolidation. ‘The practical effect of consolidation against the wishes of a disputing party is to force that party to present its case before a tribunal it did not select, with coclaimants or co-respondents with whom it might not wish to arbitrate, and possibly governed by a set of arbitral rules it did not elect.’23 Though inconsistent decisions tend to be viewed critically by commentators, a party, including even a respondent State, might be happier with two inconsistent rulings, one of which went in its favour, rather than with a single ruling that went against it. 3. Practice-Based Procedural Innovations under NAFTA

26

Several factors have coalesced to lead to the development of procedural innovations in NAFTA. The first and perhaps most important is simply the number of cases filed under one treaty and the resulting status of the NAFTA Parties as repeat players in defending themselves in Chapter Eleven cases. In addition, all three NAFTA Parties have active BIT (and FTA) negotiation programmes and so have the opportunity to put in new agreements some of the lessons learned in NAFTA practice. The traditions of open government in the United States and Canada, in addition to the influential presence of civil society and the practice of amicus curiae participation in municipal court practice, have contributed to transparency-based innovations in particular. a) Transparency

27

The NAFTA Parties have proceeded further than other States with respect to opening hearings and making public not just awards but also pleadings, memorials, and procedural decisions. Pressure on the NAFTA governments started in early disputes brought under NAFTA Chapter Eleven, with non-disputing entities seeking access to the pleadings and memorials in pending NAFTA cases.24 Both the United States and Canada have a strong culture of open government; the United States enacted the Freedom of Information Act in 196625 and Canada enacted its Access to Information Act in 1985.26 Mexico has more recently increased public access to government documents. In March 2007 the Mexican Constitution was amended to guarantee a public right of access to government information.27 23 Henri C. Alvarez, ‘Arbitration Under the North American Free Trade Agreement’ (2000) 16 Arb. Int’l 393, 413–414. 24 See, e.g., Meg Kinnear, Andrea Bjorklund, and John Hannaford (n. 4) at 1120.28–1120.35; 1120.47–1120.48; Joachim F. Delaney and Daniel B. Magraw, ‘Procedural Transparency’, in Peter Muchlinski, Federico Ortino, and Christoph Schreuer (eds), Oxford Handbook of International Investment Law, (Oxford University Press, 2008) 721, 741–750. 25 Freedom of Information Act, 5 U.S.C. § 552. 26 Access to Information Act, R.S. 1985, c. A01, s. 1.

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In the 2001 Free Trade Commission Notes of Interpretation, all three NAFTA 28 governments agreed to make NAFTA proceedings public. This agreement extends not only to awards, but also to the memorials and pleadings filed by the parties.28 In 2003 the United States and Canada issued a joint statement on open hearings, which Mexico later joined.29 The trend towards transparency is reflected in both U.S. and Canadian investment treaty practice subsequent to 2001. The US Model BIT (of both 2004 and 2012) and the Canadian Model Foreign Investment and Protection Agreement (FIPA) (2003) provide for transparent proceedings.30 Those obligations have been included in treaties and FTAs, though sometimes in slightly modified form. For example, the recent FTA between Canada and Colombia provides that documents submitted to, or issued by, an arbitral tribunal be made public, unless the parties agree otherwise.31 The NAFTA-commenced trend towards transparency has had some effect on 29 investment arbitration more broadly. The 2006 amendments to the ICSID Convention Arbitration Rules and the ICSID Additional Facility (Arbitration) Rules 27 Decreto por el que se adiciona un Segundo párrafo con siete fracciones al Artículo 60 de la Constitución Política de los Estados Unidos Mexicanos, Diario Oficial 2 (20 July 2007). 28 NAFTA Free Trade Commission, Notes of Interpretation (31 July 2001), available at http:// www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/N AFTA-Interpr.aspx. The relevant provisions provide as follows: ‘1. Nothing in the NAFTA imposes a general duty of confidentiality on the disputing parties to a Chapter Eleven arbitration, and, subject to the application of Article 1137(4), nothing in the NAFTA precludes the Parties from providing public access to documents submitted to, or issued by, a Chapter Eleven tribunal. 2. In the application of the foregoing: a. In accordance with Article 1120(2), the NAFTA Parties agree that nothing in the relevant arbitral rules imposes a general duty of confidentiality or precludes the Parties from providing public access to documents submitted to, or issued by, Chapter Eleven tribunals, apart from the limited specific exceptions set forth expressly in those rules. b. Each Party agrees to make available to the public in a timely manner all documents submitted to, or issued by, a Chapter Eleven tribunal, subject to redaction of: i. confidential business information; ii. information which is privileged or otherwise protected from disclosure under the Party’s domestic law; and iii. information which the Party must withhold pursuant to the relevant arbitral rules, as applied. c. The Parties reaffirm that disputing parties may disclose to other persons in connection with the arbitral proceedings such unredacted documents as they consider necessary for the preparation of their cases, but they shall ensure that those persons protect the confidential information in such documents. d. The Parties further reaffirm that the Governments of Canada, the United Mexican States and the United States of America may share with officials of their respective federal, state or provincial governments all relevant documents in the course of dispute settlement under Chapter Eleven of NAFTA, including confidential information. 3. The Parties confirm that nothing in this interpretation shall be construed to require any Party to furnish or allow access to information that it may withhold in accordance with Articles 2102 or 2105.’ 29 Meg Kinnear, Andrea Bjorklund, and John Hannaford (n. 4) Appendix 11. 30 2004 and 2012 U.S. Model BITs (n. 9) Art. 29; Canadian Model FIPA (n. 9) Art. 38. 31 Canada–Colombia FTA, entered into force 15 August 2011, available at http://www.internatio nal.gc.ca/trade-agreements-accords-commerciaux/agr-acc/colombia-colombie/chapter8-chapit re8.aspx?lang=eng&view=d, Art. 830.

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allow access to the legal reasoning behind awards in cases administered by ICSID, but expressly provide that awards shall be made public only with the consent of the parties.32 They also stop short of requiring the disclosure of the pleadings or the memorials submitted by the parties.33 30 On the other hand, procedural transparency has not been embraced universally in investment arbitration, yet the trend is going in that direction. UNCITRAL established a working group on transparency in arbitration and conciliation to consider whether or not to issue rules particular to treaty-based investment arbitration that would provide for more transparency. The group was initially far from unanimous on what form any transparency option should take or whether it should be required.34 In 2013, however, the Working Group agreed on a set of rules that provides for open oral hearings in IIA-based cases as well as the publication of key documents, including notices of arbitration, pleadings, transcripts, and all decisions and awards issued by the tribunal. Absent specific agreement by the parties, these rules will apply only to arbitrations under future IIAs.35 b) Amicus Curiae Participation

The issue of amicus curiae participation is sometimes subsumed within the general umbrella of transparency. Some pressure to open proceedings stems from the desire of prospective amici curiae to know more about the cases in which they might want to participate. Indeed it is arguable that for amici to participate successfully they need to have access to information about the case, including the arguments made by the disputing parties.36 The criteria that now generally govern participation by amici require that they bring to the case a ‘perspective, particular knowledge or insight that is different from that of the disputing parties’. 32 Amici curiae first sought and achieved permission to participate in investorState cases submitted to arbitration under NAFTA Chapter 11. In Methanex v. United States, an UNCITRAL case involving a challenge to California’s proposed ban on the gasoline oxygenate methyl tertiary-butyl ether, several NGOs 31

32 ICSID Convention Arbitration Rule 48(4); ICSID Additional Facility Arbitration Rule Art. 53(3). 33 ICSID Convention Arbitration Rules 41(3), 53(3); ICSID Additional Facility Arbitration Rules 37(2), 48. 34 United Nations Commission on International Trade Law, Report of Working Group II (Arbitration and Conciliation) on the work of its fifty-sixth session (New York, 6–10 February 2012), A/CN9/741 (16 February 2012), available at http://daccess-dds-ny.un.org/doc/ UNDOC/GEN/V12/509/60/PDF/V1250960.pdf?OpenElement. 35 See Report of Working Group II (Arbitration and Conciliation) on the work of its fifty-eighth session (New York, 4–8 February 2013), available at http://www.uncitral.org/pdf/english/ workinggroups/wg_arb/765-e-draft-as-submitted-website.pdf. The agreement was adopted by the Commission in July, with a slight modification to one of the proposed rules. 36 Andrea K. Bjorklund, ‘The Promise and Peril of Arbitral Precedent: The Case of Amici Curiae’, in Anne K. Hoffmann (ed), Protection of Foreign Investments Through Modern Treaty Arbitration – Diversity and Harmonisation (Association Suisse de l’arbitrage, 2010) 165, 176–179.

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sought to participate in the case, and the tribunal concluded that the rules conferred authority on the tribunal to determine whether or not amici could participate.37 Several ICSID Convention tribunals (prior to the 2006 changes in the Rules) were faced with the same decision and generally came to the same conclusion, save for one tribunal which queried whether the existing rules gave it adequate authority to grant amicus curiae status.38 The NAFTA parties enshrined the possibility of amicus participation by set- 33 ting forth, under the auspices of the Free Trade Commission, procedures governing the participation of amici curiae.39 Criteria for a tribunal to consider include whether: (a)

(b) (c) (d)

the non-disputing party submission would assist the Tribunal in the determination of a factual or legal issue related to the arbitration by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties; The non-disputing party submission would address matters within the scope of the dispute; The non-disputing party has a significant interest in the arbitration; and There is a public interest in the subject-matter of the arbitration.40

The ICSID Convention Arbitration Rules and the ICSID Additional Facility 34 Rules have also been changed to make clear that tribunals have the authority to permit amicus participation providing certain conditions are met.41

37 Methanex Corp. v. United States, UNCITRAL (NAFTA), Decision of the Tribunal on Petitions from Third Persons to Intervene As ‘Amici Curiae’, 15 January 2001, paras. 47–53. The UPS v. Canada tribunal came to a similar conclusion and also grounded its decision on Article 15(1) of the UNCITRAL Arbitration Rules. UPS v. Canada, UNCITRAL (NAFTA), Decision of the Tribunal on Petitions for Intervention and Participation as Amici Curiae, 17 October 2001. 38 Aguas Argentinas, SA et al. v. Argentina, ICSID Case No. ARB/03/19, Order in Response to a Petition for Transparency and Participation as Amicus Curiae, 19 May 2005; Aguas Provinciales de Santa Fe S.A. v. Argentina, ICSID Case No. ARB/03/17, Order in Response to a Petition for Participation as Amicus Curiae, 17 March 2006. Compare Aguas del Tunari v. Bolivia, ICSID Case No. ARB/02/3, Letter from the Tribunal to Earthjustice, Counsel for Petitioners, 29 January 2003. See generally Andrea K. Bjorklund, ‘The Participation of Amici Curiae in NAFTA Chapter Eleven Cases’ (22 March 2002), available at http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/participate-e.pdf. 39 Statement of the Free Trade Commission on Non-Disputing Party Participation (7 October 2003), available in Meg Kinnear, Andrea Bjorklund, and John Hannaford (n. 4) Appendices 3–4. 40 Ibid. The tribunal is also to ensure that the non-disputing party submission does not disrupt the proceedings and that neither disputing party is unfairly burdened or unfairly prejudiced by the submissions. 41 ICSID Convention Arbitration Rule Chapter IV, Rule 37(2); ICSID (Additional Facility) Arbitration Rule, Ch. VII, Art. 41(3). Those rules contain provisions very similar to those found in the NAFTA FTC statement. Tribunals are to consider whether (a) the non-disputing party submission would assist the Tribunal in the determination of a factual or legal issue related to the proceeding by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties; (b) the non-disputing party submission would address a matter within the scope of the dispute; (c) the non-disputing party has a significant interest in the proceeding. The tribunal should also be sure to avoid permitting the non-disputing parties to disrupt the proceeding or to unfairly burden or prejudice any of the participants.

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c) Jurisprudential Development and Control Mechanisms 35

The transparency practice in NAFTA arbitration has done more than open investment law to the general public and facilitate the participation of civil society in pending cases. It has also contributed to the development of a body of investment law both around the Agreement itself and permitted that jurisprudence to have broader effects. NAFTA’s contribution is based inter alia on the critical mass of NAFTA awards and the transparency norm that makes available the awards and the pleadings and memorials in most NAFTA cases.42 The ability of tribunals to avail themselves of the wisdom distilled in the decisions of other tribunals is essential to developing an eventual jurisprudence constante.43 As the tribunal in the Glamis Gold case explained, [T]he NAFTA regime’s effort at consistence is one that both looks backward to major trends in past decided disputes and forward toward disputes that have not yet arisen. The appeal process (in the sense that it corrects a statement of the law) in arbitration runs forward in time over several cases rather than upwards in one particular case until a supreme judicial authority settles a question for a time. It is for these reasons that as a tribunal departs from past major trends, it should indicate the reasons for doing so.44

36

Not all NAFTA tribunals have issued consistent decisions; the major trends can take some time to develop. Treaty parties might not want to wait for an eventual correction; for that reason the question of establishing an appellate body entrusted with the handling of investment disputes frequently recurs. The United States and Chile included in their 2004 Free Trade Agreement a placeholder for a bilateral appellate body45 and similar provisions were included in subsequent US agreements as well.46 Soon thereafter ICSID proposed establishing an appellate body within ICSID.47 Notwithstanding that early attention, there appears to be little political appetite for establishing an appellate body, though 42 See Meg Kinnear, ‘NAFTA at Fifteen – A View from ICSID’ in Emmanuel Gaillard and Frédéric Bachand (eds), Fifteen Years of NAFTA Chapter 11 Arbitration (JurisNet, 2011) 21, 27–32. 43 See, e.g., Andrea K. Bjorklund, ‘Investment Treaty Arbitral Decisions as Jurisprudence Constante’, in Colin Picker, Isabella Bunn, and Douglas Arner (eds), International Economic Law: The State and Future of the Discipline (Hart Publishing, 2008) 265–280; Gabrielle Kaufmann-Kohler, ‘Arbitral Precedent: Dream, Necessity or Excuse?’ (2007) 23 Arb. Int’l 357–378; Jan Paulsson, ‘Awards – and Awards’ in Andrea K. Bjorklund, Ian Laird, and Sergey Ripinsky (eds), Investment Treaty Law: Current Issues III (BIICL, 2009) 97–104; Christoph Schreuer, ‘Diversity and Harmonisation of Treaty Interpretation in Investment Arbitration’ (2006) 3 TDM 1–24; Christoph Schreuer and Matthew Weiniger, ‘A Doctrine of Precedent?’ in Peter Muchlinski, Federico Ortino, and Christoph Schreuer (eds), Oxford Handbook of International Investment Law (Oxford University Press 2008) 1108–1206. 44 Glamis Gold Corp. v. United States, UNCITRAL (NAFTA), Award, 8 June 2009, p. 6, n. 11. 45 Chile–United States Free Trade Agreement (n. 5). 46 U.S.–Central American Free Trade Agreement, entered into force between 2006 and 1 January 2009, available at http://www.ustr.gov/sites/default/files/uploads/agreements/cafta/ asset_upload_file328_4718.pdf, Annex 10-F; Barton Legum, ‘The Introduction of an Appellate Mechanism: the U.S. Trade Act of 2002’, in Emmanuel Gaillard and Yas Banifatemi (eds), Annulment of ICSID Awards (JurisNet, 2004) 289, 291–292. 47 Andrea K. Bjorklund, ‘The Continuing Appeal of Annulment: Lessons from Amco Asia and CME’, in Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases

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the European Union has sought input about the idea in the course of its 2014 consultations on investor-State dispute settlement. d) Frivolous Claims Provisions

US investment agreements, as well as the ICSID Convention Arbitration 37 Rules and the ICSID Additional Facility Rules, now permit respondents to object that claims are manifestly without legal merit and generally encourage a tribunal to address those objections preliminarily and in an expedited manner. While it is possible that those so-called ‘frivolous claims’ provisions would have made their way into some investment agreements in any event, it is not farfetched to trace their genesis to early Chapter Eleven cases. In the year 2000 in the Methanex case, the third NAFTA case to be brought against the United States, the United States argued that the case should be dismissed because Methanex ‘has not – and cannot – identify any substantive standard of customary international law implicated by the measures here, its claim under Article 1105(1) is inadmissible.”48 This was, effectively, a request for dismissal based on failure to state a claim for which relief can be granted.49 The tribunal dismissed these objections. Under the UNCITRAL Arbitration Rules, the tribunal could dismiss the claim for lack of jurisdiction, but the tribunal declined to find that jurisdictional objections included those based on admissibility, under which rubrique it placed the argument of the United States.50 According to the Methanex tribunal, the United States was effectively seeking a definitive interpretation of the relevant NAFTA provisions, which were questions for the merits.51 The United States amended its 2004 Model BIT to include a provision on pre- 38 liminary objections. ‘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 favor of the claimant may be made under Article 34 [the latter being the article concerning awards].’52 The provision is now in US investment treaties and in the investment chapters of US

48 49

50 51 52

from the ICSID, NAFTA, Bilateral Treaties, and Customary International Law (Cameron May, 2005) 471, 510–511. Methanex Corp. v. United States, UNCITRAL (NAFTA), Statement of Defense of respondent United States of America, 10 August 2000, para. 142. U.S. Federal Rule of Civil Procedure 12(b)(6). The Methanex tribunal stated: ‘The USA’s challenges to admissibility are based upon the legal submission that, even assuming all the facts alleged by Methanex to be true, there could still never be a breach of the individual provisions pleaded by Methanex (...)’, Methanex Corp. v. United States, UNCITRAL (NAFTA), Partial Award of the Tribunal on Jurisdiction, 7 August 2002, para. 109. Methanex Corp. v. United States, UNCITRAL (NAFTA), Partial Award of the Tribunal on Jurisdiction, 7 August 2002, para. 124. Ibid., paras. 120–124. 2004 U.S. Model BIT (n. 9) Art. 28(4).

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free trade agreements. The revisions to the ICSID Convention Arbitration Rules and the ICSID Additional Facility Rules lead to a similar result: A party may, no later than 30 days after the constitution of the Tribunal, and in any event before the first session of the Tribunal, file an objection that a claim is manifestly without merit. The party shall specify as precisely as possible the basis for the objection. The Tribunal, after giving the parties an opportunity to present their observations shall, at its first session or promptly thereafter, notify the parties of its decision on the objection. The decision of the Tribunal shall be without prejudice to its authority to decide on other objections that the parties may make in the course of the proceedings.53

39

The ‘frivolous claims’ provisions have played some role in cases submitted under the Dominican Republic–Central American Free Trade Agreement and in cases brought under the ICSID Convention Arbitration Rules.54 4. NAFTA’s Development of Substantive Protections

40

The three most important substantive protections in NAFTA have been the requirement to accord to covered investors and their investments national treatment, the requirement to accord covered investments the minimum standard of treatment, and the requirement not to expropriate covered investments except upon payment of prompt, adequate, and effective compensation.55 NAFTA also contains a robust prohibition against performance requirements which is not commonly found in very many treaties; in practice, however, it has not played a significant role in very many cases,56 though its importance may be growing as two recent Canadian cases feature performance requirements.57 a) National Treatment

NAFTA’s national treatment obligation protects investors who are seeking to make an investment as well as those who have actually succeeded. It is thus a ‘pre-establishment’ obligation by which the NAFTA Parties have limited their ability to exclude investors from the other NAFTA countries from their markets. 42 Notwithstanding this openness, each Party took reservations to the national treatment obligation. All three Parties limited their obligations with respect to certain economic sectors.58 Canada and the United States included reservations 41

53 ICSID Convention Arbitration Rules, Art. 41(5); ICSID Additional Facility Arbitration Rule 45(6). 54 See generally Michele Potestà and Marija Sobat, ‘Frivolous Claims in International Adjudication: A Study of ICSID Rule 41(5) and of Procedures of Other Courts and Tribunals to Dismiss Claims Summarily’, (2012) 3 J. Int’l Disp. Settlement 137–168. 55 For a fuller exposition of these obligations, see Chapter 8, Standards of Protection, in this volume. 56 Meg Kinnear, Andrea Bjorklund, and John Hannaford (n. 4) at 1106.10–1106.18. 57 Canada was found to have violated Article 1106 in the Mobil Murphy case. Mobil Oil Investments Canada Inc. and Murphy Oil Co. v. Canada, ICSID Case No. ARB(AF)/07/4 (NAFTA), Decision on Liability and on Principles of Quantum, 22 May 2012. A performance requirement is at the heart of the recently filed notice of intent challenging Ontario’s feed-in tariff. Mesa Power Group LLC v. Canada, Notice of Intent to Submit a Claim to Arbitration, 6 July 2011.

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preserving their ability to operate programmes that accord preferential treatment to historically disfavoured peoples.59 The Agreement’s treatment of sub-national government measures is of some 43 interest. Each Party excluded existing non-conforming measures taken by local governments (below the provincial level).60 NAFTA initially called for the Parties to list within the first two years of the Agreement’s entry into force those non-conforming provincial government measures they desired to maintain. In practice, however, the lists were not complete within the two-year period and the Parties, by exchange of letters, agreed to exclude all existing provincial measures from the national treatment obligation.61 Although existing non-conforming measures maintained by sub-national government units were excluded from the national treatment obligation, new measures were made subject to the discipline of the treaty. The extent of those obligations is less than clear, however, given the somewhat ambiguous language of Article 1102(3), which obligates provincial governments to give treatment no less favourable than the ‘most favorable treatment accorded, in like circumstances, by that state or province to investors, and to investment of investors, of the Party of which it forms a part’. This language gives rise to three potential interpretations. The first is that the provincial government may treat in-province investors or investments more favourably than anyone else, but that it must accord a foreign investor, or its investment, the best treatment accorded to an investor or an investment from another province in the same State. The second possible interpretation is that a foreign investor, or its investment, is entitled to the best treatment accorded to any domestic investor or investment, whether that entity is from within or without the province. A third way to read the provision is that it was meant to clarify that a province is obliged to give the best treatment available under its own laws, but is not obliged to give treatment available under the laws of a different province if that would be more favourable. This third interpretation does not necessarily conflict with either of the first two. The advantage to the first and third interpretations is that they give meaning to the provision in accordance with the principle of effet utile; the second interpretation is redundant as under principles of State responsibility the local governments would have the same obligations as the central government unless the treaty specified otherwise. The 2004 US Model BIT altered the provision is such a way as to suggest that the provincial government is required only to apply its own laws as they relate to out-of-province

58 In Annex I, the parties took reservations with respect to existing non-conforming measures. In Annex II, the parties identified sectors and subsectors in which they reserved the right to enact future non-conforming measures. These sectors include areas such as telecommunications services for Canada and Mexico and newspaper publishing for the United States. These are but a few examples; the exceptions are quite numerous and are set out in the respective countries’ annexes. 59 NAFTA Annex II, at II-C-1; NAFTA Annex II, II-U-6. 60 NAFTA Art. 8(1)(a)(iii). 61 Meg Kinnear, Andrea Bjorklund, and John Hannaford (n. 4) at 1108.13.

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investors, or their investments.62 The 2003 Canada Model FIPA is to similar effect.63 44 Many NAFTA cases have featured allegations of national treatment violations – much more so than under any other agreement.64 NAFTA panels have grappled with three key issues. The first is that the national treatment obligation prohibits both de jure and de facto discrimination on the basis of nationality. The three NAFTA State Parties have repeatedly emphasised this latter point.65 Thus, mere difference in treatment is not enough to sustain a claim; rather, the difference must be such as to suggest that nationality was the reason for the differential treatment. Claimants have argued, however, that a disparate effect alone could be enough to sustain a claim, and some tribunals seem to have accepted this proposition,66 though most have rejected it.67 45 The second key issue is that the question of ‘like circumstances’ is likely to be outcome-determinative because of the relative nature of national treatment; a great deal thus hinges on a tribunal’s assessment of whether or not the foreign investor, or its investment, is like its domestic counterpart. The foreign investor, or its investment, need to be treated only as well as a domestic investor or investment in like circumstances. Differential treatment is a violation only if the comparators should be given the same treatment. For example, in Methanex v. United States the Canadian methanol producer needed to demonstrate that it was ‘like’ the ethanol producers who received more favourable treatment. The tribunal determined that Methanex was in like circumstances with other methanol producers, all of whom had received the same treatment.68 Thus, Methanex’s claim failed because it was not ‘like’ the entity that received the allegedly more favourable treatment. The significance of the ‘like circumstances’ finding means that determining the appropriate comparator is all important. In most cases claimants will focus on whether the comparators compete in the same general economic sector, while respondents will focus on the context peculiar to the policies that are sought to be furthered in order to justify differential treatment. 46 The third issue is the question of the burden of proof.69 Many tribunals have adopted a burden-shifting approach, such that after the claimant establishes an initial case of differential treatment between entities in like circumstances, the 62 2004 US Model BIT (n. 9) Art. 3.3. The 2012 U.S. Model has the same provision. 63 Canadian Model FIPA (n. 9) Art. 3.3. 64 Andrea K. Bjorklund, ‘National Treatment’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 28. In some cases a national treatment claim might become part and parcel of an ‘arbitrary and discriminatory’ treatment claim. Ibid., at 33–34. 65 Pope & Talbot, Inc. v. Canada, UNCITRAL (NAFTA), Award on the Merits of Phase II, 10 April 2001, para. 79. 66 Ibid.; S.D. Myers Inc. v. Canada, UNCITRAL (NAFTA), Partial Award, 13 November 2000, paras. 161–162. 67 Meg Kinnear, Andrea Bjorklund and John Hannaford (n. 4) at 1102.41. 68 Methanex Corporation v. United States, UNCITRAL (NAFTA), Final Award, 7 August 2005, Part IV, Ch. B, paras 18, 22. 69 Meg Kinnear, Andrea Bjorklund, and John Hannaford (n. 4) at 1102.41.

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burden shifts to the respondent to offer a non-discriminatory reason for the difference in treatment. The standard for establishing a prima facie case is not clear; does any differential treatment suffice, or must the difference give rise to an inference of nationality-based discrimination?70 Yet burden shifting makes sense given that the State is likely to have the evidence that would justify the treatment by identifying the legitimate public policy reasons for it and thereby rebut the presumption established by the investor. b) Minimum Standard of Treatment

NAFTA Article 1105 is entitled ‘minimum standard of treatment’, though the 47 body of the provision does not refer again to the minimum standard, but requires the State Parties to accord treatment ‘in accordance with international law, including fair and equitable treatment and full protection and security’. The 2001 Notes of Interpretation, discussed in part 2.a) above, established that Article 1105 requires treatment only in accordance with the international minimum standard at customary international law, and does not permit the importation of other international law obligations (whether found in the NAFTA or elsewhere). This ended the debate about the scope of Article 1105 itself (still unresolved is whether the most favoured nation provision might be used to import a more favourable, free-standing fair and equitable treatment provision from another investment treaty).71 Even if one accepts that the appropriate benchmark against which to measure the State’s behaviour is the international minimum standard, however, one still has to answer the question of what the international minimum standard entails, a question not answered in the Notes of Interpretation. The NAFTA Parties have advocated the adoption of a baseline level of pro- 48 tection, regardless of the treatment the host State accorded to its own or thirdcountry investors.72 Its content is often described by reference to a case decided by the US–Mexico Claims Commission in 1926, Neer v. Mexico, in which the Commission described the standard as prohibiting conduct that amounts to ‘an 70 Andrea Bjorklund (n. 64) 57. 71 Several claimants have attempted to use the most favoured nation provision in this way. In those cases tribunals have sidestepped the issue by testing the State’s measures under both the international minimum standard and a free-standing fair and equitable treatment standard, and concluding the State’s treatment passed muster in either case. Meg Kinnear, Andrea Bjorklund, and John Hannaford (n. 4) at 1103.9–1103.11b. The NAFTA Parties have argued, inter alia, that the specificity of the Notes of Interpretation overrides the ability of the MFN clause to import a different provision. See, e.g., Pope & Talbot Inc. v. Canada, UNCITRAL (NAFTA), Letter from Principal Counsel, Trade Law Division to NAFTA Chapter Eleven Tribunal, 10 August 2001; Pope & Talbot Inc. v. Canada, UNCITRAL (NAFTA), Letter from Meg Kinnear to the Tribunal, 1 October 2001; Chemtura Corporation v. Canada, UNCITRAL (NAFTA), Submission of the United States of America, 31 July 2009; Chemtura Corporation v. Canada, UNCITRAL (NAFTA), Submission of Mexico Pursuant to Art. 1128 of NAFTA, 31 July 2009. 72 See, e.g., Edwin Borchard, ‘The Minimum Standard of the Treatment of Aliens’ (1940) 38 Mich. L. Rev. 445–461; J. Christopher Thomas, ‘Reflections on Article 1105 of NAFTA: History, State Practice and the Influence of Commentators’ (2002) 17 ICSID Rev.–FILJ 21–101.

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outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency’.73 In two recent cases, tribunals diverged in their conclusions. The tribunal in the first case, Glamis Gold v. United States, concluded that the claimant had not adduced evidence to show that customary international law (aside from excluding any requirement that a claimant prove ‘bad faith’ on the part of the offending State) had changed since 1926.74 Even though the Neer formulation was its starting point, however, the Glamis tribunal suggested that the kinds of treatment that would ‘shock the conscience’ have changed over the years.75 The tribunal in Merrill & Ring v. Canada took a rather different view of the matter.76 It concluded that the international minimum standard has indeed evolved over the years with respect to matters involving the protection of business, trade, or investments.77 The Merrill & Ring tribunal described the standard as prohibiting conduct ‘that might infringe a sense of fairness, equity and reasonableness.’78 The tribunal would exclude from that more flexible standard matters related to ‘personal safety, denial of justice and due process’ as representative of the earlier, more stringent track of protection exemplified by the Neer line of cases. c) Expropriation 49

Although there have been a few cases of direct expropriation submitted to NAFTA Chapter 11 tribunals,79 claims of indirect or regulatory expropriation have been much more frequent. Article 1110 provides: No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (‘expropriation’), except: (a) (b) (c) (d)

for a public purpose; on a non-discriminatory basis; in accordance with due process of law and Article 1105(1); and on payment of compensation in accordance with paragraphs 2 through 6.

73 Neer v. Mexico, 4 RIAA (1926) 60, Mexico General Claims Commission, Opinion of 15 October 1926. 74 Glamis Gold Ltd. v. United States, UNCITRAL (NAFTA), Award, 8 June 2009, paras. 614– 626. 75 Ibid., paras. 604, 612, 613. 76 Merrill & Ring Forestry LP v. Canada, UNCITRAL (NAFTA), Award, 31 March 2010, paras. 192–213. 77 Ibid., paras. 205–213. The Merrill & Ring tribunal cited other NAFTA tribunals as having adopted an evolutionary approach. See, e.g., Mondev International Ltd v. United States, ICSID Case No. ARB(AF)/99/2 (NAFTA), Award, 11 October 2002, paras. 116–125; ADF Group Inc. v. United States, ICSID Case No. ARB(AF)/00/1, Award, 9 January 2003, paras. 181–184; 190; Waste Management Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3 (NAFTA), Award, 30 April 2003, para. 93; GAMI Investments Inc. v. Mexico, UNCITRAL (NAFTA), Final Award, 15 November 2004, para. 95. 78 Merrill & Ring (n. 74) para. 210. 79 Ibid., paras. 116–133; AbitibiBowater Inc. v. Canada, UNCITRAL (NAFTA), Notice of Arbitration and Statement of Claim, 25 February 2010, paras. 87–93.

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Of early interest in NAFTA jurisprudence was whether the phrase ‘measures 50 tantamount to expropriation’ meant something more than creeping or indirect expropriation. The phrasing of the sentence suggests that it could be – ‘measures tantamount to’ is presented as an addition to indirect expropriation. Yet ‘tantamount to’ means ‘equivalent to’, rather than ‘in addition to’ or ‘approaching’.80 Tribunals have uniformly rejected the argument that the ‘tantamount to’ language requires compensation in the event of an interference with investments that falls short of a full expropriation.81 Nonetheless, some early cases suggested a relatively expansive view of the types of property interests that could be the subject of expropriation claims. In Metalclad v. Mexico, for example, the tribunal held that ‘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’ constituted an expropriation.82 In obiter dicta the Pope & Talbot v. Canada tribunal suggested that restriction of market access could be an expropriation.83 At the time the Pope & Talbot tribunal made its decision the Methanex v. United States dispute was under way. Methanex involved a challenge to California’s ban on the gasoline additive methyl tertiary-butyl ether, and the argument that removal of a market constituted an expropriation was a significant component of the claimant’s case.84 In fact none of those cases found that the conduct of the State amounted to an expropriation. Nonetheless the cases raised concerns about whether the NAFTA parties had 51 potentially more liability for regulations taken to protect public health and the safety and the environment than they had intended. Both the United States and Canada amended their model investment agreements to address the State’s ability to exercise its ‘police powers’ without triggering any obligation to compensate an investor for an expropriation. The US Model BIT (2004 and 2012) is illustrative. It provides that a tribunal should consider in assessing whether a regulatory act amounts to an expropriation: (1) the economic impact of the government action, although it emphasised that an adverse economic effect alone is insufficient to establish that a taking has occurred; (2) the extent to which the government action interfered with legitimate investment-backed expectations; and (3) the character of the government action.85 These criteria mirror those set

80 According to the Oxford English Dictionary, tantamount means ‘as much; that amounts to as much; that comes to the same thing; of the same amount; equivalent’. Oxford English Dictionary (Oxford University Press, 1989) Vol. XVII, 619. 81 Pope & Talbot Inc. v. Canada, UNCITRAL (NAFTA), Interim Merits Award, 26 June 2000, paras. 103–104; Metalclad Corporation v. Mexico, ICSID Case No. ARB(AF)/97/1 (NAFTA), Award, 2 September 2000, paras. 104, 107, 110, 112; SD Myers Inc v. Canada, UNCITRAL (NAFTA), Partial Award, 13 November 2000, paras. 285–286. 82 Metalclad Corp. v. Mexico (n. 81) para. 103. 83 Pope & Talbot, Inc. v. Canada (n. 65) paras. 96–98. 84 Methanex Corp. v. United States, UNCITRAL (NAFTA), Final Award of the Tribunal on Jurisdiction and Merits, 9 August 2005, Part IV, Chapter D, 1–3.

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out by the US Supreme Court in the Penn Central case for considering the effect of regulation in domestic takings law.86 52 The US Model BITs (and the 2003 Canadian Model FIPA) contain a second limiting provision which specifies that, 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.87 5. Conclusion 53

This is a short overview of some of the key features of a complex and multifaceted agreement. NAFTA’s influence on investment arbitration is palpable due partly to the transparency norms that make not only awards but also procedural orders and party memorials readily available to the general public and partly to the robust response of Canada and the United States in particular to early decisions rendered against them. Some of the more defensive positions adopted in the two countries’ model agreements have found their way into subsequent US and Canadian investment agreements88 and have also influenced the treaty practice of other States as well.89 Yet all three NAFTA States continue actively to negotiate investment agreements, suggesting that negative reactions among commentators, civil society, and some governments have not yet caused the NAFTA State Parties to conclude that the agreements are not worth pursuing.

85 2004 and 2012 U.S. Model BITs (n. 9) Annex B. The language in the Canadian Model FIPA (2003) is almost identical. Canadian Model FIPA (n. 9) Annex B.13(1). 86 Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978). 87 2004 and 2012 U.S. Model BITs (n. 9) Annex B. The 2003 Canadian Model FIPA (n. 9) Annex B.13(1)(c), provides: ‘Except in rare circumstances, such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation.’ 88 Mexico has a Model BIT (December 2008) that it has not made public but that it generously shares with negotiators and scholars. Mexico’s model contains some features found in NAFTA (for example, a consolidation provision), but does not generally demonstrate a reaction to Mexico’s NAFTA experience. 89 See UNCTAD, Investor-State Dispute Settlement (Pink Series) (United Nations, 2014) for an overview of dispute settlement provisions included in recent investment agreements.

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C. The ASEAN Comprehensive Investment Agreement and ‘ASEAN Plus’ – The Australia–New Zealand Free Trade Area (AANZFTA) and the PRC–ASEAN Investment Agreement

Vivienne Bath and Luke Nottage 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) ASEAN Comprehensive Investment Agreement and the ASEAN Plus Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Substantive Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Investment Encouragement and Liberalisation . . . . . . . . . . . . . . . . . . . b) Investment Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) General Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Dispute Resolution and Investor-State Arbitration. . . . . . . . . . . . . . . . . . . a) Initiating Investor-State Dispute Settlement Procedures . . . . . . . . . b) Arbitral Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Governing Law and Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) General Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Conclusions and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 9 12 12 24 30 33 35 42 50 53 55

Literature: ASEAN Secretariat, ASEAN Investment Report 2011, Sustaining FDI Flows in a Post-Crisis World, Jakarta, November 2011 (ASEAN Investment Report 2011); Vivienne Bath, ‘ASEAN: The Liberalization of Investment Through Regional Agreements’ in Leon E Trakman and Nicola W. Ranieri (eds), Regionalism in International Investment Law (Oxford University Press, 2013) 182–213; Vivienne Bath and Luke Nottage (eds), Foreign Investment and Dispute Resolution Law and Practice in Asia (Routledge, 2011); Kent Calder and Min Ye, The Making of Northeast Asia (Stanford University Press, 2010); Diane Desierto, ‘ASEAN’s Constitutionalization of International Law: Challenges to Evolution under the new ASEAN Charter’ (2011) 49(2) Colum. J. Transnat’l L. 268–320; Chris Dixon, ‘The 1997 Economic Crisis, Reform and Southeast Asian Growth’ in Rajan Rasiah and Johannes Dragsbaek Schmidt (eds), The New Political Economy of Southeast Asia (Elgar, 2010); Michael EwingChow and Geraldine R. Fischer, ‘ASEAN IIAs: Conserving Regulatory Sovereignty While Promoting the Rule of Law?’ (2011) 5 TDM 1–12; Carsten Fink and Martín Molinuevo, ‘East Asian Free Trade Agreements in Services: Key Architectural Elements’ (2008) 11(2) J. Int’l Econ. L. 263–311; Chin L. Lim, ‘East Asia’s Engagement with Cosmopolitan Ideals Under its Trade Treaty Dispute Provisions’ (2011) 56:4 McGill L. J. 821–862; Iain Maxwell and KayJannes Wegner, ‘The New ASEAN Comprehensive Investment Agreement’ (2009) 5(2) Asian Int’l Arb. J. 167–189; Philomena Murray, Regionalism and Community: Australia’s Options in the Asia-Pacific (Australian Strategic Policy Institute, 2010); Luke Nottage and Richard Garnett (eds), International Arbitration in Australia (Federation Press, 2010); Zewei Zhong, ‘The ASEAN Comprehensive Investment Agreement: Realizing a Regional Community’ (2011) 6(1) Asian J. Comp. L., Art. 4, 1–39.

1. Introduction a) Overview

The Association of South-East Asian Nations (ASEAN) was founded in 1967 1 and now comprises Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Viet Nam.1 It is the most elaborate and longstanding arrangement promoting economic integra-

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tion in the Asian region. Yet it is far less institutionalised than the EU, and ASEAN States tend to highlight their relative socio-economic diversity, as well as the strongly consensus-based approach to decision-making (one feature widely associated with the ‘ASEAN Way’). Political integration and legal harmonisation within ASEAN, let alone the Asian region more generally, has certainly been far less prominent than market-led economic regionalisation. The latter has been centred on pan-Asian production chains underpinned by burgeoning FDI from Europe and the US, but also increasingly from other parts of Asia.2 2 However, liberal market access to Western markets also provided an impetus to capacity-building and voluntary measures among Asia-Pacific States to enhance free trade and investment, as well as some regulatory convergence within the Asian region. Another important development in this respect was the establishment in 1989 of the Asia Pacific Economic Cooperation (APEC) forum, which has actively promoted investment liberalisation.3 APEC now encompasses the ten ASEAN member States plus 11 other jurisdictions – including the People’s Republic of China (PRC), the US, Australia and New Zealand.4 3 Predominantly market-led economic integration within Asia also reflected a relative lack of institutionalised cooperation between the major economic powers in North Asia: Japan, Korea and the PRC. These States – along with India, the other potential economic powerhouse – also had quite different political systems as well as levels of economic development. 4 However, these regional and global circumstances have changed significantly over the last decade, prompting greater institutionalisation within ASEAN and more generally within the Asian region.5 Geopolitically, much more extensive cooperation has emerged between Japan, Korea and China over the last decade. China’s market liberalisation initiatives and rapid economic growth, in particu1 Association of South-East Asian Nations, established by the signing of the ASEAN Declaration (Bangkok Declaration) by Malaysia, Indonesia, the Philippines, Singapore and Thailand, 8 August 1967, 1331 UNTS 243, available at http://www.aseansec.org/1212.htm. These States were subsequently joined by Brunei Darussalam (1984), Viet Nam (1995), Lao PDR and Myanmar (1997), and Cambodia (1999). For further information, see the ASEAN website, available at http://www.aseansec.org/about_ASEAN.html. 2 Chris Dixon, ‘The 1997 Economic Crisis, Reform and Southeast Asian Growth’ in Rajan Rasiah and Johannes Dragsbaek Schmidt (eds), The New Political Economy of Southeast Asia (Elgar, 2010) 103–138; Philomena Murray, Regionalism and Community: Australia’s Options in the Asia-Pacific (Australian Strategic Policy Institute, 2010), available at http:// www.aspi.org.au/publications/publication_details.aspx?ContentID=273&pubtype=. 3 See e.g. the APEC Investment Experts’ Group, information available at http://www.apec.org/ Home/Groups/Committee-on-Trade-and-Investment/Investment-Experts-Group. 4 See a list of the APEC member States, available at http://www.apec.org/About-Us/AboutAPEC/Member-Economies.aspx, and e.g. Hal Hill and Jayant Menon, ‘ASEAN Economic Integration: Features, Fulfilments, Failures and the Future’ (2010) 69 ADB Working Paper Series on Regional Economic Integration, 1–44, available at http://aric.adb.org/archives.php?section=0&subsection=workingpapers. 5 See Luke Nottage, ‘Asia-Pacific Regional Architecture and Consumer Product Safety Regulation for a Post-FTA Era’ (2009) 09/125 Sydney Law School Research Paper, 1–31, available at http://ssrn.com/abstract=1509810; Micah Burch and Luke Nottage, ‘Novel Treaty-Based Approaches to Resolving International Investment and Tax Disputes in the Asia-Pacific Region’

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lar, have dramatically increased the weight of North Asia in the world economy.6 Initiatives within ASEAN outlined below must therefore be considered in such broader context. The increasing role of the region also explains the interest shown by the US, Canada, Mexico and an increased number of Asia-Pacific States in participating in a broader-based Trans-Pacific Partnership Agreement (TPPA). This initiative derives from an FTA originally concluded in 2005 among Singapore, Brunei, New Zealand and Chile.7 The first aim of ASEAN, as set out in the ASEAN Declaration, was to expand 5 trade. This aim now encompasses the objective of encouraging and increasing investment within the ASEAN region, and between the ASEAN region and other countries around ASEAN. This was reflected in the signing in 1987 of the ASEAN Agreement for the Promotion and Protection of Investments (AAPPI or IGA)8 and in 1998 of the Framework Agreement on the ASEAN Investment Area (AIA),9 which established basic principles between the ASEAN States regarding the liberalisation, promotion and protection of investment within ASEAN.10 In 2007, the ASEAN States adopted the ASEAN Charter,11 pursuant to which 6 ASEAN decided to create the ASEAN Political-Security Community, the ASEAN Economic Community and the ASEAN Socio-Cultural Community. The aim of the Blueprint for the ASEAN Economic Community12 (the Blueprint) is the establishment of a single ASEAN economic community by 2015, an essential component of which is the free flow of investment and sig-

6 7

8

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10 11 12

(2011) 11/66 Sydney Law School Research Paper, 1–13, available at http://ssrn.com/ abstract=1938758. Kent Calder and Min Ye, The Making of Northeast Asia (Stanford University Press, 2010). See Trans-Pacific Strategic Economic Partnership (Trans-Pacific SEP), Agreement among Brunei Darussalam, Chile, New Zealand and Singapore, 2 August 2005, available at http:// www.mfat.govt.nz/downloads/trade-agreement/transpacific/main-agreement.pdf; also see the APEC 2011 Hawaii website, available at http://www.apec2011hawaii.com, regarding Canada and Mexico. Other new negotiating States are Australia, Malaysia, Peru and Viet Nam. Agreement among the Government of Brunei Darussalam, the Republic of Indonesia, Malaysia, the Republic of the Philippines, the Republic of Singapore and the Kingdom of Thailand for the Promotion and Protection of Investments, 15 December 1987, 27 ILM 612, available at http://www.aseansec.org/6464.htm, amended by the Protocol to Amend the ASEAN Agreement for the Promotion and Protection of Investments, 12 September 1996, available at http://www.asean.org/6465.htm. Framework Agreement on the ASEAN Investment Area, 7 October 1998, available at http:// www.asean.org/7994.pdf, amended by the Protocol to Amend the Framework Agreement on the ASEAN Investment Area, Ha Noi, 14 September 2001, available at http://www.asean.org/ 6467.htm. For comments on their limited success, see Muthucumaraswamy Sornarajah, ‘Review of Asian Views on Foreign Investment Law’ in Vivienne Bath and Luke Nottage (eds), Investment Law and Dispute Resolution Law and Practice in Asia (Routledge, 2011) 242–248. Charter of the Association of South East Asian States, Singapore, 20 November 2007, entered into force on 15 December 2008, available at http://www.aseansec.org/publications/ASEANCharter.pdf, Art. 9(1). Blueprint for the ASEAN Economic Community, 20 November 2007, available at http:// www.aseansec.org/5187-10.pdf. See also the information on the ASEAN website, available at http://www.aseansec.org/18757.htm.

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nificant improvements in the investment environment within ASEAN. Accordingly, in 2009, the ten ASEAN States signed the Comprehensive Investment Agreement (ACIA),13 which came into effect on 1 March 2012.14 The aim of ACIA is to create a detailed framework for mutual investment within the ASEAN region. 7 ASEAN has also entered into several FTAs with countries such as Japan, Korea, China, Australia–New Zealand and India, and since November 2012 ASEAN has been negotiating a Regional Comprehensive Economic Partnership (RCEP) agreement with all six countries.15 Of the existing FTAs, the ASEAN– Australia–New Zealand Agreement (AANZFTA)16 contains a detailed chapter dealing with the liberalisation of mutual investment. China has entered into an agreement relating specifically to investment with ASEAN (the PRC–ASEAN Agreement),17 and Korea has also negotiated and signed such an agreement (the Korea-ASEAN Agreement), although negotiations are continuing on the major substantive provisions. The ASEAN–Japan Comprehensive Economic Partnership Agreement (AJCEPA) is not fully in force and does not in any case include an Investment Chapter, although Japan is now keen to add one.18 For the purpos13 ASEAN Comprehensive Investment Agreement, 26 February 2009, available at http:// www.asean.org/documents/FINALSIGNED-ACIA.pdf. 14 See Phusadee Arunmas, ASEAN Pact due tomorrow, 29 February 2012, available at http:// www.bangkokpost.com/business/economics/282103/asean-pact-due-tomorrow. The Reservations lists to ACIA have also been published on the ASEAN website, and are available at http://www.asean.org/20632_a.htm. See also Vivienne Bath, ‘ASEAN: The Liberalization of Investment Through Regional Agreements’ in Leon E. Trakman and Nicola W. Ranieri (eds), Regionalism in International Investment Law (Oxford University Press, 2013) 182–213. 15 See Agreement on Comprehensive Economic Partnership among Member States of the Association of Southeast Asian Nations and Japan, 14 April 2008, entered into force 1 December 2008, available at http://www.mofa.go.jp/policy/economy/fta/asean/agreement.pdf; Framework Agreement on Comprehensive Economic Cooperation Between the Republic of India and the Association of Southeast Asian Nations, Bali, 8 October, 2003, available at http:// www.asean.org/15278.htm; Agreement on Investment under the Framework Agreement on Comprehensive Economic Cooperation among the Governments of the member countries of the Association of Southeast Asian Nations and the Republic of Korea, Jeju-Do, Republic of Korea, 2 June 2009, available at http://www.aseansec.org/22973.pdf. For signatories, see ASEAN website, Table of ASEAN Treaties/Agreements and Ratification, as of May 2011, available at http://222.aseansec.org/Ratifcation.pdf. On RCEP, see http://www.dfat.gov.au/fta/ rcep. 16 Agreement establishing the ASEAN–Australia–New Zealand Free Trade Area, Cha-am, Phetchaburi, Thailand, 27 February 2009, entered into force 1 January 2010, [2010] ATS 1, Ch. 11. 17 Agreement on Investment of the Framework Agreement on Comprehensive Economic Cooperation between the People’s Republic of China and the Association of Southeast Asian Nations, Bangkok, 15 August 2009, available at http://fta.mofcom.gov.cn/inforimages/ 200908/20090817113007764.pdf. 18 The ASEAN–Japan Plan of Action 2011–2015, approved at the 14th ASEAN–Japan Summit in Bali, Indonesia, 18 November 2011, available at http://www.aseansec.org/26719.htm, adopts as an action item (item 2.1.2) striving for conclusion of negotiations on trade in services and investment under the AJCEPA. Japan anyway already has bilateral FTAs with most ASEAN member States that contain Investment Chapters. See also generally Shotaro Hamamoto and Luke Nottage, ‘Foreign Investment In and Out of Japan: Economic Backdrop, Domestic Law, and International Treaty-Based Investor-State Dispute Resolution’ (2010) Syd-

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es of this chapter, AANZFTA, the PRC–ASEAN Agreement and the Korea– ASEAN Agreement – will be referred to as the ASEAN Plus Agreements. This chapter discusses the provisions regarding investment and resolution of 8 investment disputes in ACIA and the ASEAN Plus Agreements. In doing so, the chapter assesses the commitments of member States regarding investment liberalisation, the approaches taken to substantive obligations to protect investment, and investor-State dispute settlement procedures (especially investor-State arbitration). b) ASEAN Comprehensive Investment Agreement and the ASEAN Plus Agreements

The purpose of ACIA is not only to consolidate and replace the terms of ex- 9 isting investment agreements19 but also to establish new principles to facilitate the free flow of investment in (and into) the ASEAN region. The main objectives of ACIA20 are the progressive liberalisation of the investment regimes of member States (Art. 1(a)), as well as joint promotion of the ASEAN region ‘as an integrated investment area’ (Art. 1(d)), with priority given to manufacturing, agriculture, fisheries, forestry and mining,21 investment protection (Art. 1(b)), the improvement of transparency and predictability of investment rules, regulations and procedures (Art. 1(c)), and promotion of the facilitation of investment by investors of a member State in the territory of another member State (Arts. 1(e), 24, 25 and 26). ACIA’s drafters intended to draw on ‘international best practice’ as well as on the existing agreements.22 This was considered to include the investor-friendly provisions of the 2004 US Model BIT,23 NAFTA,24 the OECD Guidelines for Multinational Enterprises25 and UNCTAD’s assessment on international investment agreements, as well as provisions in the ASEAN investment agreements with China, Korea and Australia–New Zealand, which were also being drafted at that time.26

19 20 21 22 23 24 25 26

ney Law School Research Paper No. 10/145, 1, 34, available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1724999. ACIA, Preamble. ACIA Art. 1. ACIA Art. 3. ASEAN, Highlights of the ASEAN Comprehensive Investment Agreement (ACIA), 26 August 2008, available at http://www.asean.org/21885.ppt. Treaty between the Government of the United States of America and the Government of [Country] concerning the encouragement and reciprocal protection of investment, released 5 February 2004, available at http://www.state.gov/documents/organization/117601.pdf. North America Free Trade Agreement, 17 December 1992, 32 ILM 296, entered into force 1 January 1994, available at http://www.nafta-sec-alena.org/en/view.aspx?x=343. OECD Guidelines for Multinational Enterprises, available at http://www.oecd.org/document/ 28/0,3746,en_2649_34889_2397532_1_1_1_1,00.html. Zewei Zhong, ‘The ASEAN Comprehensive Investment Agreement: Realizing a Regional Community’ (2011) 6(1) Asian J. Comp. L., Art. 4, 1–39; see also ASEAN, Highlights of the ACIA (n. 22).

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The AANZFTA came into force on 1 January 2010 regarding Australia, Brunei, Malaysia, Myanmar, New Zealand, the Philippines, Singapore and Viet Nam.27 It came into effect in relation to Thailand on 12 March 2010, for Cambodia and the Lao People’s Democratic Republic on 4 January and 1 January 2011 and for Indonesia on 10 January 2012.28 Chapter 11 covers principles regarding the protection and promotion of investment between the ASEAN States and each of Australia and New Zealand, as well as providing for dispute resolution (including investor-State arbitration). Under Chapter 18, Art. 2 of AANZFTA, States party to the agreement are free to enter into other agreements between themselves regarding trade or investment. 11 The PRC–ASEAN Agreement was signed in 200929 pursuant to the Framework Agreement on Comprehensive Economic Cooperation signed in November 2002 to establish the ASEAN–China Free Trade Area (ACFTA). It came into force on 1 January 2010.30 The stated objectives of the PRC–ASEAN Agreement, as set out in Art. 2, are the liberalisation, promotion and protection of investment. The Korea–ASEAN Agreement on Investment was signed on 2 June 2009 and all parties had lodged their notifications pursuant to Art. 31 by the end of October 2010.31 10

2. Substantive Issues a) Investment Encouragement and Liberalisation 12

An important aim of ACIA is liberalisation of the intra-ASEAN investment regime, and liberalisation for foreign investors. This builds on the provisions particularly of the AIA, Schedule III of which set out a liberalisation programme which aimed to ensure that ASEAN States would review their rules and regulations regarding investment, as well as rules which might limit investment, such as licensing conditions, rules limiting access to domestic finance and so on. However, the liberalisation plans in the AIA had only limited success. Jarvis comments under the AAPPI and AIA individual States continued to maintain competing and conflicting policies, and the ability to restrict and control investment through a variety of screening mechanisms. Although the AAPPI attempt27 See ASEAN Secretariat, Agreement on Australia–New Zealand FTA Enters into Force, 12 January 2010, available at http://www.asean.org/24194.htm. 28 ASEAN–Australia–New Zealand Free Trade Area website, Signing and Entry into Force, available at http://aanzfta.asean.org/index.php?page=faq-on-signing-entry-into-force; Australian Government, Department of Foreign Affairs and Trade, ASEAN–Australia–New Zealand FTA (AANZFTA) enters into force for Indonesia, undated, available at http:// www.dfat.gov.au/fta/aanzfta/index.html. 29 See n. 17. 30 Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Cooperation between the People’s Republic of China and the Association of Southeast Asian Nations, Vientiane, 9 November 2004, available at http://fta.mofcom.gov.cn/dongmeng/annex/ xieyi2004en.pdf. ASEAN Secretariat, China Ready to Accommodate on ASEAN–China FTA, 22 January 2010, available at http://www.asean.org/24209.htm. 31 See n. 15.

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ed to establish the principle of liberalisation for investment in all sectors, this was limited in the AIA to liberalisation of investment only in the case of specified industries. He describes the resulting policy as encouraging intra-ASEAN investment while engaging in regional protectionism.32 In contrast, an important purpose of ACIA’s liberalisation policy is to attract 13 foreign investment from States outside the ASEAN region, not merely to facilitate investment among ASEAN States.33 The ASEAN Secretariat has called for more steps to encourage foreign investment in ASEAN.34 It is therefore significant that Art. 19 of ACIA (Denial of Benefits) provides that a State may only deny the benefits of the agreement to an investor that is a juridical person of an ASEAN State but which is owned or controlled by an investor of a non-member State if the investor has no substantial business operations in the home State (subject to certain limitations regarding misrepresentation).35 (The concept of ‘ownership’ is determined according to the laws of ‘each Member State,’ while the concept of control is defined in ACIA (Art. 19(3)).36) ACIA grants national treatment and most favoured nation (MFN) treatment to 14 investors and investments from ASEAN States and, as noted above, entities that are set up and maintain substantial business operations in an ASEAN State. ACIA and the ASEAN Plus Agreements provide that only investments made 15 in accordance with the laws, regulations and national policies of the host State will be accorded protection.37 The effect of this is potentially to provide an additional screening mechanism for investments, thus allowing for the imposition of restrictions notwithstanding the grant of national treatment or MFN benefits for the admission and establishment of investments. In addition, ACIA allows States to include a requirement that such investments must be specifically approved in 32 Darryl Jarvis, ‘Foreign Direct Investment and Investment Liberalization in Asia: Assessing ASEAN’s Initiatives’, Lee Kuan Yew School of Public Policy, National University of Singapore, Research Paper Series: LKYSPP08-002, 5 July 2008, available at http://ssrn.com/ abstract=1160074, 1, 16–19. See also ASEAN Secretariat, ASEAN Investment Report 2011, Sustaining FDI Flows in a Post-Crisis World, Jakarta, November 2011 (ASEAN Investment Report), 8. 33 ASEAN Investment Report (n. 32). 34 ASEAN Investment Report (n. 32) 25. 35 Similar provisions appear in AANZFTA (Ch. 11, Art. 11) and the PRC–ASEAN Agreement (Art. 15). In relation to Thailand’s position under ACIA, see Headnote List of Reservations, para. 8 (see footnote 14), which confirms that Thailand extends benefits under ACIA only to investors owned or controlled by a Member State. 36 ACIA Art. 19 (3): ‘A juridical person is (...) (b) “controlled” by an investor if the investor has the power to name a majority of its investors or otherwise to legally direct its actions.’ Both of the ASEAN Plus Agreements give special treatment to Thailand to make the determination of ownership and control and to the Philippines. The PRC–ASEAN Agreement allows Indonesia, Myanmar, the Philippines and Vietnam to define ownership and control under their domestic laws. 37 ACIA Art. 4(a), definition of ‘covered investment’, AANZFTA Art. 2, definition of ‘covered investment’. AANZFTA Art. 14(1) provides that nothing in AANZFTA Art. 4 (national treatment) prevents a party from adopting or maintaining a measure that requires special formalities in connection with covered investments, as long as the measures do not ‘substantially impair’ protections offered pursuant to Ch. 11.

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writing.38 Indeed, a major advance in ACIA is an Annex that adds procedures regarding specific approval in writing. That was an issue in dispute in Yaung Chi Oo Trading Pte. Ltd v. Myanmar,39 the first and only investor-State arbitration case decided under the ASEAN investment treaty system.40 16 Pursuant to Art. 3, ACIA applies to several listed sectors, including manufacturing, agriculture, fishery, forestry, mining and quarrying and services incidental to these, as well as other sectors agreed on by the parties. ACIA aims to liberalise investment by according national treatment and MFN treatment to investors and investments from other ASEAN States, including regarding admission and establishment of investments (Arts. 5 and 6). The drafters recognised, however, that ASEAN States would not agree to open up these sectors to investment in a totally unrestricted fashion. Art. 9 therefore provides that Art. 5 (National Treatment) and Art. 8 (Senior Management and Board of Directors) do not apply to existing measures or a renewal maintained by any level of government and notified to the ASEAN Secretariat. The member States committed to produce a single reservation list, which has already been completed and contains some significant limitations.41 Art. 10 deals with the modification of these commitments. The aim is total liberalisation by 2015.42 17 Subject to these reservations, ACIA Art. 5(a) provides that a State ‘shall accord to investors of any other Member State treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the admission, establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory’. Art. 5(b) has a similar provision regarding investments, and Art. 6 provides MFN treatment in respect of treatment accorded to ‘investors of any other Member State or a nonMember State with respect to the admission, establishment’ and so on of investments. Fn. 4 makes clear that MFN treatment does not apply to investor-State dispute settlement procedures, although it does apply to treatment otherwise accorded under existing and future arrangements. 18 The scope of these provisions is not fully reflected in the ASEAN Plus Agreements. The PRC–ASEAN Agreement does not extend national treatment to the admission and establishment of investments (Art. 4). It does accord MFN to the 38 See also Korea–ASEAN Agreement, Art. 1(c) and Annex 1 (Approval in Writing). The PRC– ASEAN Agreement provides that investments in Thailand must be specifically approved in writing in accordance with its domestic laws and policies. The name and contact details of the approving authority be provided to other parties through the ASEAN Secretariat. See Art. 3(3) and fn. 5. 39 Yaung Chi Oo Trading Pte. Ltd v Myanmar, Award, ASEAN Case No ARB/01/1, (2003) 42 ILM. 540. See also Muthucumaraswamy Sornarajah (n. 10) 246–247. 40 Ewing-Chow and Fischer describe that as ASEAN States seeking to preserve their right to regulate ‘within a rule of law framework in the investment context’. See discussion on the approval in writing requirement, Michael Ewing-Chow and Geraldine R. Fischer, ‘ASEAN IIAs: Conserving Regulatory Sovereignty While Promoting the Rule of Law?’ (2011) 8(5) TDM 1, 6, available at http://www.transnational-dispute-management.com. 41 See n. 14, at 25. Indonesia’s reservations, for example, extend to 35 pages of text. 42 Blueprint (n. 12), Strategic Schedules.

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admission and establishment of investments (Art. 5(1)). However, in contrast to ACIA, under the PRC–ASEAN Agreement (Art. 5(2)) a party which grants preferential treatment to other States in the future is not required to accord the benefits of this treatment to the other parties. In addition, neither national treatment nor MFN applies to override any existing or new non-conforming measures, although the parties should endeavour to remove the non-conforming measures (Art. 6). As in ACIA, Art. 5(4) makes clear that MFN treatment does not extend to dispute resolution. AANZFTA takes a different approach. The Investment Chapter provides for 19 national treatment for the admission and establishment of investments (Art. 4), subject to a list of reservations regarding existing measures and measures adopted or maintained regarding particular sectors or activities (Art. 12). As a fiveyear work programme is to be conducted by the parties in order to define the list of reservations and sectors (Art. 16), it is not clear at this stage whether the national treatment provision will result in any substantial concessions. AANZFTA does not provide for MFN treatment at all, but does hold out the possibility that the parties may reach agreement on MFN treatment in the future (Art. 16). The Korea–ASEAN Agreement potentially accords both national treatment and MFN treatment (in similar terms to the PRC–ASEAN Agreement) to the admission of investments, but both of these provisions are subject to negotiation under the five year work programme (Arts. 4, 5 and 27). These provisions reflect the reality that countries such as China and Australia, 20 as well as members of ASEAN, may well have bilateral arrangements offering more benefits than these more general treaties. For example, the PRC–New Zealand Free Trade Agreement43 provides for MFN treatment regarding admission of investment in certain limited circumstances. In addition, Australia and New Zealand signed on 16 February 2011 an Investment Protocol that grants mutual benefits significantly greater than those accorded to ASEAN countries.44 The significant difference between the agreements also reflects differences in 21 domestic investment policy. The PRC, for example, has a tightly regulated series of laws and policies regarding the admission of investment, and, until recently, has not been prepared to surrender its ability to control the admission of investment.45 In contrast, in AANZFTA the parties were prepared to contemplate the 43 Free Trade Agreement between New Zealand and China (China–NZ FTA), 7 April 2008, Ch. 11, Art. 139(1), available at http://www.chinafta.govt.nz/1-The-agreement/2-Text-of-theagreement/12-Chapt-11-Investment/index.php. 44 Investment Protocol to the Australia‑New Zealand Closer Economic Relations Trade Agreement, 16 February 2011, entered into force 1 March 2013 [2013] ATS 10. 45 Vivienne Bath, ‘The Quandary for Chinese Regulators: Controlling the Flow of Investment Into and Out of China’ in Vivienne Bath and Luke Nottage (n. 10) 68–89. Note, however, the experimental rules in the newly established Shanghai Free Trade Zone which relax the approval regime relating to foreign investment: see Decision on Temporarily Adjusting the Administrative Examination and Approval Items or Special Access Management Measures Prescribed by Certain Administrative Regulations and State Council Documents in the China (Shanghai) Pilot Free Trade Zone, issued by the State Council on 21 December 2013.

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possibility of granting national treatment in respect of admission and establishment – but only subject to lengthy further discussions. MFN was not included at all, probably because Australia has given concessions to the US and New Zealand46 which it may not be prepared to extend further. 22 ACIA restricts the application of performance requirements regarding new investment and limits the imposition of local nationality provisions for the board of directors and members of senior management. These provisions did not appear in the AAPPI or ACIA and their inclusion apparently was based on NAFTA Ch. 11 and the US Model BIT.47 Similar – but not identical – provisions appear in AANZFTA, yet not in the PRC–ASEAN Agreement. Art. 6 of the Korea– ASEAN Agreement refers to TRIMS in relation to performance requirements. Again, however, this provision is subject to negotiation pursuant to Art. 27. 23 Art. 8 of ACIA provides that a member State may not require that persons of any particular nationality be appointed to senior management positions (Art. 8(1)). However, a requirement may be made that a majority of the board of directors be of a particular nationality or residence as long as this ‘does not materially impair the ability of the investor to exercise control over its investment’ (Art. 8(2)). These provisions do not occur in the ASEAN Plus Agreements, presumably reflecting the lower level of importance attached by China, Australia and New Zealand to requirements of this kind. The Korea–ASEAN Agreement does deal with localisation requirements for senior management (Art. 7) – again, subject to the negotiation process under Art. 27. b) Investment Protection

The AAPPI and the AIA contain different levels of protection for investors, as well as different definitions of protected investors. Thus the AAPPI provides for fair and equitable treatment, full protection and protection regarding expropriation,48 while the AIA separately provides for national treatment, MFN, transparency, emergency safeguard provisions and so on.49 An important objective of ACIA is to ensure that the scope and nature of the protection provided is clear and consistent. 25 ACIA and the ASEAN Plus Agreements all provide for fair and equitable treatment and full protection and security.50 Each agreement provides that fair and equitable treatment requires a State not to deny justice in legal or administrative proceedings, and that full protection and security requires a State to take measures ‘as may be reasonably necessary to ensure the protection and security’ of the investment.51 Art. 7(2)(c) of AANZFTA and Art. 5(2)(c) of the Korea– 24

46 See n. 44 and also Ch. 11 of the Australia–US FTA, Washington, 18 May 2004, entered into force 1 January 2005, [2005] ATS 1. 47 See Zewei Zhong (n. 26) 12; ASEAN, Highlights of the ACIA (n. 22) slide 6. 48 AAPPI, Arts. IV and VI. 49 AIA, Arts. 7, 8, 11 and 14. 50 ACIA Art. 11(1); PRC–ASEAN Agreement Art. 7(1); AANZFTA Ch. 11, Art. 6(1); Korea– ASEAN Agreement Art. 5(1).

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ASEAN Agreement go a step further, however, by making clear that these concepts do not require a level of treatment which is higher than that required under customary international law and that they do not create any additional substantive rights. All of the agreements provide that a breach of another provision of the relevant agreement, or of a separate agreement, does not establish a breach of the requirement.52 Another issue raised by the agreements relates to the question of expropria- 26 tion and the way in which this is defined in the agreement. ACIA and the ASEAN Plus Agreements show considerable consistency regarding the basic provision. ACIA, AANZFTA and Korea–ASEAN Agreement generally provide that a party may not expropriate or nationalise a covered investment unless for a public purpose, in a non-discriminatory way, on payment of prompt, adequate and effective compensation and in accordance with due process of law.53 The PRC–ASEAN Agreement does not refer to ‘prompt, adequate and effective compensation’, but instead refers simply to ‘compensation’.54 All of the agreements refer to compensation equal to the fair market value of the investment at or before the time when the expropriation was announced or occurred.55 In addition, both ACIA and AANZFTA contain a short Annex on expropriation which sets out criteria regarding indirect expropriation and the important principle that non-discriminatory measures of the State designed to protect legitimate public welfare objectives (public health, safety and the environment) do not constitute expropriation.56 An interesting feature of the agreements is the restriction imposed on the 27 question of compensation for expropriation of land. ACIA provides that ‘any 51 ACIA Art. 6(2); PRC–ASEAN Agreement Art. 7(2); AANZFTA Ch. 11, Art. 6(2); Korea– ASEAN Agreement Art 5(2). 52 ACIA Art. 6(3); PRC–ASEAN Agreement Art. 7(3); AANZFTA Ch. 11, Art. 6(3); Korea– ASEAN Agreement, Art. 5(3). 53 ACIA Art. 14(1); AANZFTA Ch. 11, Art. 9(1); Korea–ASEAN Agreement Art. 12(1). 54 PRC–ASEAN Agreement, Art. 8(1). 55 ACIA Art. 14(2); PRC–ASEAN Agreement Art. 8(2); AANZFTA Ch. 11, Art. 9(2); Korea– ASEAN Agreement Art. 12(2). 56 ACIA Annex 2; AANZFTA Annex on Expropriation and Compensation. Ewing-Chow and Fischer trace this provision to Annex B of the 2004 US Model BIT, see Michael Ewing-Chow and Geraldine R. Fischer (n. 40) 11. ACIA and AANZFTA differ from Annex B in several significant respects. They do not state that the expropriation provisions refer to customary international law; they substitute a requirement that governmental action breaches the government’s prior written commitment for the Model BIT’s requirement that the action breaches the investor’s reasonable expectations; and they supplement the concept of ‘the character of the government action’ which is significant in determining whether expropriation took place by adding the requirement that the objective and whether the action is proportionate to the public purpose be considered. Zewei Zhong (n. 26) 26 also notes that NAFTA as well as US and Canadian Model BITs acknowledge that there may be ‘rare circumstances’ where non-discriminatory regulatory actions designed and applied to achieve legitimate public welfare objectives (such as the protection of public health, safety or the environment) may not amount to indirect expropriation; but that ACIA omits this provision. So does AANZFTA, even though the Australia–Chile FTA, Canberra, 30 July 2008, entered into force 6 March 2009, [2009] ATS 6, also refers to ‘rare circumstances’.

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measure of expropriation regarding land shall be as defined in the Member States’ respective existing domestic laws and regulations and any amendments thereto’.57 Art. 8(4) of the PRC–ASEAN Agreement contains an almost identical provision. Art. 9(6) of AANZFTA and Art. 12(2) of the Korea–ASEAN Agreement are more limited in its scope, but still provide that expropriation of land by ‘Singapore or Viet Nam (…) shall be for a purpose and upon payment of compensation made in accordance with’ existing domestic legislation. 28 A second point to be made regarding expropriation provisions in these agreements concerns the General Exceptions. The effect of the General Exceptions is to exempt States from the effect of the expropriation clause in the relevant agreement where a measure complies with the General Exceptions clause.58 In ACIA, the PRC–ASEAN Agreement and the Korea–ASEAN Agreement, these clauses provide that nothing in the relevant agreement prevents a party from adopting or enforcing any measures that are necessary to preserve public morals or public order, to protect human, animal or plant life or health, prevent fraud, protect privacy, preserve tax collection, protect national treasures, or conserve natural resources. This is subject to a reservation in the chapeau that the measures adopted may not be applied so as to constitute ‘arbitrary or unjustifiable discrimination’ or a ‘disguised restriction on investors (…) or their investments’.59 Although paragraphs on the protection of national treasures and the conservation of exhaustible natural resources are added, both of these provisions very closely track the wording of Art. XIV of the General Agreement on Trade in Services (GATS), with references changed from ‘services’ to ‘investors’ and ‘investment’. The impact of the GATS on interpretation of such a provision in an investment agreement is yet to be fully determined.60 29 The Investment Chapter of AANZFTA, in contrast, does not include a General Exceptions provision. Instead, Ch. 15 of AANZFTA incorporates Art. XIV of GATS regarding investment, and adds provisions preserving national treasures or the creative arts.61 Undoubtedly the effect of all of these provisions is to widen the regulatory space for the governments of the respective parties. c) General Comments 30

Several remarks can be made on the substance of ACIA and the ASEAN Plus Agreements outlined above. First, although the drafters of ACIA aimed to draw on ‘international’ best practice, ACIA contains several provisions clearly directed at the regional concerns of the ASEAN States. In particular, the efforts towards liberalisation of investment are ambitious, but reflect the difficulty of cre57 ACIA Art. 14(1). 58 Michael Ewing-Chow and Geraldine R. Fischer (n. 40) 10. 59 ACIA Art. 17(1). Art 16(1) of the PRC–ASEAN Agreement and Art. 20(1) of the Korea– ASEAN Agreement are very similar. 60 Michael Ewing-Chow and Geraldine R. Fischer (n. 40) 10. 61 Both ACIA (Art. 17(2)) and the PRC–ASEAN Agreement (Art. 16(2)) incorporate para. 2 (Domestic Regulation) of the Annex on Financial Services of the GATS.

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ating a regional agreement covering inbound investment. The existence of a comprehensive list of reservations regarding national treatment represents a step forward in terms of opening up markets in the region to investment. Yet the slowness in implementing ACIA, the limitation to particular industries and the content of the reservations lists suggests that liberalisation across ten quite different economies is practically difficult to achieve. The terms of the PRC– ASEAN Agreement and AANZFTA, and particularly the Korea–ASEAN Agreement, on investment liberalisation reflect the fact that achieving agreement on liberalisation outside ASEAN is also difficult, particularly regarding the grant of national treatment or MFN treatment for the admission and establishment of investments. Secondly, the review indicates that the ASEAN countries, as well as China 31 and Australia–New Zealand, tend to be cautious about open-ended guarantees of protection. These provisions are limited in scope and, in the case of AANZFTA, evidence an intention to ensure that the agreement does not expose parties to a standard higher than, or additional to, that imposed by international law. Similarly, provisions on the calculation of compensation for expropriation of land demonstrate domestic sensitivities and the willingness particularly of the ASEAN States and China to accommodate them, even if the interests of their own investors might be better served by the imposition of an international standard. Thirdly, although there is some similarity in the terms of ACIA and the 32 ASEAN Plus Agreements, there are also considerable differences, reflecting the different domestic interests of the negotiating parties. The difference in terms means that the agreements cannot be said to reflect full convergence across the region regarding concepts of liberalisation or investor protection. There is, however, significant agreement on several important issues, and the negotiation of the treaties may indicate willingness by parties across the region to attempt to establish some degree of regional regulatory harmonisation in the longer term. 3. Dispute Resolution and Investor-State Arbitration

The investor-State dispute settlement provisions in ACIA largely follow a fa- 33 miliar global standard. They are mostly followed closely in the PRC–ASEAN Agreement and AANZFTA, discussed above. The dispute settlement provisions also largely accord with those in the Korea–ASEAN Agreement, also compared briefly below. (This part refers to all four treaties as the ‘ASEAN Agreements’ or ‘Agreements’.) ACIA and AANZFTA (signed on 26 and 27 February 2009 respectively) are 34 more extensive and detailed than the PRC–ASEAN Agreement or the Korea– ASEAN Agreement, which were signed in mid-2009. There are also some potentially significant differences among all four ASEAN Agreements, noted below (especially in footnote material). This four-way comparison, plus the fact that each treaty with ASEAN may well reflect features distinctive to the evolvVivienne Bath/Luke Nottage

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ing investment treaty practice of the outside partner State,62 makes it quite difficult to determine any distinctive regional ‘ASEAN Way’63 being reflected in these treaty provisions related to dispute resolution. a) Initiating Investor-State Dispute Settlement Procedures

ACIA, like the other agreements, begins with a set of definitions as well as standard general provisions on scope of coverage for investor-State dispute settlement, excluding, for example, any claims related to events prior to its entry into force (Art. 29(3)). 36 It then expressly allows the parties to agree to ‘conciliation’, which is not defined (Art. 30(1)). Under Art. 30(2), parties may further agree to such a procedure continuing while other procedures are in progress pursuant to Art. 33, which includes arbitration (as discussed below). This would seem to provide scope for ‘Arb-Med’ – whereby arbitrators actively attempt to facilitate a settlement instead of simply hearing the case and rendering a binding arbitral award.64 ACIA also notes that positions adopted by the parties during any conciliation proceedings ‘shall be without prejudice to the rights of either disputing parties [sic]’ in any further investor-State proceedings (Art. 30(3)).65 37 ACIA also requires parties to any investment dispute to engage initially in ‘consultation and negotiation, which may include the use of non-binding, third party procedures’, initiated by written request by the investor (Art. 31(1)). The other agreements also have this provision, but do not include ACIA’s two further clarifications, namely: such negotiations generally ‘shall commence within 30 days’ of receipt of the request (Art. 31(2)), and the investor must make reasonable efforts to provide beforehand ‘information regarding the legal and factual basis for the investment dispute’ (Art. 31(3)). 38 Following another common practice in investment treaty drafting world-wide, ACIA then sets a ‘cooling off’ period. It allows the investor to ‘submit to arbi35

62 See e.g. Wei Shen, ‘Is This A Great Leap Forward? A Comparative Review of the InvestorState Arbitration Clause in the ASEAN–China Investment Treaty – From BIT Jurisprudential and Practical Perspectives’ (2010) 27(4) J. Int’l Arb. 379–419 (locating China’s broader practice on investor-State dispute settlement provisions in the context of its 2009 investment treaty with ASEAN). 63 Conventionally understood as including decision-making by consensus, non-interference in domestic affairs, and recourse to informal and non-binding arrangements. 64 See generally Luke Nottage and Richard Garnett, ‘The Top 20 Things to Change In or Around Australia’s International Arbitration Act’ in Luke Nottage and Richard Garnett (eds), International Arbitration in Australia (Federation Press, 2010) 149, 179–184 (noting persistent divergences in practices and expectations regarding Arb–Med, and suggesting as a compromise that consent to Arb–Med should be in writing and generally not allow ex parte contact with each party). 65 AANZFTA allows conciliation, or arbitration, after a 180-day ‘cooling off’ period (Ch. 11, Art. 20), but makes no other express reference to conciliation per se. (Unless otherwise indicated, all references in this part to AANZFTA refer to Ch. 11.) The PRC–ASEAN Agreement refers expressly to conciliation only regarding certain limitations or conditions for commencing instead arbitration procedures (Art. 14(7)). The Korea Agreement does not mention conciliation at all.

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tration’ a claim that the host State has breached certain specified treaty obligations and thereby caused loss or damage (Art. 32). However, no such cooling off period is specified if the foreign investor wishes to seek administrative or judicial settlement through host State institutions – a right preserved under Art. 29(4)).66 Commentators and tribunals disagree as to whether similar wording in other treaties creates a ‘jurisdictional’ requirement to wait out the specified period for consultations, before initiating the other more formal procedures.67 Crucially, ACIA then provides the host State’s consent to submit to more for- 39 mal procedures. Art. 33(1) gives the investor the choice of claiming to or under: a. b. c. d. e. f.

host State courts or administrative tribunals (if they have jurisdiction);68 ICSID Convention and Arbitration Rules (both home and host States are parties to the Convention);69 ICSID Additional Facility Rules (if only one State is a party); UNCITRAL Arbitration Rules;70 Regional Centre for Arbitration at Kuala Lumpur ‘or any other regional centre for arbitration in ASEAN’;71 any other arbitration institution agreed by the parties.

The proviso makes clear that ‘resort to any arbitration rules or fora (…) shall 40 exclude resort to the other’ – in other words, the agreements have a ‘fork in the 66 The lack of a cooling-off provision regarding local judicial or administrative proceedings also applies to AANZFTA (cf. Art. 20), but not the PRC–ASEAN Agreement (Art. 14(4): 180 days) or the Korea–ASEAN Agreement (Art. 18(5), although the subsequent phrase ‘in the latter event’ adds obscurity to that provision). 67 See further Shotaro Hamamoto and Luke Nottage (n. 18). 68 Under AANZFTA (Art. 21(1)(a)), this option is only available to an investor where the host State is the Philippines or Viet Nam. 69 Interestingly, the Korea–ASEAN Agreement (fn. 20 to Art. 18(5)(a)) requires the Philippines to consent separately in writing after the dispute arises, if a Korean investor invokes ICSID investment arbitration (or a Philippine investor claims against Korea). Note that although Australia, New Zealand, China, Korea, Brunei Darussalam, Cambodia, Indonesia, Malaysia, the Philippines and Singapore are all parties to the ICSID Convention, Burma, Lao PDR, Thailand and Viet Nam are not. See the ICSID website, List of Contracting States And Other Signatories Of The Convention (as of April 18, 2012), available at http://icsid.worldbank.org/I CSID/FrontServlet?requestType=ICSIDDocRH&actionVal=ContractingStates&ReqFrom=Ma in. 70 These are defined, in all the agreements, as the 1976 UNCITRAL Arbitration Rules. This seems to suggest that, unless the host State agrees otherwise, the investor cannot invoke the UNCITRAL Arbitration Rules agreed in 2010 (see Art. 1 thereof), which contained several helpful improvements for effective arbitration proceedings: see Clyde Croft and Christopher Kee, ‘The UNCITRAL Arbitration Rules Revisions: Implications for Australia’ in Luke Nottage and Richard Garnett (n. 64) 137–148. But the agreements also specify elsewhere that the arbitration rules that can be chosen by the parties, including the UNCITRAL Arbitration Rules, are those ‘in effect on the date’ the claims were submitted thereby to arbitration (see e.g. ACIA Art. 21(3)), which may leave some scope for an investor to invoke the 2010 UNCITRAL Arbitration Rules. 71 This phrase seems unlikely to encompass arbitration venues within member States of the region, such as the Singapore International Arbitration Centre, which remain national institutions. Further, these venue options for investors are not found in the other agreements.

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road’ provision.72 However, they also preserve access to host State courts or tribunals for certain interim measures of protection (e.g. ACIA Art. 34(2)).73 The agreements also exclude ‘diplomatic protection’ (inter-State claims) unless the host State fails to abide by the international arbitral award, but this still allows for ‘informal diplomatic exchanges for the sole purpose of facilitating a settlement of the dispute’ (Art. 34(3)). The host State must comply ‘without delay’ (Art. 41(7)),74 and ‘provide for the enforcement of an award in its territory’ (Art. 41(9)). The other agreements have similar provisions, except for a remarkable provision in the Korea Agreement (fn. 21) which states that agreement to the specified arbitration forum is only complete if Korea and the other State ‘had consented to submission of investment disputes to that forum in existing bilateral agreements to which both Korea and that other Party are parties’.75 41 ACIA (Art. 34) and generally the other agreements set out several other ‘conditions and limitations’ on claims, following common treaty practice for investment treaties. The investor must include in its notice of arbitration a written waiver of its rights to initiate or continue the other specified dispute resolution procedure options.76 At least 90 days beforehand, the investor must provide a written notice of intent to arbitrate that summarises its case. Arbitration claims also must be submitted within three years of actual or constructive knowledge of treaty breach causing loss to the investor (Art. 34(1)). The host State is precluded from arguing that the investor ‘has received or will receive, pursuant to an insurance or guarantee contract, indemnification or other compensation for all or part of any alleged loss’ (Art. 34(4)). b) Arbitral Procedure 42

ACIA (Art. 33(4)) and other agreements specify that the chosen arbitration rules apply subject both to any written modifications agreed by the parties, as well as the provisions in the respective treaty. 72 Exceptionally, the PRC–ASEAN Agreement (Art. 14(5)) allows the investor to revert to international dispute settlement if it withdraws its case from the host State’s court before final judgment is reached – except regarding Indonesia, the Philippines, Thailand and Viet Nam. 73 The Korea–ASEAN and PRC–ASEAN Agreements appear more restrictive, limiting applications to local courts and tribunals to those ‘prior’ to initiating other specified procedures (Arts. 18(8) and 14(7) respectively). None of the four agreements provide for interim measures to be ordered by the chosen arbitral tribunal. That therefore becomes a matter for the applicable arbitration rules and background national arbitration legislation and/or other treaties, such as the ICSID Convention. See further Shotaro Hamamoto and Luke Nottage (n. 18) 39. 74 Unusually, however, fn. 15 adds that the parties ‘understand that there may be domestic legal and administrative processes that need to be observed before an award may be complied with’ (emphasis added). 75 On Korea’s BIT and FTA programme, focusing on their investor-State arbitration provisions, see Joongi Kim, ‘The Evolution of Korea’s Modern Investment Treaties and Investor-State Dispute Settlement Provisions’ in Vivienne Bath and Luke Nottage (n. 10) 211–224. Also distinctive is the fact that Art. 20(a) AANZFTA does not permit conciliation or arbitration claims for any breaches of MFN treatment – simply because such treatment is not extended to investors under this particular ASEAN Plus Agreement. 76 The Korea–ASEAN Agreement omits this requirement.

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The investor’s notice of arbitration must include the name of the arbitrator it appoints or consent to the defined appointing authority making the appointment otherwise (Art. 33(5)). The disputing parties shall bear the costs of ‘their respective arbitrators to the tribunal and share equally the cost of the presiding arbitrator and other relevant costs’;77 otherwise, the tribunal determines its own procedure (Art. 35(5)) – subject to the applicable rules and so on, of course. The disputing parties also ‘may establish rules regarding expenses incurred by the tribunal, including remuneration of the arbitrators’ (Art. 35(6)).78 These might deal with costs of experts commissioned by the tribunal to report in writing on factual issues ‘concerning environmental, public health, safety or other scientific matters’ raised in arbitration proceedings (Art. 38).79 The third (presiding) arbitrator is appointed by party agreement (which would include the default arbitration rules, where necessary) and ‘shall be a national of a non-Member State which has diplomatic relations’ with both the host State and the investor’s home State and ‘shall not have permanent residence’ in either State (Art. 35(1)(b)). This comparatively strict qualification requirement is also found in AANZFTA (Art. 23(1)) but not in the Korea–ASEAN or PRC–ASEAN Agreements. Interestingly, ACIA adds that all arbitrators must (i) ‘have expertise or experience in public international law, international trade or international investment rules’ and (ii) shall be chosen (and conduct himself or herself during proceedings) ‘strictly on the basis of objectivity, reliability, sound judgment and independence’ (Art. 35(2)). AANZFTA repeats (i) but substitutes for (ii) that any arbitrator shall be ‘independent of, and not be affiliated with or take instructions from the disputing Party, the non-disputing Party or disputing investor’ (Art. 23(2)). However, none of the four agreements mentions the State party establishing a panel of prospective arbitrators.80 There are no treaty provisions on arbitrator challenge procedures, but where an arbitrator ‘resigns or becomes unable to act’ a successor shall be appointed in the same way and have ‘all powers and duties of the original arbitrator’. This seems to preclude any possibility of a ‘truncated tribunal’ proceeding with only 77 Presumably ‘relevant costs’, subject to the equal sharing rule, would encompass remuneration of an arbitrator appointed by the authority in lieu of the nominee of one party (as under ACIA Art. 35(3)). 78 AANZFTA (Art. 23(5)) repeats this provision, but has nothing like ACIA’s default rule on each party bearing the cost of its appointed arbitrator and otherwise sharing costs equally (cf. AANZFTA Ch. 17 on inter-State arbitration). The other two agreements do not mention costs at all, even though this is now a significant topic in investor-State arbitration policy debates. 79 This power, which in practice may also be useful in facilitating settlement between the parties, is expressly without prejudice to any rules on appointing experts in otherwise applicable arbitration rules. The other agreements do not add extra provisions on experts. 80 Cf. e.g. the Singapore–Japan FTA (although the panel has not yet been established: Shotaro Hamamoto and Luke Nottage (n. 18) 38), or panels established to resolve inter-State disputes under other regional agreements (e.g. Sebastian Perry, DR-CAFTA ready for state-to-state disputes, Global Arbitration Review, 27 April 2011, available at http://www.globalarbitrationreview.com.

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the original arbitrator. Nor does it elaborate (as do some arbitration rules) whether the successor can or must call for earlier proceedings to be revisited in order to get up to speed with the other original arbitrators.81 47 Once constituted, the tribunal is required to make rulings if ‘issues related to jurisdiction or admissibility are raised as preliminary objections (…) before proceeding to the merits’ (ACIA Art. 36(1)).82 The host State may also, within 30 days, object that ‘a claim is manifestly without merit’ (or otherwise outside the tribunal’s jurisdiction) – specifying ‘as precisely as possible the basis for the objection’. The tribunal must also address such an objection as a preliminary question separate from the merits, giving the disputing parties ‘reasonable opportunity’ to present their views. The tribunal may award the prevailing party ‘reasonable costs and fees’ associated with this objection, considering ‘whether the claim or the objection was frivolous or manifestly without merit’ after providing parties a reasonable opportunity for comment (Arts. 36(2)–(4)). AANZFTA (Art. 25) has identical provisions, but not the two other agreements. ACIA (Art. 39(6)) and even AANZFTA (Art. 26(6)) require disclosure of notices of intent and arbitration, whereupon the home State shall also notify all other States party to the treaty. The Korea–ASEAN and PRC–ASEAN Agreements lack these transparency provisions, and similarly do not require the host State to make public all the tribunal’s awards and decisions. 48 Another procedural provision found in ACIA (Art. 37) and AANZFTA (Art. 24), yet with no analogue in the Korea–ASEAN or PRC–ASEAN Agreements, is for consolidation of similar claims, as long as all disputing parties (including the multiple claimants) agree to such consolidation. 49 Much more significant is a common set of provisions dealing with the sensitive category of claims alleging that ‘taxation measures’ amount to a breach of the ‘expropriation’ protections under the relevant treaty.83 All four ASEAN Agreements require host and home States (including their tax officials) to consult on this issue. Any tribunal decision must give ‘serious consideration’ to their joint decision. If none is made or the States fail to consult, ‘the disputing investor shall not be prevented from submitting its claim to arbitration’ (ACIA Arts. 36(6)–(9)). This suggests that if the States jointly decide that a measure is not ‘expropriatory taxation’, then the investor cannot pursue its investor-State arbitration claim. (If they decide otherwise, then the tribunal arguably is not necessarily bound by the decision and therefore can still rule that the measure did not amount to expropriatory taxation, but only after seriously considering the States’ joint decision.)

81 Cf. generally Clyde Croft and Christopher Kee (n. 70) 141–147. 82 Arbitration rules designed by arbitral institutions primarily for commercial disputes, and/or national arbitration laws, instead often allow arbitrators to incorporate such jurisdictional decisions in their final awards. 83 See further generally Micah Burch and Luke Nottage (n. 5).

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c) Governing Law and Awards

Even beyond the field of taxation-related investment disputes, both ACIA 50 (Arts. 40(2)–(3)) and AANZFTA (Arts. 27(2)–(3)) require the tribunal to issue an award based on any written joint decision by the host and home States that interprets a provision of the respective agreement that is in dispute.84 Such a decision must be rendered within 60 days of a request by the host State, the investor or even (on its account) by the tribunal. Otherwise, these agreements require the tribunal’s award to be based on the 51 respective treaty provisions, ‘any other applicable agreements between the Member States, and the applicable rules of international law and where applicable, any relevant domestic law’ of the host State (ACIA Art. 40(1)). This explicit ‘governing law’ provision largely follows contemporary treaty practice worldwide, but is missing from the PRC–ASEAN and Korea–ASEAN Agreements. ACIA and AANZFTA also add several other almost identical provisions re- 52 garding arbitral awards, including restrictions as to monetary damages or restitution. ACIA alone adds that: – –

the disputing parties may settle their dispute at any time before the tribunal issues its final award (although this should go without saying); and arbitration claims (e.g. under the UNCITRAL Rules) are considered to arise out of a commercial relationship for the purposes of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.85 d) General Comments

As one might expect, ACIA itself does reveal somewhat more of an ‘ASEAN 53 Way’. For example, it adds express provisions on conciliation and settlement before the final award, and sets two stages where the investor must provide information and arguments before initiating arbitration. ACIA also includes the option of the Regional Centre for Arbitration Kuala Lumpur (RCAKL) as a venue for investor-State dispute settlement. It is also conceivable that Australia did not press for even greater transparency in AANZFTA because ASEAN States preferred a more informal regime ‘ASEAN Way’.86 The four ASEAN Agreements also suggest some residual caution in the sub-region regarding investor-State 84 This seems to allow the tribunal to apply the States’ determination of a legal issue (interpretation of a treaty provision) to the factual issues raised in the particular case. By contrast, a joint decision by the States that a measure is not ‘expropriatory taxation’ arguably prevents the investor-State arbitration claim proceeding to a final award. 85 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 3030 UNTS 3, 10 June 1958. This aims to facilitate enforcement in States party to the New York Convention that have made its ‘commercial’ reservation. ACIA (Art. 36(5)) and AANZFTA (Art. 25(5)) further specify that (subject to party agreement) arbitrators shall determine the arbitral seat under applicable arbitration rules provided it is in a State party to the New York Convention. This facilitates enforcement in States that have made the latter’s ‘reciprocity’ reservation.

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dispute settlement. In particular, consent to investment arbitration under the ASEAN–Korea Agreement is limited to cases where there is already a bilateral agreement, despite Korea otherwise actively agreeing to investor-State arbitration provisions in its other treaties. Most notably, all ASEAN Agreements restore some significant potential for host State sovereignty regarding arbitration claims alleging expropriatory taxation, in particular – although investors are not so constrained if claiming instead that the taxation measure amounts to breach of fair and equitable treatment or other obligations. 54 Overall, however, the investor-State dispute settlement and other provisions of these recent ASEAN Agreements are immediately recognisable as consistent with quite pro-investor or liberal ‘international best practice’.87 For example, ACIA now only allows for the investor – not the host State – to initiate arbitration, and then provides various options for venues. It also clarifies that the governing law includes international law, another difference from IGA. (The AIA had not even provided for investor-State arbitration.) This shift is also consistent with the inclusion of ‘harder’ investor-State arbitration provisions in other investment treaties throughout the Asian region – to the extent that there is arguably no significant difference in treaty practice among Asian compared to non-Asian member States.88 It remains true that ASEAN (and other Asian) States appear to remain under-represented as respondents and especially as claimants in formal investor-State arbitration filings, but this appears to be due more to a range of (potentially transient) ‘institutional barriers’ to initiating or defending claims.89 A historical unease about foreign investment and arbitration may still exist to a degree;90 but it appears to have gradually faded in treaty practice – especially over recent years, and even within ASEAN. 4. Conclusions and Outlook 55

ASEAN’s investment treaties, epitomised particularly by ACIA and the two ASEAN Plus Agreements already in force (the PRC–ASEAN Agreement and AANZFTA), indicate a strong commitment to the promotion of investment through the liberalisation of investment rules and the provision of protection for 86 Chin L. Lim, ‘East Asia’s Engagement with Cosmopolitan Ideals Under its Trade Treaty Dispute Provisions’ (2011) 56:4 McGill L. J. 821–862. Contrasting major FTAs concluded by the US as well as the original TPPA, Lim argues that the inter-State dispute resolution provisions in ASEAN’s FTAs with China, Korea and Australia–New Zealand show a ‘closed, sovereigncentric view of trade dispute settlement’, with this East Asian dispute settlement model reflecting their preference for realism over liberalism in international affairs. 87 Zewei Zhong (n. 26) 13. See also Iain Maxwell and Kay-Jannes Wegner, ‘The New ASEAN Comprehensive Investment Agreement’ (2009) 5(2) Asian Int’l Arb. J. 167–189. 88 Erik Voeten, ‘Regional Judicial Institutions and Economic Cooperation: Lessons for Asia?’ (2010) 65 ADB Working Paper Series on Regional Economic Integration (also finding no differences in patterns for Asia regarding other forms of inter-State dispute resolution activity), available at http://aric.adb.org/archives.php?section=0&subsection=workingpapers. 89 Luke Nottage and J. Romesh Weeramantry, ‘Investment Arbitration in Asia: Five Perspectives on Law and Practice’ in Vivienne Bath and Luke Nottage (n. 10) 25–52. 90 Muthucumaraswamy Sornarajah (n. 10).

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investors through international treaty commitments. However, this chapter’s analysis of the recent ASEAN Agreements and other cited commentary indicates that this remains a gradual and somewhat variable process. The outlook for future investment treaties in ASEAN and the broader Asian region is far from certain. In particular, Australia in 2011 reversed its policy on investor-State dispute settlement by eschewing investor-State arbitration provisions for foreign investors, even where the host State has a developing economy and domestic legal system, although the Australia–Korea FTA concluded by a new Government on 6 December 2013 reinstates such provisions.91 This example of a developed State within the region becoming more cautious about investor-State dispute settlement may lead other States in Asia to reject investor-State arbitration provisions requested by other States in new or renegotiated investment treaties. This could, among other things, impede the negotiation of an Investment Chapter in the TPPA.92 The exclusion of China from an expanded TPPA could further complicate free trade agreements and investment promotion arrangements within the region.93 Overall, ACIA and the other ASEAN Agreements reviewed in this chapter in- 56 dicate that countries in the region are committed to the negotiation and implementation of investment agreements, notwithstanding differences in view and the difficulties of dealing with internal constituencies. However, they also show a significant convergence of view regarding many important issues typically covered nowadays in such agreements.

91 See Luke Nottage, Arbitration Rights Back for the South Korea–Australia FTA, 1 January 2014, available at http://www.eastasiaforum.org/2014/01/01/arbitration-rights-back-for-thesouth-korea-australia-fta. 92 See Luke Nottage, ‘Throwing the Baby with the Bathwater: Australia’s New Policy on Treaty-Based Investor-State Arbitration and its Impact in Asia’ (2013) 37(2) Asian Studies Review 253–272, with an earlier version available at http://papers.ssrn.com/sol3/papers.cfm? abstract_id=1860505. These developments can be seen partly as a reaction to the first-ever investor-State arbitration claim being brought against Australia. See notice of claim and other pleadings made under the Australia–Hong Kong Agreement for the Promotion and Protection of Investments, 27 July 2011, available at http://www.ag.gov.au/Internationallaw/Pages/ Investor-State-Arbitration---Tobacco-Plain-Packaging.aspx. 93 See Peter Drysdale, China, Economic Containment and the TPP, Eastasiaforum.org, 12 December 2011, available at http://www.eastasiaforum.org/2011/12/12/china-economic-containment-and-the-tpp/#more-23346.

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D. The New EU Investment Policy Approach

Jörn Griebel 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Relevant Sources for the Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The EU Approach to Future EU Investment Treaties . . . . . . . . . . . . . . . . a) Bilateral or Multilateral Approach? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Future EU Partners? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Degree of Detailedness and Specification of Treaty Provisions d) Stand-Alone BITs or Free Trade Agreements Including an Investment Chapter? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) The Content of Future EU Investment Treaties/Investment Chapters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Scope of Investment Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Standards of Treatment and Protection . . . . . . . . . . . . . . . . . . . . . . . (3) Dispute Resolution Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Further Aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 6 14 17 19 23 25 28 30 34 43 57 60

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III.D. The New EU Investment Policy Approach ‘EU-Investitionsschutz und -förderung zwischen Übergangsregelungen und umfassender europäischer Auslandsinvestitionspolitik’ (2010) EuZW 647–652; Stephen Woolcock, ‘EU Trade and Investment Policymaking After the Lisbon Treaty’ (2010) intereconomics 22–25.

1. Introduction

The future investment policy of the EU has been the subject of great specula- 1 tion in legal as well as political writings. This is indicated by the vast amount of literature on this topic some of which can be found in the above list of selected literature. The reason for such great attention to this topic is not difficult to grasp. The EU is already the region in the world that receives most foreign direct investments (FDI) and from which most FDIs go out into the world.1 Its future investment policy in the shape of investment treaties will not only be of relevance for all of these FDIs, but will certainly influence the approaches of other countries too. The future EU approach has the potential of becoming the most important approach worldwide. Above that, future EU investment treaties will bit by bit replace the currently about 1200 bilateral investment agreements2 which EU member States have concluded with third States. The initial hope that about four years after the entry into force of the treaty of 2 Lisbon which provided for a shift of competencies in the field of foreign direct investments from the member States to the EU,3 it would be possible to trace the new EU investment police approach along the lines of a binding EU investment agreement with a third State was too optimistic. However, this article which was for a last time updated in July 2013, falls into a period of intensive activities of the EU in sharpening its future investment policy. Yet, the EU – as will be seen – has still not passed the stage of treaty negotiations with third States which officially started – at least as far as investment rules are concerned – in 2011, not to mention the probably even more difficult ratification process of a signed agreement within the EU. In order to reduce speculation on the details of the future EU policy as much as possible, the main focus of this contribution shall be laid on documents concerning the future EU investment policy which the various key EU institutions have issued in order to address their respective views on this topic, rather than on texts of provisions agreed upon in negotiations of the Commission with third States. Even such texts agreed upon by the negotiators that are subject to ratification are no more than the starting point of the internal ratification process within the EU, which may well turn out to be the greatest hurdle for future EU investment agreements. In focussing on documents of EU institu1 Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions – Towards a comprehensive European international investment policy, COM(2010)343 final, 7.7.2010, 3. 2 Colin Brown and Ilmars Naglis, ‘Dispute Settlement in Future EU Investment Agreements’ in Marc Bungenberg, August Reinisch and Christian Tietje (ed), EU and Investment Agreements – Open Questions and Remaining Challenges (Nomos, 2013) 18; see for a list of all extra EUBITs: Official Journal of the European Union, C 131/2, 8.5.2013. 3 See generally on this topic Marc Bungenberg and Stephan Hobe, ‘The Relationship of International Investment Law and European Union Law’, ch. 13.II., 1604–1630.

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tions, I will attempt to outline the aspects of the future EU investment policy that are relatively clear as well as those which are likely to cause debates as between the relevant players within the EU. 3 The focus on the respective views of the European Commission (hereinafter Commission), the Council of the EU (hereinafter Council) and European Parliament (hereinafter Parliament) is due to the fact that these organs share responsibilities in the process of negotiating and ratifying agreements with third States. While it is the task of the Commission as the organ which represents the community interest as a whole to guide the negotiations according to mandates granted by the Council, it will finally fall into the shared competence of the Council and Parliament to formally agree on the negotiated texts in order to lay the basis for their entry into force.4 The Council, being made up of representatives of the member States and representing the governments of the 28 member States and Parliament which is through its elected members representing the people of the EU, have accordingly within the EU the decisive power to ratify investment agreements. A possible last word regarding the conformity of an EU agreement with EU law lies, however, in the hands of the Court of Justice of the European Union (hereinafter CJEU). The CJEU could ultimately decide about the conformity of EU investment treaty provisions with EU law.5 Therefore, the Commission, in its negotiations with third States, has the difficult task to take the respective expectations of Council and Parliament into account without ignoring the competence of the Court as the guardian of EU law. 4 As the contribution of Bungenberg and Hobe on investment law and EU law addresses the background of the shift of competences on foreign investments from the member States to the EU, the possible limits of this transfer of competences as well as other important questions (e.g. the destiny of intra-EU bilateral investment treaties (BITs) as well as extra-EU bilateral investment treaties), the present contribution will focus only on what will most probably be the cornerstones of the future EU investment policy. 5 For this purpose, first, the most relevant sources regarding the future EU policy will be identified (2.). The focus will then be laid on the EU approach to treaty drafting in the field of international investment law (3.). Here a distinction 4 See specifically on the increased power of the European Parliament in the field of the EU external trade and investment policy after the entry into force of the treaty of Lisbon Stephen Woolcock, ‘EU Trade and Investment Policymaking After the Lisbon Treaty’ (2010) intereconomics 22, 23 and Sophie Beuttenmüller, ‘Die Beteiligung des Europäischen Parliaments an der Gemeinsamen Handelspolitik nach dem Reformvertrag von Lissabon’ in Marc Bungenberg, Jörn Griebel and Steffen Hindelang (ed), Internationaler Investitionsschutz und Europarecht (Nomos, 2010) 231–238; for the role of Council and the member States see Nikos Lavranos, ‘The Remaining Decisive Role of Member States in Negotiating and Concluding EU Investment Agreements’ in Marc Bungenberg, August Reinisch and Christian Tietje (ed), EU and Investment Agreements – Open Questions and Remaining Challenges (Nomos, 2013) 165–170. 5 See on certain aspects of this problem Stephan W. Schill, ‘Luxembourg Limits: Conditions for Investor-State Dispute Settlement under Future EU Investment Agreements’ in Marc Bungenberg, August Reinisch and Christian Tietje (ed), EU and Investment Agreements – Open Questions and Remaining Challenges (Nomos, 2013) 37–56.

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will be made between more general questions on the one side (3.a–d) and the possible future content of investment treaties or investment chapters in free trade agreements on the other (3.e). The contribution will end with a conclusion (4.). 2. Relevant Sources for the Analysis

As indicated above, the following analysis will be based on a couple of documents rendered by the involved EU organs.6 Of the many sources the most relevant are listed in the following and explained in chronological order: Firstly, a document by the Commission from 7 July 2010 is of relevance. It is entitled ‘Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions – Towards a comprehensive European international investment policy’ (hereinafter Commission’s Communication).7 The Communication marks the first time that an organ of the EU has openly expressed its perspective regarding the future investment policy. In reaction to this document the Council expressed its views on 25 October 2010 by way of ‘Conclusions on a comprehensive European international investment policy’ (hereinafter Council Conclusions).8 Another relevant document stems from the third important player, the European Parliament, which adopted on 6 April 2011 a Resolution on the future European international investment policy (hereinafter Parliament’s Resolution), addressing its own positions regarding the EU’s future investment policy.9 Furthermore, the negotiation mandate of the Council (General Affairs Council) from 12 September 2011 concerning ongoing negotiations of free trade agreements with Canada, India and Singapore (hereinafter Council’s negotiation mandate) will irrespective of its vagueness be of relevance.10 On the basis of proposals of the Commission it provides guidelines concerning the content of in6 Of the many relevant documents those were selected which do address the relevant topics in more or less clear words. Not considered were documents, the content of which was either repeated or specified later in other documents or which express positions which were later revised. This is the reason why inter alia the Commission’s roadmap of 27.9.2010 (official title: Recommendations from the Commission for the new negotiating directive(s) regarding investment for countries identified in the commission communication) and a confidential discussion paper by the Commission of 29 March 2011 were not considered. The latter is reported to describe the Commission’s view on international dispute settlement at that time, see Luke Peterson, ‘Unpublished discussion paper gives overview of the European Commission trade department’s recent thinking on foreign investment dispute settlement’, (2011) 4 IAR, No. 8 (9 June 2011). 7 COM(2010)343 final, 7.7.2010; also reprinted in Marc Bungenberg, Jörn Griebel and Steffen Hindelang (ed), International Investment Law and EU Law (Springer, 2011) 173 et seq. 8 See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/EN/foraff/117328.pdf. 9 See http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P7-TA-2011-0141& language=EN. 10 For the press release concerning the decision see http://www.consilium.europa.eu/ueDocs/ cms_Data/docs/pressData/EN/genaff/124579.pdf; the guidelines themselves were published on an NGO website: http://www.s2bnetwork.org/themes/eu-investment-policy/eu-documents/ text-of-the-mandates.html.

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vestment chapters within these agreements. These guidelines are not legally binding upon the Commission which will however regard itself as politically bound by the mandate. The mandates regarding Egypt, Jordan, Morocco and Tunisia from December 201111 as well as the mandate for a Transatlantic Trade and Investment Partnership (TTIP) with the United States of America from May 201312 will be mentioned whenever these are more detailed than the September 2011 mandate.13 11 Another two relevant documents by the Commission deal specifically with questions of investor-State dispute resolution. The first document addresses standard clauses concerning investor-State dispute settlement in EU agreements (hereinafter Commission’s ISDS standard text). It was revised on 5 June 2012 based on comments of the member States made with respect to a circulated draft text from 10 May 2012.14 It was only meant for internal communications with the other EU organs and therefore has not found any official publication. It has, however, found its way into the public domain and has even been reported about.15 From its introduction it becomes clear that it is meant to serve ‘as a basis for the (…) negotiations with Canada, India and Singapore’. The version here employed dates from 5 June 2012. The second document is a Commission’s proposal entitled ‘Proposal for a Regulation of the European Parliament and of the Council establishing a framework for managing financial responsibility linked to investor-State dispute settlement tribunals established by international agreements to which the European Union is party’ (hereinafter Commission’s proposal on financial responsibility) that addresses the internal distribution of powers and responsibilities as between the EU and the member States concerning investor-State dispute settlement.16 This proposal from 21 June 2012 is currently in the EU’s legislative process and accordingly under review by the Council as 11 3136th Council meeting (Foreign Affairs–Trade), 14 December 2011, Press release 18685/11, p. 8; so far this mandate has not found an official publication. 12 See for the original version dating from 21 May 2013 http://www.transnational-dispute-manag ement.com/legal-and-regulatory-detail.asp?key=9471 or http://www.s2bnetwork.org/fileadmi n/dateien/downloads/21st_May_DS1353_13_REV1.pdf; see for the Council’s press release regarding the mandate adopted on 14 June 2013 http://europa.eu/rapid/press-release_MEMO13-564_en.htm; this second version of the mandate has not found any official publication yet. 13 See for the launch of free trade agreement negotiations with Japan the Commission’s press release of 25 March 2013, available at http://europa.eu/rapid/press-release_MEMO-13-283_e n.htm; the mandate for these negotiations have not been published, yet. 14 For comments on this standard text which has not found any official publication see Nathalie Bernasconi-Osterwalder, ‘Analysis of the European Commission’s Draft Text on InvestorState Dispute Settlement for EU Agreements’ (2012) 4(2) ITN (July 2012), available at http:// www.iisd.org/pdf/2012/iisd_itn_july_2012_en.pdf or http://www.iisd.org/itn/2012/07/19/analy sis-of-the-european-commissions-draft-text-on-investor-state-dispute-settlement-for-eu-agree ments. 15 See n. 14. 16 COM/2012/0335 final – 2012/0163 (COD), available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=COM:2012:0335:FIN:EN:HTML; for an initial comment on the proposal see Luke Peterson, ‘European Commission unveils proposal for who should bear brunt of future investment arbitrations; member states could continue to be respondents in some cases’ (2012) 5(12) IAR (1 July 2012).

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well as Parliament, the latter of which has already proposed amendments.17 The proposal gives answers to the question of the financial division of responsibilities between EU and member States in investment arbitration proceedings based on EU agreements and the question of who takes the role of defendant. On 12 December 2012 Regulation 1219/2012 of the European Parliament and 12 of the Council establishing transitional arrangements for bilateral investment agreements between Member States and third countries was adopted (hereinafter Regulation 1219/2012). 18 It rests upon a ‘Proposal for a Regulation of the European Parliament and of the Council establishing transitional arrangements for bilateral investment agreements between Member States and third countries’ (hereinafter Commission’s proposal for a transitional arrangements Regulation) prepared by the Commission.19 The regulation addresses the destiny of the member States’ BITs with third States which in principle stay in force as well as the conditions according to which the member State may conclude new agreements. Lastly, a version of the negotiation text of investment chapter within the free 13 trade agreement of the EU and Canada dating from 7 February 2013 found their way into the public domain (hereinafter Draft CETA investment text).20 This includes also the text of the CETA Investor-to-State Dispute Settlement text (of 1 February 2013; hereinafter Draft CETA Investor-to-State Dispute Settlement Text).21 It is, however, difficult to rely on these texts because they have not even been finally agreed upon by the negotiating parties. 3. The EU Approach to Future EU Investment Treaties

As indicated above the future EU policy is still subject to many open ques- 14 tions. This is due to various reasons. On the one hand the initiation of treaty negotiations and the ratification process concerning these is subject to a complex procedure within the EU requiring the participation of all of the EU organs described above, i.e. the Commission, the Council and the Parliament. Each of these organs have their own functions within the EU system and perception on what the future policy should look like. Accordingly, it is no surprise that since the entry into force of the Lisbon treaty no binding EU agreement on investment matters has been brought about so far.22 On the other hand, contrary to what most States in the world have done so far 15 and continue to keep doing, there is no official and transparent EU Model BIT 17 See http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&mode=XML&reference =A7-2013-124&language=EN. 18 See http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:351:0040:0046:En:P DF. 19 See for the text of the original proposal COM(2010)344 final, 2010/0197 (COD), 7.7.2010. 20 The text is available at http://tradejustice.ca/en/section/3. 21 Equally available at http://tradejustice.ca/en/section/3. 22 In addition it has to be said that the Commission was insufficiently prepared to take up the new challenge speedily.

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on which negotiations with third States can be based. While this is certainly due – as will be elaborated further below – also to the respective functions of the many players involved within the EU and the lack of one organ which could authoritatively draft such a model for all EU institutions, it was primarily not the intention of some EU organs to be transparent regarding the EU’s negotiation position before negotiations started. That some sort of unofficial draft model is however required for the purpose of efficiently negotiating investment agreements is indicated by the Commission’s ISDS standard text. One may therefore assume that internal versions exist which support the negotiation processes with third States. 16 Against this background, I will in the following attempt to give some indications regarding key questions of the future EU approach. These are: bilateral or multilateral approach? (a), future partners? (b), degree of detailedness and specification of treaty provisions? (c), stand-alone BITs or free trade agreements including an investment chapter? (d), and, most importantly, significant questions of the content of investment treaties or investment chapters (e). a) Bilateral or Multilateral Approach?

While Art 21(1) of the Treaty of the European Union (hereinafter TEU) requires the Union, in international relations, to promote multilateral solutions to common problems and proposals considering also a multilateral or plurilateral approach to the new EU strategy can be found,23 this idea hardly ever figures within any of the statements made by EU organs or EU member States. Within the Commission’s Communication it is pointed out that ‘the feasibility of a multilateral initiative could further be considered in the long term’.24 From the context of the statement it becomes clear that this is only to be discussed should a bilateral approach prove impossible or inadvisable.25 The Parliament in its resolution points out that ‘the Commission should bear in mind the lessons learnt (…) in particular regarding the failure of OECD negotiations on a Multilateral Agreement on Investment’, however, here it is not clear whether this has to be understood as a general rejection of a multilateral approach or rather as an indication that its content was regarded as problematic.26 18 Considering the lack of resources for negotiating bilateral agreements with most non-EU countries within the next ten years, a multilateral or plurilateral 17

23 Marc Bungenberg, Jörn Griebel and Steffen Hindelang, ‘Challenges ahead: EU Investment Protection after the Entry into Force of the Treaty of Lisbon’, (2011) 2(2) TDM 1 (May 2011); Marc Bungenberg, ‘Die Kompetenzverteilung zwischen EU und Mitgliedstaaten nach Lissabon’ in Marc Bungenberg, Jörn Griebel and Steffen Hindelang (ed), Internationaler Investitionsschutz und Europarecht (Nomos, 2010) 81–99, in particular 98; Jörn Griebel, ‘Die neue EU-Kompetenz für ausländische Direktinvestitionen, Chance für einen multilateralen Ansatz im Internationalen Investitionsrecht’ in Marc Bungenberg, Jörn Griebel and Steffen Hindelang (ed), Internationaler Investitionsschutz und Europarecht (Nomos, 2010) 211–222. 24 Commission’s Communication (n. 7) 7. 25 Commission’s Communication (n. 7) 7. 26 Parliament Resolution (n. 9) para. 8.

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approach seemed the better choice to avoid a lagging behind of the EU.27 Such an agreement could have constituted a major contribution to the international rule of law in the field of international economic law.28 Considering also the main disputes when deciding about the details of the future EU investment agreements that will have to be solved as between EU organs and not the EU and third States, the elaboration by the EU of an agreement open to signature by all third States might have been a more efficient choice. However, for the moment being, the EU organs have clearly decided to opt for a bilateral approach. b) Future EU Partners?

The Commissions’ Communication from 7 July 2010 mentions as possible 19 partners in the short term Canada, India, Singapore and Mercosur.29 In ‘short or medium term’ reference is made to China and Russia.30 This choice was said to be based on criteria such as trade and investment flows and significant economic growth or growth prospects of markets.31 Not only for a lack of resources it can be doubted that the Commission has the intention – even in the long term – to conclude agreements with literally all States in the world.32 This is indicated also by the importance ascribed by the Commission to Regulation 1219/2012.33 The latter provides not only for a system by which the existing member State’s BITs are upheld but also for the possibility of the member States to conclude new BITs. For the moment, all that can be said regarding the EU’s strategy regarding 20 present and future partners, is that an investment negotiation mandate has officially been granted by the Council to the Commission for negotiations of investment chapters within free trade agreements involving Canada, India and Singapore;34 Egypt, Jordan, Morocco and Tunisia;35 Japan36 and for a Transatlantic Trade and Investment Partnership (TTIP), the USA.37 Especially the three last mentioned mandates demonstrate that contrary to the 21 Commission’s criteria established for the choice of future partner, it is in fact mostly political opportunity that determines who is chosen as a partner for negotiations on investment protection.

27 28 29 30 31 32

33 34 35 36 37

Marc Bungenberg, Jörn Griebel and Steffen Hindelang (n. 23). John Gaffney and Zeynep Akçay, ‘European Bilateral Approaches’, ch. 4.II.A., 186–201. Commission’s Communication (n. 7) 7. Commission’s Communication (n. 7) 7. Commission’s Communication (n. 7) 6. In the Commission’s Communication (n. 7) on p. 5 et seq. it is stated, however, that in ‘the long run, we should achieve a situation where investors from the EU and from third countries will not need to rely on BITs entered into by one or the other Member State for an effective protection of investments’. See Commission’s proposal for a transitional arrangements regulation (n. 19). See n. 10. See n. 11. See n. 13. See n. 12.

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Furthermore, it should be mentioned that on 23 May 2013, the Commission, based on the conclusions of the 14th EU–China summit held in February 2012, asked the Council to render a mandate for the negotiation of a stand-alone investment agreement with China, which already appeared on the Commission’s initial list of possible negotiation partners.38 c) Degree of Detailedness and Specification of Treaty Provisions

Regarding the methodological approach to the drafting of investment agreements, it is reported that there have been discussions within the Council on whether to follow a more vague or more detailed approach.39 Of the three relevant EU organs, it is only the Parliament which is openly addressing the problem of ‘the use of vague language in agreements being left open for interpretation’ as well as the fact that the USA and Canada ‘have adopted their model BITs in order to restrict the breadth of interpretation’ by arbitration tribunals.40 24 If one compares the current German model with that of the United States of America it is indeed remarkable that the former has only one fifth of the latter’s size.41 As demonstrated earlier in this handbook by Gaffney and Akçay, not only Germany but European States in general have tended to employ rather brief provisions within their investment agreements. Any demands for more extensive and specified approaches42 have, at least in Germany, been denied.43 This indicates that here the well-known uncertainty of law in the field of investment protection for reason of an unspecific treaty wording was regarded as favourable to their investors rather than disadvantageous.44 One can assume that the current investment negotiations with Canada are also difficult because Canada belongs to the countries which also follow the approach reflected by the US Model BIT.45 However, a certain tendency to opt for more specific and clearer provisions can be derived from the Commission’s ISDS standard text which is an in23

38 European Commission, Press Release, IP/13/458, 23/05/2013, ‘Commission proposes to open negotiations for an investment agreement with China’, published at http://europa.eu/rapid/ press-release_IP-13-458_en.htm?locale=en; regarding the content of such a future agreement see Wenhua Shan and Sheng Zhang, ‘The Potential EU–China BIT: Issues and Implications’ in Marc Bungenberg, August Reinisch and Christian Tietje (ed), EU and Investment Agreements – Open Questions and Remaining Challenges (Nomos, 2013) 87–120. 39 Luke Eric Peterson, ‘EU member-states approve negotiating guidelines for India, Singapore and Canada investment protection talks; some European governments fear “NAFTA contamination”’ (2011) 4(14) IAR (23 September 2011). 40 Parliament’s Resolution (n. 9) paras. G and H. 41 Jörn Griebel, ‘Einführung in den Deutschen Mustervertrag über die Förderung und den gegenseitigen Schutz von Kapitalanlagen von 2009’ (2010) IPRax 414, 419. 42 See for example Jörn Griebel and Yun-I Kim, ‘Zwischen Aufbruch, Stillstand und Rückschritt’ (2007) SchiedsVZ 193–195. 43 See for the German position Jörn Griebel and Yun-I Kim (n. 42) 418 et seq. 44 Jörn Griebel and Yun-I Kim (n. 42) 419. 45 On the Canadian model see Yves Fortier, ‘The Canadian Approach to Investment Protection: How Far We Have Come!’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (ed), International Investment Law for the 21st Century, Essays in Honour of Christoph Schreuer (Oxford University Press, 2009) 525–544.

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dication of a more detailed approach. This text comprises 43 Articles focussing only on the topic of investor-State dispute resolution, not to mention its annexes. d) Stand-Alone BITs or Free Trade Agreements Including an Investment Chapter?

Within its Communication from 7 July 2010, the Commission argued that ‘in 25 the short term’, use should be made of already ongoing trade negotiations to integrate investment in broader economic agreements.46 The first mandate concerning Canada, India and Singapore provided that free trade agreement negotiations with these countries should also include rules on investment protection. Regarding the mandate concerning Tunisia, Morocco, Jordan and Egypt, investment rules will equally be negotiated alongside a trade regime in the context of a so-called deep and comprehensive free trade area.47 The same is true for the free trade agreement negotiations with Japan and the TTIP negotiations with the United States of America. Combining such negotiations of different areas always carries the risk that a 26 perceived greater importance of trade rules could endanger the integrity of investment rules, which might be regarded as a space for compromise. Within the Council’s negotiation mandate it is emphasised that ‘the chapters on investment protection shall be a separate one, not linked to the market access commitments’. While this is certainly a basis for an independent negotiation of investment rules, this in itself does not provide a sufficient security against investment rules being abandoned for trade purposes. However, it may also turn out to be advantageous for investment rules to be negotiated and ratified alongside trade rules. As indicated above regarding future negotiations with China, the Commission 27 has asked the Council for a mandate with respect to a first stand-alone BIT of the EU. It will be interesting to see the degree to which negotiations isolated from trade aspects will lead to different outcomes. e) The Content of Future EU Investment Treaties/Investment Chapters

Regarding the content of the future EU investment policy, it is even more dif- 28 ficult to make any solid predictions. As mentioned above, the Commission has rejected the idea of an EU model BIT arguing that ‘a one-size-fits-all model for investment agreements’ was neither feasible nor desirable.48 This was regretted by the European Parliament which without success called on the Commission

46 Commission’s Communication (n. 7) 7. 47 See press release of 14 December 2011, available at http://trade.ec.europa.eu/doclib/press/ index.cfm?id=766. 48 Commission’s Communication (n. 7) 6; see on this question also Frank Hoffmeister and Günes Ünüvar, ‘From BITs and Pieces toward European Investment Agreements’ in Marc Bungenberg, August Reinisch and Christian Tietje (ed), EU and Investment Agreements – Open Questions and Remaining Challenges (Nomos, 2013) 70.

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‘to issue non-mandatory guidance as expediently as possible, e.g. in the form of a template for BITs’.49 Considering that even the Council’s negotiation mandate with its rather vague and hardly surprising guidelines was meant to stay confidential and that the same was supposed to be true in respect to the Commission’s ISDS standard text,50 it seems that the refusal to publish an EU BIT is at least partly due to the fact that the EU negotiation position should not be transparent to negotiation partners. Against the background of the many existing BIT models worldwide, the question can be raised as to whether considerations of confidentiality regarding one’s own position required in trade negotiations also apply to investment treaty negotiations. 29 There are many topics one could address regarding the future content of EU investment agreements. Due to a lack of space, only those topics which are either considerably important or strongly debated within the EU or both, were selected. These will be structured according to whether they are aspects regarding the scope of investment agreements (1), the standards of treatment and protection (2), dispute resolution provisions (3), or further aspects (4). (1) Scope of Investment Protection

Within the Council’s negotiation mandate the scope of future investment agreements is described as follows: ‘(…) the investment protection title of the agreement shall cover a broad range of investors and their investments, intellectual property rights included, whether the investment is made before or after the entry into force of the agreement’.51 While this guideline is rather vague, the scope of application of treaties is probably the least disputed topic as between the EU organs and member States. 31 Regarding the notion of investment, the Council is of the view that portfolio investments as an ‘area of mixed competence’ should also be included in future agreements.52 Contrary to this, the Commission in its communication and explanation of the proposal managing financial responsibility, regarded portfolio investments as belonging to the Union’s exclusive competence.53 While the question of competence may accordingly still be open to debate, it can be expected that portfolio investments will form part of the notion of investment in future EU agreements. Considering that free trade agreements like the ones for which the Council’s mandates are intended, most probably have to be signed as mixed agreements for reasons of the division of competencies in the field of trade,54 the question of to whom a certain competence belongs is currently not so important. 30

49 50 51 52

Parliament’s Resolution (n. 9) para. 10, and also para. 9. See Nathalie Bernasconi-Osterwalder (n. 14). Council’s negotiation mandate (n. 10), under the heading ‘Scope’. Council’s negotiation mandate (n. 10), under the heading ‘Objective’; see also Marc Bungenberg and Stephan Hobe (n. 3). 53 Commission’s Communication (n. 7) 8 and Commission’s proposal on financial responsibility, para.1.2. (p. 3); see also Frank Hoffmeister and Günes Ünüvar (n. 48) 66 et seq.

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The situation will change as soon as mandates for stand-alone investment agreements are negotiated and finally concluded. Within the Parliament’s resolution one finds two further interesting aspects 32 that have not been addressed within the guidelines. Firstly the Parliament insists that ‘where intellectual property rights are included in the scope of the investment agreement (…) the provisions should avoid negatively impacting the production of generic medicines and must respect the TRIPS exceptions for public health’.55 Especially the latter aspect is important as it indicates that decisions have to be made regarding the primacy of conflicting rules within different areas of international economic law. As intellectual property rights are usually protected within investment agreements, it will be interesting to see what the Commission will negotiate in this respect. Secondly, Parliament has expressed the view to exclude ‘speculative forms of 33 investments from protection’.56 Reports can also be found suggesting that the Commission is concerned about granting protection to so-called mailbox companies which do not have substantial business operations within their home State. The Commission has expressed the view that substantial business operations of the investor within the home State should accordingly be required in order to benefit from investment protection.57 (2) Standards of Treatment and Protection

As far as the standards of protection are concerned, there surprisingly seems 34 to be hardly any controversy among the EU organs. The Council’s negotiation mandate gives the following list of the most relevant standards of protection which should be included: a) fair and equitable treatment, including a prohibition of unreasonable, arbitrary or discriminatory measures, b) unqualified national treatment, c) unqualified most favoured nation treatment, d) protection against direct and indirect expropriation, including the right to prompt, adequate and effective compensation, e) full protection and security of investors and investments, f) other effective protection provisions, such as an ‘umbrella clause’, g) free transfer of funds of capital and payments by investors.

54 ‘Towards a comprehensive European international investment policy: An interview with Tomas Baert, European Commission, Directorate General for Trade, Services and Investment’ (2010) 1 ITN (September 2010) 3. 55 Parliament’s Resolution (n. 9) para. 11. 56 Parliament’s Resolution (n. 9) para. 11. 57 See the ‘presentation on investment protection’ by the Commission in the context of the civil society dialogue, 15 April 2013, available at http://trade.ec.europa.eu/doclib/docs/2013/april/ tradoc_150853.pdf.

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It is interesting that no specifications whatsoever are given by the Council considering that the fields of application of the standards are almost without exception disputed in investment jurisprudence. This prima facie seems to contradict the very first objective of future investment agreements which is according to the Council itself ‘the highest possible level of legal protection and certainty’.58 However, the Commission within its negotiations with Canada, demonstrated a clear intention to specify clauses such as fair and equitable treatment.59 Furthermore, in order to achieve the required certainty of law and predictability of awards, Commission and Council have a specific mechanism in mind. The Council in its mandate for the TTIP speaks of an investor-to-State dispute settlement mechanism which should provide for predictability of the Agreement, ‘including through the possibility of binding interpretation of the Agreement by the Parties’.60 This idea is based on a concept by the Commission61 that was inspired by the concept of the NAFTA Free Trade Commission, which has the competence to render binding interpretations of the NAFTA.62 This approach may in fact serve as a means to gradually specifying the content of the agreements. 36 The Parliament is not more imaginative regarding the standards. In respect to the fair and equitable treatment standard as the most important standard in practice,63 the Parliament is even of the opinion that this vague standard should be ‘defined on the basis of the level of treatment established by international customary law’.64 In academic writings as well as investment jurisprudence it is however regarded as making no real difference as to whether fair and equitable treatment is formulated as an autonomous standard or whether it is linked to international customary law, the law of aliens or the international minimum standard.65 Accordingly, it does not play a great role whether the standard is formulated as an autonomous one or as linked to customary international law, (i.e. the international minimum standard). Regarding ‘umbrella clauses’, the Parliament 35

58 See the Council’s negotiation mandate, under the heading ‘Objective’; for a comment on this aspect see also Luke Peterson (n. 39); as already addressed above, this is equally a major concern for the Parliament, see Parliament’s Resolution (n. 9) para. G. 59 See n. 20, especially the provision on fair and equitable treatment. 60 See n. 12, under the heading ‘enforcement’. 61 See Commission’s ISDS standard text (n. 14), Art. 9, para. 2; see also the ‘presentation on investment protection’ by the Commission in the context of the civil society dialogue (n. 57). 62 See on this topic Andrea Bjorklund, ‘NAFTA’s Contributions to Investor-State Dispute Settlement’, ch. 4.III.B., 261–282. 63 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2012) 131. 64 Parliament’s Resolution (n. 9) para. 19 and para. G. 65 See for example Stephan W. Schill, ‘Fair and Equitable Treatment, the Rule of Law, and Comparative Public Law’ in Stephan W. Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010) 152 et seq.; Rudolf Dolzer and Christoph Schreuer (n. 63) 138; see also Saluka v. Czech Republic, UNCITRAL, Partial Award, 17 March 2006, para. 291, published at http://www.pca-cpa.org/showpage.asp?pag_id=1149.

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in its resolution expressed a certain reservation without, however, indicating any reasons for this.66 Another important aspect within the Council’s negotiation mandate is marked 37 by the fact that while emphasising maximum protection as a goal, it is pointed out that the agreement shall provide for a level playing field for investors in Canada/India/Singapore and in the EU and shall be without prejudice to the right of the EU and the Member States to adopt and enforce, in accordance with their respective competences, measures necessary to pursue legitimate public policy objectives such as social, environmental, security, public health and safety in a non-discriminatory manner.67

The idea of general exceptions to the standards of protection as found for ex- 38 ample in Art. XX of the GATT, in other words a certain freedom for legitimate regulation or a right to regulate was strongly opposed by some member States within the Council for a long time as this was seen as reducing investment protection considerably. Accordingly it was attempted by some member States to safeguard their own current BIT standards that do not provide for a right to regulate or similar provisions. Contrary to this the Commission and in particular the Parliament have opted for such provisions.68 Parliament in fact called on the Commission to include in all future agreements specific clauses laying down the right of the parties to the agreement to regulate, inter alia, in the areas of protection of national security, the environment, public health, worker’s and consumers’ rights, industrial policy and cultural diversity.69

The related idea of ‘sustainable development’ is in fact reiterated by Parlia- 39 ment.70 The debate is probably not as relevant as one might think. Apart from the fact 40 that the EU has to rely on such provisions in order to legitimately implement its own policies without having to fear claims from foreign investors, the right to regulate is widely recognised by tribunals in their application of various treatment standards even in the absence of explicit clauses. Explicit clauses would therefore only have the effect to codify such tendencies and to provide for greater certainty of law. A greater balance between the interest of investors and States expressed in explicit clauses seems overdue. A general exception regime will not lead to an abuse of regulatory power if it is drafted along the lines of GATT Art. XX in a restrictive way. Regarding the current EU approach against this background, one can expect that future agreements will provide for such exception clauses irrespective of certain concerns of some member States. Within

66 Parliament’s resolution (n. 9) para. 20. 67 See Council’s negotiation mandate (n. 10), under the heading ‘Objectives’; the guidelines proceed by emphasising that policies for the promotion and protection of cultural diversity shall equally be respected by the agreement. 68 Commission’s Communication (n. 7) 9 and Parliament’s Resolution (n. 9) para. 6 and paras. 23–26. 69 Parliament’s Resolution (n. 9) para. 25. 70 Parliament’s Resolution (n. 9) paras. 2, 27, 39.

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the CETA negotiations a general exceptions regime has also been discussed, although until February 2013 no agreement had been found.71 41 An aspect which seemingly has never been addressed by any of the organs concerns the question of exceptions for reason of regional economic integration organisations (REIO clauses).72 So far the member States provided within their BITs for clauses which exempted the application of a treaty with a third State to privileges based on the European integration process. Now that the EU is negotiating itself, one could at least discuss whether such clauses are still necessary. However, if one does not want to extend all of the specific benefits of the EU to third country nationals – and this seems desirable – such a clause would be mandatory. This will naturally reduce the attractiveness of agreements with the EU for third States considering that those parts of the acquis communautaire providing for privileges of EU citizens are quite vast. It will be very difficult to draft such a provision in the complex net of relationships among the EU, its member States and third countries. In fact this problem can also be regarded as one of the specific discrimination standards (i.e. national treatment and most favoured nation treatment), which in the absence of exceptions in favour of the rules of regional economic integration organisations probably need to be specified to the effect that special EU privileges are not subject to the discrimination standards. 42 As far as the question of market access is concerned, the EU organs prima facie very much seem to follow their member State’s approach in not addressing such access for investments within their BITs. While the Council’s negotiation mandate makes no mention of market access in the context of the substantive rules to be provided for,73 the Parliament only calls on the Commission ‘to ensure reciprocity when negotiating market access’.74 From this it seems as if market access for investments is not a priority of the future EU approach.75 However, an enhanced market access as desired by the Commission76 will certainly be a topic in the negotiations with third States for reason of an overlap with the EU’s competences in the field of trade liberalisation.77 The mandates for the EU’s free trade agreements already provided for market access for investments 71 See n. 20, Art. X-19 as proposed by the EU; see for the Commission’s position also the ‘presentation on investment protection’ by the Commission in the context of the civil society dialogue (n. 57). 72 Within the European Parliament’s Resolution (n. 9) it is only stated that some flexibility in the MFN clauses is required ‘in order not to obstruct regional integration processes in developing countries’ (emphasis added), see para. 19. 73 Market access is only mentioned regarding other parts of the agreement: ‘the chapter on investment protection shall be a separate one, not linked to market access commitments’, Council’s negotiation mandate (n. 10). 74 Parliament’s Resolution (n. 9) para. 21. 75 The same is true for the Commission which equally makes no mention of market access within its considerations on the future substantive rules, see Commission’s Communication (n. 7) 8 et seq. 76 See the ‘presentation on investment protection’ by the Commission in the context of the civil society dialogue (n. 57).

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before the negotiations were extended to the field of investment protection. One can expect that also future stand-alone BITs of the EU will equally provide for rules concerning market access for investments. (3) Dispute Resolution Provisions

Dispute resolution was the field which initially seemed to provide for most 43 controversies as between EU organs.78 As will be seen the Commission’s ISDS standard text as well as the Council’s mandate for a TTIP with the United States of America show that the fields of conflict have in the meantime been reduced.79 Already before the entry into force of the treaty of Lisbon, the question was 44 discussed within the Commission as to whether investor-State arbitration should not better be replaced by an exclusive State-to-State dispute settlement mechanism like in the WTO system.80 Today it is an almost commonly shared view that this mechanism in principle enjoys major advantages in comparison to an inter-State mechanism, at least in the field of investment law. Accordingly, the Commission, as well as Parliament and the Council have in principle expressed the solid view that investor-State arbitration should be held on to.81 However, Parliament in its debates concerning the Commission’s proposal for a transitional arrangements regulation also expressed the view that future EU investment agreements need not necessarily include an investor-State dispute resolution mechanism and that doing so should be a ‘conscious and informed policy choice’.82 Seemingly a decisive factor in this decision should be the existence of a competent, efficient and especially independent national court system of the other State. It can be doubted that Parliament will succeed with this approach as investor-State dispute resolution is far too established to be easily abolished. Within the Council’s recent mandate for a TTIP, Council emphasised that even regarding the United States of America with its independent and reliable judicial 77 A provision on market access is also found in the Draft CETA investment text (n. 21); see on this topic Céline Lévesque, ‘The Challenges of “Marrying” Investment Liberalisation and Protection in the Canada–EU CETA’ in: Marc Bungenberg, August Reinisch and Christian Tietje (eds), EU and Investment Agreements – Open Questions and Remaining Challenges (Nomos, 2013) 121–146. 78 For a general analysis on this topic, see Colin Brown and Ilmars Naglis, ‘Dispute Settlement in Future EU Investment Agreements’ in Marc Bungenberg, August Reinisch and Christian Tietje (eds), EU and Investment Agreements – Open Questions and Remaining Challenges (Nomos, 2013) 17–36. 79 See for these documents n. 14 and n. 12. 80 See Jörn Griebel, ‘Der Weg seit Lissabon – Die neue Kommissionsstrategie im Bereich der Direktinvestitionen’ in Marc Bungenberg and Christoph Herrmann (ed), Die gemeinsame Handelspolitik der Europäischen Union nach Lissabon (Nomos, 2011) 193, 211. 81 Council’s negotiation mandate (n. 10) under heading ‘enforcement’; Commission’s Communication (n. 7) 9 et seq.; Parliament’s Resolution (n. 9) para. 32. 82 See Amendment 3 of the Draft European Parliament Legislative Resolution on the Commission’s proposal of a regulation for the financial responsibility regulation which regards an investor-state dispute settlement mechanism as a mere option within investment treaties but not as an indispensable requirement, 26 March 2013, available at http://www.europarl.europa.eu/ sides/getDoc.do?type=REPORT&reference=A7-2013-0124&language=EN#title1.

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system an ‘effective and state-of-the-art investor-to-state dispute settlement mechanism’ should be provided for.83 It will be interesting to see Parliament’s position as soon as it comes to ratifying the CETA which also provides for an investor-State dispute resolution mechanism irrespective of Canada’s reliable judicial system.84 45 A further uncertainty regarding investor-State arbitration lies in the fact that it is not sure that the CJEU will without reservation accept international investment tribunals as a competing judicial means of dispute resolution.85 46 In the negotiation mandate of the Council also ‘State-to-State’ dispute resolution is included but in a way that it ‘will not interfere with the right of investors to have recourse to the investor-to-state dispute settlement mechanism’.86 For a lack of opposition on this point one can expect that, like in all existing BITs, the future EU agreements will also contain a mechanism for the resolution of conflicts as between the parties to the treaty.87 For the moment, it seems that the responsibility of bringing claims within such proceedings and of taking the position of the respondent in case of claims by third States falls on the EU. This raises a couple of questions as to the distribution of responsibility as between the EU and its member States which regarding the investor-State dispute settlement mechanism are intended to be settled by way of the regulation establishing a framework for managing financial responsibility linked to investor-State dispute settlement tribunals. No indications so far can be found on how these problems will be settled regarding State-to-EU dispute resolution. 47 It is remarkable that the Council’s negotiation mandate for Canada, India and Singapore apart from addressing State-to-State dispute resolution makes only one other statement regarding dispute resolution without any further specification. It is pointed out that the investor should have the option of such a ‘wide range of arbitration as currently available under Member States’ bilateral investment agreements’.88 This can be understood as an original intention of the Council to leave the dispute settlement system for investment disputes as it currently stands, considering that it is in principle the approach of most BITs of the member States to provide investors with a wide range of arbitral mechanisms they can choose for dispute resolution.89 Accordingly, it used to be in the interest of the member States that European investors also have the option to choose mech83 See n. 12, under the heading ‘enforcement’. 84 See Draft CETA Investor-to-State Dispute Settlement Text (n. 21). 85 See on this topic specifically Steffen Hindelang, ‘The Autonomy of the European Legal Order – EU Constitutional Limits to Investor-State Arbitration on the Basis of Future EU Investment-related Agreements’ (2013) EYIEL, Special Issue (Common Commercial Policy after Lisbon) 187–198; Stephan W. Schill (n. 5). 86 See n. 10; this is also the view expressed by Parliament which still regards State-to-State dispute settlement procedures as important, Parliament’s Resolution (n. 9) para. 32. 87 See on this Frank Hoffmeister and Günes Ünüvar (n. 48) 74. 88 See n. 10. 89 Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff, 1995) 129.

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anisms which for reason of their procedural rules for example enable confidential proceedings or avoid amicus curiae briefs. In this respect the Commission as well as Parliament at an early stage expressed quite opposing views to the Council. The Commission within its Communication emphasised the importance of achieving transparency within the investor-State dispute resolution mechanism.90 Also Parliament formulated demanding conditions for dispute resolution. It believes that ‘changes must be made to the present dispute settlement regime, in order to include greater transparency’ and ‘the possibility to use amicus curiae briefs (…)’.91 In the Commission’s ISDS standard text transparency is one of the most prominent aspects. Within the short cover note to the standard text the Commission simply states, that the ‘inclusion of effective rules on transparency is unavoidable’.92 While Art. 5 of the standard text grants a certain choice of arbitration fora to a claimant, inter alia the International Centre for Settlement of Investment Disputes (ICSID) or the rules of the United Nations Commission on International Trade Law (UNCITRAL), Articles 11 and 12 which concern transparency and amicus curiae submissions shall apply to all arbitration mechanisms chosen and override the respective arbitration rules of these.93 The transparency rules mentioned in Art. 11 are elaborated within a special annex. The provisions therein are quite far-reaching, requiring that all written documents concerning a certain proceeding including also the award shall be made available to the public. Also hearings shall be public. Exceptions from these rules are only provided for in cases where it is necessary to protect certain information or the integrity of the arbitral process.94 The recent TTIP mandate has reduced this conflict considerably as the Council stated that the investor-State dispute settlement mechanism shall provide inter alia for ‘transparency’.95 Accordingly it can be expected that both Council and Parliament will be able to agree on a far more transparent dispute resolution system as it stands today. At an early stage of the debates the Commission within its Communication expressed the firm view that it was for the EU to be the respondent party in dispute with investors from third countries.96 Considering that the EU for reason of 90 91 92 93

Commission’s Communication (n. 7) 10. Parliament’s Resolution (n. 9) para. 31. Commission’s ISDS standard text (n. 14) ‘introduction’. An exception is made regarding the UNCITRAL Rules on Transparency on Investor to State Dispute Settlement, see Art. 11 of the Commission’s ISDS standard text (n. 14); in this context it is of interest, that on 11 July 2013 the United Nations Commission on International Trade Law (UNCITRAL) adopted the UNCITRAL Rules on Transparency in Treaty-based InvestorState Arbitration, see http://www.unis.unvienna.org/unis/pressrels/2013/unisl186.html; the works on this document have seemingly strongly influenced the Commission’s approach regarding transparency questions. 94 See on the question of transparency within the standard text Nathalie Bernasconi-Osterwalder (n. 14). 95 See n. 12, reference to be found under the heading ‘enforcement’. 96 Commission’s Communication (n. 7) 10.

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not being a State cannot accede to the ICSID Convention, any reference to ICSID as a means of dispute resolution did not seem to make sense as long as no changes to this non-membership problem were in reach. However, in this respect the Commission was supported by Parliament which took note of the fact that the EU currently cannot use certain dispute mechanisms, such as ICSID, and requested that the Commission and member States ‘work towards the necessary reforms’.97 While it is still not very probable that the ICSID Convention will ever be changed in order to allow also international organisations to become a member,98 the Proposal managing financial responsibility, which is also defining under which circumstances a member State will take the responsibility of the respondent party, gives an explanation for holding on to ICSID as one possible mechanism for investor-State dispute resolution. The same is true for Art. 4 of the Commission’s ISDS standard text which reflects this concept as a possible part of an international agreement. Accordingly it is not surprising that ICSID is among the mechanisms listed in Art. 5 of the Commission’s ISDS standard text.99 In this context it should also be mentioned that the Commission has attempted to establish some of the fortunate rules of the ICSID system as standard clauses of the investor-State dispute settlement mechanism so that these are applicable irrespective of the chosen arbitration institution or rules.100 52 It is furthermore interesting that the Parliament foresaw ‘the obligation to exhaust local remedies where they are reliable enough to guarantee due process’.101 While this is still a requirement in general international law regarding the exercise of diplomatic protection, this concept is for good reasons only rarely provided for in modern BITs. The purpose of allowing direct access to investment arbitration without a previous exhaustion of local remedies rests upon the conviction that local courts are not sufficiently reliable in respect of their neutrality and independence in claims brought against the State to which they belong. Accordingly it is widely seen as one of the most important aspects of effective investment protection, that there is no need to spend many years in local courts before international arbitration can be initiated. The fear that an exhaustion of local remedies could defeat the purpose of providing access to international arbitration was also the reason why the Commission has not foreseen it within its Communication,102 nor does it figure within the Council’s negotiation mandate. Providing for an exhaustion of local remedies would in fact be a remarkable regress for an effective investment protection. The Commission’s 97 Parliament’s Resolution (n. 9) para. 33. 98 An amendment of the ICSID Convention requires according to Art. 66 the consent of all currently (as of September 2013) 149 members, which is not very likely. 99 See on this topic also Frank Hoffmeister and Günes Ünüvar (n. 48) 75 et seq. 100 See Commission’s ISDS standard text (n. 14), for example Art. 16 which relies on Arts. 53 and 54 of the ICSID Convention. 101 Parliament’s Resolution (n. 9) para. 31. 102 See Luke Peterson, ‘Unpublished discussion paper gives overview of European Commission trade department’s recent thinking on foreign investment dispute settlement’ (2011) 4 IAR, No. 8 (9 June 2011).

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ISDS standard text does accordingly not require an exhaustion of local remedies rule. Another concern for Parliament is the ‘opportunity for parties to appeal’.103 If 53 one holds on to an investor’s choice as between the various mechanisms currently used for investment arbitration, such an opportunity is in fact nowhere provided for, not even within the ICSID system where annulment proceedings can only be successful on a limited number of grounds.104 An appeal mechanism is already mentioned by the Commission within its Communication105 and also referred to in Art. 19 of the Commission’s ISDS standard text106 and could in fact be one out of a couple of possible mechanisms to enhance certainty of law. Here, the Commission proposes that an EU investment treaty can later be amended to include such a mechanism by way of a decision of a so-called Committee for the Settlement of Investor-State Disputes. This committee will consist of representatives of the treaty parties. Within its mandate for the TTIP, the Council opted for the first time for an appeals mechanism: ‘Considerations should be given to the possibility of creating an appellate mechanism applicable to investor-to-state dispute settlement (…)’.107 Accordingly an appeals mechanism will more than ever be likely to find its way into the system of dispute resolution in international investment law. There are a couple of further interesting aspects to be found in the Commis- 54 sion’s ISDS standard text, inter alia a not so common solution to avoid parallel claims instead of a classical fork in the road clause,108 special mediation rules109 or a special code of conduct for members of arbitral tribunals and mediators.110 These very detailed aspects are hardly addressed elsewhere by the involved EU organs and therefore it is difficult to forecast any developments in this respect. As indicated above, the division of functions and responsibilities as between 55 the EU and the member States in investor-State proceedings, is outlined within the Commission’s proposal on financial responsibility. Here answers are given as to who should represent the defendant side within investment proceedings initiated by investors from third countries and in terms of who should bear the financial burden regarding compensations and costs to be paid. Regarding financial questions the proposal follows the following logic: where the treatment concerned is afforded by the Union institutions then financial responsibility should rest with the Union institutions. Where the treatment concerned is afforded by a Member State of the European Union, then financial responsibility should rest with that Member State. It is

103 Parliament’s Resolution (n. 9) para. 31. 104 See Art. 52 I lit. a–e of the ICSID Convention; it has, however, to be admitted that there have been very different approaches to the interpretation of these prerequisites, sometimes allowing quite wide interpretations of these. 105 See Commission’s Communication (n. 7) 10. 106 See n. 14. 107 See n. 12, under the heading ‘enforcement’. 108 See n. 14, Art. 6. 109 See n. 14, Art. 3 and Annex 1. 110 See n. 14, Annex II.

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As the proposed arrangement follows fair considerations it must be doubted that Parliament and Council will not adopt it. It remains however to be seen to what degree the required adaptation of foreign investors to the specifics of EU law will influence the position of possible negotiation partners. (4) Further Aspects

An aspect not addressed within the Council’s negotiation mandate, only scarcely addressed within the Commission’s communication and extensively addressed in the Parliament’s Resolution concerns the question of corporate social responsibility and the relevance of documents such as the OECD Guidelines for Multinational Enterprises in the context of the future EU investment policy.112 While the Commission regards the mentioned OECD document in short words as ‘an important instrument to balance the rights and responsibilities of investors’, the Parliament calls for corporate social responsibility clauses and asks the Commission, ‘to include, in all future agreements, a reference to the updated OCED Guidelines for Multinational Enterprises’.113 Furthermore Parliament expressed the view that investment agreements to benefit developing countries ‘should also be based on investor obligations in terms of compliance with human rights and anti-corruption standards’.114 58 The Council, in its Conclusions from 25 October 2010, while recognising the importance of instruments in the field of corporate social responsibility, emphasises in this context that ‘it remains crucial that the main focus of international investment agreements should continue to be effective and ambitious’.115 59 It will be seen what direction the agreements negotiated by the Commission will take in this respect considering that Parliament wishes for clear provisions on corporate social responsibility which are at the same time mostly rejected by the Council. It seems likely that a non-binding reference will finally be provided for. One might also propose that an investor who fails to comply with corporate social responsibility provisions loses investment protection. The same logic is applied by some States when they grant guarantees or credits to foreign investors. These are equally made subject to compliance with standards of corporate social responsibility. 57

4. Conclusion 60

Even though one has to admit that the task flowing from the above described shift of the competences regarding foreign direct investments is an enormous 111 112 113 114 115

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one, it can be criticised that after four years since the Lisbon treaty’s entry into force, the future approach of the EU is in many important aspects unclear. This is not only due to confidentiality considerations and divergent views within the involved organs, it is also due to an at least initial lack of resources invested in this topic by the EU. Apart from the fact that the current standards of investment protection of the member State’s BITs are likely to be endangered when negotiated together with trade rules, it is regrettable that the idea of a multilateral or plurilateral approach has never been properly put on the agenda of the various involved EU organs. Doing so could have greatly increased effectiveness and therefore it would have been worth taking the risk of such an attempt. Considering the great bargaining power of the EU, it seems likely that such an approach would have quickly succeeded. It seems as if the approach of combined bilateral negotiations of trade and investment aspects constitutes a barrier to such an efficient approach regarding the field of investments. Though bilateralism is currently without alternative regarding trade negotiations, this does not infer that the same is true in the field of investment protection. Furthermore it has to be criticised that the current agenda for negotiations is with only a few though important negotiation partners very limited. Considering that every single member State should, for the sake of its own investors and their appeal as an investment host, enjoy investment protection to the extent of the number of German BITs, the EU is confronted with the task of concluding about 140 BITs to fill in the currently existing gap of about 2000 missing member States’ BITs.116 This will not be possible unless more resources are put in the negotiation process. Accordingly the call by Parliament on the Commission in light of negotiations of BITs being a ‘time-consuming process’ to ‘invest in terms of its personal and its material resources’ is well understandable.117 Whatever the outcome of the first completed negotiations of the Commission will be, the partly opposing views of Council and Parliament will certainly endanger the necessary ratification process within the EU. And it should not be forgotten, that even a successful ratification process is not a bar to possible reservations of the CJEU with respect to a competing competence of investorState arbitration tribunals. Against this background the present contribution has to acknowledge that it marks only a very speculative analysis along the way of the development of a proper EU approach in the field of foreign direct investment regulation.

116 Jörn Griebel (n. 80) 196. 117 Parliament’s Resolution (n. 9) para. 16.

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E. MERCOSUR and CAFTA

Gabriel Bottini, Veronica Lavista and Mariana Lozza 1. MERCOSUR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. DR–CAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Jeffrey T. Cook, ‘The Evolution of Investment-State Dispute Resolution in NAFTA and CAFTA: Wild West to World Order’ (2007) 34 Pepp. L. Rev. 1085–1139; David A. Gantz, ‘Settlement of Disputes under the Central America – Dominican Republic – United States Free Trade Agreement’ (2009) 6 TDM 331–410; Rachel Thorn and Jennifer Doucleff, ‘Disregarding the Corporate Veil and Denial of Benefit Clauses: Testing Treaty Language and the Concept of “Investor”’ in Michael Waibel, Asha Kaushal, Kyo-Hwa Chung and Claire Balchin (eds), The Backlash against Investment Arbitration (Kluwer Law International, 2010).

The purpose of this chapter is to describe the legal developments relating to foreign investments within the context of the Mercado Común del Sur (MERCOSUR) and the Central American Free Trade Agreement (CAFTA). These groupings include several Latin American countries and the United States, the relationship between the former and the latter meriting consideration as it has been said to be at the origin of modern international investment law.1 2 MERCOSUR was created through the Treaty of Asunción on 26 March 1991, which was signed among Argentina, Brazil, Paraguay and Uruguay.2 Venezuela is also now a party to MERCOSUR, and Bolivia is in the process of becoming a full member.3 The Treaty of Asunción provides for the establishment of a common market, which involves the free circulation of assets, services and productive factors among member States, the establishment of a common external tariff and the adoption of a common commercial policy vis-à-vis third States, and the coordination of macroeconomic and sector-specific policies.4 This first MERCOSUR treaty deals basically with trade-related issues and the creation of the original institutional framework of MERCOSUR,5 but not directly with the regulation of foreign investment. 1

1 See Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2004) 20–21. 2 Tratado para la Constitución de un Mercado Común entre la República Argentina, la República Federativa del Brasil, la República del Paraguay y la República Oriental del Uruguay of 26 March 1991 [Mercosur Treaty], available at http://www.mercosur.int/innovaportal/file/3862/1/c mc_1991_tratado_es_asuncion.pdf. But note, Paraguay was suspended from 29 June 2012 until 15 August 2013, available at http://www.mercosur.int/innovaportal/file/3862/1/dec_028-2012_e s_reglam_suspension_paraguay.pdf and http://www.mercosur.int/innovaportal/file/4506/1/decisi on_cese_suspension_paraguay_es.pdf. 3 See ‘Quienes somos’ in http://www.mercosur.int/t_generic.jsp?contentid=3862. Chile, Colombia, Peru, and Ecuador are ‘Associated States’ of Mercosur, while Guyana and Suriname are in the process of attaining this status. Ibid. 4 Mercosur Treaty (n. 2) Art. 1. 5 Ibid., Art. 9 (creating the Consejo Mercado Común and the Grupo Mercado Común).

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The Treaty of Asunción was complemented by the Ouro Preto Protocol of 17 December 1994.6 This Protocol enlarges the institutional structure of MERCOSUR, through the establishment of four additional organs.7 There are no provisions on foreign investment in this treaty either. CAFTA was signed on 28 May 2004 by the United States and five Central American countries – Costa Rica, Honduras, Nicaragua, El Salvador, and Guatemala. On 5 August 2004 the Dominican Republic–Central America–United States Free Trade Agreement (DR–CAFTA) was signed, which added the Dominican Republic to the original parties.8 The DR–CAFTA establishes a free trade area9 and includes broad trade liberalisation objectives,10 but it also seeks to ‘substantially increase investment opportunities in the territories of the Parties’.11 Further, it includes a chapter wholly devoted to the regulation of investments.12 The contents of Chapter Ten (‘Investments’) are discussed below. Outside the framework of Mercosur and DR–CAFTA, it should be noted that on 22 April 2013 Bolivia, Cuba, Ecuador, Nicaragua, Dominican Republic, St. Vincent and Grenadine and Venezuela came together in the 1st Ministerial Meeting of Latin American States Affected by Transnational Interests and they signed a declaration.13 In this declaration, these States set out concerns regarding the functioning of international arbitration and a proposal that regional organisms should be created for settling investment disputes. Further, they purported to create an International Observatory – whose functions include monitoring these international disputes and procedures – and an Executive Committee, which would have a role designing and implementing mutually supportive actions in the political and legal arenas. The declaration additionally notes the intention of these countries to seek global agreements in this regard, including with the Group of 77 plus China.

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The first MERCOSUR instrument dealing specifically with investments is the 7 Colonia Protocol for the Promotion and Protection of Investments in Mercosur

6 Protocolo Adicional al Tratado de Asunción sobre la Estructura Institucional del Mercosur – Protocolo de Ouro Preto – of 17 December 1994, available at http://www.mercosur.int/innovaportal/file/721/1/cmc_1994_protocolo_ouro_preto_es.pdf. 7 Ibid., Art. 1 (the new organs are the Comisión de Comercio del Mercosur, the Comisión Parlamentaria Conjunta, the Foro Consultivo Económico-Social and the Secretaría Administrativa del Mercosur). 8 The text of the DR–CAFTA can be found at http://www.sice.oas.org/Trade/CAFTA/ CAFTADR_e/CAFTADRin_e.asp. 9 DR–CAFTA Art. 1.1. 10 Ibid., Art. 1.2. 11 Ibid., Art. 1.2(d). 12 Ibid., Chapter Ten. 13 The Declaration is available at http://cancilleria.gob.ec/wp-content/uploads/2013/04/22abr_de claracion_transnacionales_eng.pdf.

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(Colonia Protocol), signed on 17 January 1994.14 The Colonia Protocol has not been ratified by any of the State parties to MERCOSUR. In the preamble, the MERCOSUR countries express their belief that creating favourable conditions for intra-MERCOSUR investments will ‘intensify economic cooperation and accelerate the process of integration among the four countries’.15 They also affirm that ‘the promotion and protection of such investments on the basis of an agreement will contribute to stimulate individual economic initiative and increment prosperity in the four countries.’16 Article 1 of the Colonia Protocol contains a broad definition of the term investment, similar to that found in many bilateral investment treaties (BITs), which includes ‘every kind of asset invested directly or indirectly by investors of one of the Contracting Parties in the territory of another Contracting Party, in accordance with the laws and regulations of the latter’.17 It is worth noting that the non-exclusive list of protected investments includes loans ‘only when they are directly linked to a specific investment’.18 As to the standards of treatment, Article 2 provides for national and most favoured nation treatment.19 Fair and equitable treatment, prohibition of unjustified or discriminatory measures and ‘full legal protection’ are established in Article 3.20 The expropriation provision is standard except for compensation.21 Under the Colonia Protocol, compensation must be prior to the taking.22 Article 5, which grants investors free transfer of investments and profits, contains the ordinary guarantees to be found in most BITs. Disputes between the contracting parties are subject to the Brasilia Protocol for the Resolution of Disputes (Brasilia Protocol), or to the system that replaces it under the Treaty of Asunción.23 The Brasilia Protocol24 is no longer in force, since it was replaced by the Olivos Protocol for the Resolution of Disputes in Mercosur,25 which provides inter alia for direct negotiations,26 ad hoc arbitration,27 and a revision procedure before a Permanent Revision Tribunal.28 14 See Colonia Protocol for the Promotion and Protection of Investments in Mercosur of 17 January 1994 (Colonia Protocol), available at http://www.mercosur.int/msweb/Normas/normas_w eb/Decisiones/ES/CMC_DEC_1994-011_ES_Protocolo%20Protecci%C3%B3n%20Inversion es.PDF. 15 Ibid., Preamble. 16 Ibid. 17 Ibid., Art. 1.1. 18 Ibid., Art. 1.1.c). 19 Ibid., Art. 2.1. 20 Ibid., Art. 3. 21 Ibid., Art. 4. 22 Ibid., Art. 4.1. 23 Colonia Protocol, Art. 8. 24 See Brasilia Protocol for the Resolution of Disputes, 17 December 1991, available at http:// www.tprmercosur.org/es/docum/Protocolo_de_Brasilia_es.pdf. 25 See Olivos Protocol for the Resolution of Disputes in Mercosur, 18 February 2002, available at http://www.mre.gov.py/v1/Adjuntos/mercosur/Acuerdos/2002/espanol/51-protocolodeolivo s.pdf. This Protocol is further modified by a Modifying Protocol, available at http://www.mre.

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Disputes between an investor and a contracting party will ‘to the extent possible, be resolved through amicable consultations’.29 If the dispute is not resolved within six months, it may be submitted by the investor to the courts of the host State, to international arbitration, or to the permanent system of resolution of disputes with private persons that may be established under the Treaty of Asunción.30 The choice by the investor of any of the three alternatives – which in the case of arbitration includes ICSID and UNCITRAL – is definitive.31 On 5 August 1994 the MERCOSUR countries signed the Buenos Aires Protocol on the Promotion and Protection of Investments from States not parties to the MERCOSUR (Buenos Aires Protocol).32 The Buenos Aires Protocol is not in force either, since it was ratified by Argentina, Paraguay and Uruguay, but not by Brazil.33 The aim of the Buenos Aires Protocol is to ‘harmonize the general legal principles to be applied by each of the States Parties to investments from States not Parties to the Mercosur’, in order to avoid ‘differing conditions that distort the flow of investments’.34 This is why, under Article 1, the contracting parties cannot accord to investments of investors of third States a more favourable treatment than the one established in this protocol.35 The provisions on the definition of investment and the standards of treatment are analogous to the ones contained in the Colonia Protocol.36 The Buenos Aires Protocol, however, does not require that compensation be prior to the taking in case of expropriation, but that expropriation be accompanied by provisions related to compensation.37 Under this protocol, resolution of disputes between a MERCOSUR country and a third State is subject to consultations and, if these fail, to ‘international arbitration’.38 The same is true as to disputes between an investor of a third State and a MERCOSUR country,39 although the Buenos Aires Protocol does not specify which arbitration rules would be applicable.

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gov.py/v1/Adjuntos/mercosur/Acuerdos/2007/espanol/102-protocolomodificatoriodelprotocol odeolivos.pdf, which has not entered into force yet. Ibid., Art. 4. Ibid., Art. 9. Ibid., Art. 17. Colonia Protocol, Art. 9.1. Ibid., Art. 9.2. Ibid., Arts. 9.3 and 9.4. Buenos Aires Protocol on the Promotion and Protection of Investments from not parties to the Mercosur, 5 August 1994, available at http://www.mre.gov.py/v1/Adjuntos/mercosur/Acuerdos/1994/espanol/6-protocolodepromocionyprotecciondeinversiones(portugues).pdf. Ibid. Ibid., Preamble. Ibid., Art. 1. Ibid., Art. 2. Ibid., Art. 2.D). Ibid., Art. 2.G). Ibid., Art. 2.H).

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In addition, several memoranda of understanding have been celebrated between MERCOSUR and different countries, both within the region of Latin America as well as other regions. These memoranda of understanding do not foresee a dispute resolution procedure open to individuals. 19 On 28 June 1999, the countries of MERCOSUR, as State parties to this agreement, and Guyana, executed a memorandum of understanding.40 In this instrument, the parties agreed to strengthen their reciprocal bonds with the following objectives related to investment: (i) to stimulate economic relations in issues of commerce and investment; (ii) to promote investments of the signing parties, and (iii) to seek to agree on mechanisms for the protection and promotion of investment.41 To support these objectives the signatories approved certain initiatives, such as carrying out activities to broaden the commercial and investment relations between their private sectors, as well as the identification of potential sectors for investments that would allow the generation of reciprocal commerce and promote commerce with third markets.42 20 On that same date, the countries of MERCOSUR, as State parties to that agreement, executed another memorandum of understanding, in the same terms, with Trinidad and Tobago.43 21 MERCOSUR also signed a Memorandum of Understanding on Cooperation in the Field of Investment and Trade and a Plan of Action with Singapore on 24 September 2007.44 In this memorandum the parties agreed, to the extent relevant for present purposes, to seek to promote economic relations, amongst others, in the area of investment, as well as to strengthen their cooperation identifying measures that could promote the flow of investment.45 In accordance with a plan of action that is annexed as Annex A to the memorandum, the parties agreed to develop more favourable conditions for the expansion of investment.46 The parties will also examine the impact the issues set out in the plan of action might have on their bilateral economic relations or on their interests in commerce with third States, including multilateral common interest issues.47 With the purpose of stimulating investment, the parties also agreed to favour the regular exchange of points of view on opportunities for investment.48 In addition, the parties agreed 18

40 Memorandum of Understanding between Mercosur and Guyana in the Fields of Trade and Investment of 28 June 1999, available at http://www.mercosur.int/msweb/portal%20intermediari o/Normas/acordos%20es/54_1999_MEMO%20ENTEND%20MCS-GUYANA_ES.pdf. 41 Ibid., at 1. 42 Ibid., at 2. 43 Memorandum of Understanding between Mercosur and Trinidad and Tobago in the Fields of Trade and Investment of 28 June 1999, available at http://www.mercosur.int/msweb/portal%2 0intermediario/Normas/acordos%20es/52_1999_MEMO%20ENTEND%20MCS-TRINIDAD %20Y%20TOBAGO_ES.pdf. 44 Memorandum of Understanding on Cooperation in the Field of Trade and Investment and Plan of Action between Mercosur and Singapore of 24 September 2007, available at http:// www.mercosur.int/msweb/Portal%20Intermediario/Normas/Tratados.html. 45 Ibid., Art. 1. 46 Ibid., Art. 2(1). 47 Ibid., Art. 2(2).

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to set up a Consultative Group on Cooperation on Trade and Investment which would examine and guide the progress of the plan of action.49 The plan of action sets out areas of priority interest. In relation to investment, it foresees the strengthening of exchanges of information and institutions and the promotion of commerce and investment through the private sector.50 MERCOSUR signed a Memorandum of Understanding with the Republic of 22 Korea on 23 July 2009 for the Establishment of a Joint Consultative Group for the Promotion of Trade and Investment. This memorandum was approved by the Grupo Mercado Común (Common Market Group) in its Decision 04/2009.51 The parties agreed to explore the possibilities and means to strengthen the commercial and economic relations in conformity with WTO rules.52 The parties also established a joint consultative group to explore the means to promote commerce and investment, foreseeing the exchange of information amongst other mechanisms.53 Further, several framework agreements for the creation of a free trade area 23 were signed by MERCOSUR State parties. As regards investment, these framework agreements aim to strengthen the existing relations between the parties, attempting to broaden the existing investment opportunities on both sides. On 15 December 2000, a framework agreement for the creation of a free trade area was signed with South Africa, which is in force.54 On 17 June 2003, a framework agreement was also signed with India, although this agreement is not in force.55 Another framework agreement that is in force was signed with Morocco on 26 November 2004.56 A Framework Agreement on Economic Cooperation between the Member States of the Cooperation Council for Arab States of the Gulf and the Member States of Mercosur was signed on 10 May 2005,57 in which the parties agree to, inter alia, promote investment cooperation. This agreement, to48 49 50 51

52 53 54 55 56 57

Ibid., Art. 2(3). Ibid., Art. 3. Ibid., Annex A. Memorandum of Understanding for the Establishment of a Joint Consultative Group for the Promotion of Trade and Investment between Mercosur and the Republic of Korea of 23 July 2009, available at http://www.mre.gov.py/v 1/Adjuntos/mercosur/Acuerdos/2009/ingles/memo _comercial_mercosur_corea.pdf. Ibid., Art. 1. Ibid., Art. 2. Framework Agreement for the Creation of a Free Trade Area between Mercosul and the Republic of South Africa of 15 December 2000, available at http://www.mre.gov.py/v 1/Adjuntos/mercosur/Acuerdos/2000/ingles/47-acuerdomarcomsur-sudafrica.pdf. Framework Agreement between the Mercosur and the Republic of India of 17 June 2003, available at http://www.mre.gov.py/v1/Adjuntos/mercosur/Acuerdos/2003/ingles/65-acuerdomarcomsur-india-.pdf. Framework Agreement on Trade between the Mercosur and the Kingdom of Morocco of 26 November 2004, available at http://www.mre.gov.py/v1/Adjuntos/mercosur/Acuerdos/2004/ ingles/73-acuerdomarcodecomerciomsur-marruecos--.pdf. Framework Agreement on Economic Cooperation between the Member States of the Cooperation Council for Arab States of the Gulf and the Member States of Mercosur of 10 May 2005, available at http://www.mre.gov.py/v1/Adjuntos/mercosur/Acuerdos/2005/ingles/83-acuerdomarcomsur-golfo--.pdf.

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gether with a framework agreement signed with Pakistan on 20 July 2006, is not in force.58 Further, on 30 June 2008, a similar framework agreement was signed with Turkey, but this agreement is not in force.59 However, on this same date a framework agreement was also signed with Jordan and this agreement is in force.60 On 16 December 2010 similar framework agreements were signed with Syria61 and Palestine,62 neither of which is in force. 24 Finally, two free trade agreements have been signed by MERCOSUR, one with Israel and one with Egypt.63 Only the former is in force. The free trade agreement with Israel was signed on 18 December 2007.64 It foresees that the parties will make efforts to broaden reciprocal knowledge about trade and investment opportunities.65 The agreement does not refer to dispute resolution procedures open to individuals or investors. 2. DR–CAFTA 25

DR–CAFTA’s preamble contains two references to investment. First, the State parties express they are resolved to ensure ‘a predictable commercial framework for business planning and investment’.66 Secondly, State parties affirm their resolve to ‘PROMOTE transparency and eliminate bribery and corruption in international trade and investment’.67 The latter is in line with the consensus among investment tribunals that illegal investments do not deserve protection under international investment agreements.68 58 Framework Agreement on Trade between the Mercosur and the Islamic Republic of Pakistan of 20 July 2006, available at http://www.mre.gov.py/v1/Adjuntos/mercosur/Acuerdos/2006/ ingles/95-acuerdomarcodecomerciomercosur-pakistan--.pdf. 59 Framework Agreement for the Creation of a Free Trade Area between Mercosur and the Republic of Turkey of 30 June 2008, available at http://www.mre.gov.py/v1/Adjuntos/mercosur/ Acuerdos/2008/ingles/111-msur-turquia.pdf. 60 Framework Agreement between Mercosur and the Hashemite Kingdom of Jordan of 30 June 2008, available at http://www.mre.gov.py/v 1/Adjuntos/mercosur/Acuerdos/2008/ingles/110msur-jordania.pdf. 61 Framework Agreement for the Creation of a Free Trade Area between Mercosur and the Syrian Arab Republic of 16 December 2010, available at http://www.mre.gov.py/v 1/Adjuntos/mer cosur/Acuerdos/2010/ingles/acuerdomarcoparalacreaciondeunareadelibrecomercioentreelmerc osurysiria.pdf. 62 Framework Agreement on Trade and Economic Cooperation Between Mercosur and the Palestinian Liberation Organization on behalf of the Palestinian National Authority of 16 December 2010, available at http://www.mre.gov.py/v 1/Adjuntos/mercosur/Acuerdos/2010/ ingles/acuerdomarcocomercioycooperacioneconomicamercosur-palestina.pdf. 63 Free Trade Agreement between Mercosur and the Arab Republic of Egypt of 2 August 2010, available at http://www.mercosur.int/innovaportal/file/2370/1/Acuerdo%20MCS-Egipto.pdf. 64 Free Trade Agreement between the State of Israel and Mercosur of 18 December 2007, available at http://www.moital.gov.il/NR/rdonlyres/3492F883-5CD7-40AF-A168-90CF1D44866F/ 0/FTAinEnglish.pdf. 65 Id., Art. 9. 66 DR–CAFTA, Preamble. By the same token, the State parties state their resolve to, inter alia, ‘PRESERVE their flexibility to safeguard the public welfare’. Ibid. 67 Ibid. 68 See, e.g., Salini Costruttori S.P.A. and Italstrade S.P.A. v. Morocco, ICSID Case No. ARB/ 00/4, Decision on Jurisdiction, 23 July 2001, para. 46; Inceysa Valliosoletana SI v. El Sal-

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Chapter Ten of DR–CAFTA contains substantive and procedural provisions 26 regarding the protection of investors from one party who have made investments covered by the agreement in another party’s territory.69 This chapter is divided in three parts: (i) Section A, which mainly contains standards of treatment; (ii) Section B, which regulates the resolution of disputes; and (iii) Section C, which defines a list of terms.70 The contents of the first two sections are briefly described here.71 In Section A,72 international standards of treatment are included in terms that 27 can be found in many international investment agreements.73

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vador, ICSID Case No. ARB/03/26, Award, 2 August 2006, paras. 247–249; Alasdair Ross Anderson and others v. Costa Rica, ICSID Case No. ARB(AF)/07/3, Award, 19 May 2010, para. 53. Conceptual differences remain, however, for example in relation to whether the illegality affects the jurisdiction of the tribunal or only the admissibility or merits of the case, and as to what kind of illegalities must be present for the investor to lose the right to bring a treaty claim. The benefits of this chapter may be denied when persons of a non-State party own or control an investment, which would be otherwise covered under the chapter, when there are no diplomatic relations between the concerned States, or the transactions with the non-State party or the person of a non-State party are prohibited (Art. 10.12.1). Such denial of benefits may also be applicable to an enterprise that in principle would be a covered investment but that has no substantial business activities in the territory of any party, other than the denying party, and persons of a non-State party or of the denying State party own or control the enterprise (Art. 10.12.2). On denial of benefits clauses see Rachel Thorn and Jennifer Doucleff, ‘Disregarding the Corporate Veil and Denial of Benefits Clauses: Testing Treaty Language and the Concept of “Investor”’ in Michael Waibel, Asha Kaushal, Kyo-Hwa Chung and Claire Balchin (eds), The Backlash against Investment Arbitration (Kluwer Law International, 2010) 3, 8. The tribunal in the Pac Rim v. El Salvador case, which was the first one to decide on (and accept) a denial of benefits objection under DR–CAFTA, noted that the provision of 10.12.2 of the Agreement resembles the one contained in Art. 1113(1) of the NAFTA, and that no case has ever been brought under such provision. Pac Rim Cayman LLC v. El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections, 1 June 2012, paras. 4.1–4.5. Additionally, by means of annexes, State parties may reject or limit certain foreign investments. It should be noted, however, that the term ‘investment’ is defined in Chapter Ten, Section C, of the DR–CAFTA agreement – similar to many international investment agreements – as ‘every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment’, although the definition goes further and expressly states some of the characteristics an investment has to include: the commitment of capital or other resources, the expectation of gain or profit, and the assumption of risk. Per Annex 10-A, the rescheduling of the debts of a Central American party or the Dominican Republic is not subject to Section A other than the provisions on national treatment and most favoured nation treatment. Besides State parties, State enterprises and persons who exercise regulatory, administrative or other governmental authority delegated by a State party are also bound by this Section (Art. 10.1.2). But DR–CAFTA contains special provisions as regards the relationship between investment protection and provisions of the treaty dealing with other matters. Government measures that are covered by Chapter Twelve (Financial Services) are expressly excluded from the scope of Chapter Ten (Art. 10.2.3). Moreover, this chapter does not prevail in case of conflict with other chapters of the DR–CAFTA (Art. 10.2.1). Additionally, under certain provisions State parties have expressly stressed the superior hierarchy of other chapters over Chapter Ten, for instance through the reference to Chapter Fifteen (Intellectual Property Rights) in Art. 10.7.5 (expropriation). Further, Chapter Ten shall not be construed to limit the adoption, maintenance and enforcement of measures, otherwise consistent with the Chapter, adopted with respect to

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Briefly, those standards are provided for in the following terms:

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National treatment:74 investors and investments shall not receive treatment less favourable than that State parties accord, in like circumstances, to its own investors and their investments. The scope of this standard covers the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of the investment. This obligation is made expressly applicable to the regional level of government.75 Most favoured nation (MFN) treatment:76 State parties are bound to accord investors and investments of nationals of another party treatment no less favourable than that they accord, in like circumstances, to investors and investments of any other State party or non-party. As with national treatment, it is expressly provided that this obligation applies both to investors and to investments. It is worth noting that not all international investment agreements, when providing for MFN or national treatment, make this distinction.77 Minimum standard of treatment:78 investments shall be treated in accordance with customary international law.79 This standard includes fair and equitable treatment80 and full protection and security.81 In light of the discussions around this standard, it is expressly provided that ‘[f]or 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.82 The concepts of “fair and equitable treatenvironmental concerns (Art. 10.11). Environmental protection is also foreseen in Art. 10.10.3.c. Art. 10.3. Procurement, subsidies and grants provided by a party are not covered by this provision (Art. 10.13.5). Art. 10.3.3. Art. 10.4. Procurement, subsidies and grants provided by a party are not covered by this provision (Article 10.13.5). It has been argued that, different from DR–CAFTA, when the MFN clause ‘applies only to “investments” and not to “investors” the importation of procedural rights would be logically impossible’. Noah Rubins, ‘MFN Clauses, Procedural Rights, and a Return to the Treaty Text’ in Todd Grierson Weiler, Investment Treaty Arbitration and International Law (JurisNet, 2008) 225–228. During the negotiations of the CAFTA Agreement the negotiating States recorded their shared ‘understanding and intent’ that the MFN clause now contained in the DR–CAFTA ‘does not encompass international dispute resolution mechanisms’ (see CAFTA Draft Text of 28 January 2004, 10-2, available at http://www.sice.oas.org/TPD/USA_CAFTA/ Jan28draft/CAFTAind_e.asp). Art. 10.5. Annex 10-B expressly states that customary international law minimum standard of treatment of aliens means ‘all customary international law principles that protect the economic rights and interests of aliens.’ Including the prohibition of denial of justice in accordance with the general principle of law of due process (Art. 10.5.2). Including the obligation to provide police protection as required under customary international law (Art. 10.5.2). This clarification is considered to ‘merely elucidate, for the benefit of tribunals charged with interpreting the treaty, the Parties’ intent in agreeing to those obligations.’ David A. Gantz, ‘Settlement of Disputes Under the Central America–Dominican Republic–United States Free

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ment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the minimum standard, and do not create additional substantive rights.’83 Non-discriminatory treatment in connection with measures any part adopts or maintains with respect to losses suffered by investments in their territories owing to armed conflicts or civil strife.84 Importantly, an obligation to provide restitution or compensation only arises if an investor suffers a loss ‘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’.85 This implies that the host State is in principle not obliged to pay compensation for damages suffered by investors in the referred to situations, even if these damages result from State measures. This may be said to reflect the principle of customary law of nonresponsibility in such situations.86 Expropriation:87 direct and indirect (through measures equivalent to) expropriation or nationalisation are not allowed except under certain conditions, which are as follows: (i) public purpose; (ii) in a non-discriminatory manner; (iii) on payment of prompt, adequate and effective compensation; and (iv) in accordance with due process of law and the minimum standard of treatment contained in the DR–CAFTA.88 As to compensation, the value to be compensated shall be the fair market value of the expropriated investment immediately before the expropriation took place.89 Free transfers:90 transfers related to covered investments shall be permitted to be made freely and without delay into and out of the State parties’ territory. However, under certain circumstances, such as bankruptcy, insolvency, protection of the rights of creditors, criminal or penal offenses, and ensuring compliance with orders in judicial proceedings, State parties may prevent a Trade Agreement’ (2009) 6 TDM 331, 358 (quoting Andrea J. Menaker, ‘Benefiting from Experience in the United States Most Recent Investment Agreements’ (2005) 12 UC Davis J. Int’l L. & Pol’y 121, 122. Art. 10.5.2. Art. 10.6.1 and Annex 10-D (relating to the special situation of Guatemala). Art. 10.6.2. See Affaire des biens britanniques au Maroc espagnol (Espagne contre Royaume-Uni), 1 May 1925, RIAA Vol. II, 615–742, 645 (‘A ce sujet, il semble qu’une règle assez généralement reconnue existe: l’État n’est pas responsable des dommages causés même par les opérations militaires de ses propres troupes.’). Art. 10.7, and Annex 10-C. Art. 10.7.1. Art. 10.7.2. Art. 10.7.3 provides that ‘interest at a commercially reasonable rate’ shall be added to the compensation, and Art. 10.7.4 regulates the case in which the ‘fair market value is denominated in a currency that is not freely usable’. The term ‘transfer’ includes contribution to capital, profits, dividends, capital gains, and proceeds from the sale or liquidation of a covered investment, interest, royalty payments, management fees, technical assistance fees, payments made under a contract, payments arising out of a dispute among others (Art. 10.8.1).

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transfer through equitable, non-discriminatory and good faith application of their laws.91 Performance requirements:92 no performance requirements – such as ‘export a given level or percentage of goods or services’ or ‘achieve a given level or percentage of domestic content’ – may be imposed.93 There are exceptions, however, relating inter alia to conditions referring to ‘to locate production, supply a service, train or employ workers, construct or expand particular facilities, or carry out research and development’, requirements deriving from the application of competition laws, and measures necessary for the protection of certain public interests.94 Senior management and board of directors: although a State party may not require the appointment to senior management positions of an enterprise that is a covered investment of ‘natural persons of any particular nationality’, it may require ‘that 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.’95

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Section B, which regulates investor-State dispute settlement,96 starts by providing that the parties to the dispute ‘should initially seek to resolve the dispute through consultation and negotiation’, which may consist of conciliation and mediation.97 But the use of the word ‘should’, and in particular the fact that a dispute may be submitted to arbitration if ‘a disputing party considers that an investment dispute cannot be settled by consultation and negotiation’,98 may create doubts as to the scope of these provisions. Importantly, however, a claimant must deliver a notice of intent to submit to arbitration, containing certain specifications about the dispute, at least 90 days before filing the claim.99 30 The DR–CAFTA further establishes that, in order for a claimant to submit a claim to arbitration, a six-month period should ‘have elapsed since the events giving rise to the claim’.100 At that point, investors may opt between: (i) ICSID arbitration, when applicable, either under the ICSID Convention and ICSID 29

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Art. 10.8.4. Art. 10.9. Art. 10.9.1 and 10.9.2. Art. 10.9.3. Art. 10.10. Art. 10.17.1 expressly contains the States parties’ consent to arbitration. The claimant’s consent should also be in writing (Art. 10.18.2). Art. 10.15. Art. 10.16.1. Art. 10.16.2. A peculiar fork in the road provision may apply in certain cases. A US investor may not submit to arbitration a claim against a State party if the investor has alleged a breach of Sec. A of this chapter in local proceedings of a Central American party or the Dominican Republic (Annex 10-E). Art. 10.16.3.

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Rules of Procedures for Arbitration Proceedings or ICSID Additional Facility Rules;101 or (ii) UNCITRAL arbitration.102 Under ‘Conditions and Limitations on Consent of Each Party’,103 Article 31 10.18.1 provides that no claim may be submitted to arbitration if more than three years have elapsed from the date on which the claimant first acquired, or should have first acquired, knowledge of the breach alleged and that damage has resulted. Moreover, at the moment of submitting the dispute to arbitration, the claimant should present a waiver of any right to initiate or continue before State parties’ domestic administrative tribunals or courts.104 In case the claimant is acting on behalf of an enterprise it owns or controls directly or indirectly under Article 10.16.1(b), both the claimant’s and the enterprise’s written waivers should be submitted.105 This is another instance of State practice that, consistently with national laws, disallows the admissibility of claims by shareholders for damages suffered by the company in which they hold shares – unless specifically provided for in the relevant treaty.106 Further, since the relevant provision of the DR–CAFTA requires the waiver of the enterprise as well as of the claimant, one of the problems with derivative claims by shareholders, the possibility of double recovery, appears to be at least somewhat addressed. It should be noted, however, that proceedings relating to interim injunctive relief are not covered by these waivers.107 Procedural rules are also provided in this section, such as those related to the 32 institution of proceedings,108 constitution of the tribunal,109 place of arbitration,110 preliminary objections,111 governing law,112 expert reports,113 consolidation,114 enforcement of a final award,115 and interim measures.116 A non-disput101 Out of the seven State parties, the Dominican Republic is the only one that has not ratified the ICSID Convention yet, cf. List of Contracting States and Other Signatories of the Convention available at http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=ShowDocument&language=English (last visited on 23 January 2014). 102 Art. 10.16.3. 103 These terms imply that, in the event any of the established conditions or limitations is bypassed, consent by the State party in question will be lacking. Further, any arbitral tribunal that could be formed to consider a claim in these circumstances would have no jurisdiction. See, e.g., Case concerning Armed Activities on the Territory of the Congo (Democratic Republic of the Congo v. Rwanda), Decision on Jurisdiction and Admissibility, ICJ Rep. 2006, paras. 91–93. 104 Art 10.18.2. 105 Ibid., para. (b)(ii). 106 See in general Gabriel Bottini, ‘Indirect Claims under the ICSID Convention’ (2008) 29 U. Pa. J. Int’l L. 563–639; Zachary Douglas, The International Law of Investment Claims (Cambridge University Press, 2009) 397–457. 107 Art. 10.18.3. 108 Arts. 10.16.2 and 10.16.4. 109 Arts. 10.16.6 and 10.19. 110 Art. 10.20.1. 111 Art. 10.20.4. 112 Art. 10.22. 113 Art. 10.24. 114 Art. 10.25. 115 Arts. 10.26.6 to 10.26.9.

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ing State party may intervene with oral and written submissions regarding the interpretation of the DR–CAFTA,117 and amici curiae may also be admitted by the tribunal.118 A provision strongly in favour of the principle of transparency is also included.119 33 Disputing parties may even request that the arbitral tribunal, before issuing a decision or award on liability, transmit its proposed decision or award to the disputing parties and to the non-disputing parties, who may submit comments on it.120 This does not apply to those arbitrations in which appeal has been made available.121 34 Final awards have binding force only between the disputing parties and in respect of the particular case.122 Although Annex 10-F establishes the creation of an appellate body or similar mechanism to review awards rendered under Chapter Ten, so far no such appellate mechanism has been created. This mechanism could have a considerable positive impact on the dispute resolution system, by inter alia making the decisions of arbitral tribunals more consistent. 35 Several arbitral proceedings have already been brought under the DR– CAFTA.123 So far, three decisions on jurisdictional objections124 and four 116 Art. 10.20.8. 117 Art. 10.20.2. For instance, in the Pac Rim v. El Salvador, Costa Rica and the United States of America filed written submissions and attended the hearing during the jurisdictional phase, although they did not make oral arguments. Pac Rim Cayman LLC v. El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections, 1 June 2012, paras. 1.21–1.32. In Commerce Group, Costa Rica and Nicaragua filed submissions during the merits phase as non-disputing parties and attended the hearing. Commerce Group Corp. and San Sebastian Gold Mines, Inc. v. El Salvador, ICSID Case No. ARB/09/17, Award, 14 March 2011, paras. 40, 47, 81–82. Further, in Teco the Dominican Republic, the Republic of El Salvador, the Republic of Honduras, and the United States submitted nondisputing party briefs. See TECO Guatemala Holdings, LLC v. Guatemala, ICSID Case No. ARB/10/23, paras. 46, 55, 59. 118 Art. 10.20.3. In Pac Rim v. El Salvador an amicus brief was filed during the jurisdictional phase. The peculiarity of this submission was that one of the objections to the tribunal’s jurisdiction discussed in it – regarding Article 25 of the ICSID Convention – had not been raised by the respondent. Pac Rim Cayman LLC v. El Salvador, ICSID Case No. ARB/ 09/12, Decision on the Respondent’s Jurisdictional Objections, 1 June 2012, paras. 1.33– 1.38. 119 The notice of intent and of arbitration, main written submissions, transcripts of hearings, and tribunal orders and decisions, among others, are publicly available (Art. 10.21.1). Nevertheless, protected information may remain confidential (Art. 10.21.2 to 10.21.4), to the extent it does not conflict with the State party’s obligation to disclose information pursuant to its laws (Art. 10.21.5). DR–CAFTA provisions on transparency have been considered by some scholars as evidence of an evolution in this type of agreements. See Jeffrey T. Cook, ‘The Evolution of Investment-State Dispute Resolution in NAFTA and CAFTA: Wild West to World Order’ (2007) 34 Pepp. L. Rev. 1085, 1106. 120 Art. 10.20.9(a). Cook considers that this mechanism will lead to a lesser number of challenges against awards. Jeffrey T. Cook (n. 119) 1125. 121 Art. 10.9.b. 122 Art. 10.26.4. Awards may provide for restitution or monetary compensation (Art. 10.26.1 and 10.26.2), but punitive damages are not authorised under Chapter Ten (Art. 10.26.3). 123 These include Railroad Development Corporation v. Guatemala, ICSID Case No. ARB/ 07/23; TCW Group, Inc. and Dominican Energy Holdings, L.P. v. Dominican Republic, UNCITRAL (NAFTA); Pac Rim Cayman LLC v. El Salvador, ICSID Case No. ARB/09/12;

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awards have been published. As to the awards, in TCW v. Dominican Republic, a consent award terminating the proceeding was rendered, upon a full and final settlement agreement signed between the parties.125 In Commerce Group v. El Salvador, the tribunal found that the dispute was 36 not ‘within its jurisdiction and competence pursuant to CAFTA’.126 This decision was based upon the failure by the claimants to submit a written waiver with respect to any proceeding relating to any measure alleged to constitute a breach of the treaty, as required by Article 10.18.127 After citing the award in Waste Management I v. Mexico, the tribunal confirmed that ‘Article 10.18(2)(b) of CAFTA requires Claimants to file a formal “written waiver”, and then materially ensure that no other legal proceedings are “initiated” or “continued”.’128 In Railroad v. Guatemala, the tribunal concluded that Guatemala breached the 37 minimum standard of treatment.129 In its construction of Article 10.5, the tribunal ‘adopt[ed] the conclusion reached by the tribunal in Waste Management II in considering NAFTA Article 1105 standard of review and after surveying NAFTA arbitral awards’.130 In doing so, the decision essentially disregarded the respondent’s and the non-disputing parties’ argument referring to Annex 10-B, which states that ‘“customary international law” generally and as specifically referenced in Articles 10.5, 10.6, and Annex 10-C results from a general and consistent practice of States that they follow from a sense of legal obligation’.131

124

125 126 127 128 129 130 131

TECO Guatemala Holdings, LLC v. Guatemala, ICSID Case No. ARB/10/23; Commerce Group Corp. and San Sebastian Gold Mines, Inc. v. El Salvador, ICSID Case No. ARB/ 09/17; Guatemalan, Costa Rican and Dominican Victims of the Stanford Ponzi Scheme v. United States of America, and Spence International Investments, LLC, Bob F. Spence, Joseph M. Holsten, Brenda K. Copher, Ronald E. Copher, Brette E. Berkowitz, Trevor B. Berkowitz, Aaron C. Berkowitz and Glen Gremillion v. Costa Rica, UNCITRAL. Railroad Development Corporation v. Guatemala, ICSID Case No. ARB/07/23, Decision on Objections to Jurisdiction, CAFTA Article 10.20.5, 17 November 2008; Ibid., Second Decision on Objections to Jurisdiction, 18 May 2010; Pac Rim Cayman LLC v. El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections, 1 June 2012. In Pac Rim, the tribunal declared that it had no ‘jurisdiction or competence’ over the CAFTA claims, but rejected El Salvador’s jurisdictional objections under the Salvadoran Investment Law. Ibid., para. 7.1. TCW Group, Inc. and Dominican Energy Holdings, L.P. v. Dominican Republic, UNCITRAL (NAFTA), Consent Award, 16 July 2009. Commerce Group Corp. and San Sebastian Gold Mines, Inc. v. El Salvador, ICSID Case No. ARB/09/17, Award, 14 March 2011, para. 140. Ibid., paras. 114–115. Ibid., paras. 83–84. Railroad Development Corporation v. Guatemala, ICSID Case No. ARB/07/23, Award, 29 June 2012 (Railroad), para. 283. Ibid., para. 219. Ibid., paras. 159, 207–208, 211. In relation to this finding, Lori Wallach has observed that ‘the touted U.S. Customary International Law (CIL) Annex has proved quite useless in foreclosing tribunals from generating ever-expanding interpretations of States’ obligations to investors, such as those based on fanciful notions of investors’ expectations’. Lori Wallach, ‘Brewing Storm over ISDR Clouds: Trans-Pacific Partnership Talks – Part II,’ 14 January 2013, available at http://kluwerarbitrationblog.com/blog/2013/01/14/brewing-storm-over-isd r-clouds-trans-pacific-partnership-talks-part-ii/?utm_source=feedburner&utm_medium=ema

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Importantly, the tribunal concluded that ‘the waiver is required as a condition to Respondent’s consent to CAFTA’, so that if ‘the waiver is invalid, there is no consent’, and the ‘Tribunal, therefore, does not have jurisdiction over the Parties’ CAFTA dispute’.132 This reasoning – if a condition attached to the respondent’s consent to arbitration is not fulfilled there is no consent, and if there is no consent there is no jurisdiction – is a relevant consideration for the resolution of many investment disputes. 39 Finally, in Teco v. Guatemala, the dispute arose from an alleged violation by the Comisión Nacional de Energía Eléctrica (National Commission of Electric Energy) of the Guatemalan regulatory framework for setting tariffs for distribution of energy.133 The tribunal observed that ‘the minimum standard of [the Fair and Equitable Treatment] under Article 10.5 of DR–CAFTA 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’.134 40 The tribunal stated as well that ‘the minimum standard is part and parcel of the international principle of good faith’,135 and that ‘a lack of good faith on the part of the State or of one of its organs should be taken into account in order to assess whether the minimum standard was breached’.136 The first statement was based exclusively on scholarly opinion; no State practice was cited to support it. It should be recalled, however, that while under international law good faith is ‘[o]ne of the basic principles governing the creation and performance of legal obligations, whatever their source’,137 it is ‘not in itself a source of obligation where none would otherwise exist’.138 38

3. Conclusion 41

At present, there is a stark contrast between MERCOSUR and CAFTA in terms of treaty provisions dealing with foreign investments. MERCOSUR was created in 1991, but still has no treaties in force amongst its member States directly regulating foreign investments in any comprehensive way. CAFTA is much more recent, but this treaty not only has investment provisions in force but there are also several ongoing investment treaty arbitrations under it. Jurisdictional decisions and awards have been rendered in some of these arbitrations.

132 133 134 135 136 137 138

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il&utm_campaign=Feed%3A+KluwerArbitrationBlogFull+%28Kluwer+Arbitration+Blog+ -+Latest+Entries%29. Railroad, para. 115 (emphasis added). TECO Guatemala Holdings, LLC v. Guatemala, ICSID Case No. ARB/10/23, Award, para. 79. Ibid., para. 454. Ibid., para. 456. Ibid. Nuclear Tests (New Zealand v. France), Judgment, ICJ Rep. 1974, 457, 473. Border and Transborder Armed Actions (Nicaragua v. Honduras), Jurisdiction and Admissibility, Judgment, ICJ Rep. 1988, 69, 105.

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One of the reasons for this contrast may be the obvious fact that the main 42 driving force behind the DR–CAFTA, the United States, has a particular interest in promoting international agreements that provide protection to its investors and the possibility to have recourse to international arbitration. By contrast, MERCOSUR was constituted by developing countries, whose interest in establishing investment protection regimes in the international arena is not as strong. Even the most powerful MERCOSUR country, Brazil, is always given as an example of a State that has been successful in attracting a great deal of foreign investment without ratifying BITs. This reality is changing however. Certain political developments in Latin 43 America and the undeniable rise of Brazil as one of the world’s most important economies, have fostered new initiatives both within MERCOSUR and within the Unión de Naciones Suramericanas (UNASUR). These groupings are again considering the adoption of regional instruments on the regulation of foreign investments. In the context of UNASUR, the creation of organs that would assist State parties to investment disputes and even of regional arbitration centres is under consideration.139 There is no doubt that these new regimes would build upon existing treaties and institutions. But they would surely bring new legal and economic perspectives as well.

139 See Declaración IV Reunión Ordinaria del Consejo de Jefas y Jefes de Estado y de Gobierno de la Unión de Naciones Suramericanas (Unasur), Georgetown, República Cooperativa de Guyana 26 November 2010, para. 20, available at http://www.unasursg.org/uploads/8f/fe/ 8ffeeffa7c121e3363221419e9e95bf4/declaracion-georgetown.pdf.

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F. The Negotiations on the OECD Multilateral Agreement on Investment1

Joachim Karl 1. 2. 3. 4.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preparing for Take-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . It Looks Like a Smooth Ride . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Getting into Heavy Turbulence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Definition of ‘Investment’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Concept and Degree of Investment Liberalisation . . . . . . . . . . . . . . . . c) The REIO Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) International Investor-State Dispute Settlement . . . . . . . . . . . . . . . . . . e) Indirect Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Labour and Environmental Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Cultural Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h) Performance Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i) Respect Clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . j) Extraterritorial Application of Investment-Related Laws . . . . . . . . 5. The Crash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Outlook: Prospects for a New Departure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 9 19 21 23 26 28 29 32 34 35 37 39 41 46

Literature: Chris Baumgartner, ‘The Demise of the Multilateral Agreement on Investment’ (1998) Colo. J. Int’l Envtl. L. & Pol’y (Yearbook) 40–47; Yusuf Caliskan, The Development of International Investment Law, Lessons from the OECD MAI Negotiations and their Application to a Possible Multilateral Agreement on Investment (Dissertation.Com, 2002); Stephen C. Canner, ‘The Multilateral Investment Agreement’ (1998) 31 Cornell Int’l L. J. 657–682; Riyaz Dattu, ‘A Journey from Havana to Paris: The 50 Year-Quest for the Elusive Multilateral Agreement on Investment’ (2000) 24 Fordham Int’l L. J. 275–316; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008); William A. Dymond, ‘The MAI – A sad and melancholy tale’ in Fen Osler Hampson, Michael Hart and Martin Rudner (eds), A Big League Player? Canada Among Nations (Oxford University Press, 1999); Rainer Geiger, ‘Towards a Multilateral Agreement on Investment’ (1998) 31 Cornell J. Int’l L. 467–475; David Henderson, The MAI Affair: A Story and its Lessons (The Royal Institute of International Affairs, 1999); Jan Huner, ‘Lessons from the MAI: A View from the Negotiating Table’ in Halina Ward and Duncan Brack (eds), Trade, Investment and the Environment (The Royal Institute of International Affairs, 2001) 242–251; Patrick Julliard, ‘Direct Investment: MAI: A European View’ (1998) 31 Cornell Int’l L. J. 477–484; Joachim Karl, ‘Das Multilaterale Investitionsabkommen (MAI)’ (1998) RIW 432– 440; Joachim Karl, ‘International Investitionsschutz – Quo vadis?’ (2000) 99 ZVglRWiss 143–169; Joachim Karl, ‘On the Way to Multilateral Investment Rules – Some Recent Policy Issues’ (2002) ICSID Rev.–FILJ 293–319; Peter T. Muchlinski, ‘The Rise and Fall of the Multilateral Agreement on Investment: Where now?’ (2000) 34 Int’l Law. 1033–1053; August Reinisch, Recent Developments in International Investment Law (Paris, 2009); Alan Rugman, ‘New Rules for International Investment: The Case for a Multinational Agreement on Investment (MAI) in the WTO’ in Chris Milner and Robert Read (eds), Trade Liberalisation, Competition and the WTO (Edward Elgar, 2002) 176–189; Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2010); UNCTAD, World Investment Report 1996, Investment, Trade and International Policy Agreements (United Nations, 1996); UNCTAD, Lessons from the MAI (United Nations, 1999); UNCTAD, World Investment Report 2011, Non-Equity Modes of International Produc-

1 The author expresses his personal views.

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III.F. The Negotiations on the OECD Multilateral Agreement on Investment tion and Development (United Nations, 2011); UNCTAD, World Investment Report 2014, Investing in the SDGs: An Action Plan (United Nations, 2014).

1. Introduction

This article tells the story of the negotiations on the Multilateral Agreement 1 on Investment (MAI) that took place in the Organisation for Economic Co-operation and Development (OECD) between 1995 and 1998. These negotiations were the hitherto latest attempt to establish a multilateral, legally binding framework for foreign investment. The paper recalls the objective and the content of the intended agreement and describes the main reasons why the negotiations ultimately failed. It argues that a multitude of factors contributed to the demise of the undertaking, including different perceptions of negotiators about the substance of the agreement, an overloaded negotiation agenda, lukewarm political and business support, the limitation of the negotiations to OECD members, an insufficient communication strategy, and strong opposition from civil society. The article concludes by exploring the prospects for future multilateral investment rulemaking in light of recent developments. 2. Preparing for Take-Off

Preparations for the MAI negotiations started in the early 1990s. At that time, 2 the political climate for concluding a multilateral investment agreement looked more promising than ever. After the end of the East–West conflict, global trade and investment liberalisation, together with deregulation, were high on the political agenda and could count on broad support. The momentum towards multilateralism was in full swing, as demonstrated by the establishment of NAFTA and the European Economic Area in 1994, the conclusion of the Energy Charter Treaty (ECT) and the APEC Non-Binding Investment Principles in 1994, the accession of Mexico to the OECD in 1994, and the coming into existence of the WTO in 1995. Investment issues seemed hardly controversial, all the more so as the MAI ne- 3 gotiations were supposed to take place within a group of like-minded countries, and the original purpose of the negotiations was relatively modest, namely to consolidate in one single treaty what the OECD had achieved so far in the area of investment liberalisation and protection.2 Given that the OECD had many years of experience with investment matters and that it already had various international instruments dealing with investment – notably the two OECD Codes on Capital Movements and on Current Invisible Transaction, as well as the OECD Declaration on Multinational Enterprises with its various components3 – the MAI project looked perfectly feasible. After many failed attempts to establish

2 See also Rainer Geiger, ‘Towards a Multilateral Agreement on Investment’ (1998) 31 Cornell J. Int’l L. 467, 468. 3 All these instruments are available at the OECD website at www.oecd.org.

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multilateral investment rules in the past, the time seemed finally ripe to bring these efforts to a successful conclusion.4 4 The prevailing ‘Yes, we can’ mentality could also refer to recent impressive policy achievements in the EU – one of the key supporters of the MAI. Milestones were the Single European Act in 1987 with the goal to complete the internal market by the end of 1992; the ‘Maastricht Treaty’ of 1992; establishing, inter alia, the Economic and Monetary Union and opening the way to a single European currency; the accession of Austria, Finland and Sweden in 1994; and the outlook of further substantial EU enlargement in the years to come. 5 Policy developments at the bilateral level further supported this optimism. Since the first bilateral investment treaty (BIT) had been concluded in 1959 between Germany and Pakistan, the global network of these treaties had been expanding rapidly. Some two-thirds of the nearly 1,160 treaties existing in the mid-1990s had been concluded in the 1990s, involving 158 countries.5 With the collapse of the Soviet Union and the fall of the Berlin Wall, a large group of formerly communist countries became ardent supporters of investment agreements and gave further impetus to international investment rulemaking. Many developing countries that in the past had serious reservations about investment agreements likewise changed their view and looked at these treaties much more favourably. 6 The preparatory work for the MAI negotiations was undertaken in the OECD Committees on International Investment and Multinational Enterprises (CIME) and on Capital Movements and Invisible Transactions (CMIT) – the two predecessors of the OECD’s present Investment Committee. The discussions held in these fora and their associated working groups laid the ground for the official launching of the MAI negotiations in May 1995. According to the mandate, the objective of the negotiations was to: –

–

7

provide a broad multilateral framework for international investment with high standards for the liberalisation of investment regimes and investment protection and with effective dispute settlement procedures; and be a free-standing international treaty open to all OECD members and the European Communities, and to accession by non-OECD member countries, which will be consulted as the negotiations progress.6

The initial mandate for the MAI negotiations spanned over two years. In view of the promising policy environment, this seemed to be a reasonable timeframe. 4 For a brief history of international investment rulemaking, see Riyaz Dattu, ‘A Journey from Havana to Paris: The 50 Year-Quest for the Elusive Multilateral Agreement on Investment’, (2000) 24 Fordham Int’l L. J. 275. 5 UNCTAD, World Investment Report 1996, Investment, Trade and International Policy Agreements (United Nations, 1996). 6 See OECD, Report by the Committee on International Investment and Multinational Enterprises (CIME) and the Committee on Capital Movements and Invisible Transactions (CMIT), available at http://www1.oecd.org/daf/mai/htm/cmitcime95.htm#3.

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In organisational respect, a decision was taken to establish a special ‘MAI 8 Negotiating Group’ in which all OECD member countries were represented. The Negotiating Group was supported by several Working Groups dealing with individual issues, such as investment liberalisation, investment protection, dispute settlement or other ‘special topics’. These Working Groups had the status of auxiliary bodies without decision-making powers. Decisions were to be made exclusively by the Negotiating Group. Both the Negotiating Group and the Working Groups received technical support from the OECD Secretariat. 3. It Looks Like a Smooth Ride

The preparatory work leading to the launching of the negotiations had already resulted in the development of a basic structure for the future MAI and had identified major policy issues on which the MAI negotiations were supposed to focus. Among the expected core elements of the agreement were a preamble, rules on scope and application, treatment of investors and investment, investment protection, dispute settlement, exception clauses and safeguards, country-specific exceptions, the relationship to other international agreements, implementation and operation, and final provisions. With regard to all these issues, there was a broadly shared view that negotiators should not try to ‘re-invent the wheel’, but stick to existing common ground and approaches. As expected, the MAI plane quickly gained altitude and cruised with strong tailwinds. The various working groups made rapid progress in all areas and were soon able to present first drafts of the envisaged MAI provisions.7 Advancement was fastest in the field of investment protection because of the high degree of commonality between OECD member countries. Not surprisingly, policy approaches were similar with regard to issues such as definitions, general treatment of investors, the principle of non-discrimination (national treatment and most favoured nation treatment), expropriation and compensation, protection from strife, freedom of capital transfer, and employment of key personnel. With regard to investment liberalisation, it helped a lot that from early on agreement was reached to base the negotiations on a ‘top-down’ approach as opposed to a ‘bottom-up’ method, i.e. there was consensus on the principle of freedom of investment with the proviso that each contracting party had the right to designate sectors, industries or economic activities, in regard to which access of foreign investors was restricted (also called ‘negative list’ approach). There was also a broadly shared view that the MAI should contain binding rules on dispute settlement, comprising both investor-State arbitration and StateState dispute settlement. With a high degree of consensus on these three core pillars, and with draft texts well advanced, it looked as if the MAI plane was on a safe and speedy flight.

7 Joachim Karl, ‘Das Multilaterale Investitionsabkommen (MAI)’ (1998) RIW 432–440.

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It also helped that views were broadly shared on a number of other issues of strategic importance for the negotiations. For instance, a consensus emerged rather quickly that taxation matters should, in principle, be excluded from the MAI. As regards corporate social responsibility, delegations supported the idea of referring to the already existing OECD Guidelines for Multinational Enterprises instead of negotiating something new. Remarkably, negotiators also intended that investment incentives should be controlled more closely in order to avoid investment distortions and that separate negotiations on this issue should be initiated some time after the signature of the MAI. 14 A tight negotiation schedule helped to make progress. In general, the Negotiating Group and the Working Groups met every six to eight weeks, with each round of negotiations lasting for several days. Working Groups often met in parallel, leading to further efficiency gains. The meeting schedule was even tighter for EU member States that also gathered in Brussels to coordinate their positions. In addition, an ambitious outreach programme was set up with the purpose of informing and consulting interested non-OECD member States about the state of negotiations. Such workshops took place in Brazil (twice), Egypt, New Zealand and the Republic of Korea. 15 Unfortunately, for a number of reasons, things were not as good as they appeared.8 First, although negotiators had similar views about the basic structure and content of the three main treaty pillars – investment liberalisation, investment protection, and dispute settlement – there was considerable disagreement when it came to drafting details. However, without agreement on each and every aspect of a treaty provision, consensus on the core principles was of limited avail. Second, even with regard to those treaty provisions where consensus was close – such as the ones on investment protection – it could not be taken for granted, since negotiators worked under the hypothesis that ‘nothing is agreed upon, until everything is agreed upon’. There was thus no ‘lock-in’ mechanism that would have prevented a re-opening of seemingly ‘settled’ issues. Third, negotiators did not stop adding new policy issues to an increasingly overloaded agenda (see box below).9 Examples include the idea to add specific provisions for financial services; to deal with monopolies, State enterprises, concessions and privatisation; to develop rules for the treatment of public debt; to address research and development (R&D), or to restrict the extraterritorial application of national laws. As a consequence, the initial recipe for success – the plan to basically limit the negotiations to a consolidation of the existing OECD investment rules and instruments – was gradually abandoned, thereby significantly diminishing the chances for a successful outcome. 13

8 See also David Henderson, The MAI Affair: A Story and its Lessons (The Royal Institute of International Affairs, 1999) 5. 9 UNCTAD, Lessons from the MAI (United Nations, 1999).

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Structure of the MAI The latest MAI Negotiating Text, as of 24 April 1998, was structured as follows: I. General Provisions Preamble II. Scope and Application Definitions Investor Investment Geographical Scope of Application Application to Overseas Territories III. Treatment of Investors and Investments National Treatment and Most-Favoured-Nation Treatment Transparency Temporary Entry, Stay and Work of Investors and Key Personnel Nationality Requirements for Executives, Managers and Members of Boards of Directors Employment Requirements Performance Requirements Privatization Monopolies/State Enterprises/Concessions Entities with Delegated Governmental Authority Investment Incentives Recognition Arrangements Authorization Procedures Membership of Self-Regulatory Bodies Intellectual Property Public Debt Corporate Practices Technology R&D Not Lowering Standards Additional Clause on Labour and Environment IV. Investment Protection General Treatment Expropriation and Compensation Protection from Strife Transfers Information Transfer and Data Processing Subrogation Protecting Existing Investments V. Dispute Settlement State-State Procedures Investor-State Procedures VI. Exceptions and Safeguards General Exceptions Transactions in Pursuit of Monetary and Exchange Rate Policies Temporary Safeguards VII. Financial Services Prudential Measures Recognition Arrangements Authorization Procedures Transparency Information Transfer and Data Processing

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Chapter 4: International Investment Agreements – History, Approaches, Schools Membership of Self-regulatory Bodies and Associations Payments and Clearing Systems/Lender of Last Resort Dispute Settlement Definition of Financial Services VIII. Taxation IX. Country-Specific Exceptions Lodging of Country-Specific Exceptions X. Relationship to Other International Agreements Obligations under the Articles of Agreement of the International Monetary Fund The OECD Guidelines for Multinational Enterprises XI. Implementation and Operation The Preparatory Group The Parties Group XII. Final Provisions Signature Acceptance and Entry into Force Accession Non-Applicability Review Amendment Revisions to the OECD Guidelines for Multinational Enterprises Withdrawal Depositary Status of Annexes Authentic Texts Denial of Benefits Source: OECD, MAI Negotiating Text, 24 April 1998, reprinted in UNCTAD, Lessons from the MAI (United Nations, 1999) 6–8.

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Fourth, negotiations were conducted at the level of investment experts from capitals with limited support from politicians. The negotiations were perceived as a primarily ‘technical’ issue to be solved at the technical level – just as it had always been the case with regard to the work of CIME and CMIT. This setup proved to be sufficient only as long as the negotiations advanced smoothly. Fifth, and related to the previous point, negotiations were conducted for a long time without the involvement of civil society, continuing the previous practice with regard to the investment-related work of CIME/CMIT. Sixth, negotiations were limited to OECD member countries, in relation to which the added value of a multilateral investment agreement as regards investment liberalisation and protection was less obvious than in the context of a global treaty. Although the OECD invited a number of economies as observers to the negotiations – initially Argentina, Brazil, Chile, and Hong Kong, China, later followed by Estonia, Latvia, Lithuania, and the Slovak Republic – this strategy was not a real substitute for a broad multilateral approach, all the more so as such heavyweights as China, India, or Russia did not participate. Seventh, it became a handicap that one of the key negotiators – the EU – had considerable difficulties to speak with one voice. Each individual EU member State had its own negotiation position 348

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and the right to speak in the MAI Negotiating Group and the various working groups, whereas the EU Commission formally only had observer status. Attempts to arrive at common positions were not always successful. In sum, the MAI plane already suffered from severe engine problems at the 18 time of take-off, but they remained unnoticed during a long part of the flight. However, at the beginning of 1997, it became increasingly clear that things were not going according to plan. The initial schedule had foreseen to conclude the negotiations within two years. Confronted with an ever growing negotiation agenda and with little or no progress on the outstanding sensitive policy issues, it became impossible to meet this deadline. To prevent failure, member States agreed that ‘to do it right is more important than to do it fast’, and accorded themselves another year to bring the negotiations to a successful conclusion. 4. Getting into Heavy Turbulence

A lot of the outstanding issues were mainly of a technical nature, and it was 19 reasonable to expect that they would be resolved in due course. More worrying was the fact that at this stage substantial differences and uncertainties had emerged about some of the core principles of international investment law – a situation one would not have imagined among a group of so-called ‘like-minded’ countries.10 Furthermore, a number of MAI provisions that were hardly controversial between negotiating partners came under severe attack from NGOs. It became obvious that the smooth flight of the MAI plane was over and that it was entering a zone of strong turbulence.11 20 The debate focused on the following issues:12 a) Definition of ‘Investment’

Surprisingly, negotiators were not able to agree on a definition of what consti- 21 tutes an ‘investment’. Without a definition, the whole ‘MAI’ was built on shaky ground. Most negotiators favoured a broad, asset-based definition of ‘investment’ as it is used in many existing BITs. At the same time, they had to admit that a definition including ‘any kind of asset’ lacked limitation, and would have included, inter alia, loans or trade goods. The negotiating parties therefore developed a text that summarised what in their view were the characteristics of an ‘investment’, namely the commitment of capital, the expectation of gain or profit, and the assumption of risk.

10 Peter T. Muchlinski, ‘The Rise and Fall of the Multilateral Agreement on Investment: Where now?’ (2000) 34 Int’l Law. 1033–1040. 11 Joachim Karl, ‘Internationaler Investitionsschutz – Quo vadis?’ (2000) 99 ZVglRWiss 143– 169. 12 The latest state of the MAI negotiations is reflected in the so-called ‘MAI Draft Consolidated Text’ and ‘Commentary’, both dated 22 April 1998. The documents are still available at the OECD website at www.oecd.org.

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This seemed to be a way out, but at closer look the definition would still have been so broad as to include, for instance, loans. Negotiators therefore started to discuss the possibility to exclude certain types of assets from the definition as is the case, for example, in BITs of the United States of America. Apart from this carve-out issue, negotiators also singled out five kinds of investment which required further discussion concerning their treatment in the definition and the MAI as a whole. These were indirect investments, intellectual property, concessions, public debt, and real estate. No final agreement could be reached on any of these issues. b) Concept and Degree of Investment Liberalisation

There are basically three methods of investment liberalisation. One can agree upon an absolute right of establishment (example of the EU), a relative right of establishment based on the principle of non-discrimination, and a legally nonbinding ‘best efforts’ commitment towards liberalisation. From early on, MAI negotiators opted for the second approach, i.e. a legally binding obligation to apply the principle of non-discrimination, comprising national treatment and most favoured nation treatment, with regard to the establishment of foreign investors in the host country. There was also agreement that each contracting party would have the right to take individual exceptions to this right, thereby denying foreign investors non-discriminatory treatment with regard to individual sectors, industries or activities. 24 Despite this general consensus on the principle and method of investment liberalisation, different views remained on the extent to which each individual contracting party would have had the right to take exceptions. When countries presented their exception lists, it became apparent that these lists differed substantially in length and content. While some countries had relatively short lists covering only a few industries, others came up with a huge catalogue, resulting in a severe imbalance in the level of commitments. The long exception lists could hardly be considered a demonstration of an open investment climate in OECD member countries. In addition, the exception lists mirrored the status quo in individual countries, meaning that one of the key objectives of the negotiations – to make progress on investment liberalisation – could apparently not be achieved. Some negotiating parties also demanded a so-called ‘list B of exceptions’, which would have allowed to introduce new non-conforming measures even after the MAI had entered into force for those sectors, industries or activities mentioned in this list. 25 The obvious failure to move ahead with investment liberalisation, together with disappointment about the unexpected long list of remaining restrictions, had serious consequences for the dynamics of the negotiations. Politicians and the business community which so far had supported the negotiations in light of the prospect of opening new markets and investment opportunities lost much of their enthusiasm. This lack of support proved to be fatal the more the MAI plane 23

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got into stormy weather and the greater the need for backing and stabilisation became. Both politicians and the business community saw no reason why they should fight for an agreement that apparently achieved so little. c) The REIO Clause

Until the very end of the negotiations, discussions continued about the need 26 for and scope of an exception clause for regional economic integration organisations (REIOs). The issue at stake was whether REIOs, such as the European Union, should have the right to claim an exception to the obligation to grant most favoured nation treatment in order to be able to grant preferential treatment to REIO members. While REIO members defended such an exception as essential for preserving the nature and objective of regional integration, some nonREIO members opposed it as undermining one of the key goals of the MAI negotiations, namely to establish a level playing field between all contracting parties. Strikingly, the REIO clause did not make it into the draft MAI itself, but was listed only in an annex as one of many country-specific proposals for the agreement. Despite the fierce opposition that some non-REIO negotiating partners 27 showed against the REIO clause, it is possible that this attitude was more an expression of negotiating tactics than ‘real’ resistance. The REIO clause had been accepted before in the GATT and WTO (GATT Art. XXIV, GATS Art. V), it had made its way into the Energy Charter Treaty (Art. 25), and it has been part of the OECD Liberalisation Codes for many years (Arts. 10 respectively). Given this broad international acceptance, it is likely that the opposition to the REIO clause in the MAI negotiations was used as a bargaining chip to trade it off against some concessions of the REIO partners in other policy areas. d) International Investor-State Dispute Settlement

Since the 1980s, international investor-State dispute settlement had become 28 an integral part of many BITs. It had likewise been included in NAFTA and the ECT. It therefore only seemed natural to follow the same approach in the MAI. However, as negotiations proceeded, this idea increasingly ran into difficulties. First, there was a group of countries that opposed the idea of allowing investorState dispute settlement with regard to disputes on the establishment of foreign investors. These countries considered establishment issues as being politically too sensitive as to subject them to binding international arbitration. Second, some countries also had reservations against investor-State dispute settlement in the post-establishment phase. They made the point that the MAI – as an agreement between developed countries with intensive investment relations – would create a much higher risk for host countries to be drawn into investment disputes than is the case under BITs between developed and developing countries. Third, NGOs opposed the whole idea of allowing foreign investors to sue host country governments before an international tribunal. They argued that this would not Joachim Karl

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only give unwarranted privileges to foreign investors, but also undermine democratic rights as the judicial power shifts from domestic courts to international tribunals not being subject to domestic control. As a result of this criticism, the whole MAI text on dispute settlement remained in limbo, and only reached the status of a proposal of the chairman of the MAI working group on dispute settlement. e) Indirect Expropriation

Investment law is since long familiar with the distinction between direct and indirect expropriation. Whereas in the former case, the State formally takes the assets and becomes the new owner of the investment, indirect expropriation refers to situations where the formal ownership remains untouched, but where the State measures nevertheless have the effect of depriving the owner of all or most of the economic benefits of the property. 30 Investment treaties often cover both scenarios, and the MAI was supposed to follow the same approach. However, this strategy ran into trouble with the emergence of the ‘Ethyl case’ in 1997, when the US-based company ‘Ethyl Corporation’ sued the Canadian government for damages because of a Canadian ban on the importation of a fuel additive produced by Ethyl. While Ethyl claimed that this ban would amount to an expropriation under NAFTA’s investment provisions, Canada argued that the import prohibition was justified for environmental and health reasons. The issue remained undecided since the case was finally settled amicably out of court. Nevertheless, many MAI negotiators got frightened by the idea that foreign investors could raise similar claims under the MAI expropriation article and demand huge amounts of compensation for the effect of general regulatory measures that host countries would never have considered to constitute expropriation.13 This was also a major issue for civil society, arguing that the Damocles sword of huge compensation claims would result in a regulatory freeze as governments would shy away from taking actions necessary to protect the environment or improve social rights. 31 After lengthy and inconclusive discussions, the chairman of the MAI Negotiating Group proposed an interpretative note in the agreement, clarifying that the MAI does not establish a new requirement according to which parties pay compensation for losses which an investor may incur through regulation, revenue raising, and other normal activity in the public interest undertaken by governments. In addition, he suggested a separate MAI article affirming the contracting parties’ right to regulate. The problem with these proposals – and any similar treaty language – was that they can only provide very general guidance to arbitrators on how to distinguish between the normal exercise of regulatory powers 29

13 Jan Huner, ‘Lessons from the MAI: A View from the Negotiating Table’ in Halina Ward and Duncan Brack (eds), Trade, Investment and the Environment (The Royal Institute of International Affairs, 2001) 242–251.

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and indirect expropriation. In practice, a decision whether an expropriation actually occurred can only be made on the basis of each individual case. f) Labour and Environmental Issues

When the MAI negotiations started, labour and environmental issues did not 32 figure very prominently on the agenda. They were, however, not ignored because from the beginning there was an understanding that the MAI should integrate the OECD Guidelines for Multinational Enterprises, which contain rather detailed recommendations on these issues. As negotiations advanced, it became clear that this approach would not be sufficient. Indeed, one of the main objections of NGOs and trade unions against the MAI was that it would not do enough to prevent transnational corporations from negatively affecting the environment or harming social rights. In their view, only legally binding obligations of foreign investors to abstain from ‘negative’ behaviour would have been adequate to address the problem. In addition, they demanded a binding commitment of MAI contracting parties not to lower environmental or social standards in order to attract foreign investment. As the negotiations advanced, the two issues became top items on the MAI 33 agenda. Although no final agreement could be reached on how to deal with them, there was broad support for a compromise proposal by the Chairman of the MAI Negotiating Group. It consisted of several elements with its core part being a legally binding prohibition of contracting parties to lower environmental, labour or health standards to attract foreign investment. In addition, the MAI preamble would have confirmed the contracting parties’ commitment to relevant international instruments, such as the Rio and Copenhagen Declarations, a separate article would have confirmed the contracting parties’ right to regulate, and the OECD Guidelines on Multinational Enterprises with their environmental and social provisions would have been annexed to the Agreement. g) Cultural Exception

Another controversial issue had to do with cultural policies. Some delegations 34 demanded from the outset of the negotiations that the MAI should include a cultural exception clause confirming the right of contracting parties to take any investment-related measure in the framework of policies designed to preserve and promote cultural and linguistic diversity. It would have given contracting parties the explicit right to discriminate cultural industries of other countries – an outcome that numerous other negotiating parties found unacceptable. One compromise solution under discussion was to include clearly defined cultural industries in an exception list. Another option on the negotiation table was to apply to cultural industries the ‘bottom-up’ liberalisation approach rather than the principle of ‘top-down’ liberalisation. No common solution could be developed, and the respective draft MAI provision remained an individual country proposal.

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h) Performance Requirements

The MAI followed a quite ambitious approach with regard to performance requirements, aiming at prohibitions of investment-related measures well beyond what had been agreed upon in the WTO TRIMS Agreement a couple of years before. In addition to the performance requirements proscribed in the TRIMS Agreement with regard to trade in goods, the MAI would have prohibited certain requirements in respect of trade in services. Furthermore, it was intended to establish certain prohibitions of performance requirements related to transfer of technology, location of headquarters, exclusive supply channels, research and development, employment of nationals, and minimum or maximum levels of equity participation, unless these requirements were linked to the granting of an advantage to the investor. 36 No agreement could be reached because of remaining uncertainties as to the effect of these prohibitions on government’s regulatory powers. Several delegations hesitated to accept the provision since it would have established an absolute prohibition to impose the listed performance requirements. Strong opposition also came from civil society, arguing that this provision could have severe negative effects on development policies. 35

i) Respect Clause

Many investment treaties contain a provision according to which contracting parties will respect any other obligation that they have entered into with regard to an investment of an investor of the other contracting party. It therefore came as a surprise that this clause did not receive broad support in the MAI negotiations. Numerous delegations argued that one should keep separate obligations deriving from the MAI itself and commitments having their origin in other legal documents, such as investment contracts between a foreign investor and the host country. In particular, there was some reluctance to apply the MAI dispute settlement mechanism to disputes arising from such other obligations. 38 In the ECT, the problem had been resolved by giving each contracting party the right to exclude the applicability of the ECT dispute settlement rules to disputes arising out of ‘other obligations’. In the MAI context, negotiators considered yet another option. Under this approach, the rights of foreign investors deriving from other obligations would have been protected under the MAI only to the extent they were covered by the MAI definition of ‘investment’. This definition included, inter alia, ‘contractual rights’. Accordingly, the investor would have been protected, for instance, against an expropriation of those rights under the MAI expropriation provision. The degree of protection would thus have been lower than under a respect clause, where any kind of violation of a host country’s obligation vis-à-vis the foreign investor would have triggered the former’s responsibility under the MAI.14 37

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j) Extraterritorial Application of Investment-Related Laws

In 1996, the US government introduced new sanctions against Cuba, as in- 39 corporated in the so-called ‘Helms–Burton Act’. In essence, the Act provided for the possibility to impose sanctions on companies outside the US that made investments in or traded with Cuba. The purpose of the legislation was to prevent trafficking in former US property that had been illegally expropriated during the Cuban revolution. The issue became particularly controversial between the US and the EU, as the latter strictly opposed the idea of an extraterritorial application of national law in this context. Bilateral consultations were held in 1997, and an understanding was reached to develop disciplines governing transactions in so-called illegally expropriated property and the use of extraterritorial measures, and to eventually incorporate these rules, once agreed upon, into the MAI.15 It turned out that neither the US and the EU at the bilateral level, nor the MAI 40 negotiators were able to agree on a common text. All that the MAI draft contained at the end were two country-specific proposals relating to the issues of conflicting requirements and so-called secondary investment boycotts. The article on conflicting requirements provided, in essence, that no contracting party shall impose measures that require an investor to act in conflict with the laws, regulations or policies of another contracting party in whose territory such acts occur. The provision on secondary investment boycotts stipulated, in substance, that no contracting party may take measures that impose liability on foreign investors or impose sanctions for dealing with them, because those foreign investors make investments in a third country in accordance with international law. 5. The Crash

Despite an increasingly frenzied meeting schedule, MAI negotiators did not 41 succeed in making decisive progress on the long list of unresolved policy issues. Still, there was hope that solutions to all open issues would be found in a ‘lastminute’ effort so that the MAI plane could finally leave the turbulence behind and prepare for a safe landing. Things turned out very differently. The turbulence became a hurricane when NGOs around the globe started a massive campaign against the MAI. Delegates who were still struggling to find technical solutions for the outstanding policy issues at the negotiating table were suddenly confronted with an additional huge ‘battlefield’ outside the OECD headquarters. MAI negotiators who were used to discussing investment issues calmly at the 42 expert level, largely undisturbed by the outside world, had no experience in han14 Joachim Karl, ‘On the Way to Multilateral Investment Rules – Some Recent Policy Issues’ (2002) 7 ICSID Rev.–FILJ 293–311. 15 Stephen C. Canner, ‘The Multilateral Investment Agreement’ (1998) 31 Cornell Int’l L. J. 657, 667.

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dling this situation.16 Suddenly, delegates were forced to enter the OECD headquarters amidst a crowd of protesters and with the startling sound of beating drums in their ears. They lacked a solid strategy for dealing with civil society, and had difficulties explaining the complexity of international investment issues. In addition, and as mentioned above, negotiators could not count on a lot of support from politicians and the business community. Vice versa, NGOs were extremely skilful in orchestrating their anti-MAI campaign, connecting globally and extensively using the internet – a novelty in the history of international investment negotiations. Through all these means, NGOs were highly successful in mobilising the public at large and in raising resistance against the MAI far beyond their own communities.17 43 Another obstacle for a constructive dialogue were serious misunderstandings about some key MAI concepts, like the principles of ‘standstill’ and ‘rollback’. In international investment law, a ‘standstill’ commitment essentially means that the contracting parties refrain from introducing new discriminatory measures against foreign investors. ‘Rollback’, as understood by the MAI negotiators, implies a political pledge to gradually reduce remaining discrimination of foreign investors. Civil society, however, partially interpreted the two terms in a radically different manner. In its view, ‘standstill’ would have amounted to an outright prohibition of contracting parties to introduce any new measure with potentially negative effects for business (e.g. new taxes, environmental or social regulations increasing production costs). ‘Rollback’, in this interpretation, would have meant an obligation of governments to dismantle all laws that foreign investors consider as burdensome. No wonder that with such perceptions in mind, the MAI was perceived as an enemy. 44 Communication between the MAI negotiators and civil society also suffered from the fact that the latter suspected the OECD of having a hidden agenda. As said above, the initial phase of the MAI negotiations went by largely unnoticed by the public. When the MAI finally received attention, there was a perception among civil society that negotiators had attempted to conclude the MAI secretly. This created a climate of distrust which neither the OECD nor its member States were able to overcome. 45 The strong opposition against the MAI increasingly became a political issue. Numerous governments came under heavy fire. It was the then French Prime Minister, Mr Lionel Jospin, who declared in the French National Assembly on 14 October 1998 that France would no longer participate in the MAI negotiations. Without France, the EU was paralysed, and soon afterwards, the MAI ne16 Katia Tielemann, The Failure of the Multilateral Agreement on Investment (MAI) and the Absence of a Global Public Policy Network, UN Vision Project on Global Public Policy Networks, European University Institute, Firenze and Harvard University, 1999, available at http://www.gppi.net/fileadmin/gppi/Tieleman_MAI_GPP_Network.pdf. 17 See also Alan Rugman, ‘New Rules for International Investment: The Case for a Multinational Agreement on Investment (MAI) in the WTO’ in Chris Milner and Robert Read (eds), Trade Liberalisation, Competition and the WTO (Edward Elgar, 2002) 176.

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gotiations collapsed altogether. On 3 December 1998, the OECD issued a press communiqué announcing that negotiations would no longer take place. What had started as a promising and supposedly easy-going undertaking in 1995, ended up in ashes three years later. All that remained of the negotiations was the draft consolidated MAI text – a piece of paper without any legal value, of interest primarily for historians studying the failures of international treaty making and lessons for the future. 6. Outlook: Prospects for a New Departure

Since the end of the MAI negotiation more than a decade ago, only one more 46 – unsuccessful – attempt to develop multilateral investment rules has been made. It was undertaken in the framework of the current WTO Doha Round, which initially intended to launch negotiations on international investment.18 However, in light of strong opposition from some developing countries, this plan was abandoned at the WTO Ministerial Meeting in Cancún in September 2003. Since then, the idea of establishing multilateral investment rules has disappeared almost completely from the international policy agenda. Occasionally, some summit declarations – such as the G-8 Declaration at the Heiligendamm Summit in June 200719 – still give a hint in this direction, but without any follow up actions. Equally important, the international business community is not demanding a multilateral investment agreement, as it is probably worried that such a treaty would come along with new social or environmental obligations, while achieving relatively little with regard to investment liberalisation and reinforced investment protection. In addition, national approaches to international investment rule-making have 47 become more diverse since the MAI negotiations collapsed, thus making it more difficult to find common ground for a multilateral treaty. The sheer number of BITs almost tripled from 1,042 in 1995 – the year when the MAI negotiations started – to 2,902 at the end of 2013. To this, 334 bilateral or regional free trade agreements or economic cooperation agreements that deal with investment need to be added.20 Countries such as the US and Canada have developed very sophisticated model BITs that differ significantly from ‘traditional BITs’ both in substance and length. In addition, some of the main actors in the investment area – the EU countries – have lost their competence for negotiating international investment agreements (IIAs) with the entering into force of the Lisbon Treaty on 18 At the WTO Ministerial Meeting in Doha in November 2001, it had been decided to start such negotiations after the next Ministerial Conference two years later. 19 For instance, the Joint Statement by the German G-8 Presidency and the Heads of State and/or Government of Brazil, China, India, Mexico and South Africa on the occasion of the G-8 Summit in Heiligendamm, 2007, provides, inter alia, that participants ‘share a common interest in promoting investment and to safeguard and further develop a sound global investment environment’. 20 UNCTAD, World Investment Report 2014, Investing in the SDGs: An Action Plan (United Nations, 2014).

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1 January 2010, and the EU Commission as the new competence holder is still in the process of developing its own approach with regard to IIAs. 48 Furthermore, the huge increase in international investment disputes – the total number of publicly known cases rose from 27 in 1998 to 568 at the end of 201321 – has made governments much more hesitant to agree upon individual treaty provisions as they are concerned about the potential implications of such commitments. Three countries (Bolivia, Ecuador, Venezuela) have already denounced their membership in the ICSID.22 Australia declared it would no longer include investor-State dispute settlement provisions in its IIAs.23 South Africa gave notice of the termination of its BITs with Belgium and Luxembourg, Germany, the Netherlands, Spain and Switzerland; and Indonesia gave notice of the termination of its BIT with the Netherlands. Ecuador, El Salvador, Nicaragua, and Venezuela have also denounced some of their BITs.24 The recent financial crisis and the perceived need for more government regulation have caused a further setback for the idea of moving towards more investment liberalisation and agreeing on binding commitments in this regard. While it would be premature to interpret these developments as signs of disintegration of the existing IIA universe, one is today certainly further away from a consolidated approach than at the time of the MAI negotiations. 49 Developments in other policy areas demonstrate how difficult it has become to make progress on multilateral rule-making. The WTO Doha Round which started in November 2001 has not yet been brought to a successful conclusion, although the recent success with regard to streamlining trade at the 9th Ministerial Conference in Bali in December 2013 may have given it a new impetus. Climate change negotiations in the UN to succeed the Kyoto Protocol have proven very contentious and are advancing at a slow pace. These developments do not 21 UNCTAD, World Investment Report 2014, Investing in the SDGs: An Action Plan (United Nations, 2014). 22 The Plurinational State of Bolivia’s notification of its withdrawal from the ICSID Convention was received by the ICSID on 2 May 2007, and took effect on 3 November 2007. Ecuador’s denunciation notification was received on 6 July 2009, and took effect on 7 January 2010. See UNCTAD, Denunciation of the ICSID Convention and BITs: Impact on Investor-State Claims, IIA Issues Note, No. 2, 2010. Venezuela’s official announcement of 24 January 2012 is available at http://www.mre.gov.ve/index.php?option=com_content&view=article&id=18939:mppre&catid=3:comunicados&Itemid=108. 23 Australian Government, Gillard Government Trade Policy Statement: Trading our way to more jobs and prosperity, April 2011, p. 14. Available at www.dfat.gov.au/publications/trade/ trading-our-way-to-more-jobs-and-prosperity.pdf. 24 National Assembly of Ecuador, Press Release, 5 November 2009, available at http:// www.asambleanacional.gov.ec/200911051406/noticias/boletines/intensifican-debate-sobre-denuncia-de-tratados-de-proteccion-reciproca-de-inversiones.html. Republic of South Africa, Department of Trade and Industry, Bilateral Investment Treaty Framework Review, Executive Summary of Government Position Paper, June 2009, available at http://www.info.gov.za/view/ DownloadFileAction?id=103768. See also Minister of Trade and Industry Rob Davies, Speech, 26 July 2012, p. 2, available at http://unctad.org/meetings/en/Miscellaneous%20Documents/South-Africa-Investment-statement_Rob_Davies.pdf. See also UNCTAD, Denunciation of the ICSID Convention and BITs: Impact on Investor-State Claims, IIA Issues Note, No. 2, 2010.

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augur well for the prospects of a multilateral investment agreement. What was almost in reach in 1998 when the MAI negotiations collapsed, is now far out of sight.25 This is particularly the case if one aimed for a ‘state-of-the-art’ agreement 50 containing ambitious rules on investment liberalisation, promotion, and dispute settlement, while also dealing with the host countries’ right to regulate and investor responsibilities, including in the area of social and environmental policies. As the MAI negotiations have amply demonstrated, such a treaty would be extremely difficult to negotiate. It seems that the ‘investment world’ has become too complex to deal with in one single international instrument. Recent international policy developments related to foreign investment reflect 51 these multiple challenges. Rather than attempting a ‘big bang’ approach in a treaty dealing with all investment-related aspects of globalisation at the same time, the emphasis nowadays is to tackle specific investment-related problems of a more limited scale. Activities are manifold and range from industry-specific initiatives to projects addressing more general investment-related issues. Examples from recent years include the UN Global Compact,26 the UN Guiding Principles on Business and Human Rights,27 the UN Principles for Responsible Investment (PRI),28 UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD),29 the World Bank/FAO/UNCTAD/IFAD Principles for Responsible Agricultural Investment,30 the OECD Guidelines for Multinational Enterprises, the OECD Policy Framework for Investment,31 the G-20 commitments to refrain from investment protectionism in times of financial crisis and to act together to reform the financial system,32 and the ‘Santiago Principles’ de25 Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2010) 262. 26 The United Nations Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. It is available at the UN website at www.unglobalcompact.org. 27 The Guiding Principles on Business and Human Rights aim to provide an authoritative global standard for preventing and dealing with negative impact to human rights of business activities. The text is available at the UN website at http://www.ohchr.org. 28 The United Nations-backed Principles for Responsible Investment (PRI) is a network of international institutional investors working together to put six Principles for Responsible Investment into practice. The principles cover environmental, social, and corporate governance (ESG) issues. 29 UNCTAD, World Investment Report 2012, Towards a New Generation of Investment Policies (United Nations, 2012). 30 Principles for Responsible Agricultural Investment that Respects Rights, Livelihoods and Resources, A discussion note prepared by FAO, IFAD, the UNCTAD Secretariat and the World Bank Group to contribute to an ongoing global dialogue, 16 April 2010, D/B/C.II/CRP.3. The text is available at the UNCTAD website at www.unctad.org/en/docs/ciicrp3_en.pdf. 31 The Policy Framework for Investment is a tool, providing a checklist of important policy issues for consideration by any government interested in creating an environment that is attractive to all investors and in enhancing the development benefits of investment to society, especially the poor. It is available at the OECD website at www.oecd.org. 32 See, for instance, the G-20 Summit Declaration of Toronto, 26–27 June 2010 (plus Pittsburgh Summit 2009).

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veloped in 2008 by 23 countries with sovereign wealth funds, aiming to improve their transparency and ensure that they bring economic benefits.33 Also worth mentioning in this context are the many initiatives to enhance industry self-regulation (corporate social responsibility). 52 Idealists will not be happy with this piecemeal approach to multilateral investment rule-making and complain about a lack of vision and ambition. Realists will argue that in the current policy environment, progress with regard to multilateral investment rule-making can only be made in small steps – whether one likes it or not. Their contribution to ‘better’ and more responsible investment can nevertheless be significant. Such a limited and targeted approach could also be helpful in addressing other crucial investment policy issues that have attracted much attention recently and still wait for a solution.34 53 In conclusion, it looks as if the future of multilateral investment rule-making will be quite different from what the MAI negotiators had in mind. Rather than aiming at an Airbus A380 type-like agreement we are watching the development of a variety of much smaller planes. The challenge is to ensure that their flights go into the right direction, namely to promote investment for sustainable development. This would not be the least of achievements. Or, as the saying goes – ‘half a loaf is better than no bread’.

33 International Working Group of Sovereign Wealth Funds (IWG-SWF), Santiago Principles (Generally Accepted Principles and Practices), October 2008, available at http:// www.ifswf.org. Through the Kuwait Declaration of April 2009 the IWG-SWF established an ‘International Forum of Sovereign Wealth Funds’ to exchange views on issues related to the ‘Santiago Principles’, available at www.iwg-swf.org/mis/kuwaitdec.htm. The International Forum of SWFs has met annually since 2009. Further information available at www.ifswf.org. 34 One example has to do with considerations to set up an appeals mechanism in order to deal with the increasing number of conflicting investment arbitration awards.

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Chapter 5: International Investment Agreements and the General Body of Rules of Public International Law I. Two Worlds, but Not Apart: International Investment Law and General International Law

Bruno Simma and Dirk Pulkowski A. Investment Law is Not a ‘Self-Contained Regime’. . . . . . . . . . . . . . . . . . . . . . .

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B. Fallback on General International Law in Investment Proceedings . . . . .

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C. Impact of Investment Proceedings on General International Law . . . . . . .

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D. Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Yas Banifatemi, ‘Mapping the Future of Investment Treaty Arbitration as a System of Law’ (2010) Am. Soc’y Int’l L Proc. 323–330; Norberto Bobbio, Essais de théorie du droit (LGDJ, 1998); Zachary Douglas, The International Law of Investment Claims (Cambridge University Press, 2009); Campbell McLachlan, ‘Investment Treaties and General International Law’ (2008) 57 ICLQ 361–401; Anthea Roberts, ‘Power and Persuasion in Investment Treaty Interpretation: The Dual Role of States’ (2010) 104 AJIL 179–225; Jeswald W. Salacuse, The Law of Investment Treaties (Oxford University Press, 2010); Stephen M. Schwebel, ‘The Influence of Bilateral Investment Treaties on Customary International Law’ (2004) 98 Am. Soc’y Int’l L. Proc. 27–30; Bruno Simma and Dirk Pulkowski, ‘Of Planets and the Universe: Self-Contained Regimes in International Law’ (2006) 17 EJIL 483–530; Joseph H. Weiler, ‘The Rule of Lawyers and the Ethos of Diplomats: Reflections on the Internal and External Legitimacy of WTO Dispute Settlement’ (2001) 35 JWT 191–207.

A. Investment Law is Not a ‘Self-Contained Regime’

Investment law is not a self-contained regime – neither in the technical sense 1 of a closed system that embraces a complete set of secondary rules,1 nor in the wider and more general sense of a subsystem that functions in isolation from the remainder of public international law. The contemporary international law for the protection of foreign investments is constituted by legal provisions – often similar in content – contained in a network of close to 3,000 bilateral investment agreements as well as a small number of multilateral treaties with investment chapters, such as the Energy Charter Treaty (ECT) or the North-American Free Trade Agreement (NAFTA). There is no overarching treaty structure that would provide systemic context for such rules for the protection of foreign investment. It is perhaps due to the decentralised nature of investment law without any 2 obvious kernel that investment lawyers tend not to perceive their discipline as separate, decoupled from the remainder of international law, although more limi-

1 Bruno Simma and Dirk Pulkowski, ‘Of Planets and the Universe: Self-Contained Regimes in International Law’ (2006) 17 EJIL 483, 492–493.

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ted claims as to the special character of an investment treaty have of course been embraced.2 Investment law is subject to a comparatively low level of institutionalisation: in most cases, no institution equivalent to a ‘European Commission’ or ‘WTO Secretariat’ is established; and where permanent institutions are created, such as under the ECT or NAFTA, their role in shaping the substance of investment law is limited. International investment law is largely administered by ad hoc decision-makers who are appointed anew for each particular dispute. A certain degree of continuity of jurisprudence across different treaty arrangements is created, however, through a habitual practice (especially in pleadings) of referring to prior decisions of other tribunals3 and through a high degree of personal continuity of decision-makers serving on several arbitral tribunals. 3 In light of these characteristics, it is difficult to argue that investment law constitutes a complete system that is independent from general international law. Investment law depends on general international law in many ways, as will be outlined in the following sections of the present chapter and demonstrated in detail in the following chapters of this volume. At the same time, general international law does not remain unaffected by the encounter with the modern investment system: some of its substantive norms are inevitably shaped by the rich practice of investment tribunals, and the procedural ‘ethos’ of State-State dispute settlement under international law is bound to undergo changes (for better or worse) in light of established practices in investor-State proceedings, which, in turn, are shaped by the experience of international commercial arbitration. B. Fallback on General International Law in Investment Proceedings 4

It is sometimes said that international investment law constitutes a particular ‘system’. There is nothing objectionable to such a qualification as long as it is clear what is meant by it: undeniably, investor-State tribunals operate in a particular definitional universe, shaped mostly by rather similar provisions in bilateral or multilateral investment treaties; they have developed a particular way of justifying their decisions (although differences in style and approach among arbitrators do remain); and they have adopted a particular way of conducting proceedings, shaped by international commercial arbitration as much as by more traditional State-State dispute resolution.4 However, these characteristics do not transform investment law into a legal system of its own as defined in a more 2 Campbell McLachlan thus makes the point that investment lawyers have been more willing to acknowledge the integration of their discipline with the remainder of international law than trade lawyers, who, as the system was at least prior to the establishment of the World Trade Organization (WTO) perceived to be ‘hermetically sealed’, had some difficulty to ‘make the case for a broader set of potentially applicable norms’ (‘Investment Treaties and General International Law’ (2008) 57 ICLQ 361, 370). 3 See AES Corp. v. Argentina, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, paras. 30–31. 4 Jeswald W. Salacuse has thus more aptly qualified investment law as an ‘international regime’ (The Law of Investment Treaties (Oxford University Press, 2010)).

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technical manner. As a definitional precondition for a legal system, legal theorists would usually require that the relevant primary rules of a particular arrangement are complemented by a more or less complete set of secondary rules: rules for the ‘conservation’ or ‘transformation’ of the primary legal rules, such as rules of interpretation, rules regarding the consequences of breach, or rules of change, including in respect of amendment or termination.5 The dependence of investment law on general international law was acknowl- 5 edged in the very first treaty-based investment dispute administered by the International Centre for Settlement of Investment Disputes (ICSID), AAPL v. Sri Lanka. The tribunal found that the bilateral investment treaty in question did not constitute ‘a self-contained closed legal system limited to provide for substantive material rules of direct applicability, but it has to be envisaged within a wider juridical context in which rules from other sources are integrated through implied incorporation methods, or by direct reference to certain supplementary rules, whether of international law character or of domestic law nature.’6 Many more recent investor-State tribunals have agreed with that position; for instance, the tribunal in Phoenix v. Czech Republic emphasised (with reference to the famous WTO Appellate Body dictum in the U.S.–Gasoline case) that investment law ‘cannot be read and interpreted in isolation from public international law, and its general principles’.7 International investment law is not a legal system in the technical sense of an 6 arrangement containing a more or less complete set of secondary rules. First, investment treaties typically do not contain rules or maxims of interpretation. Accordingly, investment tribunals have routinely resorted to the provisions of Articles 31 and 32 of the Vienna Convention on the Law of Treaties (Vienna Convention) to give meaning to the rules of the treaty. In fact, some investment awards go to considerable length in clarifying the methodology of treaty interpretation used, such as to determine the extent to which subsequent practice by the States parties is to be taken into account.8 As August Reinisch observes in the present volume, investor-State tribunals almost universally invoke the interpretive maxims laid down in the Vienna Convention (even though these maxims are not always applied consistently).

5 Norberto Bobbio, ‘Nouvelles réflexions sur les normes primaires et secondaires’ in Norberto Bobbio, Essais de théorie du droit (LGDJ, 1998) 159–173, 168. 6 Asian Agricultural Products Ltd v Sri Lanka, ICSID Case No. ARB/87/3, Award, 27 June 1990, 4 ICSID Rep. 245. 7 Phoenix Action Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 78. 8 See Anthea Roberts, ‘Power and Persuasion in Investment Treaty Interpretation: The Dual Role of States’ (2010) 104 AJIL 179, 215 et seq. For an enlightening discussion of interpretive methodology in investment arbitration see the debate between the majority of the tribunal and the dissenting arbitrator in the UNCITRAL arbitration HICEE B.V. v. Czech Republic, Partial Award, 23 May 2011 and the contribution of August Reinisch, ‘The Interpretation of International Investment Agreements’, ch. 5.II., 372–410 of the present volume.

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Second, investor-State tribunals routinely apply at least elements of the customary international law of State responsibility. For instance, it is untypical for investment treaties to set out any particular rules of attribution. The question whether conduct is attributable to a State by virtue of an entity being considered a State organ, of it exercising elements of governmental authority, of it acting under the instructions, direction or control of the State, or for other reasons will be resolved by recourse to the rules on attribution under the general international law of State responsibility. There appears to have been little dispute in investorState proceedings about the content of the applicable rules on attribution; rather, parties have disagreed, on the facts of a particular case, as to whether certain entities properly qualified as State organs or their conduct was otherwise attributable to the State. Moreover, as James Crawford and Simon Olleson have pointed out,9 there has been a tendency by investor-State tribunals to invoke the rules on attribution contained in the ILC Articles as general authority on the relationship of government organs or agents with the State, beyond the situation of attribution of conduct ‘for the purposes of determining [a State’s] international responsibility’ contemplated by the ILC.10 8 The matter is less clear-cut when it comes to the invocation of the responsibility of the host State: One would expect investment treaties to contain an express lex specialis (within the meaning of Article 55 of the ILC Articles)11 vis-à-vis the local remedies rule traditionally found in public international law. However, in reality, many investment treaties do not address the relationship of international arbitration with local court proceedings, either by requiring investors first to seek relief in the host State’s courts or by precluding investors from litigating one and the same dispute in several fora (‘fork in the road’). 9 In interpreting a Treaty of Friendship, Commerce and Navigation between Italy and the United States in the Elettronica Sicula case, the International Court of Justice had endorsed a presumption in favour of the application of the local remedies rule: 7

The Chamber has no doubt that the parties to a treaty can therein either agree that the local remedies rule shall not apply to claims based on alleged breaches of that treaty; or confirm that it shall apply. Yet the Chamber finds itself unable to accept that an important principle of customary international law should be held to have been tacitly dispensed with, in the absence of any words making clear an intention to do so.12

9 See the detailed discussion by James Crawford and Simon Olleson, ‘The Application of the Rules on State Responsibility’, ch. 5.III., 411–441, 423. 10 Articles on the Responsibility of States for Internationally Wrongful Acts, Report of the International Law Commission on the Work of its Fifty-third Session, UN doc. A/56/10, Chapter IV, Introductory Commentary to Part One, Chapter II, para. 7. 11 Article 55 of the ILC Articles, entitled lex specialis, provides: ‘These articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or the content or implementation of the international responsibility of a State are governed by special rules of international law.’ 12 Elettronica Sicula (ELSI) (USA v. Italy), ICJ Judgment, ICJ Rep. 1989, 42, para. 50.

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In international investment law, tribunals will often come to the opposite conclusion – that a requirement to exhaust local remedies before commencing arbitral proceedings cannot be presumed. Pursuant to Article 26 of the ICSID Convention, the host State’s consent to arbitration expressed in an investment treaty must, ‘unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy’. States that wish to preserve the application of the local remedies rules would thus be expected specifically to state so in the text of the investment agreement. Given the importance of the Convention within the normative architecture of the international investment law regime, Article 26 can reasonably be regarded as establishing a default interpretive rule for investment agreements more generally. Yet, while the default rules under international investment law and general international law may be different, investor-State tribunals and courts or tribunals under general international law will by and large follow the same approach when faced with a jurisdictional objection to the effect that a national of the other State has failed to exhaust local remedies – to acknowledge the existence of the local remedies rule under public international law and then to ascertain whether that rule is to apply within the context of a particular treaty. The fact that investment law tends to dispense with the traditional local remedies rule, and sets out special procedures instead, merely serves to confirm the potential relevance of general international law for investment tribunals. Less than obvious is also the question which remedies an investor-State tribunal is competent to order in arbitral proceedings pursuant to a bilateral or multilateral investment treaty. According to the customary international law on State responsibility, reparation may take the form of restitution or compensation. A State may only refuse restitution, in turn, if a return to the status quo ante is either ‘materially impossible’ or ‘involve[s] a burden out of all proportion to the benefit deriving from restitution instead of compensation’.13 As a matter of policy, it is open to debate whether it is desirable to allow investor-State tribunals to order restitution, as restitution will often be more onerous to the host State, in particular where the measure in dispute is a legislative act. However, to the extent that claimants have sought restitution rather than compensation, investorState tribunals appear to have confirmed the presumptive applicability of the customary international rules on State responsibility and, thus, the availability in principle of restitution as a remedy in international investment law.14 Another – and particularly controversial – question of State responsibility is the application of rules regarding circumstances precluding wrongfulness under customary international law to disputes arising under investment treaties.15 From 13 That is at least the position taken by the International Law Commission in Article 35 of the Draft Articles on State Responsibility, which, in accordance with the mandate of the Commission, may include components of ‘codification’ and ‘progressive development’. 14 Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, 28 March 2011, paras. 149–150.

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a systemic point of view, it is clear that any special provisions contained in an investment agreement constitute leges speciales: investment treaties, depending on their particular terms, may provide the host State with greater latitude in the event of economic emergencies than would be available under general international law or, conversely, offer a sort of insurance policy to investors precisely in the event that circumstances of economic crisis arise. At the same time, it would seem that circumstances precluding wrongfulness under general international law remain available to the extent that an investment treaty is silent in this regard. Christina Binder discusses the complex relationship between circumstances precluding wrongfulness under general international law and special exceptions or justifications under investment treaties in chapter 5.IV. 14 As regards, finally, the termination of treaties, most investment agreements contain specific provisions regulating such matters. However, the question remains to what extent such provisions are exhaustive. Respondent States have argued, for example, that intra-EU investment treaties can be abrogated independently of the particular termination provisions of such treaties, by consent of the States parties (embodied, in their view, in the signature of the accession instrument to the European Community Treaty).16 15 While the dependence of international investment law on the body of general international law is most obvious when it comes to secondary rules, even the primary rules of investment law are not solely and exclusively those to be found in special treaty arrangements. A number of norms of general international law continue to play a role in investment proceedings. 16 The substantive general international law regarding the protection of aliens may come into play in the interpretation of the international minimum standard of treatment guaranteed in an investment treaty. The matter has become particularly relevant in the NAFTA context, where the three States parties, forming the Free Trade Commission, resolved that ‘[t]he 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.’17 However, while general international law is thus often invoked to buttress an argument made under the specific fair and equitable treatment provisions of the investment treaty, one sometimes wonders whether such invocation is more than a polite nod to the historic pedigree of the investment system. The fact pattern of the famous Neer case, as important as it

15 See the disagreement between the arbitral tribunals and the annulment committees in Enron v. Argentina (ICSID Case No. ARB/01/3) and Sempra v. Argentina (ICSID Case No. ARB/ 02/16), discussed in detail by Christina Binder, ‘Circumstances Precluding Wrongfulness’, ch. 5.IV., 442–480. 16 See the somewhat different approaches in the awards of Eureko B.V. v. Slovakia, PCA Case No. 2008-13, Award on Jurisdiction, Arbitrability and Suspension, 26 October 2010, para. 231 et seq. and Eastern Sugar B.V.(Netherlands) v. Czech Republic, SCC Case No. 088/2004, Partial Award, 27 March 2007, para. 142 et seq. 17 Free Trade Commission Clarifications Related to NAFTA Chapter 11, 31 July 2001.

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is (and, particularly, was) in defining the standard of treatment owed to aliens in relation to criminal offences perpetrated against them in the host country, was rather dissimilar from that occurring in contemporary economic relations.18 Hence, the Neer formula pursuant to which, for international responsibility to arise, government conduct must ‘amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency’19 provides limited guidance to decision-makers who sit in judgement over present-day government regulation of the economy.20 What is controversial in investment proceedings is not the applicability in 17 principle of general international law. Tribunals of varying compositions have endorsed the application of customary international law as part of the applicable law. Rather, what has become contentious is the precise place for custom and the sequence in which it may be resorted to. This latter question can be said to lie at the heart of the controversy surrounding various awards dealing with utilities investments in Argentina. While some tribunals gave the general international law on State responsibility a particularly prominent place, essentially reading the respective treaty standards as giving expression to general international law,21 other tribunals (and annulment committees) considered that general international law would apply in a subsidiary fashion only, to inform the meaning of the investment treaty, once the special treaty provision had been interpreted on its own terms.22 In the Argentina cases, the interpretive approach adopted by a particular tribunal appears to have been outcome-determinative. The place of general international law in investment disputes, although a doctrinal and theory-laden topic, is thus of immediate practical consequence.

18 In fact, most inter-State cases regarding the protection of aliens seem to concern questions of denial of justice – no doubt a consequence of the applicability of the ‘exhaustion of local remedies’ rule in the law of diplomatic protection, which would usually bar any claims directed against administrative action from proceeding. 19 L.F.H. Neer and Pauline Neer (USA) v. Mexico, 15 October 1926, (1926) IV UNRIAA 60, 61–62. 20 The relevance of general international law has also been discussed in the context of jurisdictional requirements for investment tribunals. For instance, in investment cases brought by shareholders of a company, respondent host States occasionally attempted to cast doubt on the claimant’s qualification as an ‘investor’ by referring to principles of diplomatic protection under general international law, as expressed in the ICJ judgment in the Barcelona Traction case. See for example, with respect to the issue of minority shareholding, Gami Investments, Inc. v. Mexico, Final Award, 15 November 2004, para. 26 et seq. 21 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005; Enron Corporation Pondorosa Assets L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007; Sempra Energy International v. Argentina, ICSID Case No. ARB/ 02/16, Award, 28 September 2007. 22 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Decision of the Ad Hoc Committee on the Application of Annulment by the Argentine Republic, 25 September 2007; LG&E Energy Corp. et al. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006.

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C. Impact of Investment Proceedings on General International Law

Yet one would paint an incomplete picture of the relationship of investment law with general international law, were one to describe such relationship as essentially a one-way street, with investment law exclusively at the receiving end. In reality, general international develops in tandem with investment law, as investor-State tribunals apply rules of general international law to the realities of modern-day commerce. The interaction between the two branches of international law becomes apparent when particular rules of general international law are interpreted (and some examples are discussed below). 19 Courts and tribunals under general international law have come to appreciate their function as being complementary to that of investor-State tribunals. In the Diallo case, for instance, the ICJ acknowledged that ‘in contemporary international law, the protection of the rights of companies and the rights of their shareholders, and the settlement of the associated disputes, are essentially governed by bilateral or multilateral agreements for the protection of foreign investments’. Accordingly, the traditional ‘role of diplomatic protection somewhat faded, as in practice recourse is only made to it in rare cases where treaty régimes do not exist or have proved inoperative’.23 It was against this backdrop that the Court approached the interpretive question as to whether, under general international law, an applicant State is entitled to espouse claims by a shareholder of a company, which itself is incorporated in the respondent State.24 20 The rulings of investment tribunals – probably over 400 by now, of which a sizable proportion has become public – inevitably contribute to shaping expectations as to the standard of protection that a host State owes foreign nationals on its territory. One need not go as far as to conclude that the customary international law standard of treatment has come to be identical with the typical standard of protection afforded under investment agreements, as a distinguished commentator has argued.25 Even if the formal relevance of such agreements as practice for the purpose of constituting custom may be doubtful (as compliant 18

23 Case concerning Ahmadou Sadio Diallo (Republic of Guinea v. Congo), Preliminary Objections, Judgment, 24 May 2007, para. 88. 24 Interestingly, Guinea argued this particular point by specific reference to awards rendered in investor-State proceedings. As the ICJ noted, ‘Guinea contends that the existence of the rule of protection by substitution and its customary nature are confirmed by numerous arbitral awards establishing “that the shareholders of a company can enjoy the diplomatic protection of their own national State as regards the national State of the company when that State is responsible for an internationally wrongful act against it”. Further, according to Guinea, “[s]ubsequent practice [following Barcelona Traction], conventional or jurisprudential ... has dispelled any uncertainty ... on the positive nature of the ‘exception’”. Guinea thus refers to certain decisions of the European Commission of Human Rights, to the Washington Convention establishing the ICSID, to the latter’s jurisprudence and to the jurisprudence of the Iran/ United States Claims Tribunal.’ (Id., para. 83). 25 Stephen M. Schwebel, ‘The Influence of Bilateral Investment Treaties on Customary International Law’ (2004) 98 Am. Soc’y Int’l L. Proc. 27, 29–30. See also CMS v. Argentina (n. 18) para. 284 and Mondev International Ltd. v. USA, Case No. ARB(AF)/99/2, Award, 11 October 2002, para. 120 et seq.

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States would primarily act in accordance with the treaty rather than with the purpose of complying with their obligations under general international law),26 it is nonetheless difficult to imagine that a court or tribunal examining an allegation of unfair treatment of a foreign national under general international law would completely disregard an award by an arbitral tribunal that struggled with a similar fact pattern. The practice of investment tribunals constitutes persuasive authority for the interpretation of rules under general international law, although the value of such authority is likely to vary significantly depending on the terms of the particular investment treaty (for instance, one might expect an award rendered in application of NAFTA Article 1103 – which purports to incorporate the applicable customary international law standard into NAFTA – or of similarly worded bilateral investment treaties would constitute stronger authority than a ruling rendered pursuant to a more protective investment treaty). Thus, to some extent, the content of custom co-evolves with the interpretation of the corresponding standard in investment treaties by specialised tribunals.27 The mutual interaction between ‘general’ public international law and the 21 ‘special’ branch of international investment law is also apparent in more technical legal rules, such as the rules governing the determination of nationality of aliens. While investor-State tribunals continue to be guided by the principal ICJ judgments dealing with the protection of aliens abroad – in the ELSI and Barcelona Traction cases28 – it is nonetheless clear that, nowadays, the most complex questions regarding nationality of claims are being adjudicated in investor-State proceedings. Such questions include the relevance of the domestic law of the State of nationality (Soufraki),29 the recognition of the nationality of a shell company without significant assets (Tokios Tokelės,30 Saluka),31 or the question of (minority) shareholder protection (Gami).32 It is difficult to imagine that a court or tribunal operating under general international law would not give

26 In this sense, the tribunal in United Parcel Service of America Inc. v. Canada, UNCITRAL, Award on Jurisdiction, 22 November 2002, para. 97. 27 Zachary Douglas has observed that BIT guarantees of fair and equitable treatment must be taken as embodying ‘the set of norms that the relevant state holds out to be both reasonable and acceptable as a legal basis for the protection of foreign investment in its own economy’ (Zachary Douglas, The International Law of Investment Claims (Cambridge University Press, 2009) 159). And Campbell McLachlan has concluded that there is a sort of ‘convergence’ ‘between treaty practice and custom, in which the modern understanding of the content of the customary right is being elaborated primarily through the treaty jurisprudence’ (Campbell McLachlan (n. 2) 394). 28 A third case – the Interhandel case instituted by Switzerland against the United States – did not proceed to the merits stage, as the Court found that Interhandel had not exhausted local remedies that were available to it before the Unites States courts. 29 Hussein Nuaman Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7, Award, 7 July 2004. 30 Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004. 31 Saluka Investments B.V. v. Czech Republic, PCA, Partial Award, 17 March 2006. 32 Supra (n. 20).

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careful consideration to these rulings, were it confronted with a comparable situation in State-State litigation or arbitration.33 22 More subtle, but no less fundamental, is the influence of investment arbitration on the procedure of public international law litigation. Investment proceedings tend to follow in many respects the model of commercial arbitration.34 Perhaps most strikingly, the process of evidence-taking (and consequently the volume of evidence that is tendered) is structured in a manner that will be more familiar to commercial arbitrators than judges operating under general international law: witness cross-examination is common; scientific or econom(etr)ic evidence is presented by calling upon scientific experts (rather than through pleadings of legal counsel) and may be subject to evaluation by a tribunal-appointed expert; documentary evidence tends to be voluminous and may have been obtained through document disclosure requests. While the ICJ has so far been reluctant to make full use of the evidentiary powers under its statute and press for a more formalised process of evidence gathering, recent State-State arbitration proceedings35 – involving the determination of land and maritime boundaries, the use of force, or environmental matters – have demonstrated that such a process can be fruitfully deployed in inter-State proceedings. The experience gained in international economic law, including investor-State dispute settlement and WTO litigation, is likely to shape States’ expectations as to how evidence-taking is to occur in international proceedings.36 23 The ethos of commercial arbitration also transpires in what appears to be a recent tendency in State-State proceedings to scrutinise arbitrators more carefully for compliance with the requirement to remain impartial and independent during the course of the proceedings. Disclosure statements, in which arbitrators inform the parties about any relevant connections that they may have with a party, withdrawals of arbitrators in the event that a party raises concerns, and even outright challenges of arbitrators, all of which have been part and parcel of investor-State proceedings, are now beginning to become commonplace in State-

33 As the Diallo judgment of the ICJ (n. 23) has shown, such careful consideration does not preclude the possibility of the distinguishing practice pursuant to investment treaties from the situation that arises under general international law. 34 Yas Banifatemi has thus qualified commercial arbitration and investment arbitration as part of the same ‘system’ of arbitration, ‘Mapping the Future of Investment Treaty Arbitration as a System of Law – Remarks’ (2010) Am. Soc’y Int’l L. Proc. 323–330. 35 Examples include arbitrations administered by the Permanent Court of Arbitration (PCA), such as the Eritrea–Ethiopia Claims Commission dealing with post-conflict compensation; a boundary dispute between Eritrea and Yemen; an arbitration concerning land reclamation by Singapore in and around the Straits of Johor, initiated by Malaysia; a boundary dispute between Barbados and Trinidad and Tobago; a boundary dispute initiated by Guyana against Suriname; the Mox Plant and OSPAR arbitrations initiated by Ireland against the United Kingdom; or the Abyei arbitration between the Government of Sudan and the Sudan People’s Liberation Movement/Army. 36 See also joint dissenting opinion Judges Al-Khasawneh and Simma in the Case concerning Pulp Mills on the River Uruguay (Argentina v. Uruguay), 20 April 2010, available at http:// www.icj-cij.org/docket/files/135/15877.pdf.

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State (arbitral) proceedings37 under general international law. Certainly, a situation as the one recounted by Jan Paulsson in connection with the Alaskan boundary dispute, which involved direct ex parte communications between the executive branch of one of the parties with ‘its’ party-appointed arbitrators regarding the most desirable outcome, would be inconceivable today without exposing an arbitrator to the risk of a (justified) challenge.38 D. Outlook

As the contributions in the present section of this volume show, the legal rela- 24 tionship between investment law and general international law is complex and multi-faceted. Yet, while different tribunals have occasionally endorsed divergent interpretations of general international law, there appears to be broad consensus that general international law forms part of the applicable law. There is no collision in international investment law of the ‘ethos of diplomats’ with the ‘rule of lawyers’,39 as Joseph Weiler has diagnosed with respect to international trade law. Rather, the rule of international lawyers and that of commercial lawyers meet and combine rather harmoniously. While public international law provides the discursive deep structure for investment law, the arbitral process is crafted in a manner familiar from commercial proceedings. The amalgam of the two should permit international lawyers to take a fresh look at general international law through the lens of the many awards rendered in investor-State proceedings.

37 The ICJ Statute or Rules of Court, by contrast, do not provide for the possibility of party-initiated challenges. Rather, pursuant to Article 24(2) of the Statute, it falls to the President to raise any concerns ‘that for some special reason one of the members of the Court should not sit in a particular case’. 38 Jan Paulsson, ‘Moral Hazard in International Dispute Resolution’, Inaugural Lecture as Holder of the Michael R. Klein Distinguished Scholar Chair, University of Miami School of Law, 29 April 2010, on file with the authors. 39 Joseph H. Weiler, ‘The Rule of Lawyers and the Ethos of Diplomats: Reflections on the Internal and External Legitimacy of WTO Dispute Settlement’ (2001) 35 JWT 191–207.

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August Reinisch A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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B. The Interpretation of IIAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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C. The Ordinary Meaning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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D. Contextual Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Context within International Investment Agreements . . . . . . . . . . . . . . . 2. The Contextual Relevance of Other International Investment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. General International Law as Relevant Context. . . . . . . . . . . . . . . . . . . . . .

28 29 35 40

E. Object and Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52

F. Intent of the Parties – Negotiating History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61

G. Interpretative Statements concerning International Investment Agreement Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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H. The Impact of the Hybrid Nature of Investment Arbitration on the Interpretation of International Investment Agreements . . . . . . . . . . . . . . . . . .

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I. The Special Role of Precedent for the Interpretation of International Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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J. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Frank Berman, ‘Treaty Interpretation in a Judicial Context’ (2004) 29 Yale J. Int’l L. 315–322; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008); Zachary Douglas, ‘The MFN Clause in Investment Arbitration: Treaty Interpretation Off the Rails’ (2010) 2 Journal of International Dispute Settlement 97–113; Malgosia Fitzmaurice, Olufemi Elias and Panos Merkouris (eds), Treaty Interpretation and the Vienna Convention on the Law of Treaties: 30 Years On (Martinus Nijhoff, 2010); Ole Fauchald, ‘The Legal Reasoning of ICSID Tribunals: An Empirical Analysis’ (2008) 19 EJIL 301–364; John Gaffney and James Loftis, ‘The “Effective Ordinary Meaning” of BITs and the Jurisdiction of Treaty-Based Tribunals to Hear Contract Claims’ (2007) 8 JWIT 5–68; Omar E. Garcia-Bolivar, ‘The Teleology of International Investment Law: The Role of Purpose in the Interpretation of the International Investment Agreements’ (2005) 6 Journal of World Investment and Trade 751–772; Richard Gardiner, Treaty Interpretation (Oxford University Press, 2008); Virtus Chitoo Igbokwe, ‘Determination, Interpretation and Application of Substantive Law in Foreign Investment Treaty Arbitrations’ (2006) 23(4) J. Int’l Arb. 267–299; Gabriele Kaufmann-Kohler, ‘Interpretation of Treaties: How Do Arbitral Tribunals Interpret Dispute Settlement Provisions Embodied in Investment Treaties’ in Loukas Mistelis and Julian Lew (eds), Pervasive Problems in International Arbitration (Kluwer, 2006) 257–276; Lars Markert, ‘International Investment Law and Treaty Interpretation – Problems, Particularities and Possible Trends’ in Rainer Hofmann and Christian Tams (eds), International Investment Law and General International Law – From Clinical Isolation to Systemic Integration? (Nomos, 2011) 53–69; Campbell McLachlan, ‘Investment Treaties and General International Law’ (2008) 57 ICLQ 361–401; Campbell McLachlan, ‘The Principle of Systemic Integration and Article 31(3)(c) of the Vienna Convention’ (2005) 54 ICLQ 279–320; Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Kluwer, 2009); Alexander Orakhelashvili, ‘Principles of Treaty Interpretation in the NAFTA Arbitral Award on Canadian Cattlemen’ (2009) 26 Journal of International Arbitration 159– * This contribution is current as of December 2012.

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II. The Interpretation of International Investment Agreements 173; Martins Paparinskis, ‘Sources of Law and Arbitral Interpretations of Pari Materia Investment Protection Rules’ in Ole Fauchald and André Nollkaemper (eds), The Practice of International and National Courts and the (De-)Fragmentation of International Law (Hart, 2012) 87–116; August Reinisch, ‘How Narrow are Narrow Dispute Settlement Clauses in Investment Treaties?’ (2011) 2 Journal of International Dispute Settlement 115–174; Anthea Roberts, ‘Power and Persuasion in Investment Treaty Interpretation: the Dual Role of States’ (2010) 104 AJIL 179–225; Christoph Schreuer, ‘Diversity and Harmonization of Treaty Interpretation in Investment Arbitration’ in Malgosia Fitzmaurice, Olufemi Elias and Panos Merkouris (eds), Treaty Interpretation and the Vienna Convention on the Law of Treaties: 30 Years On (Brill, 2010) 129–151; Christoph Schreuer, ‘The Interpretation of ICSID Arbitration Agreements’ in Karel Wellens (ed), International Law Theory and Practice: Essays in Honour of Eric Suy (Martinus Nijhoff, 1998) 719–735; Bruno Simma and Theodore Kill, ‘Harmonizing Investment Protection and International Human Rights: First Steps Towards A Methodology’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (Oxford University Press, 2009) 678–707; Ingo Venzke, How Interpretation Makes International Law (Oxford University Press, 2012); Michael Waibel, ‘Demystifying the Art of Interpretation’ (2011) 22 European Journal of International Law 571–588; Michael Waibel, ‘International Investment Law and Treaty Interpretation’ in Rainer Hofmann and Christian Tams (eds), International Investment Law and General International Law – From Clinical Isolation to Systemic Integration? (Nomos, 2011) 29–52; J. Thomas Wälde, ‘Interpreting Investment Treaties: Experiences and Examples’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century: Liber Amicorum Christoph Schreuer (Oxford University Press, 2009) 724–781; Romesh Weeramantry, Treaty Interpretation in Investment Law (Oxford University Press, 2012); Matthew Weiniger, ‘Jurisdiction Challenges in BIT Arbitration: Do you Read a BIT by Reading a BIT or by Reading into a BIT?’ in Loukas Mistelis and Julian Lew (eds), Pervasive Problems in International Arbitration (Kluwer, 2006) 235–256.

A. Introduction

International investment agreements (IIAs), bilateral investment treaties 1 (BITs) as well as multilateral agreements with investment chapters, such as NAFTA, the Energy Charter Treaty, or the like, are treaties; as such they have to be applied and interpreted according to the principles of treaty interpretation codified in the Vienna Convention on the Law of Treaties (Vienna Convention, VCLT).1 This is in no way special and different from any other treaties and has been confirmed by many investment tribunals. What is, however, special with IIAs is the fact that their treaty provisions usu- 2 ally display a particularly high degree of generality and vagueness. IIAs consist of a number of abstract concepts, ranging from the definitions of ‘investment’ or ‘investor’ to substantive treatment standards like ‘fair and equitable treatment’

1 Vienna Convention on the Law of Treaties, 1155 UNTS 331, (1969) 8 ILM 679. See Gerald Fitzmaurice, ‘The Law and Procedure of the International Court of Justice: Treaty Interpretation and Certain Other Treaty Points’ (1951) 28 BYIL 1; Ian Sinclair, The Vienna Convention on the Law of Treaties (Manchester University Press, 1984); Richard Gardiner, Treaty Interpretation (Oxford University Press, 2008).

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or ‘full protection and security’, which all require interpretation in order to be applied. 3 Also special is the hybrid nature of investment arbitration as a form of enforcement of international treaty obligations, on the one hand, and as direct dispute settlement between private parties and States, on the other hand. This latter aspect clearly points to commercial arbitration paradigms where different rules of interpretation are applied. Although the legal reasoning of some investment treaty tribunals displays a commercial arbitration pedigree also when it comes to interpretation techniques, it is clear that at least officially tribunals tend to adhere to an international treaty interpretation approach. 4 This chapter outlines the reliance of investment tribunals on the rules of treaty interpretation, particularly those contained in Articles 31 and 32 of the Vienna Convention. At the same time it will assess to what extent the actual interpretation given to IIAs conforms to such principles. Practice demonstrates that in particular the intent of the IIA parties as well as general international law appear to play a more prominent role than envisaged in the interpretation rules of the Vienna Convention. The chapter will thus also address the specific impact of international law on the interpretation of IIAs which results from the fact that many IIA provisions are closely linked to customary international law concepts and may even expressly be considered relevant for purposes of treaty application and interpretation. 5 Finally, the often contradictory outcomes of investment arbitration tribunals, professedly relying on the same interpretation rules, are a matter of concern that must be dealt with. It needs to be analysed to what extent taking into account precedent may help to develop a jurisprudence constante leading to a predictable interpretation of IIAs. B. The Interpretation of IIAs

There is general agreement among scholars and arbitral tribunals that IIA provisions have to be interpreted according to the rules of interpretation laid down in Articles 31 to 33 of the Vienna Convention.2 7 Article 31 of the Vienna Convention provides: 6

1. 2.

A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:

2 See only Methanex v. USA, UNCITRAL (NAFTA), Final Award, 3 August 2005, Part IV, Ch. B, para. 29 (‘As the Tribunal has observed above and in its Partial Award, NAFTA, as a treaty, is to be interpreted in accordance with Articles 31 and 32 of the Vienna Convention on the Law of Treaties, which codifies the customary international rules of treaty interpretation.’); AES Summit Generation Limited and AES-Tisza Erömü Kft v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para. 7.6.5 (‘If interpretation of the ECT is required, the general rules of interpretation of the Vienna Convention, established in its Articles 31 and 32 should be applied.’).

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3.

4.

any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty; (b) any instrument which was made by one or more parties in connection with the conclusion of treaty and accepted by the other parties as an instrument related to the treaty. There shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties. A special meaning shall be given to a term if it is established that the parties so intended.3

Article 32 of the Vienna Convention provides as follows:

8

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) (b)

leaves the meaning ambiguous or obscure; or leads to a result which is manifestly absurd or unreasonable.4

Finally, Article 33 of the Vienna Convention provides as follows: 1.

2. 3. 4.

9

When a treaty has been authenticated in two or more languages, the text is equally authoritative in each language, unless the treaty provides or the parties agree that, in case of divergence, a particular text shall prevail. A version of the treaty in a language other than one of those in which the text was authenticated shall be considered an authentic text only if the treaty so provides or the parties so agree. The terms of the treaty are presumed to have the same meaning in each authentic text. Except where a particular text prevails in accordance with paragraph 1, when a comparison of the authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not remove, the meaning which best reconciles the texts, having regard to the object and purpose of the treaty, shall be adopted.

These provisions are regarded as codifying customary international law in the 10 case law of international courts and tribunals.5 Sometimes investment tribunals 3 VCLT Art. 31. 4 VCLT Art. 32. 5 See e.g. Libya v. Chad, ICJ Judgment, ICJ Rep. 1994, 19, para. 41 (‘(…) in accordance with customary international law, reflected in Article 31 of the 1969 Vienna Convention on the Law of Treaties, a treaty must be interpreted in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose.’); Asian Agricultural Products Ltd. (AAPL) v. Sri Lanka, ICSID Case No. ARB/87/3, Award, 27 June 1990, para. 38 (‘[T]he first task of the Tribunal is to rule on the controversies existing in this respect by indicating what constitutes the true construction of the Treaty's relevant provisions in conformity with the sound universally accepted rules of treaty interpretation as established in practice, adequately formulated by the Institut de Droit International in its General Session in 1956, and as codified in Article 31 of the Vienna Convention on the Law of Treaties.’); Salini Costruttori S.p.A. and Italstrade S.p.A. v. Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, 9 November 2004, para. 75 (‘(…) the interpretation of [a BIT] Article in conformity with Articles 31 to 33 of the Vienna Convention on the Law of Treaties which reflect customary international law.’); Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, para. 27 (‘(…) we interpret the ICSID Convention and the Treaty between the Contracting Parties according to the rules set forth in the Vienna Convention on the Law of Treaties, much of which reflects customary international law.’); Mondev Int’l Ltd v. USA, ICSID Case No. ARB(AF)/99/2, Award, 11 October 2002, para. 43 (‘(…) the question is what the relevant provisions mean, interpreted in accordance with the applicable rules of interpretation of treaties.

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expressly apply Articles 31 and 32 of the Vienna Convention as applicable treaty rules.6 Jurisprudence has also confirmed that the starting point for any treaty interpretation is the plain wording of the individual provisions of an agreement,7 aided by a contextual understanding of the entire agreement8 and supported by teleological considerations about the aims of an agreement.9 Some tribunals like the one in Noble Ventures v. Romania have paraphrased the interpretative maxims of the Vienna Convention by stating that (…) treaties have to be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of the object and purpose of the Treaty, while recourse may be had to supplementary means of interpretation, including the preparatory work and the circumstances of its conclusion, only in order to confirm the meaning resulting from the application of the aforementioned methods of interpretation. Reference should also be made to the principle of effectiveness (effet utile), which, too plays an important role in interpreting treaties.10

11

It is generally accepted that a textual interpretation does not enjoy primacy over the other elements contained in Article 31 of the Vienna Convention.

6

7 8 9 10

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These are set out in Articles 31–33 of the Vienna Convention on the Law of Treaties, which for this purpose can be taken to reflect the position under customary international law.’); Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 50 (‘(…) reference has to be made to Arts. 31 et seq. of the Vienna Convention on the Law of Treaties which reflect the customary international law concerning treaty interpretation.’); Phoenix Action Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 75 (‘It is not disputed that the interpretation of the ICSID Convention and of the BIT is governed by international law, including the customary principles of interpretation embodied in the Vienna Convention on the Law of Treaties and the general principles of international law.’); Enron Creditors Recovery Corp., Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Decision on Annulment, 30 July 2010, para. 114 (‘(…) the terms of the BIT and the ICSID Convention, which fall to be interpreted in accordance with customary international law rules of treaty interpretation as codified in the 1969 Vienna Convention on the Law of Treaties.’). See e.g. Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 221 (‘The ICSID Convention, the ICSID Arbitration Rules, and the UABIT are silent on the rules for interpreting treaty provisions, and the parties provided little guidance in this regard. However, both Austria and Ukraine are parties to the Vienna Convention on the Law of Treaties (May 23, 1969, 1155 UNTS 331) (“Vienna Convention”), which sets forth general rules of interpretation applicable to “treaties between States.” The Tribunal will accordingly adhere to the interpretive framework set forth in Articles 31 and 32 of the Vienna Convention, (…)’); Fraport AG Frankfurt Airport Services Worldwide v. Philippines, ICSID Case No. ARB/03/25, Decision on Annulment, 23 December 2010, para. 73 (‘(…) The Committee notes that for the proper construction of the BIT, the rules of the Vienna Convention on the Law of Treaties are relevant; they are directly applicable as conventional rules since both Germany and the Philippines had been parties to it at the moment when they concluded the BIT in 1997.’); see also HICEE B.V. v. Slovakia, Partial Award, PCA case No. 2009-11, 23 May 2011, para. 115. See infra, text and footnotes at II.C. The Ordinary Meaning. See infra, text and footnotes at II.D. Contextual Interpretation. See infra, text and footnotes at II.E. Object and Purpose. Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 50; see also Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Award, 3 March 2010, para. 429 (‘The Tribunal is required to interpret and apply the treaty in good faith, in accordance with the ordinary meaning to be given to the terms of the treaty in their proper context, and in light of the treaty’s object and purpose, consistent with Article 31(1) of the Vienna Convention of the Law Treaties.’).

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Rather, all aspects enjoy equal relevance. Investment tribunals have captured this approach as a ‘process of progressive encirclement.’11 However, it is clear from the VCLT and accepted by investment tribunals that the supplementary means of interpretation according to VCLT Article 32 are secondary to the elements mentioned in Article 31.12 In spite of this general agreement on the use of the rules of treaty interpreta- 12 tion contained in the Vienna Convention, the actual outcomes appear to differ sharply. In fact, the proper meaning of IIA provisions raises highly interesting interpretation questions; they demonstrate that tribunals may come to diverging results, although the actual difference in the specific wording of the treaty clauses they have to apply is often limited. C. The Ordinary Meaning

In response to the old controversy whether treaty interpretation should be pri- 13 marily guided by the text or by the intention of the parties, it is often asserted that the Vienna Convention favours the textual approach.13 The ILC has made clear that the text should be presumed to be the best expression of the parties’ intentions14 – a view that was echoed in a number of investment cases.15 Interna11 Aguas del Tunari v. Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21 October 2005, para. 91 (‘Interpretation under Article 31 of the Vienna Convention is a process of progressive encirclement where the interpreter starts under the general rule with (1) the ordinary meaning of the terms of the treaty, (2) in their context and (3) in light of the treaty’s object and purpose, and by cycling through this three step inquiry iteratively closes in upon the proper interpretation. [I]t is critical to observe [that] the Vienna Convention does not privilege any one of these three aspects of the interpretation method.’). 12 Gruslin v. Malaysia, Award, ICSID Case No. ARB/99/3, 27 November 2000, para. 21.6 (‘The Tribunal has considered the materials from sources ranging from 1960 (Respondent’s Reply, Annex 21) to 2000 (Hearing Book, Tab 17). Its approach is first to consider the terms of proviso (i). If its meaning is found to be clear, the Tribunal will not reduce its reach by reference to general considerations or assumptions derived from extrinsic sources of the sort relied upon by the Respondent in its materials and arguments.’); Murphy Exploration and Prod. Co. Int’l v. Ecuador, ICSID Case No. ARB/08/4, Award on Jurisdiction, 15 December 2010, para. 71 (‘Taking into account the general rule on the interpretation of treaties of Article 31(1) of the Vienna Convention on the Law of Treaties of 1969, the Tribunal considers that the language of Article 25(4) is clear and unambiguous. It also considers unnecessary to resort to supplementary means of interpretation, in accordance with Article 32 of the Vienna Convention, in order to interpret the ICSID Convention in good faith, within its context and considering its purpose.’). 13 See also Richard Gardiner (n. 1) 144. 14 See the comment of the International Law Commission on Article 31 in International Law Commission, Draft Articles on the Law of Treaties with commentaries, Yearbook of the International Law Commission, vol. II (United Nations, 1966) 220 (‘The article as already indicated is based on the view that the text must be presumed to be the authentic expression of the intentions of the parties; and that, in consequence, the starting point of interpretation is the elucidation of the meaning of the text, not an investigation ab initio into the intentions of the parties.’). 15 Wintershall v. Argentina, ICSID Case No. ARB/04/14, Award, 8 December 2008, para. 78 (‘The carefully-worded formulation in Article 31 is based on the view that the text must be presumed to be the authentic expression of the intention of the parties. The starting point of all

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tional courts and tribunals, including the ICJ, have often expressed the view that they would take the wording as starting point for interpreting a treaty.16 14 It has become a truism for many investment tribunals to state that the wording of IIAs matters and that they will pay specific attention to the actual language of the provisions applicable in various cases.17 The pre-eminence of the ordinary wording has also been stressed by investment tribunals. For instance, the NAFTA tribunal in ADF v. USA held: We understand the rules of interpretation found in customary international law to enjoin us to focus first on the actual language of the provision being construed. The object and purpose of the parties to a treaty in agreeing upon any particular paragraph of that treaty are to be found, in the first instance, in the words in fact used by the parties in that paragraph.18

Similarly, the annulment committee in the Sempra case stated:

15

According to Article 31(1) of VCLT, the first point of reference for interpretation of a BIT provision is the ‘ordinary meaning’ of the words of the treaty themselves.19

16

Sometimes tribunals emphasise the literal interpretation without even invoking the Vienna Convention. For instance, in the Thunderbird v. Mexico case, a NAFTA tribunal introduced its consideration of the investor’s national treatment

16

17

18 19

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treaty-interpretation is the elucidation of the meaning of the text, not an independent investigation into the intention of the parties from other sources (such as by reference to the travaux préparatoires, or any predilections based on presumed intention.’); Methanex v. USA, UNCITRAL (NAFTA), Final Award, 3 August 2005, Part II, Ch. B, para. 22 (‘(...) the approach of the Vienna Convention is that the text of the treaty is deemed to be the authentic expression of the intentions of the parties.’); Berschader v. Russia, Separate Opinion by Todd Weiler, SCC Case No. 080/2004, Award, 21 April 2006, para. 4 (‘While my colleagues concentrate much of their analysis on identifying the intent of the drafters of the Treaty (…), I focus on the treaty terms themselves as the best evidence of ascertaining such intent.’). Competence of the General Assembly for the Admission of a State to the United Nations (1949–1950), ICJ Advisory Opinion, ICJ Rep. 1950, 8 (‘The first duty of a tribunal which was called upon to interpret and apply the provisions of a treaty [is] to endeavour to give effect to them in their natural and ordinary meaning (…).’); Libya v. Chad, ICJ Judgment, ICJ Rep. 1994, 20, para. 41 (‘Interpretation must be based above all upon the text of the treaty.’). See e.g. M.C.I. Power Group L.C. and New Turbine, Inc. v. Ecuador, ICSID Case No. ARB/ 03/6, Award, 31 July 2007, para. 127 (‘From the wording of Article VII of the ArgentinaEcuador BIT, the Tribunal concludes that, in accordance with the interpretation rules of Article 31 of the Vienna Convention, the references made in the text of that Article to “either Contracting Party,” “between the Contracting Parties,” “an investor of one Contracting Party and the other Contracting Party,” and “the other Contracting Party” unquestionably refer to the Contracting Parties of the Argentina–Ecuador BIT.’); Saluka Investments BV (The Netherlands) v. Czech Republic, Partial Award, 17 March 2006, para. 297 (‘The “ordinary meaning” of the “fair and equitable treatment” standard can only be defined by terms of almost equal vagueness. In MTD, the tribunal stated that: ‘In their ordinary meaning, the terms “fair” and “equitable” (...) mean “just”, “evenhanded”, “unbiased”, “legitimate”.’ On the basis of such and similar definitions, one cannot say much more than the tribunal did in S.D. Myers by stating that an infringement of the standard requires treatment in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective. (footnote omitted) This is probably as far as one can get by looking at the “ordinary meaning” of the terms of Article 3.1 of the Treaty.’) (footnotes omitted). ADF Group Inc. v. USA, ICSID Case No. ARB(AF)/00/1, Award, 9 January 2003, para. 147. Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Decision on Annulment, 29 June 2010, para. 188.

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claim by merely stating: ‘In construing Article 1102 of the NAFTA, the Tribunal gives effect to the plain wording of the text.’20 Investment tribunals have also stressed that they would not adopt any inter- 17 pretation deviating from the clear wording of an IIA, which suggests a certain primacy of the literal interpretation.21 A clear example of such an emphasis on the ordinary meaning can be found in the ICSID award of Saba Fakes v. Turkey which adopted a minimalist approach towards the interpretation of the notion of ‘investment’ under Article 25 of the ICSID Convention.22 That a literal interpretation can also lead to a more expansive reading of the notion of ‘investment’ is evidenced by the award in Fraport v. Philippines.23 The ‘ordinary meaning’ is regularly invoked in cases where tribunals are 18 called upon to decide on the scope of IIA clauses. For instance, the Maffezini tribunal emphasised the wording of the applicable MFN clause24 which referred to treatment ‘in all matters subject to this Agreement.’ However, the tribunal did not simply conclude that this broad wording also covered dispute settlement. Rather, it resorted to the intention of the parties and the object and purpose of 20 International Thunderbird Gaming Corp. v. Mexico (NAFTA), Award, 26 January 2006, para. 175. 21 Saba Fakes v. Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, para. 76, rejecting an implicit ‘effective nationality’ principle for Claimants under the ICSID Convention (‘The Tribunal cannot side with this interpretation of the nationality requirements within the framework of the ICSID Convention, as such interpretation finds no support in the text of the Convention. The language of Article 25(2)(a) of the ICSID Convention is clear and does not require any further clarification. Pursuant to the generally accepted rules of treaty interpretation, as codified in Article 31 of the Vienna Convention on the Law of Treaties, the Tribunal is precluded from elaborating any interpretation that would run counter to this clear language, in particular any interpretation that would result in establishing additional limitations to the Centre’s jurisdiction where no such limitations were provided by the Contracting Parties.’). 22 Ibid., para. 110 (‘(…) the criteria of (i) a contribution, (ii) a certain duration, and (iii) an element of risk, are both necessary and sufficient to define an investment within the framework of the ICSID Convention. In the Tribunal’s opinion, this approach reflects an objective definition of “investment” that embodies specific criteria corresponding to the ordinary meaning of the term “investment”, without doing violence either to the text or the object and purpose of the ICSID Convention. These three criteria derive from the ordinary meaning of the word “investment,” (…)’); ibid., para. 111 (‘(…) while the preamble refers to the “need for international cooperation for economic development,” it would be excessive to attribute to this reference a meaning and function that is not obviously apparent from its wording.’). See on the ‘investment’ notion under the ICSID Convention text infra at (n. 111). 23 Fraport AG Frankfurt Airport Services Worldwide v. Philippines, ICSID Case No. ARB/ 03/25, Award, 16 August 2007, para. 340 (‘But while a treaty should be interpreted in the light of its objects and purposes, it would be a violation of all the canons of interpretation to pretend to use its objects and purposes, which are, by their nature, a deduction on the part of the interpreter, to nullify four explicit provisions. Plainly, as indicated by these four provisions, economic transactions undertaken by a national of one of the parties to the BIT had to meet certain legal requirements of the host state in order to qualify as an “investment” and fall under the Treaty.’). 24 Article IV(2) of the Argentina–Spain BIT, Bilateral Investment Treaty between the Argentine Republic and the Kingdom of Spain, 3 July 1991, entry into force 3 March 1993 (1993) 1728 UNTS 298. (‘In all matters subject to this Agreement, this treatment shall not be less favorable than that extended by each Party to the investments made in its territory by investors of a third country.’).

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BITs in order to conclude that dispute settlement was covered by the MFN clause.25 A literal interpretation as primary reason for such a broad reading of an MFN clause can be found in the Suez case where the tribunal held that dispute settlement was certainly a ‘matter’ governed by the Argentina–Spain BIT and that the ‘ordinary meaning’ of the term ‘treatment’ included the rights and privileges granted by a contracting State to investors covered by the treaty.26 19 Also the NAFTA tribunal in Methanex v. USA stressed the importance of the literal interpretation of treaty provisions. It did so in the context of giving meaning to NAFTA’s national treatment clause: As the Tribunal has observed above and in its Partial Award, NAFTA, as a treaty, is to be interpreted in accordance with Articles 31 and 32 of the Vienna Convention on the Law of Treaties, which codifies the customary international rules of treaty interpretation. Hence, the Tribunal begins with an inquiry into the plain and natural meaning of the text of Article 1102.27

20

On this basis, the Methanex tribunal clearly emphasised the ordinary meaning approach over any other interpretation technique: The issue here is not the relevance of general international law, as the late Sir Robert Jennings proposed on behalf of Methanex, or the theoretical possibility of construing a provision of NAFTA by reference to another treaty of the parties, for example the GATT. International law directs this Tribunal, first and foremost, to the text; here, the text and the drafters’ intentions, which it manifests, show that trade provisions were not to be transported to investment provisions. Accordingly, the Tribunal holds that Article 1102 is to be read on its own terms and not as if the words ‘any like, directly competitive or substitutable goods’ appeared in it.28

The last sentence in the quoted passage clearly demonstrates the overriding importance of the literal interpretation to the Methanex tribunals which is used to reject any inclusion of general international law concepts (any third treaties) in interpreting national treatment.29 22 A particular strand of the ordinary meaning or literal interpretation can be identified in a number of investment cases applying a so-called dictionary ap21

25 Emilio Agustín Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000, paras. 53, 54 (’53. In other treaties the most favored nation clause speaks of “all rights contained in the present Agreement” or, as the basic Argentine-Spain BIT does, “all matters subject to this Agreement”. These treaties do not provide expressly that dispute settlement as such is covered by the clause. Hence, like in the Ambatielos Commission of Arbitration it must be established whether the omission was intended by the parties or can reasonably be inferred from the practice followed by the parties in their treatment of foreign investors and their own investors. 54. Notwithstanding the fact that the basic treaty containing the clause does not refer expressly to dispute settlement as covered by the most favored nation clause, the Tribunal considers that there are good reasons to conclude that today dispute settlement arrangements are inextricably related to the protection of foreign investors, as they are also related to the protection of rights of traders under treaties of commerce. (…).’). 26 Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/03/19 and AWG Group Ltd. v. Argentina, UNCITRAL, Decision on Jurisdiction, 3 August 2006, para. 55. 27 Methanex v. USA, UNCITRAL (NAFTA), Final Award, 3 August 2005, Part IV, Ch. B, para. 29. 28 Methanex v. USA, UNCITRAL (NAFTA), Final Award, 3 August 2005, Part IV, Ch. B, para. 37. 29 See infra text at n. 66 and n. 79.

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proach30 in order to elucidate the meaning of central standards of treatment like fair and equitable treatment. For instance, in MTD v. Chile, an ICSID tribunal, relying on the Concise Oxford Dictionary of Current English, found that ‘[i]n their ordinary meaning, the terms “fair” and “equitable” used in Article 3(1) of the BIT mean “just”, “even-handed”, “unbiased”, “legitimate”’.31 But investment tribunals have also demonstrated awareness that a dictionary approach to interpreting such vague concepts like fair and equitable treatment has inherent limitations.32 With regard to the interpretation of the fair and equitable treatment standard, 23 investment tribunals like the ICSID panel in Suez v. Argentina33 have also emphasised an ordinary meaning approach in order to reject the equalisation of this standard with the customary international minimum standard prevalent within the NAFTA context.34 Similarly, in expropriation cases tribunals have resorted to the dictionary ap- 24 proach in order to ascertain the meaning of the notion of ‘measures tantamount to expropriation’ which some have argued to constitute a new category of expropriation beyond direct or indirect expropriation.35 Most tribunals, however, rejected this approach and found that ‘measures tantamount to expropriation’ were 30 See also Richard Gardiner (n. 1) 148, for examples of WTO and ICJ decisions relying on dictionaries. 31 MTD Equity Sdn. Bhd. & MTD Chile S.A. v. Chile, ICSID Case No. ARB/01/7, Award, 24 May 2004, para. 113; Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 290 (‘In their ordinary meaning, the terms “fair” and “equitable” mean “just”, “even-handed”, “unbiased”, “legitimate”. (…)’). See also Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Award, 3 March 2010, para. 430 (‘Several tribunals have attempted to parse the meaning of “fair and equitable”, producing a catalogue of alternative dictionary meanings, including “just”, “even-handed”, unbiased” and legitimate”. (…)’). 32 Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability, 14 January 2010, para. 258 (‘An inquiry into the ordinary meaning of the expression “fair and equitable treatment” does not clarify the meaning of the concept. “Fair and equitable treatment” is a term of art, and any effort to decipher the ordinary meaning of the words used only leads to analogous terms of almost equal vagueness.’). 33 Suez, Sociedad General de Aguas de Barcelona S.A., and InterAgua Servicios Integrales del Agua S.A. v. Argentina, ICSID Case No. ARB/03/17, Decision on Liability, 30 July 2010, para. 178 (‘Following accepted principles of treaty interpretation, particularly Article 31(1) of the VCLT which requires that treaty terms be interpreted in accordance with their “ordinary meaning,” the Tribunal concludes that “in accordance with the principles of international law” means just what it says: that the tribunal is to interpret fair and equitable treatment under Article 3 of the Argentina-France BIT in accordance with all relevant sources of international and that it is not limited in its interpretation to the international minimum standard. The ordinary meaning of the words “principles of international law” is “the legal principles derived from all sources of international law.” Authoritative documents employing the term “international law” contain no implication that the term is limited to the international minimum standard and amply support the Tribunal’s interpretation of the term “international law.”’). 34 See infra (n. 172). 35 See on this issue Meg Kinnear, Andrea Bjorklund, and John Hannaford, Investment Disputes Under NAFTA 1110 – 28a (Kluwer 2009); Waste Management, Inc. v. Mexico, Case No. ARB(AF)/00/3, Award, 30 April 2004, para. 144 (‘Evidently the phrase “take a measure tantamount to nationalization or expropriation of such an investment” in Article 1110(1) was intended to add to the meaning of the prohibition, over and above the reference to indirect expropriation.’).

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equivalent to ‘indirect expropriation’.36 One of these tribunals in S.D. Myers v. Canada specifically invoked the dictionary meaning of ‘tantamount’ in order to arrive at this result.37 This demonstrates that reliance on the same interpretation techniques may lead to diverging results. 25 While the majority of investment tribunals stay faithful to literal interpretation techniques and try to arrive at conclusions that at least do not do violence to the text, some tribunals in order to reach a certain result are ready to neglect the ordinary meaning of treaty provisions. 26 An example is the tribunal in Berschader v. Russia.38 It obviously transgressed the limits of literal interpretation in regard to an MFN clause39 which was similar to the one applicable in Maffezini.40 The tribunal, however, asserted that ‘[w]ith respect to the construction of expressions such as “all matters” or “all rights” covered by the treaty, it should be noted that (…) not even seemingly clear language like this can be considered to have an unambiguous meaning in the context of an MFN clause.’41 The tribunal concluded that the ‘expression “all matters covered by the present Treaty” certainly cannot be understood literally.’42 Rather, it should be read to relate only to the ‘classical elements of material investment protection, i.e. fair and equitable treatment, non-expropriation and free transfer of funds’ as referred to in the clarification.43 Here one can sense already the relevance of general international law on investment protection for the interpretation of IIAs. The Berschader tribunal bluntly concluded 36 Pope & Talbot, Inc. v. Canada, UNCITRAL (NAFTA), Interim Award, 26 June 2000, para. 104 (‘“Tantamount” means nothing more than equivalent. Something that is equivalent so something else cannot logically encompass more.’); Marvin Feldmann v. Mexico, ARB(AF)/ 99/1, 16 December 2002, para. 100 (‘Most significantly with regard to this case, Article 1110 deals not only with direct takings, but indirect expropriation and measures “tantamount to expropriation,” which potentially encompass a variety of government regulatory activity that may significantly interfere with an investor’s property rights. The Tribunal deems the scope of both expressions to be functionally equivalent. (...)’). 37 S.D. Myers, Inc. v. Canada, UNCITRAL (NAFTA), Partial Award, 13 November 2000, para. 285 (‘(…) The primary meaning of the word “tantamount” given by the Oxford English Dictionary is “equivalent”. Both words require a tribunal to look at the substance of what has occurred and not only at form. A tribunal should not be deterred by technical or facial considerations from reaching a conclusion that an expropriation or conduct tantamount to an expropriation has occurred. It must look at the real interests involved and the purpose and effect of the government measure.’). 38 Berschader v. Russia, SCC Case No. 080/2004, Award, 21 April 2006. 39 Article 2 of the Belgium/Luxembourg–USSR BIT, Belgium/Luxembourg–USSR Agreement concerning the Promotion and the Reciprocal Protection of Investments, 9 February 1989, (1990) 29 ILM 299 (‘Each Contracting Party guarantees that the most favoured nation clause shall be applied to investors of the other Contracting Party in all matters covered by the present Treaty, and in particular in articles 4, 5 and 6, with the exception of benefits provided by one Contracting Party to investors of a third country on the basis – of its participation in a customs union or other international economic organisations, or – of an agreement to avoid double taxation and other taxation issues.’). 40 See supra (n. 24). 41 Berschader v. Russia, SCC Case No. 080/2004, Award, 21 April 2006, para. 184. 42 Berschader v. Russia, para. 192. 43 Berschader v. Russia, para. 193.

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In other words, the tribunal’s majority openly rejected a literal interpretation 27 in favour of following the presumed intent of the parties. Such an approach opens the Pandora box of substituting the treaty-makers’ will, manifested in the objective wording of a treaty, by the presumed and often subjectively re-constructed view of the interpreters’ opinion of such original intentions.45 D. Contextual Interpretation

A contextual interpretation of treaty provisions is clearly mandated by VCLT 28 Article 31 calling for an interpretation of the ‘terms in their context.’46 The immediate context of a treaty expression is determined by grammar and syntax of a sentence.47 The VCLT makes clear, however, that context specifically relates to the entire text as well as the preamble and annexes of a treaty.48 Investment tribunals regularly stress the importance of context for their interpretation tasks.49 However, they do not restrain their considerations to the context of the specific BIT they are interpreting. Rather, they also look at other BITs50 and even general international law in order to arrive at a contextual interpretation of IIA provisions.51 1. Context within International Investment Agreements

Investment tribunals often determine the meaning of provisions by reference 29 to their location within a specific BIT.52 44 45 46 47 48 49

Berschader v. Russia, para. 194. See infra text at (n. 169). See supra text at (n. 3). Cf. Richard Gardiner (n. 1) 178. VCLT Art. 31(2). See e.g. Fraport AG Frankfurt Airport Services Worldwide v. Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007, para. 339 (‘(…) Article 31 of the Vienna Convention on the Law of Treaties enjoins interpretation of particular provisions in their context, i.e. with reference to the rest of the treaty and in the light of its objects and purposes. The fact that there are three explicit references in the total of 16 provisions in the Treaty and Protocol plus an additional reference in the Instrument of Ratification, which selected only four items in the treaty deemed so important to the Philippines as to require additional recitation, indicates the significance of this condition. (…)’). 50 See infra, text starting at II.D.2. 51 See infra, text starting at II.D.3. 52 See e.g. Saluka Investments BV (The Netherlands) v. Czech Republic, Partial Award, 17 March 2006, para. 298 (‘The immediate “context” in which the “fair and equitable” language of Article 3.1 is used relates to the level of treatment to be accorded by each of the Contracting Parties to the investments of investors of the other Contracting Party. The broader “context” in which the terms of Article 3.1 must be seen includes the other provisions of the Treaty. In the preamble of the Treaty, the Contracting Parties recognize[d] that agreement upon the treat-

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For instance, for the purpose of interpreting MFN clauses, tribunals have frequently looked at the context of such clauses and the relationship to other clauses in an IIA which might shed light on their proper interpretation. One recurrent line of argument, particularly of those tribunals which were willing to allow the extension of MFN clauses to procedural or even jurisdictional provisions in third country IIAs, relates to the implications of certain exceptions to MFN treatment as they are often expressly foreseen in IIAs. At a minimum, many IIAs provide that MFN treatment does not cover benefits granted as a result of preferential trade agreements like customs unions and free trade agreements. E contrario or on the basis of the principle of expressio unius est exclusio alterius, – which is often seen as a rule of logic and not of treaty interpretation53 – tribunals have argued that other exceptions should not be read into the text. Thus, where an MFN clause is wide enough to cover procedural or jurisdictional issues, the lack of any express exception in these fields could be interpreted as a clear indication that they are included. This reasoning was adopted by the tribunal in National Grid, stating that (…) the MFN clause does not expressly refer to dispute resolution or for that matter to any other standard of treatment provided for specifically in the Treaty. On the other hand, dispute resolution is not included among the exceptions to the application of the clause. As a matter of interpretation, specific mention of an item excludes others: expressio unius est exclusio alterius.54

31

The same reasoning was emphasised in the RosInvest case where the tribunal specifically noted that the UK–USSR BIT exempted preferential trade and tax agreements from the application of its MFN clause55 and concluded that (…) it can certainly not be presumed that the Parties ‘forgot’ arbitration when drafting and agreeing on Article 7. Had the Parties intended that the MFN clauses should also not apply to arbitration, it would indeed have been easy to add a subsection (c) to that effect in Article 7. The fact that this was not done, in the view of the Tribunal, is further confirmation that the MFN-clauses in Article 3 are also applicable to submissions to arbitration in other Treaties.56

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ment to be accorded to such investments will stimulate the flow of capital and technology and the economic development of the Contracting Parties and that fair and equitable treatment is desirable. The preamble thus links the “fair and equitable treatment” standard directly to the stimulation of foreign investments and to the economic development of both Contracting Parties.’); Industria Nacional de Alimentos, S.A. and Indalsa Perú, S.A. v. Peru, ICSID Case No. ARB/03/4 (previously Empresas Lucchetti, S.A. and Lucchetti Perú, S.A. v. Peru), Decision on Annulment, 5 September 2007, para. 80 (‘Having regard to the main rule in Article 31(1) of the Vienna Convention, the Ad hoc Committee finds that the second sentence of Article 2 of the BIT must be read in its context, i.e. together with the first sentence of the same Article which provides that the BIT shall apply to investments made both before and after the entry into force of the BIT.’). Christoph Schreuer, ‘Diversity and Harmonization of Treaty Interpretation in Investment Arbitration’ in Malgosia Fitzmaurice, Olufemi Elias and Panos Merkouris (eds), Treaty Interpretation and the Vienna Convention on the Law of Treaties: 30 Years On (Brill, 2010) 129, 134. National Grid plc v. Argentina, UNCITRAL, Decision on Jurisdiction, 20 June 2006, para. 82. Art. 7 UK–USSR BIT, Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Union of Soviet Socialist Republics for the Promotion and Protection of Investments, 8 April 1989, (1999) 1670 UNTS 27. RosInvestCo UK Ltd. v. Russia, SCC Case No. Arb. V079/2005, Decision on Jurisdiction, October 2007, para. 135.

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It thus followed the argument proposed by claimant who had urged the tri- 32 bunal to apply ‘the principle of expressio unius est exclusio alterius (…).’57 But the principle of expressio unius est exclusio alterius was adhered to by 33 investment tribunals also in other contexts. For instance, the tribunal in Tokios Tokelės v. Ukraine, expressly relied on it for the correct interpretation of the definition of an ‘investor’.58 The tribunal in Waste Management v. Mexico implicitly relied upon this principle by arguing that NAFTA does not exclude the protection of indirect investors.59 Also the ejusdem generis principle, equally prominent in the MFN debate, 34 can be seen as a form of contextual interpretation.60 It is often regarded to mean that ‘general words following or perhaps preceding special words are limited to the genus indicated by the special words.’61 Investment tribunals have largely accepted that under the ‘principle ejusdem generis the most favored nation clause can only operate in respect of the same matter and cannot be extended to matters different from those envisaged by the basic treaty.’62 The contentious issue was, however, whether BIT matters were limited to substantive matters (or material aspects of the treatment granted to investors) or extended also to procedural or jurisdictional questions.63 While the Maffezini progeny of cases found 57 RosInvestCo UK Ltd. v. Russia (n. 56), para. 99 (‘Applying the principle of expressio unius est exclusio alterius, Claimant therefore interprets Article 7 to the effect that all matters within the scope of the IPPA not expressly excluded from Article 3 are included.’). 58 Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, para. 30 (‘Under the well established presumption expressio unius est exclusio alterius, the state of incorporation, not the nationality of the controlling shareholders or siège social, thus defines “investors” of Lithuania under Article 1(2)(b) of the BIT.’). 59 Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3 (NAFTA), Award, 30 April 2004, para. 85 (‘Where a treaty spells out in detail and with precision the requirements for maintaining a claim, there is no room for implying into the treaty additional requirements, whether based on alleged requirements of general international law in the field of diplomatic protection or otherwise. If the NAFTA Parties had wished to limit their obligations of conduct to enterprises or investments having the nationality of one of the other Parties they could have done so. Similarly they could have restricted claims of loss or damage by reference to the nationality of the corporation which itself suffered direct injury. No such restrictions appear in the text. It is not disputed that at the time the actions said to amount to a breach of NAFTA occurred, Acaverde was an enterprise owned or controlled indirectly by the Claimant, an investor of the United States. The nationality of any intermediate holding companies is irrelevant to the present claim. Thus the first of the Respondent’s arguments must be rejected.’). 60 See, however, Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Kluwer, 2009) 112, who regard the ejusdem generis principle as a principle of textual interpretation. In fact, it may relate to both. 61 Ian Brownlie, Principles of Public International Law (Oxford University Press, 2003) 604. 62 Emilio Agustín Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000, para. 41. 63 See Stephen Fietta, ‘Most Favoured Nation Treatment and Dispute Resolution under Bilateral Investment Treaties: A Turning Point?’ (2005) 8 Int’l Arb. L. Rev. 131–138; Dana H. Freyer and David Herlihy, ‘Most Favoured-Nation Treatment and Dispute Settlement in Investment Arbitration: Just how Favoured is “Most Favoured”?’ (2005) 20(1) ICSID Rev.–FILJ 58–83; Emmanuel Gaillard, ‘Establishing Jurisdiction through a Most-Favored-Nation Clause’ (2005) 233 NYLJ 1, 3; Kaj Hobér, ‘MFN Clauses and Dispute Resolution in Investment Treaties: Have we reached the end of the road?’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century (Oxford Univer-

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that procedural issues of protecting investors would fall under the ejusdem generis principle,64 Plama and other investment tribunals considered only substantive protection to be covered.65 2. The Contextual Relevance of Other International Investment Agreements

When ascertaining the proper meaning of IIA clauses via contextual considerations, tribunals often take a comparative approach by looking at the wording of other IIAs concluded by one of the parties with third States or between third States. To what extent reliance on such ‘external’ context is justified raises complex legal issues.66 As a matter of empirical fact, investment tribunals like international courts and tribunals in general quite often take into account the formulation of third country treaties in order to confirm or to contrast the interpretation of the treaty rules they have to apply. 36 The area of interpreting the content of key substantive investment standards, such as fair and equitable treatment or full protection and security,67 is a particu35

sity Press, 2009) 31–41; Yannick Radi, ‘The Application of the Most-Favoured-Nation Clause to the Dispute Settlement Provisions of Bilateral Investment Treaties: Domesticating the Trojan Horse’ (2007) 18 EJIL 757–774; August Reinisch, ‘How Narrow are Narrow Dispute Settlement Clauses in Investment Treaties?’ (2011) 2 J. Int’l Disp. Settlement 115–174; Noah Rubins, ‘MFN Clauses, Procedural Rights, and a Return to the Treaty Text’ in Todd J. Grierson Weiler (ed), Investment Treaty Arbitration and International Law, vol. 1 (JurisNet, 2008) 213–230; Guido S. Tawil, ‘Most Favoured Nation Clauses and Jurisdictional Clauses in Investment Treaty Arbitration’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century (Oxford University Press, 2009) 9–30; Scott Vesel, ‘Clearing a Path through a Tangled Jurisprudence: Most-Favored-Nation Clauses and Dispute Settlement Provisions in Bilateral Investment Treaties’ (2007) 32 Yale J. Int’l L. 125–190. 64 Emilio Agustín Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000, para. 56 (‘From the above considerations it can be concluded that if a third party treaty contains provisions for the settlement of disputes that are more favorable to the protection of the investor’s rights and interests than those in the basic treaty, such provisions may be extended to the beneficiary of the most favored nation clause as they are fully compatible with the ejusdem generis principle.’); Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Decision on Jurisdiction, 3 August 2004, para. 120 (‘Access to [special dispute settlement mechanisms] is part of the protection offered under the Treaty. It is part of the treatment of foreign investors and investments and of the advantages accessible through an MFN clause.’); see also Gas Natural SDG, S.A. v. Argentina, ICSID Case No. ARB/03/10, Decision on Preliminary Questions on Jurisdiction, 17 June 2005; Camuzzi International S.A. v. Argentina, ICSID Case No. ARB/03/2, Decision on Jurisdiction, 11 May 2005; National Grid plc v. Argentina, UNCITRAL, Decision on Jurisdiction, 20 June 2006; Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentine, ICSID Case No. ARB/ 03/19 and AWG Group Ltd. v. Argentina, UNCITRAL, Decision on Jurisdiction, 3 August 2006. 65 Plama Consortium Ltd v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005; Salini Costruttori SpA and Italstrade SpA v. Jordan, ICSID Case No. ARB/ 02/13, Decision on Jurisdiction, 15 November 2004; Telenor Mobile Communications AS v. Hungary, ICSID Case No. ARB/04/15, Award, 22 June 2006. 66 See Martins Paparinskis, ‘Sources of Law and Arbitral Interpretations of Pari Materia Investment Protection Rules’ in Ole Fauchald and André Nollkaemper (eds), The Practice of International and National Courts and the (De-)Fragmentation of International Law (Hart Publishing, 2012) 87–116.

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larly clear example of tribunals heavily relying on the interpretation of similar clauses contained in third party treaties in the gradual elaboration of a jurisprudence constante or de facto case law.68 Strictly speaking the third country BITs and their interpretation in investment awards is beyond the direct context of interpretation. However, like general (customary) international law on point69 it is often relied upon for interpretive purposes. In addition, some NAFTA tribunals have looked at third country BITs in order to elucidate the meaning of a fair and equitable treatment clause.70 A comparative approach is also often used in the field of interpreting the 37 scope of MFN clauses. For instance in the case of Salini v. Jordan, the tribunal distinguished the MFN clause it had to apply from the one applicable in Maffezini71 in order to explain why it rejected the idea that it would encompass dispute settlement. It found that ‘Article 3 of the BIT between Italy and Jordan does not include any provision extending its scope of application to dispute settlement. It does not envisage “all rights or all matters covered by the agreement”.’72 Thus, it held that its jurisdiction could not be based on another BIT via the applicable MFN clause. The case of National Grid provides another example of a decision concerning 38 an MFN clause where a tribunal, inter alia, looked at BITs of the contracting parties with third States in order to interpret the MFN clause of the Argentina– UK BIT: while not exclusively relying on it, the tribunal noted that the UK had subsequently expressed its intention to extend MFN clauses in BITs to dispute settlement provisions and that Argentina subsequently dispensed with the requirement of proceedings before domestic courts prior to the submission of an investment claim.73

67 See Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2007); August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008). 68 See infra (n. 187). 69 See infra text at II.D.3. 70 Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in the Merits of Phase 2, 10 April 2001, para. 115. See also infra text at n. 166. 71 The Maffezini tribunal itself compared the MFN clause of the applicable Argentina–Spain BIT with other Spanish BITs in order to support its broad interpretation. Emilio Agustín Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000, para. 60 (‘The Tribunal also notes that of all the Spanish treaties it has been able to examine, the only one that speaks of “all matters subject to this Agreement” in its most favored nation clause, is the one with Argentina. All other treaties, including those with Uruguay and Chile, omit this reference and merely provide that “this treatment” shall be subject to the clause, which is of course a narrower formulation.’). 72 Salini Costruttori SpA and Italstrade SpA v. Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, 15 November 2004, para. 118. 73 Argentina–UK BIT, Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Argentina for the Promotion and the Protection of Investments, 11 December 1990, (2000) 1765 UNTS 34. See National Grid plc v. Argentina, UNCITRAL, Decision on Jurisdiction, 20 June 2006, para. 91.

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Also in the context of emergency or non-precluded measures clauses,74 third country BITs were sometimes relied upon in order to interpret the precise meaning of such clauses. In CMS v. Argentina75 an ICSID tribunal had to decide whether the emergency clause of the applicable Argentina–US BIT76 was selfjudging or not. It came to a negative answer by comparing the clause’s language with that of differently worded provisions in the GATT and other US BITs, like the Russia–US BIT which contain language referring to measures adopted by a party ‘which it considers necessary’.77 In the absence of comparable language in the Argentina–US BIT it concluded that its emergency clause was not self-judging.78 3. General International Law as Relevant Context

According to VCLT Article 31(3)(c), ‘[t]here shall be taken into account, together with the context (…) any relevant rules of international law applicable in the relations between the parties.’ 41 This provision, which has been termed the ‘most ambivalent’ one of the interpretation rules of the VCLT79 and was rarely invoked initially,80 has received much attention in WTO law lately,81 in particular in the aftermath of WTO Ap40

74 See William Burke-White and Andreas von Staden, ‘Investment Protection in Extraordinary Times: Interpreting Non-Precluded Measures Provisions’ (2007) 48 Virginia J. Int’l L. 307– 410. 75 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005. 76 Article XI of the Argentina–US BIT, Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment, 14 November 1991, (1992) 31 ILM 124 (‘This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.’). 77 Russia–US BIT, Treaty Concerning the Encouragement and Reciprocal Protection of Investment, 17 June 1992, (1992) 31 ILM 794. See CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para. 370 (‘The Tribunal is convinced that when States intend to create for themselves a right to determine unilaterally the legitimacy of extraordinary measures importing non-compliance with obligations assumed in a treaty, they do so expressly. The examples of the GATT and bilateral investment treaty provisions offered above are eloquent examples of this approach. The first does not preclude measures adopted by a party “which it considers necessary” for the protection of its security interests. So too, the U.S.–Russia treaty expressly confirms in a Protocol that the non-precluded measures clause is self-judging.’). 78 CMS Gas Transmission Company v. Argentina (n. 75) para. 373. 79 Thomas Wälde, ‘Interpreting Investment Treaties: Experiences and Examples’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century (Oxford University Press, 2009) 724, 769. 80 Richard Gardiner (n. 1) 265. 81 See Joost Pauwelyn, ‘Role of Public International Law in the WTO Law’ (2001) 95 AJIL 535, 539; Isabelle van Damme, Treaty Interpretation by the WTO Appellate Body (Oxford University Press, 2009) Chapter 9, 355–378; José E. Alvarez, ‘The Factors Driving and Constraining the Incorporation of International Law in WTO Adjudication’ in Merit E. Janow, Victoria Donaldson and Alan Yanovich (eds), The WTO: Governance, Dispute Settlement & Developing Countries (Juris Publishing, Inc., 2008) 611, 622; Martins Paparinskis, ‘Equivalent Prima-

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pellate Body decisions declaring that WTO cannot be read in ‘clinical isolation’ of general international law.82 But also in investment law recent developments have led to a more intense debate of this interpretative guideline.83 The potential of integrating general international law, mainly in the form of custom, as a means to mitigate the dangers of fragmentation stemming from a proliferation of treaty regimes was recognised by the ILC Study Group on Fragmentation.84 According to the Study Group’s Conclusions, customary international law and general principles of law are of particular relevance to the interpretation of a treaty under VCLT Article 31(3)(c), where the treaty rule is unclear or open-textured,85 the treaty terms have a recognised meaning in customary law,86 and where the parties presumptively intended to refer to customary law for questions that were not resolved in the treaty in express terms.87 Investment tribunals often generally assert that they interpret IIA provisions 42 in accordance with customary international law.88 In some cases, investment tribunals have even expressly referred to WTO jurisprudence in order to advocate a systemic integration of general international law by declaring that also investment law (treaties) cannot be interpreted in isolation of general international law.89 In some core areas of investment law, like in the field of expropriation, tri- 43 bunals may rely on general international law in order to interpret undefined IIA provisions that have a recognised meaning. With regard to expropriation clauses, IIAs usually contain detailed rules on the conditions under which a contracting

82 83

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85 86 87 88 89

ry Rules and Differential Secondary Rules: Countermeasures in WTO and Investment Protection Law’ in Tomer Broude and Yuval Shany (eds), Multi-Sourced Equivalent Norms (Hart Publishing, 2010) 259–288. Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, 29 April 1996, 18 (‘The General Agreement is not to be read in clinical isolation from public international law.’). Campbell McLachlan, ‘Investment Treaties and General International Law’ (2008) 57 ICLQ 361–401; Campbell McLachlan, ‘The Principle of Systemic Integration and Article 31(3)(c) of the Vienna Convention’ (2005) 54 ICLQ 279–320; Martins Paparinskis, ‘Investment Protection Law and Systemic Integration of Treaty and Custom’ (2010) SIEL Online Proceedings, Working Paper 2010/21, available at http://www.ssrn.com/link/SIEL-2010-Barcelona Conference.html; Christoph Schreuer (n. 53) 129–151. Conclusions of the Study Group of the ILC, ‘Fragmentation of International Law: Difficulties Arising from Diversification and Expansion of International Law’ in ILC Yearbook, General Assembly Official Records, Sixty-first session, Supplement No. 10 (A/61/10) (United Nations, 2006) 407–423, 414. Ibid., para. 20(a). Ibid., para. 20(b). Ibid., para. 20(c). Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 233 (‘The Tribunal will apply the provisions of the UABIT and interpret the UABIT in a manner consistent with customary international law.’). Phoenix Action Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April, 2009, para. 78 (After citing the WTO Gasoline case, supra note 82, the tribunal held: ‘It is evident to the Tribunal that the same holds true in international investment law and that the ICSID Convention’s jurisdictional requirements – as well as those of the BIT – cannot be read and interpreted in isolation from public international law, and its general principles.’).

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party may lawfully expropriate.90 However, they normally do not define what measures constitute an expropriation. Thus, investment tribunals rely quite extensively on customary international law in order to specify what is meant by the notion of expropriation.91 44 Traditionally, many tribunals have broadly interpreted the notion of indirect expropriation as any wealth deprivation of a significant effect on the investor.92 More recently, tribunals in Methanex93 and Saluka94 have expressly relied on general international law in order to adopt a more restrictive understanding of what constitutes ‘indirect expropriation’. 45 According to the NAFTA tribunal in Methanex, (…) as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.95

46

In a similar way the UNCITRAL tribunal in the Saluka case, relying on Methanex, invoked customary international law in order to reason that the police powers doctrine would limit the broad scope of indirect expropriations. The tribunal was of the opinion that

90 See contribution of Ursula Kriebaum, ‘Expropriation’, ch. 8.VIII., 959–1030. 91 See, in detail, Anne Hoffmann, ‘Indirect Expropriation’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 151–170; Rudolf Dolzer, ‘Indirect Expropriations: New Developments?’ (2002) 11 NYU Env. L. J. 64–93; Yves L. Fortier and Stephen L. Drymer, ‘Indirect Expropriation in the Law of International Investment: I know It When I See It, or Caveat Investor’ (2004) 19 ICSID Rev.–FILJ 293–327; Rosalyn Higgins, ‘The Taking of Foreign Property by the State’ (1982-III) 176 RC 259–392; Andreas Lowenfeld, International Economic Law (Oxford University Press, 2002) 392; Andrew Newcombe, ‘The Boundaries of Regulatory Expropriation in International Law’ (2005) 20 ICSID Rev.– FILJ 1–57; August Reinisch, ‘Expropriation’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 407–458; Catherine Yannaca-Small, ‘“Indirect Expropriation” and the “Right to Regulate” in International Investment Law’,in OECD (ed), International Investment Law. A Changing Landscape (OECD, 2005) 43–72, available at http://www.oecd.org/ dataoecd/11/53/40077899.pdf; UNCTAD, Taking of Property (UNCTAD, 2000), available at http://www.unctad.org/en/docs/psiteiitd15.en.pdf. 92 See, e.g., Metalclad Corp. v. Mexico, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000, para. 103 (‘Thus, expropriation (...) includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favor of the host State, but also 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.’); CME v. Czech Republic, Partial Award, 13 September 2001, para. 604 (‘De facto expropriations or indirect expropriations, i.e. measures that do not involve an overt taking but that effectively neutralize the benefit of the property of the foreign owner, are subject to expropriation claims.’). 93 Methanex v. USA, UNCITRAL (NAFTA), Final Award, 3 August 2005. 94 Saluka Investments BV (The Netherlands) v. Czech Republic, Partial Award, 17 March 2006. 95 Methanex v. USA, UNCITRAL (NAFTA), Final Award, 3 August 2005, Part IV, Ch. D, para. 7.

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This ‘importation’ of customary international law concepts into treaty inter- 47 pretation was received with mixed feelings and unleashed a considerable amount of controversy among scholars as to the content of the alleged customary international law exception.97 However, the underlying treaty interpretation principle cannot be really ques- 48 tioned. Customary international law is part of the ‘relevant rules of international law applicable in the relations between the parties’. It may thus be relied upon as additional criterion for interpretation in the sense of Article 31(3)(c) of the Vienna Convention. The reliance on customary international law arguably containing more precise definitions of the notions of indirect expropriation left undefined in the applicable IIAs, the NAFTA in Methanex and the Czech Republic–Netherlands BIT in Saluka, may be regarded as a legitimate device of treaty interpretation.98 The Methanex/Saluka jurisprudence had an interesting impact beyond interpretation. Recently, some IIAs have even started to incorporate this jurisprudence in order to circumscribe more closely what would amount to (indirect) expropriation.99 96 Saluka Investments BV (The Netherlands) v. Czech Republic, Partial Award, 17 March 2006, para. 262. 97 See Thomas Wälde and Abba Kolo, ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law’ (2001) 50 ICLQ 811–848; Vaughan Lowe, ‘Regulation or Expropriation?’ (2002) 55 Current Legal Problems 447–466; Andrew Newcombe, ‘The Boundaries of Regulatory Expropriation in International Law’ (2005) 20 ICSID Rev.– FILJ 1–57; Ursula Kriebaum, ‘Regulatory Takings: Balancing the Interests of the Investor and the State’ (2007) 8(5) JWIT 717–744; August Reinisch, ‘Enteignung und Fair and Equitable Treatment’ in Christian Tietje (ed), International Investment Protection and Arbitration – Theoretical and Practical Perspectives (Berliner Wissenschafts-Verlag, 2008) 119–138. 98 Czech Republic–Netherlands BIT, Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic, 29 April 1991, (2004) 2242 UNTS 224. 99 See, e.g., 2004 Canadian Model–BIT, Canadian Model Foreign Investment Promotion and Protection Agreement, Annex B 13(1) on the clarification of indirect expropriation (‘The Parties confirm their shared understanding that: a) Indirect expropriation results from a measure or series of measures of a Party that have an effect equivalent to direct expropriation without formal transfer of title or outright seizure; b) The determination of whether a measure or series of measures of a Party constitute an indirect expropriation requires a case-by-case, fact-based inquiry that considers, among other factors: i) the economic impact of the measure or series of measures, although the sole fact that a measure or series of measures of a Party has an adverse effect on the economic value of an investment does not establish that an indirect expropriation has occurred; ii) the extent to which the measure or series of measures interfere with distinct, reasonable investment-backed expectations; and iii) the character of the measure or series of measures; c) Except in rare circumstances, such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation.’).

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That customary international law may be used as a guide to interpreting IIA provisions can also be seen in a number of the Argentinean necessity cases.100 While some tribunals directly applied Article 25 of the ILC Articles on State Responsibility101 as an expression of customary international law on state of necessity, a number of others relied on this provision in order to interpret the applicable treaty clause.102 The extent of such reliance proved controversial in the annulment of the Sempra award. Initially, an ICSID tribunal had relied on Article 25 in order to interpret the applicable non-precluded measures clause of Article XI of the Argentina–US BIT.103 According to the tribunal, the BIT clause was

100 See contribution of Christina Binder, ‘Circumstances Precluding Wrongfulness’, ch. 5.IV., 442–480; José Alvarez and Kathryn Khamsi, ‘The Argentine Crisis and Foreign Investors: A Glimpse into the Heart of the Investment Regime’ (2008–2009) YB Int’l Inv. L. & Pol’y 379–478; Andrea K. Bjorklund, ‘Emergency Exceptions: State of Necessity and Force Majeure’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), Oxford Handbook of International Investment Law (Oxford University Press, 2008) 495–523; Andrea K. Bjorklund, ‘Economic Security Defenses in International Investment Law’ (2008–2009) YB Int’l Inv. L. & Pol’y 479–503; Tarcisio Gazzini, ‘Necessity in International Investment Law: Some Critical Remarks on CMS v. Argentina’ (2008) 26 JENRL 450–470; Charles Leben, ‘L’Etat de nécessité dans le droit international de l’investissement’ (2005) 349 Gazette de Palais 47–52; August Reinisch, ‘Necessity in International Investment Arbitration – An Unnecessary Split of Opinions in Recent ICSID Cases?’ (2007) 8 JWIT 191–214; Stephan W. Schill, ‘International Investment Law and the Host State’s Power to Handle Economic Crises’ (2007) 24(3) J. Int’l Arb. 265–286; Michael Waibel, ‘Two Worlds of Necessity in ICSID Arbitration: CMS and LG&E’ (2007) 20 Leiden J. Int’l L. 637–648. 101 ILC Articles on State Responsibility, Article 25 (‘1. Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a) Is the only way for the State to safeguard an essential interest against a grave and imminent peril; and (b) Does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole. 2. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if: (a) The international obligation in question excludes the possibility of invoking necessity; or (b) The State has contributed to the situation of necessity.’), 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, UN GAOR, 56th Sess., Supp. No. 10, 43, UN Doc. A/56/10 (2001). 102 See on this problem Jürgen T. Kurtz, ‘ICSID Annulment Committee Rules on the Relationship between Customary and Treaty Exceptions on Necessity in Situations of Financial Crisis’ (11) 30 ASIL Insight, available at http://www.asil.org/insights/volume/11/issue/30/icsidannulment-committee-rules-relationship-between-customary-and; Isabelle Buffard, ‘Anmerkungen zum Verhältnis zwischen allgemeinem Völkerrecht und besonderen Vertragsbestimmungen bzw. vertraglichen Subsystemen im Hinblick auf die Nichterfüllung völkerrechtlicher Vertragspflichten’ in Stephan Wittich, August Reinisch and Andrea Gattini (eds), Kosovo – Staatsschulden – Notstand – EU-Reformvertrag – Humanitätsrecht, Beiträge zum 33. Österreichischen Völkerrechtstag 2008 in Conegliano (Peter Lang, 2009) 97–118; Christina Binder, ‘Nichterfüllung völkerrechtlicher Vertragspflichten wegen Notstands – Der Notstand im Völkergewohnheitsrecht und in besonderen Vertragsbestimmungen’ in ibid., 119–151; Christina Binder, ‘Changed Circumstances in International Investment Law: Interfaces between the Law of Treaties and the Law of State Responsibility with a Special Focus on the Argentine Crisis’ in Christina Binder, Ursula Kriebaum, August Reinisch, Stephan Wittich (eds), International Investment Law in the 21st Century (Oxford University Press, 2009) 608–630. 103 Article XI of the Argentina–US BIT (n. 76) (‘This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfilment of

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‘inseparable from the customary law standard insofar as the definition of necessity and the conditions for its operation are concerned, given that it is under customary law that such elements have been defined.’104 The tribunal then proceeded to apply the detailed preconditions of the necessity defence under Article 25 because it thought that such preconditions were also relevant for the invocation of Article XI of the BIT which failed to include comparable provisions.105 The annulment committee, however, found that this amounted not only to a misinterpretation of Article XI of the BIT, but constituted an annullable failure to apply the applicable law.106 While the committee in principle accepted that ‘it may be appropriate to look to customary law as a guide to the interpretation of terms used in the BIT’107 it found that the two provisions were too different in wording and function108 in order to allow for the State responsibility norm to serve as a guide to interpret the BIT provision.109 This divergence of opinion demonstrates that it will often be difficult to decide whether the parties intended to refer to customary law for questions that were not resolved in the treaty in express terms.110

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its obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential interests.’). Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 376; similarly, Enron Creditors Recovery Corporation (formerly Enron Corporation) and Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007, para. 334. Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 378 (‘It is no doubt correct to conclude that a treaty regime specifically dealing with a given matter will prevail over more general rules of customary law. The problem here, however, is that the Treaty itself did not deal with the legal elements necessary for the legitimate invocation of a state of necessity. The rule governing such questions will thus be found under customary law. As concluded above, such requirements and conditions have not been fully met in this case. (...) Nor does the Tribunal believe that because Article XI did not make an express reference to customary law, this source of rights and obligations becomes inapplicable. International law is not a fragmented body of law as far as basic principles are concerned and necessity is no doubt one such basic principle.’). Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Decision on Annulment, 29 June 2010, para. 208. Ibid., para. 197. Already the CMS annulment committee severely criticised this approach, CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Decision on Annulment, 25 September 2007, para. 129 (‘The Committee observes first that there is some analogy in the language used in Article XI of the BIT and in Article 25 of the ILC’s Articles on State Responsibility. (…) However Article XI specifies the conditions under which the Treaty may be applied, whereas Article 25 is drafted in a negative way: it excludes the application of the state of necessity on the merits, unless certain stringent conditions are met. Moreover, Article XI is a threshold requirement: if it applies, the substantive obligations under the Treaty do not apply. By contrast, Article 25 is an excuse which is only relevant once it has been decided that there has otherwise been a breach of those substantive obligations.’). The Sempra committee equally noted that the treaty clause had to be applied first and Article 25 would become relevant only where the BIT had been violated. Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Decision on Annulment, 29 June 2010, para. 200. Sempra Energy International v. Argentina (n. 106) para. 199 (‘It is apparent from this comparison that Article 25 does not offer a guide to interpretation of the terms used in Article XI. The most that can be said is that certain words or expressions are the same or similar.’).

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Another highly controversial example of systemic integration can be seen in the attempt of some investment tribunals to integrate further requirements into the highly undetermined notion of ‘investment’ as a jurisdictional requirement under the ICSID Convention.111 In practice, ICSID tribunals have adhered to the so-called Salini test112 according to which an ‘investment’ displays the following typical features: a certain duration, a certain regularity of profit and return, the assumption of risk, a substantial commitment, and a significant contribution to the host State’s development.113 Some have disagreed over the question whether these elements should be regarded as jurisdictional requirements114 or merely as typical indicative features.115 While most ICSID tribunals appear to follow the latter approach, the panel in Phoenix v. Czech Republic116 adopted a systemic interpretation approach in order to hold that in addition to the abovementioned Salini criteria other elements are constitutive of an investment.117 These additional requirements usually result from specific BIT provisions, socalled ‘in accordance with domestic law’ clauses118 and from the general principle of bona fides. In the view of the Phoenix tribunal, however, it should be regarded as an implicit, general requirement under general principles of law.119 110 See supra text at n. 87. 111 Article 25(1) of the ICSID Convention does not define the jurisdictional requirement of an ‘investment’ (‘The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.’) See contribution of Jan Asmus Bischoff and Richard Happ, ‘The Notion of Investment’, ch. 6.II.A., 495–544. 112 Salini Costruttori S.p.A. and Italstrade S.p.A. v. Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001, para. 52. 113 See also Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary (Cambridge University Press, 2009) 128, 129. 114 See Patrick Mitchell v. Congo, ICSID Case No. ARB/99/7, Decision on the Application for Annulment of the Award, 1 November 2006; Malaysian Historical Salvors, SDN, BHD v. Malaysia, ICSID Case No. ARB/05/10, Award on Jurisdiction, 17 May 2007. 115 Malaysian Historical Salvors, SDN, BHD v. Malaysia, ICSID Case No. ARB/05/10, Decision on the Application for Annulment, 16 April 2009. 116 Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009. 117 Ibid., para. 114 (‘1 – a contribution in money or other assets; 2 – a certain duration; 3 – an element of risk; 4 – an operation made in order to develop an economic activity in the host State; 5 – assets invested in accordance with the laws of the host State; 6 – assets invested bona fide.’). 118 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 65; Christina Knahr, ‘Investments “in accordance with host state law”’ (2007) 4 TDM 1–28; see also contribution of Katharina Diel-Gligor and Rudolf Hennecke, ‘Investment in Accordance with the Law’, ch. 6.II.D., 566–576. 119 Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 100 (‘The purpose of the international mechanism of protection of investment through ICSID arbitration cannot be to protect investments made in violation of the laws of the host State or investments not made in good faith, obtained for example through misrepresentations, concealments or corruption, or amounting to an abuse of the international ICSID arbitration system. In other words, the purpose of international protection is to protect legal and bona fide investments.’).

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The tribunal expressly arrived at this result by resorting to a systemic interpretation after first looking at the ordinary meaning of the treaty text and its object and purpose.120 That such an integrative approach may conflict with a strictly literal interpretation of the ‘investment’ notion was stressed by the tribunal in Saba Fakes v. Turkey.121 The interpretation of IIA provisions in light of general international law ac- 51 cording to Article 31(3)(c) of the Vienna Convention is sometimes difficult to distinguish from a direct application of customary international law and general principles of law.122 It is clearly accepted that in situations where certain issues, in particular State responsibility principles like attribution, preclusion of wrongfulness and others, are not addressed in IIAs, general international law (custom and general principles) is applicable.123 Sometimes applicable law clauses in BITs even expressly provide for this.124 The lack of a clear bright line between application and interpretation is particularly evident in some of the necessity cases dealing with the relationship between interpreting the BIT non-precluded measures clauses and the customary international law rules on necessity like in the Sempra case.125

120 Ibid., para. 80 (‘In order to perform this interpretation, the Tribunal will first analyse the ordinary meaning of the notion of investment under the ICSID Convention, and will then ascertain which investments are protected in view of their object and purpose, before looking at the BIT definition. Finally, in order to complete the determination of protected investments under the international arbitration mechanism, the Tribunal will interpret these two international agreements in the light of the general principles of international law.’). 121 Saba Fakes v. Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, para. 112 (‘(…) the principles of good faith and legality cannot be incorporated into the definition of Article 25(1) of the ICSID Convention without doing violence to the language of the ICSID Convention: an investment might be “legal” or “illegal,” made in “good faith” or not, it nonetheless remains an investment. The expressions “legal investment” or “investment made in good faith” are not pleonasms, and the expressions “illegal investment” or “investment made in bad faith” are not oxymorons.’). See also supra (n. 22). 122 See Tarcisio Gazzini, ‘The Role of Customary International Law in the Field of Foreign Investment’ (2007) 8 JWIT 691–715. 123 See contribution of James Crawford and Simon Olleson, ‘The Application of Rules on State Responsibility’, ch. 5.III., 411–441. 124 See e.g. NAFTA Article 1131(1) (‘A Tribunal established under this Section shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law.’); ECT Article 26(6) (‘A tribunal established under paragraph (4) shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.’); ICSID Convention Article 42(1) (‘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.’). See also Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair (n. 113) 575 et seq. 125 See supra text at (n. 100).

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E. Object and Purpose 52

A ‘teleological’ approach to ascertain the meaning of treaty provisions has been widely used in treaty interpretation practice.126 Article 31(1) of the Vienna Convention explicitly makes ‘object and purpose’127 of a treaty one of the relevant interpretation criteria. It is thus not surprising that investment tribunals regularly refer to the ‘object and purpose’ of IIAs128 – which they often find expressed in their preambles.129 A specifically articulate expression of this approach can be found in the Siemens v. Argentina decision in which an ICSID tribunal considered (…) that the Treaty has to be interpreted neither liberally nor restrictively, as neither of these adverbs is part of Article 31(1) of the Vienna Convention. The Tribunal shall be guided by the purpose of the Treaty as expressed in its title and preamble. It is a treaty ‘to protect’ and ‘to promote’ investments. The preamble provides that the parties have agreed to the provisions of the Treaty for the purpose of creating favorable conditions for the investments of nationals or companies of one of the two States

126 IBM World Trade Corporation v. Ecuador, ICSID Case No. ARB/02/10, Decision on Jurisdiction, 22 December 2003, para. 44 (‘The interpretation of international treaties does not only submit itself to principles such as the parties’ intention, literality according to the natural and ordinary meaning, good faith, interpretation according to the context, practical application by the parties or by the international organizations, interpretation based on the preparatory works, restrictive and effective interpretations (in accordance with the nature of the matters the treaty deals with), but it shall also take into account the specific purposes of the treaty (teleological interpretation).’). 127 With regard to this highly problematic concept, it has been stated that ‘object’ may relate primarily to the content of a rule itself, while ‘purpose’ refers to the aim pursued by a rule. Cf. Isabelle Buffard and Karl Zemanek, ‘The “Object and Purpose” of a Treaty: An Enigma?’ (1998) 3 Austrian Rev. Eur. & Int’l L. 311, 326. 128 Occidental Exploration and Production Company v. Ecuador, Award, LCIA Case No. UN 3467, 1 July 2004, para. 183; Siemens AG v. Argentina, Decision on Jurisdiction, ICSID Case No. ARB/02/8, 3 August 2004, para. 81; Enron Corporation and Ponderosa Assets, L.P. v. Argentina, Award, ICSID Case No. ARB/01/3, 22 May 2007, para. 259. 129 Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 7.4.4 (‘As to the object and purpose of the BIT, the Tribunal notes the parties’ wish, as stated in the preamble, for the Treaty to create favourable conditions for French investments in Argentina, and vice versa, and their conviction that the protection and promotion of such investments is expected to encourage technology and capital transfers between both countries and to promote their economic development. In interpreting the BIT, we are thus mindful of these objectives. (…)’); MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Chile, Award, ICSID Case No. ARB/01/7, 24 May 2004, para. 113 (‘(…) As regards the object and purpose of the BIT, the Tribunal refers to its Preamble where the parties state their desire “to create favourable conditions for investments by investors of one Contracting Party in the territory of the other Contracting Party”, and the recognition of “the need to protect investments by investors of both Contracting Parties and to stimulate the flow of investments and individual business initiative with a view to the economic prosperity of both Contracting Parties”. (…)’); LG&E Energy Corp v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 26 September 2006, para. 124 (‘In considering the context within which Argentina and the United States included the fair and equitable treatment standard, and its object and purpose, the Tribunal observes in the Preamble of the Treaty that the two countries agreed that “fair and equitable treatment of investment is desirable in order to maintain a stable framework for investment and maximum effective use of economic resources.’); Saluka Investments BV (The Netherlands) v. Czech Republic, Partial Award, 17 March 2006, para. 299 (‘The “object and purpose” of the Treaty may be discerned from its title and preamble.’).

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Related to such a teleological approach is the question whether, as a matter of 53 principle, IIAs should be interpreted in a pro-investor or pro-State fashion. While some tribunals appear to lean towards one131 and others towards the other approach,132 the more useful view is to recognise that effective investment protection is in the long-term interest of host States133 and thus avoids prioritising one over the other. Thus, investment tribunals have insisted that IIAs should be interpreted ‘neither liberally nor restrictively’134 and applied this approach, for instance, to the question of agreements to arbitrate under the jurisdictional provisions of BITs135 or to the grounds for annulment under the ICSID Convention.136 130 Siemens AG v. Argentina, Decision on Jurisdiction, ICSID Case No. ARB/02/8, 3 August 2004, para. 81. 131 See, for instance with regard to an expansive interpretation of umbrella clauses: SGS Société Générale de Surveillance SA v. Philippines, Decision on Objections to Jurisdiction and Separate Declaration, ICSID Case No. ARB/02/6, 29 January 2004, para. 116 (‘The object and purpose of the BIT supports an effective interpretation of Article X(2). The BIT is a treaty for the promotion and reciprocal protection of investments. According to the preamble it is intended “to create and maintain favourable conditions for investments by investors of one Contracting Party in the territory of the other”. It is legitimate to resolve uncertainties in its interpretation so as to favour the protection of covered investments.’); Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 52 (‘The object and purpose rule also supports such an interpretation. While it is not permissible, as is too often done regarding BITs, to interpret clauses exclusively in favour of investors, here such an interpretation is justified. Considering, as pointed out above, that any other interpretation would deprive Art. II (2)(c) of practical content, reference has necessarily to be made to the principle of effectiveness, also applied by other Tribunals in interpreting BIT provisions (see SGS v. Philippines, para. 116 and Salini v. Jordan, para. 95).’). 132 Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 55 (‘Thus, an umbrella clause, when included in a bilateral investment treaty, introduces an exception to the general separation of States obligations under municipal and under international law. In consequence, as with any other exception to established general rules of law, the identification of a provision as an “umbrella clause” can as a consequence proceed only from a strict, if not indeed restrictive, interpretation of its terms (…)’); it has been noted that this ‘avowed predilection’ for a restrictive approach was not actually reflected in the tribunal’s decision. See Rudolf Dolzer and Christoph Schreuer (n. 118) 33. See also (n. 131). 133 See Amco Asia Corporation and others v. Indonesia, ICSID Case No. ARB/81/1, Decision on Jurisdiction, 25 September 1983, para.23 (‘(…) the Convention is aimed to protect, to the same extent and with the same vigour the investor and the host State, not forgetting that to protect investments is to protect the general interest of development and of developing countries.’). 134 Siemens AG v. Argentina, Decision on Jurisdiction, ICSID Case No ARB/02/8, 3 August 2004, para. 81 (‘(…) the Treaty has to be interpreted neither liberally nor restrictively, as neither of these adverbs is part of Article 31(1) of the Vienna Convention.’). 135 Mondev v. USA, ICSID Case No. ARB(AF)/99/2 (NAFTA), Award, 11 October 2002, para. 43 (‘There is no principle of either extensive or restrictive interpretation of jurisdictional provision in treaties.’); Amco Asia Corporation and others v. Indonesia, ICSID Case No. ARB/81/1, Decision on Jurisdiction, 25 September 1983, para. 14 (‘[A] convention to arbitrate is not to be construed restrictively, nor, as a matter of fact, broadly or liberally.’); Methanex v. USA, UNCITRAL (NAFTA), Award on Jurisdiction, 7 August 2002, paras. 103, 105 (‘The USA contends that a doctrine of restrictive interpretation should be applied in in-

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Investment tribunals have repeatedly stressed that object and purpose of a treaty provision are of primary relevance for the interpretation of IIAs.137 55 Reliance on IIA preamble language for the purpose of interpreting IIA provisions has played an important role in the context of fair and equitable treatment clauses. A number of tribunals have relied on IIA preambles in order to ascertain the content of such treaty clauses.138 But tribunals and commentators139 have 54

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vestor-state disputes. In other words, wherever there is any ambiguity in clauses granting jurisdiction over disputes between states and private persons, such ambiguity is always to be resolved in favour of maintaining state sovereignty. (…) ‘The Tribunal rejects the contention of the USA for reasons which can be stated briefly, given that the point did not greatly influence our decision in this Award. (…) We accept that the NAFTA Parties intended that the provisions of Chapter 11, particularly Article 1101(1) NAFTA, should be interpreted in good faith in accordance with their ordinary meaning (in accordance with Article 31(1) of the Vienna Convention), without any one-sided doctrinal advantage built in to their text to disadvantage procedurally an investor seeking arbitral relief.’). Klöckner Industrie-Anlagen GmbH and others v. Cameroon and Société Camerounaise des Engrais, ICSID Case No. ARB/81/2, Decision on Annulment, 3 May 1985, p. 3 (‘(…) application of the paragraph Article 52(1) of the Convention demands neither a narrow interpretation, nor a broad interpretation, but an appropriate interpretation, taking into account the legitimate concern to surround the exercise of the remedy to the maximum extent possible with guarantees in order to achieve a harmonious balance between the various objectives of the Convention.’); Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Decision on Annulment, 29 June 2010, para. 75 (‘As for the interpretation of grounds for annulment there is compelling support for the view that neither a narrow nor a broad approach is to be applied.’). See e.g. Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Pakistan, ICSID Case No. ARB/ 03/29, Decision on Jurisdiction, 14 November 2005, para. 96 (‘Pursuant to the general principles of interpretation set forth in Article 31 of the Vienna Convention on the Law of Treaties (…) this Tribunal considers that the real meaning of Article VII of the BIT is to be determined in the light of the object and purpose of that provision.’); Lauder v. Czech Republic, UNCITRAL Award, 3 September 2001, para. 292; MTD v. Chile, Award, 25 May 2004, paras. 104, 105; Siemens v. Argentina, Decision on Jurisdiction, 3 August 2004, para. 81; Aguas del Tunari S.A. v. Bolivia, Decision on Jurisdiction, ICSID Case No. ARB/02/3, 21 October 2005, paras. 153, 240–241; Continental Casualty Company v. Argentina, Decision on Jurisdiction, 22 February 2006, para. 80. See e.g., Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability, 14 January 2010, para. 264 (‘Words used in treaties must be interpreted through their context. The context of Article II.3 is to be found in the Preamble of the BIT, in which the contracting parties state “that fair and equitable treatment of investment is desirable in order to maintain a stable framework for investment (…)”. The FET standard is thus closely tied to the notion of legitimate expectations – actions or omissions by Ukraine are contrary to the FET standard if they frustrate legitimate and reasonable expectations on which the investor relied at the time when he made the investment.’); Total S.A. v. Argentina, ICSID Case No. ARB/04/01, Decision on Liability, 27 December 2010, para. 116 (‘In various disputes between U.S. investors and Argentina under that BIT, tribunals have relied on the explicit mention in its preamble of the desirability of maintaining a stable framework for investments in order to attract foreign investment as a basis for finding that the lack of such stability and related predictability, on which the investor had relied, had resulted in a breach of the fair and equitable treatment standard. This reference is justified because, although such a statement in a preamble does not create independent legal obligations, it is a tool for the interpretation of the treaty since it sheds light on its purpose.’). Lars Markert, ‘International Investment Law and Treaty Interpretation – Problems, Particularities and Possible Trends’, in Rainer Hofmann and Christian Tams (eds), International Investment Law and General International Law – From Clinical Isolation to Systemic Integration? (Nomos, 2011) 53, 55.

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also cautioned against excessive reliance on preambles in order to interpret fair and equitable treatment. Instead, tribunals like the UNCITRAL panel in Saluka have insisted on a ‘balanced approach’ in assessing the impact of preambular language.140 The ‘object and purpose’ of IIAs was also particularly relevant in cases where 56 tribunals had to interpret the scope of dispute settlement and the reach of MFN clauses. In a number of cases, arbitral tribunals have relied on ‘object and purpose’ and stressed that effective investor-State dispute settlement is a crucial aspect of investment protection.141 This has led to calls for an extensive interpretation of MFN clauses to include also dispute settlement.142 For instance, in Telefónica v. Argentina143 an ICSID tribunal held that [a]n MFN clause is aimed at ensuring equality of treatment to the beneficiaries in respect of its subject matter at the most advantageous level. In respect of trade in goods, establishment, services and investments, the purpose of an MFN clause has been described as that of guaranteeing equal competitive conditions to businessmen of the countries concerned in the contracting States’ territories. Specifically as to foreign investors, it appears correct to state that ‘the basic purpose of MFN is to guarantee equality of competitive opportunities for foreign investors in the host state’.144

Other tribunals have cautioned against such a strong emphasis on ‘object and 57 purpose’ and rejected reliance on the purpose of IIAs to effectively protect for140 Saluka Investments BV (The Netherlands) v. Czech Republic, Partial Award, 17 March 2006, paras. 299, 300 (‘The “object and purpose” of the Treaty may be discerned from its title and preamble. These read: (…) This is a more subtle and balanced statement of the Treaty’s aims than is sometimes appreciated. The protection of foreign investments is not the sole aim of the Treaty, but rather a necessary element alongside the overall aim of encouraging foreign investment and extending and intensifying the parties’ economic relations. That in turn calls for a balanced approach to the interpretation of the Treaty’s substantive provisions for the protection of investments, since an interpretation which exaggerates the protection to be accorded to foreign investments may serve to dissuade host States from admitting foreign investments and so undermine the overall aim of extending and intensifying the parties’ mutual economic relations.’). 141 See e.g. Emilio Agustín Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000, para. 54 (‘(…) dispute settlement arrangements are inextricably related to the protection of foreign investors, as they are also related to the protection of rights of traders under treaties of commerce.’); National Grid plc v. Argentina, UNCITRAL, Decision on Jurisdiction, 20 June 2006, para. 49 (‘(…) assurance of independent international arbitration is an important – perhaps the most important – element in investor protection.’); Eastern Sugar BV v. Czech Republic, Partial award and Partial Dissenting Opinion, SCC Case No. 088/2004, 27 March 2007, para. 165 (‘From the point of view of the promotion and protection of investments, the arbitration clause is in practice the most essential provision of Bilateral Investment Treaties.’); Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/03/19 (pending); AWG Group Ltd. v. Argentina, UNCITRAL, Decision on Jurisdiction, 3 August 2006, para. 59 (‘From the point of view of the promotion and protection of investments, the stated purposes of both the Argentina-Spain BIT and the Argentina-U.K. BIT, dispute settlement is as important as other matters governed by the BITs and is an integral part of the investment protection regime that the respective sovereign states have agreed upon.’). 142 See e.g. Stephan W. Schill, The Multilateralization of International Investment Law (Cambridge University Press, 2009) 180. 143 Telefónica SA v. Argentina, ICSID Case No. ARB/03/20, Decision of the Tribunal on Objections to Jurisdiction, 25 May 2006. 144 Ibid., para. 98.

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eign investors as an interpretative tool to justify reliance on MFN clauses in order to establish access to investor-State arbitration.145 58 Investment tribunals have also linked the teleological interpretation to the traditional maxim of effet utile or ut res magis valeat quam pereat according to which a treaty provision should be interpreted so as to be most effective or at least to ensure that it is interpreted as meaningful rather than meaningless.146 A number of tribunals that had to interpret umbrella clauses147 relied on this principle in order to reject a limiting interpretation which might leave such a clause meaningless.148 59 Traditionally, preambles of IIAs have been rather short, mostly referring to the ‘promotion’ and ‘protection’ of investments, the ‘stimulation of investment flows’, ‘favourable conditions for investments’, a ‘stable framework for investments’ or the like. Only recently, IIA practice has led to the inclusion of broader and more diverse aims in the preambles of IIAs which may be important for interpretation purposes. Many post-2000 Model BITs as well as IIAs based on such models contain lengthy preambles, including economic as well as non-economic objectives.149 Among these newer items, aspects like ‘international development efforts’, ‘respect for human rights’, ‘the protection of health, safety, and 145 Plama Consortium Limited v. Bulgaria, Decision on Jurisdiction, ICSID Case No. ARB/ 03/24, 8 February 2005, para. 193 (‘The object and purpose of the Bulgaria-Cyprus BIT are: “the creation of favourable conditions for investments by investors of one Contracting Party in the territory of the other Contracting Party.” (Preamble) (…) Such statements are as such undeniable in their generality, but they are legally insufficient to conclude that the Contracting Parties to the Bulgaria-Cyprus BIT intended to cover by the MFN provision agreements to arbitrate in other treaties to which Bulgaria (and Cyprus for that matter) is a Contracting Party. Here, the Tribunal is mindful of Sir Ian Sinclair’s warning of the “risk that the placing of undue emphasis on the ‘object and purpose’ of a treaty will encourage teleological methods of interpretation [which], in some of its more extreme forms, will even deny the relevance of the intentions of the parties”.’). 146 Richard Gardiner (n. 1) 148; see also Asian Agricultural Products Ltd. (AAPL) v. Sri Lanka, ICSID Case. No. ARB/87/3, Award, June 27, 1990, para. 40; Eureko B.V. v. Poland, Partial Award, 19 August 2005, para. 248 (‘(…) It is a cardinal rule of the interpretation of treaties that each and every operative clause of a treaty is to be interpreted as meaningful rather than meaningless.’); Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 223 (‘(…) the Tribunal will employ generally accepted rules of interpretation, such as the ones neatly summarized by the AAPL tribunal: (i) the tribunal should not interpret that which has no need of interpretation; (ii) effect should be given to every provision of an agreement; and (iii) a provision must be interpreted so as to give it meaning rather than so as to deprive it of meaning.’); CEMEX Caracas Investments B.V. and CEMEX Caracas II Investments B.V. v. Venezuela, ICSID Case No. ARB/08/15, Decision on Jurisdiction, 30 December 2010, paras. 107, 114 (‘The Tribunal recalls that, as recognized by the International Court of Justice, “the principle of effectiveness has an important role in the law of treaties.” (…) In this respect one must recall that this principle does not require that a maximum effect be given to a text. It only excludes interpretations which would render the text meaningless, when a meaningful interpretation is possible. (…)’). 147 See contribution of Anthony Sinclair, ‘Umbrella Clause’, ch. 8.VII., 887–958. 148 Eureko B.V. v. Poland, Partial Award, 19 August 2005, paras. 248–260; SGS Société Générale de Surveillance SA v. Philippines, Decision on Objections to Jurisdiction and Separate Declaration, ICSID Case No ARB/02/6, 29 January 2004, para. 116; Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 52. See also (n. 131).

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the environment, and the promotion of internationally recognised labour standards’, ‘corporate social responsibility’, ‘the fight against corruption’, and ‘sustainable development’ can be found.150 Gradually, this may lead to new interpretation options available to investment 60 tribunals basing their decisions, inter alia, on such broad, multi-purpose preambles. F. Intent of the Parties – Negotiating History

The intention of treaty parties is not an express guideline for treaty interpreta- 61 tion pursuant to Articles 31 and 32 of the Vienna Convention. In fact, the only reference to intent can be found in Article 31(4) clarifying that ‘[a] special meaning shall be given to a term if it is established that the parties so intended.’ However, it is widely accepted that the intention of the treaty parties is a relevant aspect of interpretation. Thus, it is not surprising that international courts and tribunals often inquire into the intention of the parties in order to ascertain the content of specific treaty provisions. This is also true for investment tribunals.151

149 See International Investment Agreements: A Survey of Environmental, Labour and Anticorruption Issues, in OECD (ed), International Investment Law. Understanding Concepts and Tracking Innovations (OECD, 2008) 135. 150 See, e.g., Uruguay–US BIT, Treaty between the United States of America and the Oriental Republic of Uruguay Concerning the Encouragement and Reciprocal Protection of Investment, 4 November 2005, available at http://www.unctad.org/sections/dite/iia/docs/bits/ US_Uruguay.pdf; see also Canada–Peru BIT, Agreement between Canada and the Republic of Peru for the Promotion and Protection of Investments, 14 November 2006, available at htt p://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/Canada-Per u10nov 06-en.pdf. See also Andrew Newcombe, ‘Sustainable Development and Investment Treaty Law’ (2007) 8 JWIT 357, 399. 151 See e.g. Amco Asia Corporation and others v. Indonesia, ICSID Case No. ARB/81/1, Decision on Jurisdiction, 25 September 1983, para. 14 (‘[A] convention to arbitrate is not to be construed restrictively, nor, as a matter of fact, broadly or liberally. It is to be construed in a way which leads to find out and to respect the common will of the parties.’); Berschader v. Russia, SCC Case No. 080/2004, Award, 21 April 2006, para. 175 (‘Firstly, the tribunal must express its firm view that the fundamental issue in determining whether or not an MFN clause encompasses the dispute resolution provisions of other treaties must always be an assessment of the intention of the contracting parties upon the conclusion of each individual treaty. (…) Ultimately, that question can only be answered by a detailed analysis of the text and, where available, the negotiating history of the relevant treaty, as well as other relevant facts.’); Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 7.4.4 (‘(…) the Tribunal notes the parties’ wish, as stated in the preamble, for the Treaty to create favourable conditions for French investments in Argentina, and vice versa, and their conviction that the protection and promotion of such investments is expected to encourage technology and capital transfers between both countries and to promote their economic development.’); Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, para. 277 (‘The standard of “fair and equitable treatment” has been interpreted broadly by Tribunals and, as a result, a difference of interpretation between the terms “fair” and “reasonable” is insignificant. The Claimant did not show any evidence which could demonstrate that, when signing the BIT, the Republic of Lithuania and the Kingdom of Norway intended to give a different

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As has already been mentioned, ideally, the wording of a treaty is seen as the best expression of what the parties really intended.152 Whether this is always true may be open to doubt, although the idea as such has been affirmed in investment arbitration practice. 63 Tribunals often attempt to uncover the intention of treaty parties by having recourse to the travaux préparatoires of a treaty. Though mentioned in Article 32 of the Vienna Convention only as supplementary means of interpretation153 – which means that the travaux can only be relied upon in order to confirm a meaning found through the principal interpretation techniques laid down in Article 31154 or if they leave the meaning ambiguous or obscure or lead to a manifestly absurd or unreasonable result155 – establishing the (re-)constructed will of the parties is frequently the avowed task of arbitration tribunals.156 Since States often do not specifically negotiate individual treaty provisions, but rather rely on templates taken from national model BITs such emphasis on their presumed intention to be unearthed by studying the travaux may be overly optimistic.157 64 Further, other than with the ICSID Convention158 or various multilateral investment agreements,159 the negotiating history of BITs is often insufficiently 62

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protection to their investors than the protection granted by the “fair and equitable” standard.’). See supra text at (n. 15). See supra text at (n. 4). See Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 50 (‘(…) recourse may be had to supplementary means of interpretation, including the preparatory work and the circumstances of its conclusion, only in order to confirm the meaning resulting from the application of the aforementioned methods of interpretation.’); less clear: AES Summit Generation Limited and AES-Tisza Erömü Kft v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para. 7.6.5 (‘Although Article 32 provides for the use of historical interpretation, the Tribunal notes that such use is only as a complementary method of interpretation.’). Pope & Talbot v. Canada, UNCITRAL (NAFTA), Interim Award, 26 June 2000, para. 68 (‘Article 32 of the Vienna Convention permits recourse to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, to confirm the meaning resulting from the application of Article 31 or to discern that meaning when the application of Article 31 leaves the meaning ambiguous or obscure or leads to a manifestly absurd or unreasonable result.’); Enron Creditors Recovery Corp., Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Decision on Annulment, 30 July 2010, para. 122 (‘As to Article 32 of the Vienna Convention, the Committee does not consider the relevant provisions of the BIT or Articles of the ICSID Convention to be ambiguous or obscure. However, Argentina in effect argues that the interpretation referred to above leads to a result which is manifestly absurd or unreasonable.’). Plama Consortium Limited v. Bulgaria, Decision on Jurisdiction, ICSID Case No. ARB/ 03/24, 8 February 2005, paras. 189–195; Pope & Talbot Inc v. Canada, UNCITRAL (NAFTA), Award on the Merits of Phase 2, 10 April 2001, paras. 39–41; Mondev v. US, ICSID Case No. ARB (AF)/99/2, Award, 11 October 2002, para. 111. See Thomas Wälde, ‘Interpreting Investment Treaties: Experiences and Examples’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century (Oxford University Press, 2009) 724, 750 (‘What these features do is to place a question mark over the use of travaux under Article 32 VCLT, but also over too much reliance on established interpretation maxims such as ‘e contrario’ or the principle of effectiveness of each element of the text. These assume a degree of perfection and information with the drafters that did not exist.’).

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documented,160 which poses practical difficulties to parties and tribunals to rely on travaux.161 Many cases fail to explain the legal basis of their underlying presumptions 65 and, in particular, why a presumption should work in one direction and not in the opposite. Possibly this is a result of the interpretation principle in dubio mitius according to which, in case of doubt, States must be presumed to incur fewer and less onerous rather than more far-reaching obligations.162 However, the validity of such a principle as a guideline for interpretation is controversial163 and was rejected in a number of cases.164

158 See ICSID, History of the ICSID Convention, Documents Concerning the Origin and the Formulation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington DC, 1968). See also the reliance of tribunals on these travaux as evidenced in Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair (n. 113) which contains short notes on the drafting history of the ICSID Convention in almost all articles commented. 159 Initially, the travaux of the NAFTA were apparently not available publicly nor produced by the State parties upon request of arbitral panels. Cf. Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in Respect of Damages, 31 May 2002, paras. 28 et seq. The negotiating history of NAFTA has been made available in due course; it can now be found at http:// naftaclaims.com/commission.htm. See also Meg Kinnear, Andrea Bjorklund and John Hannaford, Investment Disputes Under NAFTA: An Annotated Guide to NAFTA Chapter 11, 2007 Update (Kluwer Law International, 2007). 160 Rudolf Dolzer and Christoph Schreuer (n. 118) 33. 161 Aguas del Tunari v. Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21 October 2005, para. 274 (‘This sparse negotiating history thus offers little additional insight into the meaning of the aspects of the BIT at issue, neither particularly confirming nor contradicting the Tribunal's interpretation.’); see also Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in Respect of Damages, 31 May 2002, paras. 25– 42. 162 See Loewen v. USA, ICSID Case No. ARB (AF)/98/3, Award, 26 June 2003; SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003, para. 177 (‘(…). The appropriate interpretive approach is the prudential one summed up in the literature as in dubio pars mitior est sequenda, or more tersely, in dubio mitius.’). See also Gus van Harten, Investment Treaty Arbitration and Public Law (Oxford University Press, 2007) 132. 163 See Thomas Wälde, ‘Interpreting Investment Treaties: Experiences and Examples’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century (Oxford University Press, 2009) 741. See also Mondev v. US, ICSID Case No. ARB(AF)/99/2 (NAFTA), Award, 11 October 2002, para. 43 (‘There is no principle of either extensive or restrictive interpretation of jurisdictional provision in treaties. In the end the question is what the relevant provisions mean, interpreted in accordance with the applicable rules of interpretation of treaties.’). 164 See Methanex v. USA, UNCITRAL (NAFTA), Award on Jurisdiction, 7 August 2002, where a NAFTA tribunal rejected the host State’s suggestion that ‘a doctrine of restrictive interpretation should be applied in investor-state disputes’ according to which ‘any ambiguity in clauses granting jurisdiction over disputes between states and private persons, such ambiguity is always to be resolved in favour of maintaining state sovereignty.’ Ibid., para. 103. The Methanex tribunal, however, stressed that Chapter 11 of NAFTA ‘should be interpreted in good faith in accordance with their ordinary meaning (in accordance with Article 31(1) of the Vienna Convention), without any one-sided doctrinal advantage built in to their text to disadvantage procedurally an investor seeking arbitral relief.’ Ibid., para. 105. See also Aguas del Tunari v. Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21 October 2005, para. 91 (‘(…) the Vienna Convention does not men-

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In order to ascertain the intention of treaty drafters, investment tribunals sometimes also refer to other IIAs,165 which also implies that third party IIAs may be relevant ‘context’ for their interpretation.166 67 The reasoning of the UNCITRAL tribunal in National Grid displays a proper cautionary approach to elucidating an intention of the parties from the contextual relevance of third party BITs for the interpretation of an MFN clause. When examining the dispute settlement clause of the applicable BIT between Argentina and the UK, the tribunal also looked at a number of subsequent UK BITs. While finding that this may indicate an intention on the part of the UK to extend MFN clauses to dispute settlement, it held that the lack of a similar practice on the part of Argentina prevented it from deriving a common intent of the parties.167 68 An example demonstrating the relevance of the intention of the parties and the travaux, not of an IIA, but of the ICSID Convention can be seen in the challenge decision in Compañía de Aguas del Aconquija S.A. & Vivendi Universal v. Argentina.168 In this case the outcome of a strictly literal interpretation was cor66

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tion the canon that treaties are to be construed narrowly, a canon that presumes States can not have intended to restrict their range of action.’). Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in the Merits of Phase 2, 10 April 2001, para. 115 (‘(…) there are very strong reasons for interpreting the language of Article 1105 consistently with the language of BITs. First, there is the basic unlikelihood that the Parties to NAFTA would have intended to curb the scope of Article 1105 vis a vis one another when they (…) had granted broader rights to countries that cannot be considered to share the close relationships with the NAFTA parties that those Parties share with one another.’). See supra text at (n. 66). National Grid plc v. Argentina, UNCITRAL, Decision on Jurisdiction, 20 June 2006, para. 85 (‘Since 1991, the MFN clause in the UK model investment treaty has included a third paragraph stating that: “For the avoidance of doubt”, the MFN clause extends to Articles 1 to 11 of the treaty and, hence, to dispute resolution matters. The implication in the wording of this additional paragraph is that, all along, this was the UK’s understanding of the meaning of the MFN clause in previously concluded investment treaties. On the other hand, after the decision on jurisdiction in Siemens, the Argentine Republic and Panama exchanged diplomatic notes with an “interpretative declaration” of the MFN clause in their 1996 investment treaty to the effect that, the MFN clause does not extend to dispute resolution clauses, and that this has always been their intention. The Tribunal has not been furnished with any evidence that at any point in time an interpretation of such nature was considered by either party to the Treaty. Neither has the Tribunal received any evidence that the Argentine Republic adopted similar interpretations of the MFN clause incorporated in the more than 50 bilateral investment treaties concluded with other States parties. While it is possible to conclude from the UK investment treaty practice contemporaneous with the conclusion of the Treaty that the UK understood the MFN clause to extend to dispute resolution, no definite conclusion can be reached regarding the Argentine Republic’s position at that time. Therefore, the review of the treaty practice of the State parties to the Treaty with regard to their common intent is inconclusive. (…)’). Compañía de Aguas del Aconquija S.A. & Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Decision on the Challenge to the President of the Committee, 3 October 2001. In this decision, the other two members of an ad hoc committee applied the rules of arbitrator disqualification to the disqualification of an annulment committee member, though this was strictly speaking not permitted by the wording of the Convention. The deciding members found that this was not ‘inconsistent with the Convention, having regard to its object and

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rected, not only because the outcome would have been contrary to object and purpose, but also because – in the tribunal’s view – the parties could not have intended it. Since the intention of the parties – in particular in the absence of travaux – 69 may not always be easy to ascertain, commentators and tribunals have warned against excessive construction or reconstruction of presumed intent.169 G. Interpretative Statements concerning International Investment Agreement Provisions

Beyond the usual rules of treaty interpretation under the Vienna Convention 70 IIAs may be subject to a number of specific interpretation devices. A peculiar feature is an express IIA authorisation given to a treaty body to adopt binding interpretations of IIA provisions. Some BITs provide for this,170 but the most prominent example is NAFTA which empowers the multilateral Free Trade Commission to adopt binding NAFTA interpretations.171 So far this power has been rarely exercised. The first and most important use 71 of it occurred in 2001 when the Commission adopted an interpretation of the concepts of FET and FPS contained in NAFTA Article 1105,172 which addressed the interpretative divergence of opinions of whether the two standards corresponded to the customary international law minimum standard or were indepenpurpose.’ Ibid., para. 10. They concluded: ‘As to the object and purpose of the Convention, there is no difficulty. Ad hoc Committees have an important function to perform in relation to awards (in substitution for proceedings in national courts), and their members must be, and appear to be, independent and impartial. No other procedure exists under the Convention, expressly or impliedly, for deciding on proposals for disqualification. The only question then is whether it is literally inconsistent with the terms of the Convention, given that Chapter V is not applied by Article 52 to annulment, for the Rules to step in and make equivalent provision. Admittedly, the catalogue of provisions incorporated by reference in Article 52 (4) appears a considered one. The provisions incorporated are not only concerned with the powers of Committees. They apply to a range of questions, including the status of decisions made. On the other hand the matter of disqualification might simply have been overlooked, and other aspects of Chapter V are clearly apt to be applied to ad hoc Committees.’ Ibid., para. 11. 169 Wintershall v. Argentina, ICSID Case No. ARB/04/14, Award, 8 December 2008, para. 88 (‘There is no room for any presumed intention of the Contracting Parties to a bilateral treaty, as an independent basis of interpretation; because this opens up the possibility of an interpreter (often, with the best of intentions) altering the text of the treaty in order to make it conform better with what he (or she) considers to be the treaty’s “true purpose”.’). 170 See, e.g., Article 30(3) of the 2004 US Model BIT, Treaty between the Government of the United States of America and the Government of [Country] concerning the encouragement and reciprocal protection of investment, released 5 February 2004 (‘A joint decision of the Parties, each acting through its representative designated for purposes of this Article, declaring their interpretation of a provision of this Treaty shall be binding on a tribunal, and any decision or award issued by a tribunal must be consistent with that joint decision.’). 171 NAFTA Art. 2001(2) (‘The Commission shall: (a) supervise the implementation of this Agreement; (b) oversee its further elaboration; (c) resolve disputes that may arise regarding its interpretation or application; (...) (e) consider any other matter that may affect the operation of this Agreement.’); NAFTA Art. 1131(2) (‘An interpretation by the Commission of a provision of this Agreement shall be binding on a Tribunal established under this Section.’).

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dent treaty standards that went beyond that.173 The Commission came to the following conclusion: 1.

2.

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Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 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.174

Most NAFTA tribunals have accepted this interpretation.175 However, the award of the NAFTA tribunal in Pope & Talbot176 demonstrates some of the inherent problems of giving treaty bodies such wide ranging powers. In fact the interpretation of the Commission squarely contradicted the tribunal’s early views in its award on the merits, espousing an ‘additive interpretation’ of the NAFTA’s FET standard according to which Article 1105 goes beyond the international minimum standard.177 In its final award, the Pope & Talbot178 tribunal thus did not simply accept the Commission’s interpretation as such. Rather, it first ascertained whether the Commission had not exceeded its powers by effectively amending the text of NAFTA Article 1105, instead of merely interpreting it.179 Without clearly deciding this issue the tribunal concluded that its finding of a breach of NAFTA Article 1105 could also be sustained under the Commission’s interpretation.180

172 NAFTA Art. 1105 (‘Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.’). 173 See contributions of Andrea K. Bjorklund, ‘NAFTA’s Contributions to Investor-State Dispute Settlement’, ch. 4.III.B., 261–282, and Marc Jacob and Stephan Schill, ‘Fair and Equitable Treatment’, ch. 8.I., 700–763. 174 NAFTA Free Trade Commission, Clarifications Related to NAFTA Chapter 11, Decision of 31 July 2001, available at http://www.dfait-maeci.gc.ca/tna-nac/NAFTA-Interpr-en.asp. 175 Mondev International Ltd. v. USA, ICSID Case No. ARB(AF)/99/2, ICSID Additional Facility Award, 11 October 2002, para. 122; United Parcel Service of America Inc. v. Canada, Decision on Jurisdiction, 22 November 2002, para. 97; ADF Group Inc. v. USA, Case No. ARB(AF)/00/1, ICSID Additional Facility Award, 9 January 2003, para. 199; Loewen v. USA, ICSID Case No. ARB (AF)/98/3, Award, 26 June 2003, paras. 125–127; Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004, paras. 90– 91; Methanex v. USA, UNCITRAL (NAFTA), Final Award, 3 August 2005, Part II, Ch. H, para. 23. 176 Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in Respect of Damages, 31 May 2002. 177 Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in the Merits of Phase 2, 10 April 2001, para. 117. 178 Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in Respect of Damages, 31 May 2002. 179 Ibid., para. 16. See also August Reinisch, ‘Verfahrensrechtliche Aspekte der Rechtskontrolle von Organen der Staatengemeinschaft’ in Rainer Hofmann, August Reinisch,Thomas Pfeiffer, Stefan Oeter and Astrid Stadler, Die Rechtskontrolle von Organen der Staatengemeinschaft, Berichte der Deutschen Gesellschaft für Völkerrecht (C.F. Müller, 2007) 43–92, 51. 180 Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in Respect of Damages, 31 May 2002, para. 69.

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On a more general level, the Pope & Talbot episode demonstrates the inher- 73 ently problematic aspects of shifting part of the interpretation powers from an independent tribunal to a treaty body composed of representatives of the contracting parties. This power, especially when activated during pending proceedings, may in effect be used to the detriment of investors181 and be thus incompatible with due process guarantees.182 H. The Impact of the Hybrid Nature of Investment Arbitration on the Interpretation of International Investment Agreements

In addition to the VCLT rules, which are formally applicable to the interpreta- 74 tion of IIAs, a number of other factors appear to play a role in the actual interpretation practice of investment tribunals. One of these immeasurable aspects stems from the hybrid nature of investment arbitration as a mixture between commercial arbitration and inter-State dispute settlement.183 It appears to result primarily from the practical fact that the individual actors in investment arbitration often have a different legal background that may often unconsciously influence their approach to interpretation problems. The persons involved in investment arbitration, arbitrators but also counsel 75 and experts, largely come from two different groups: arbitration practitioners, often with a clear commercial arbitration background, and public international law specialists, often from academia or the public service.184 While the latter are usually ‘socialised’ in the tradition of treaty interpretation according to the VCLT rules, the former may bring a different legal background and education which is likely to influence their interpretation approach. Commercial arbitrators are likely to base their legal reasoning on the canons 76 of interpretation they normally apply in commercial cases which is usually a specific domestic law. Since current investment arbitration is largely dominated by practitioners with an Anglo-American legal education the rules of strict statutory interpretation leading to a preference for a more literal interpretation over teleological considerations is likely to impact investment decisions. It is also probable that commercial lawyers in general have less enthusiasm for systemic integration and the relevance of public international law than the circle of international law professors and government lawyers. Rather, they often emphasise a fact-specific reasoning focusing on their professed goal to provide an efficient

181 Ibid., para. 21, referring to ‘an opinion by Sir Robert Jennings in which he describes the Interpretation as “amending the treaty to curtail investor protection.”’ 182 Rudolf Dolzer and Christoph Schreuer (n. 118) 35. 183 See Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 151–290. 184 Gabriele Kaufmann-Kohler, ‘Interpretation of Treaties: How Do Arbitral Tribunals Interpret Dispute Settlement Provisions Embodied in Investment Treaties’ in Loukas Mistelis and Julian Lew (eds), Pervasive Problems in International Arbitration (Kluwer, 2006) 257–276.

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dispute resolution without much concern about the doctrinal implications of their decisions.185 77 An example of this approach can be seen in the SCC award in Eastern Sugar v. Czech Republic.186 The tribunal’s finding of a breach of the fair and equitable treatment standard is preceded by a long and detailed, very fact-specific account of the measures affecting the investor. However, the actual reason why the measures adopted as a result of the host State’s accession to the EU amounted to a violation of this standard was not analysed in detail. Also any reference to treaty interpretation techniques is missing in the award. I. The Special Role of Precedent for the Interpretation of International Investment Agreements

The fact that most investment arbitration cases, as opposed to awards in traditional commercial arbitration, have been made public has contributed to another element of interpretative force: precedent. Although not part of the canon of interpretation, one can see that investment tribunals often rely on other tribunals’ reasoning in order to interpret the meaning of IIA provisions.187 79 While it is clear that investment arbitration, like dispute settlement in other fields of international law,188 does not follow a system of formal binding precedent (stare decisis) adhered to by Common Law jurisdictions, tribunals often take guidance from previous decisions and awards and are starting to build a de facto case law or jurisprudence constante.189 78

185 Thomas Wälde, ‘Interpreting Investment Treaties: Experiences and Examples’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century (Oxford University Press, 2009) 724, 725. 186 Eastern Sugar BV v. Czech Republic, SCC Case No. 088/2004, Partial Award, 27 March 2007. 187 See Gabriele Kaufmann-Kohler, ‘Arbitral Precedent: Dream, Necessity or Excuse?’ (2007) 23 Arb. Int’l 357–378; Andrea K. Bjorklund, ‘Investment Treaty Arbitral Decisions as Jurisprudence Constante’ in Colin B. Picker, Isabella D. Bunn and Douglas W. Arner (eds), International Economic Law: State and Future of the Discipline (Hart Publishing, 2008) 265–280; August Reinisch, ‘The Role of Precedent in ICSID Arbitration’ (2008) Austrian Arb. YB 495–510; Christoph Schreuer and Matthew Weiniger, ‘A Doctrine of Precedent?’ in Peter Muchlinski, Federico Ortino, Christoph Schreuer (eds), Oxford Handbook of International Investment Law (Oxford University Press, 2008) 1188–1206; Andrés Rigo Sureda, ‘Precedent in Investment Treaty Arbitration’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century (Oxford University Press, 2009) 830–842; Tai-Heng Cheng, ‘Precedent and Control in Investment Treaty Arbitration’ (2007) 30 Fordham Int’l L. J. 1014–1049; Catherine Kessedjian, ‘To Give or Not to Give Precedential Value to Investment Arbitration Awards?’ in Catherine A. Rogers and Roger P. Alford (eds), The Future of Investment Arbitration (Oxford University Press, 2009) 43–68. 188 Mohamed Shahabuddeen, Precedent in the World Court (Cambridge University Press, 1996); Robert Y. Jennings, ‘The Judiciary, International and National, and the Development of International Law’ (1996) 45 ICLQ 1, 9; Raj Bhala, ‘The Precedent Setters: De facto stare decisis in WTO Adjudication’ (1999) 9 J. Transnat’l L. & Pol’y 1–151. 189 SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision on Jurisdiction, 29 January 2004, para. 97 (‘It must be initially for the control mechan-

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Thus, investment tribunals have repeatedly stressed that they are not legally 80 bound by precedent,190 but that they are willing to take previous decisions into account in order to interpret applicable rules. For instance, the ad hoc Committee in Amco v. Indonesia, after rejecting the precedential value of ICJ and other ICSID decisions,191 held that (…) the absence (…) of a rule of stare decisis in the ICSID arbitration system does not prevent this ad hoc Committee from sharing the interpretation given to Article 52(1)(e) by the Klöckner ad hoc Committee.192

Similarly, other investment tribunals have stressed the value of ‘precedents’, 81 not as binding rules, but as aid to interpretation.193 Often, investment tribunals justify their regard for ‘precedents’ as persuasive by the quest for certainty and predictability in investment arbitration.194 A particularly clear example of reliance on prior case law as a guide to inter- 82 preting the BIT standard of fair and equitable treatment can be found in the Suez decision on liability where an ICSID tribunal stressed that it looked at investment law ‘precedent’ as a subsidiary means for the determination of international law in the sense of ICJ Statute Article 38(1)(d).195

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isms provided for under the BIT and the ICSID Convention, and in the longer term for the development of a common legal opinion or jurisprudence constante, to resolve the difficult legal questions discussed by the SGS v. Pakistan Tribunal and also in the present decision.’); AES Corporation v. Argentina, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 33 (‘(…) the institutional dimension of the control mechanisms provided for under the ICSID Convention might well be a factor, in the longer term, for contributing to the development of a common legal opinion or jurisprudence constante, to resolve some difficult legal issues discussed in many cases, inasmuch as these issues share the same substantial features.’). AES Corporation v. Argentina, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 23 (‘There is so far no rule of precedent in general international law; nor is there any within the specific ICSID system for the settlement of disputes between one State party to the Convention and the National of another State Party.’). Amco v. Indonesia, Decision on Annulment, 16 May 1986, para. 44, 1 ICSID Reports 509, 521 (‘Neither the decisions of the International Court of Justice in the case of the Award of the King of Spain nor the Decision of the Klöckner ad hoc Committee are binding on this ad hoc Committee.’). Ibid. LETCO v. Liberia, Award, 31 March 1986, 2 ICSID Reports 346, 352 (Though an ICSID tribunal is ‘not bound by the precedents established by other ICSID Tribunals, it is nonetheless instructive to consider their interpretations.’); Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1, Award, 16 December 2002, para. 107 (The tribunal ‘sought guidance in the decisions of several earlier NAFTA Chapter 11 tribunals that have interpreted Article 1110.’). See, e.g. Saipem S.p.A. v. Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction, 21 March 2007, para. 67 (‘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.’).

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J. Conclusion 83

An analysis of investment cases demonstrates a strong self-professed adherence to the interpretation principles contained in the Vienna Convention by tribunals. A closer view reveals, however, an à la carte approach followed by many tribunals whereby they appear to be willing to rely on any legitimate interpretation technique which supports a particular outcome without necessarily adhering to the principled approach of the Vienna Convention. It is clear that for the sake of predictability a stricter reliance on the interpretation rules of the Vienna Convention would be in the interest of all users of the system of investment arbitration.

195 Suez, Sociedad General de Aguas de Barcelona S.A., and InterAgua Servicios Integrales del Agua S.A. v. Argentina, ICSID Case No. ARB/03/17, Decision on Liability, 30 July 2010, para. 189 (‘In interpreting this vague, flexible, basic, and widely used treaty term, this Tribunal has the benefit of decisions by prior tribunals that have struggled strenuously, knowledgeably, and sometimes painfully, to interpret the words “fair and equitable” in a wide variety of factual situations and investment relationships. Many of these cases arose out of Argentina’s economic crisis of 2001–2003. Although this tribunal is not bound by such prior decisions, they do constitute “a subsidiary means for the determination of the rules of [international] law.” Moreover, considerations of basic justice would lead tribunals to be guided by the basic judicial principle that ‘like cases should be decided alike,’ unless a strong reason exists to distinguish the current case from previous ones. In addition, a recognized goal of international investment law is to establish a predictable, stable legal framework for investments, a factor that justifies tribunals in giving due regard to previous decisions on similar issues. Thus, absent compelling reasons to the contrary, a tribunal should always consider heavily solutions established in a series of consistent cases.’).

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James Crawford and Simon Olleson A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. The Relevance of the ILC’s Articles on State Responsibility for Investment Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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C. General Questions of Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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D. Attribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Attribution of the Conduct of Organs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Attribution of Conduct of Entities Exercising Elements of Governmental Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Attribution of Conduct of Entities acting under the Instructions, Direction or Control of the State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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E. Breach of an Obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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F. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: David Caron, ‘The ILC Articles on State Responsibility: The Paradoxical Relationship Between Form and Authority’ (2002) 96 AJIL 857–873; James Crawford, The International Law Commission’s Articles on State Responsibility; Introduction, Text and Commentaries (Cambridge University Press, 2002); James Crawford, State Responsibility; The General Part (Cambridge University Press, 2013); James Crawford and Simon Olleson, ‘The Continuing Debate on a UN Convention on State Responsibility’ (2005) 54 ICLQ 959–971; James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010); Zachary Douglas, ‘Other Specific Regimes of Responsibility: Investment Treaty Arbitration and ICSID’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 815– 842; Simon Olleson, State Responsibility before International and Domestic Courts; The Impact and Influence of the ILC Articles (Oxford University Press, 2014); Michael Wood, ‘The General Assembly and the International Law Commission: What Happens to the Commission’s Work and Why?’ in Isabelle Buffard, James Crawford, Alain Pellet and Stephan Wittich (eds), International Law Between Universalism and Fragmentation: Festschrift in Honour of Gerhard Hafner (Brill, 2008) 373–390.

A. Introduction

The law of State responsibility forms one of the building blocks of the system 1 of public international law. At the most general level, its purpose is, on the one hand, to define the circumstances in which a State will incur responsibility as a result of acting in a manner which is not consistent with the international obligations (whatever their source) which are in force and binding upon it; and on the other to stipulate the content of the responsibility which arises as a matter of operation of law consequent upon such a breach. Those dual functions, are implicit in Article 1 of the Articles on Responsibility of States for Internationally Wrongful Acts,1 (the Articles; Articles on State Responsibility, or ARSIWA) 1 Articles on the Responsibility of States for Internationally Wrongful Acts, adopted by the International Law Commission (ILC) on 10 August 2001; for the text of the Articles and the ILC’s accompanying Commentary, see Report of the International Law Commission on the work of its

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which provides that ‘[e]very internationally wrongful act of a State entails the international responsibility of that State’. 2 Within that somewhat lapidary formulation are concealed the major issues of the law of responsibility. On the one hand, closer investigation of the precise contours of the notion of the ‘internationally wrongful act’ raises questions as to, inter alia: a) the types of conduct (acts and omission) which may result in a breach of an international obligation; b) the range of actors who act on behalf of the State and whose conduct is to be held to be attributable to the State for the purposes of its international responsibility, and thus capable of constituting an internationally wrongful act if inconsistent with the State’s obligations; c) the circumstances in which the conduct of private individuals or other entities which do not formally constitute a part of the State will nevertheless be held to be attributable to the State for the purposes of its international responsibility; d) when a breach of an obligation is to be held to have occurred, including questions relating to the point in time at which a breach occurs as the result of a composite act, and more generally the extension in time of breach of obligations; and e) the circumstances in which the consequences which flow from conduct which is attributable and would otherwise normally constitute a breach of one or more of the State’s international obligations (and thus an internationally wrongful act) are to be held to be attenuated or avoided entirely due to the existence of factors amounting to a defence or justification (the so-called ‘circumstances precluding wrongfulness’). 3

On the other hand, the notion of the ‘international responsibility of the State’ covers a number of further questions, and in particular a) the scope of the obligation to make full reparation; b) the interaction and inter-relation between the different possible forms of reparation (restitution; compensation; and satisfaction) which may be combined in order to ensure full reparation; c) when payment of compensation is required in order to ensure full reparation; issues arising include:

fifty-third session, UN Doc. A/56/10, Chapter IV; (2001) II(2) YBILC 20 et seq. The text of the Articles and the Commentary, together with an introduction and various other useful materials relating to the drafting history of the Articles are reproduced in James Crawford, The International Law Commission’s Articles on State Responsibility; Introduction, Text and Commentaries (Cambridge University Press, 2002).

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i.

questions as to the appropriate approach to the quantification of any harm caused by the internationally wrongful act, ii. questions relating to interest, and in particular the availability under international law of compound interest so as to ensure full reparation; d) questions of causation, including: i. the extent to which any particular harm claimed is caused by a particular breach; ii. the consequences of the existence of multiple concurrent causes of harm; and iii. the effect on the amount of compensation payable to the injured party of circumstances in which the injured party’s own acts may have materially contributed to the occurrence of the harm in respect of which compensation is claimed; e) the incidence of the obligation of cessation, and the circumstances in which a wrong-doing State may be required to give assurances or guarantees of non-repetition. The law of State responsibility thus operates as a general law of wrongs in 4 public international law,2 dealing with the secondary questions which may arise, whatever the specific subject matter and the source of the underlying obligation which has or may have been breached.3 Although the law of State responsibility also extends to cover a range of other 5 issues, including some which are essentially limited to inter-State claims,4 it will be noted that the issues listed in the preceding paragraphs are all issues which may (at least potentially) arise equally in the context of investor-State arbitration proceedings for breach of a bilateral investment treaty (BIT). Here the fundamental (and obvious) point is that BITs are treaties, as are the 6 various multilateral instruments with chapters containing equivalent substantive and procedural protections, 5 with the result that claims for breach of such instruments are claims for breach of treaty. As a result, it is self-evident that, as a general matter, the responsibility of States in the field of investment treaty arbitration is a species of State responsibility, i.e. the responsibility of a State party for breach of the substantive international obligations created by the investment treaty.6

2 See James Crawford and Simon Olleson, ‘The Character and Forms of International Responsibility’ in Malcolm Evans (ed), International Law (Oxford University Press, 2014) 443, 447. 3 See e.g. ARSIWA, Art. 12. ‘There is a breach of an international obligation by a State when an act of that State is not in conformity with what is required of it by that obligation, regardless of its origin or character.’, and the Commentary to Art. 12. 4 In particular, questions relating to standing, including standing to invoke a breach of multilateral obligations (see ARSIWA, Arts. 42 and 48); the means by which responsibility may be invoked as between States (ARSIWA, Art. 43); questions relating to the admissibility of claims (ARSIWA, Art. 44) and the circumstances in which the right to invoke responsibility may be lost (ARSIWA, Art. 45). 5 See e.g. ECT Part III; NAFTA Chapter 11; CAFTA Chapter 10.

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Where a BIT provides for international arbitration at the election of an investor in relation to claims of breach by the host State of the substantive standards of protection which it contains (or where similar provision is made in a multilateral instrument), such claims are, and necessarily remain, claims for breach of treaty. It is thus the law of State responsibility which will govern the various questions which may arise of breach, reparation, etc. 8 This is so despite the fact that, at least under the traditional conceptions of international law, it was exceptional for individuals to be directly endowed with rights under international law,7 and even more exceptional for them to have standing to bring a claim for breach of the corresponding obligations incumbent on the State.8 It is also so despite the (entirely normal) position in investment protection claims that other aspects of the same dispute may be governed by different applicable laws (whether international or domestic).9 9 Proper analysis and the correct identification of the law applicable to any given issue are therefore fundamental. For example, there may exist additional claims forming part of the dispute which are governed not by international law but by a relevant system of domestic law, for instance a contractual claim for breach of an investment agreement, or a claim under an applicable domestic investment protection law. Quite apart from such considerations, particular discrete issues which may arise incidentally in deciding the central question whether there has been a breach of the substantive standards of protection contained in a BIT may, on proper analysis, be governed by domestic law.10 10 It is important that international law, and in particular the law of State responsibility, should not be made to do too much. In particular, international law should not be applied to decide issues to which it is not properly applicable, and a fortiori, should not be applied to decide issues which, on analysis, are properly governed by a particular system of domestic law. As will be seen, this is a particular danger with the rules of attribution, which are often prayed in aid in rela7

6 James Crawford, ‘Treaty and Contract in Investment Arbitration’, 22nd Freshfields International Arbitration Lecture, (2008) 24(3) Arb. Int’l 351, 355. 7 Although cf. Jurisdiction of the Courts of Danzig, Advisory Opinion, (1928) PCIJ (Ser. B) No. 15, 17–18; and see now LaGrand (Germany v. USA), ICJ Judgment, ICJ Rep. 2001, 466, 494, para. 77 and Avena and Other Mexican Nationals (Mexico v. USA), ICJ Judgment, ICJ Rep. 2004, 12, 36, para. 40. 8 Although cf. the mechanism of the Iran–US Claims Tribunal and the individual complaints procedures under, e.g.the European Convention on Human Rights and American Convention on Human Rights. 9 Cf. the observations of the ad hoc committee in Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/97/3, Decision on Annulment, 3 July 2002, para. 96. 10 For instance, where a separate entity has entered into a contract with an investor, the question of whether the State is to be regarded as having undertaken obligations for the purpose of an ‘umbrella’ clause depends on whether the State is to be treated as a party to, and therefore bound by, the contract; that question is normally to be determined in accordance with domestic law, and in particular by whatever law is stipulated to be applicable to the contract. It is not a question of international responsibility, and the rules on attribution which form part of the law of State responsibility have no role to play.

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tion to issues which in reality have nothing to do with questions of State responsibility. B. The Relevance of the ILC’s Articles on State Responsibility for Investment Arbitration

Any discussion of the modern law of State responsibility must now take as its 11 starting point the Articles on State Responsibility, adopted on second reading by the International Law Commission (ILC) in 2001. The Articles are the fruit of over 40 years of work by the ILC. Following the adoption of the draft Articles on State Responsibility on second reading, accompanied by a detailed Commentary, the ILC recommended that the General Assembly take note of the Articles and annex them to a resolution, deferring to a later stage the question of whether an international diplomatic conference should be convened with a view to concluding a convention on the topic.11 After debate in the Sixth Committee towards the end of 2001, in which a 12 number of States called for the immediate calling of a diplomatic conference in order to transform the draft Articles into a multilateral convention, the General Assembly followed the ILC’s recommendation; by Resolution 56/83, it annexed the Articles to the resolution, took note of ‘the Articles on Responsibility of States for Internationally Wrongful Acts’ (thereby removing the qualifier ‘draft’),12 and ‘commend[ed] them to the attention of Governments’ without prejudice to the question of their future adoption or other appropriate action.13 Thereafter, at three year intervals, in 2004, 2007, 2010 and 2013,14 the Gener- 13 al Assembly has repeatedly deferred taking a definitive decision on what form the Articles should finally take.15 11 Report of the International Law Commission on the work of its fifty-third session (n. 1) paras. 72–73. 12 See similarly Michael Wood, ‘The General Assembly and the International Law Commission: What Happens to the Commission’s Work and Why?’ in Isabelle Buffard, James Crawford, Alain Pellet and Stephan Wittich (eds), International Law Between Universalism and Fragmentation: Festschrift in Honour of Gerhard Hafner (Brill, 2008) 373, 380, n. 34. 13 GA Res 56/83, 12 December 2001; UN Doc. A/RES/56/83. 14 GA Res 59/35, 2 December 2004; UN Doc. A/RES/59/35; GA Res 62/61, 6 December 2007; UN Doc. A/RES/62/61; GA Res 65/19, 6 December 2010; UN Doc. A/RES/65/19; GA Res 68/104, 16 December 2013; UN Doc. A/RES/68/104. For a summary of the debate and the positions taken by States in the Sixth Committee in 2004, see James Crawford and Simon Olleson, ‘The Continuing Debate on a UN Convention on State Responsibility’ (2005) 54 ICLQ 959–971. 15 When the matter was considered in 2010, the General Assembly resolved that when the topic again returned for consideration in 2013, it would ‘examine, within the framework of a working group of the Sixth Committee and with a view to taking a decision, the question of a convention on responsibility of States for internationally wrongful acts or other appropriate action on the basis of the articles’: GA Res 65/19 (above, n. 14), para. 4. A resolution in near identical terms was adopted in 2013, deferring further consideration of the question to 2016: GA Res 68/104 (above, n. 14). The 2007 resolution had previously decided that consideration of what action should be taken would in 2010 be undertaken by a Working Group of the Sixth Committee: GA Res 62/61 (above, n. 14).

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The Articles constitute, at the very least, an important resource in relation to questions of the law of State responsibility; in addition a growing number of provisions have been endorsed and applied by the International Court of Justice (ICJ) as reflecting customary international law. However, the Articles themselves are, on their own terms, only partially applicable to the various questions of State responsibility which may arise in investment disputes. In this regard, a clear distinction is to be drawn between Part One and the remainder of the Articles. 15 The provisions of Part One of the Articles have as their object to lay down the default conditions for, and tests by which it is to be determined whether a State has breached one or more of its substantive primary international obligations. They apply (subject to the lex specialis principle)16 to any internationally wrongful act, no matter to whom the obligation which is breached may be owed.17 16 In this connection, Article 2 of the Articles provides 14

[t]here is an internationally wrongful act of a State when conduct consisting of an action or omission: (a) (b)

is attributable to the State under international law; and constitutes a breach of an international obligation of the State.

The existence of conduct attributable to a State (expanded upon in Chapter II of Part One) and the determination that that conduct constitutes a breach of that State’s international obligations (dealt with in Chapter III of Part One) together constitute the necessary and sufficient conditions for the international responsibility of the State to arise. Such responsibility (and the obligations which come into being upon a breach and form the content of that responsibility) will arise provided that none of the circumstances precluding wrongfulness enumerated in Chapter V of Part One are shown to exist (i.e. valid consent; the existence of a state of necessity or circumstances constituting force majeure, an attack justifying appropriate action by way of self-defence, or the prior breach of an international obligation justifying the adoption of proportionate countermeasures in response). 18 The provisions contained in Part One of the Articles are all phrased with reference to the substantive, primary obligations of the responsible State, with no reference to the entity to which those obligations are owed. As such, the question of obligation (and when a primary obligation is breached) is entirely detached from the questions of to whom the obligations under the relevant primary rules are owed, and, as importantly, to whom the secondary obligations which arise upon a breach of those primary rules are owed, and who holds the corresponding rights.18 17

16 Cf. ARSIWA, Art. 55. 17 Cf. ARSIWA, General Commentary, para. (5), which notes that the Articles ‘apply to the whole field of the international obligations of States, whether the obligation is owed to one or several States, to an individual or group, or to the international community as a whole.’

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The provisions of Part Two of the Articles, concerned with the ‘content’ of 19 international responsibility, are likewise for the most part similarly phrased in terms of the (secondary) obligations of the responsible State, with no reference to the obligations of any other State (the exception being Part Two, Chapter III which provides for limited obligations of third States in the face of a serious breach of a peremptory norm).19 However, the scope of Part Two of the Articles is expressly limited by Article 33 which, whilst providing in its paragraph (1) that the obligations contained in Part Two may be ‘owed either to a State, a group of States or the international community as a whole’, specifies in paragraph (2) that the application of Part Two is without prejudice to ‘any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State.’ This is explained in the Introductory Commentary to Part Two, Chapter I as 20 follows: (…) article 33 specifies the scope of the Part, both in terms of the States to which obligations are owed and also in terms of certain legal consequences which, because they accrue directly to persons or entities other than States, are not covered by Parts Two or Three of the Articles.

The point is also dealt with in the Commentary to Article 28 (‘Legal conse- 21 quences of an international wrongful act’), which clearly explains the difference in scope of application as between Part One and Part Two: Article 28 does not exclude the possibility that an internationally wrongful act may involve legal consequences in the relations between the State responsible for that act and persons or entities other than States. This follows from article 1, which covers all international obligations of the State and not only those owed to other States. Thus State responsibility extends, for example, to human rights violations and other breaches of international law where the primary beneficiary of the obligation breached is not a State. However, while Part One applies to all the cases in which an internationally wrongful act may be committed by a State, Part Two has a more limited scope. It does not apply to obligations of reparation to the extent that these arise towards or are invoked by a person or entity other than a State. In other words, the provisions of Part Two are without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State, and article 33 makes this clear.20

Accordingly, in contrast to Part One, and despite the fact that the content of 22 responsibility is articulated principally in terms of the secondary obligations of cessation and reparation of the responsible State, with no reference to the beneficiary of the obligations in question, Part Two is limited to cases of inter-State responsibility and the exceptional case of responsibility to the international community as a whole. As a consequence, the provisions of Part Two are, on their own terms, not directly applicable to questions of the content of the responsibility which may arise in the context of an investment arbitration as the result of the breach of the substantive obligations contained in an investment protection in18 As to the distinction between ‘primary’ rules establishing substantive obligations and the ‘secondary’ rules which make up the law of State responsibility, see ARSIWA, General Commentary, paras. (1) and (2). 19 See ARSIWA, Art. 41. 20 ARSIWA, Commentary to Art. 28, para. (3).

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strument (whether bilateral or multilateral). The point was recognised by the tribunal in Wintershall Aktiengesellschaft v. Argentina, which noted that Article 33(1) deals with the primary obligation of the Responsible State (to the other State or international community as a whole) for an ‘internationally wrongful act.’ Article 33(2) of the ILC’s Articles, however, acknowledges the ‘possibility’ (as yet only a possibility – the ILC having taken no definite stand on this) of a ‘secondary obligation’ arising from a breach of a treaty accruing directly in favour of person or entity other than a State.21

The tribunal went on to observe that despite such considerations, the Articles remain of relevance in investment disputes insofar as ‘Tribunals are left to determine the ways in which State Responsibility may be invoked by non-State entities from the provisions of the text of the particular Treaty under consideration.’22 24 Despite this, the provisions on reparation in general, and compensation in particular, have been referred to frequently by arbitral tribunals in investment protection disputes; such reliance is unproblematic, as it is not obvious that the content of the responsibility owed to an investor (or at least those rules relating to the manner in which compensation is to be quantified) differ from those applicable in the context of inter-State responsibility.23 25 As for Part Three (dealing with the implementation of State Responsibility), in contrast to the rules laid down in Parts One and Two of the Articles, the rules contained therein are phrased explicitly in terms of the rights of injured States (or ‘States other than the injured State’) to invoke responsibility. As a result of their formulation and subject matter, the provisions contained in Part Three, Chapter I, relating to invocation of responsibility, are necessarily concerned solely with inter-State claims. Part Three, Chapter II, dealing with countermeasures, is likewise framed in terms of the right of the injured State to adopt countermeasures, and the conditions relating to their adoption. The subject matter of those provisions, as well as their formulation means that they are not apt to be invoked or relied upon directly by an investor in investment treaty arbitration: at most, they concern relations between the host State and the national State of the investor. However, that is not to say that they are irrelevant. Countermeasures, if validly adopted, may constitute a circumstance precluding wrongfulness, and the 23

21 Wintershall Aktiengesellschaft v. Argentina, ICSID Case No. ARB/04/14, Award, 8 December 2008, para. 112 (emphasis in original). See also Micula et al. v. Romania, ICSID Case No. ARB/05/20, Award, 11 December 2013, footnote 172, where the tribunal, whilst noting the formal inapplicability of the provisions of Part Two of the Articles, expressed the view that ‘the Articles reflect customary international law in the matter of state responsibility’ and stated that ‘to the extent that a matter is not ruled by the treaties applicable to this case and that there are no circumstances commanding otherwise, the Tribunal will turn to the ILC Articles for guidance’. 22 Ibid., para. 113. 23 Quite apart from this, it has been suggested that ICSID tribunals are not competent to make an order for restitution in favour of an investor: see Zachary Douglas, ‘Other Specific Regimes of Responsibility: Investment Treaty Arbitration and ICSID’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 815, 829–832.

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validity of countermeasures as a circumstance precluding wrongfulness under Article 22 of the Articles is expressly made subject to compliance of the relevant measures with the procedural and substantive limitations contained in the provisions of Chapter II of Part Three. It is possible that a State might attempt to justify its treatment of an investor, otherwise in breach of a BIT, on the basis that the conduct in question was taken by way of countermeasure in reaction to a breach of an international obligation by the investor’s home State. In such circumstances, a number of issues are raised as to the appropriate functions of treaty arbitration, not least the extent to which an arbitral tribunal may assess whether or not the countermeasure complies with the conditions contained in Chapter II of Part Three, including the requirement of proportionality. Such an examination would also necessarily involve an assessment of whether the home State had committed an internationally wrongful act in reaction to which the purported countermeasure was adopted.24 To complete this brief survey of the Articles, Part Four contains a series of 26 general provisions, or saving clauses, applicable to the entirety of the Articles and articulating their relationship to other bodies of law, including provisions stating that the Articles are without prejudice to the Charter of the UN, questions of individual responsibility and the responsibility of international organisations. The most important such provision is Article 55 which enshrines the lex specialis principle, and makes clear that the Articles apply only to the extent that the conditions for the existence of an internationally wrongful act, or the content or implementation of international responsibility, are not governed by special rules of international law. That provision is potentially applicable in investorState arbitration, to the extent that individual investment protection treaties may contain specific rules governing discrete questions of State responsibility which deviate from the general suppletive rules articulated in Articles.25 In the decade and more since their adoption by the ILC in 2001, the Articles 27 have been extensively relied upon in international judicial and arbitral practice, as well as by national courts.26 In this context, they have been cited with particular frequency by tribunals sitting in investment treaty protection cases in support of their reasoning on issues of State responsibility. The assessment, with very few exceptions, has been positive. In many cases, the Articles have been endorsed by tribunals as representing customary international law. For instance, in M.C.I. Power Group L.C. and New Turbine Inc. v. Ecuador, the tribunal stated at the outset of its discussion of its jurisdiction that it would rule on the respondent’s objections to jurisdiction 24 For detailed consideration, see the contribution by Christina Binder, ‘Circumstances Precluding Wrongfulness’, ch. 5.IV., 442–480. 25 For an example of recognition and application of the lex specialis principle in relation to a question of attribution under NAFTA, see United Parcel Services, Inc. v. Canada, UNCITRAL, Award, 11 June 2007, paras. 54–63. 26 See Simon Olleson, State Responsibility before International and Domestic Courts; The Impact and Influence of the ILC Articles (Oxford University Press, 2014).

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28

However, application of the Articles must be undertaken with care; despite their form, the Articles are not a treaty, and the ILC made clear at the outset of its commentary that the Articles contain elements of both progressive development and codification.28 David Caron, soon after the final adoption of the Articles warned of the danger of treating the Articles as if they were a legislative text.29 Evidence of a more cautious approach by an investment treaty tribunal is apparent from the decision in Cargill v. Mexico, in which the tribunal observed The ILC Articles on State Responsibility in part are a codification of custom and in part manifest a progressive development of international law. It is not always apparent whether a particular article should be viewed as the codification of custom or the progressive development of it.30

The tribunal went on to state that it would approach the various issues which arose in that case as to countermeasures ‘recognizing both the central position of the work of the International Law Commission, and the importance of ascertaining the applicable custom in the light of the ILC [A]rticles and the particular facts of this case.’31 30 The remainder of the present chapter provides an overview of the manner in which questions of State responsibility have arisen in investment protection disputes. Questions of the incidence of circumstances precluding wrongfulness in investment disputes (including countermeasures) are dealt with separately elsewhere in the present volume, as is the question of compensation. As such, the following sections focus on the questions covered by Chapters I to III of Part One of the Articles, namely, in turn, general questions of responsibility, attribution and the circumstances in which a breach of an obligation will be held to occur. 29

C. General Questions of Responsibility 31

The fundamental rules of the international law of State responsibility are embodied in the rules laid down in Part One, Chapter I of the Articles, namely, a) that the international responsibility of a State is necessarily entailed upon the commission of an internationally wrongful act (Article 1);

27 M.C.I. Power Group L.C. and New Turbine Inc. v. Ecuador, ICSID Case No. ARB/03/6, Award, 31 July 2007, para. 42. 28 ARSIWA, General Commentary, para. (1). 29 David Caron, ‘The ILC Articles on State Responsibility: The Paradoxical Relationship Between Form and Authority’ (2002) 96 AJIL 857–873. 30 Cargill, Inc. v. Mexico, ICSID Case No. ARB(AF)/05/2 (NAFTA), Award, 18 September 2009, para. 381. 31 Ibid.

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b) that the international responsibility of a State arises where there is conduct, whether consisting of an action or of an omission, which is (i) attributable to the State, which (ii) constitutes a breach of an international obligation of that State (Article 2); and c) that the characterisation of the act of a State as internationally wrongful is governed by international law, and that that characterisation is not affected by the fact that the same act may be lawful as a matter of the internal law of the State (Article 3). The basic principles contained in Articles 1 and 2 are so fundamental that 32 they have very rarely given rise to dispute in international investment arbitrations. Nevertheless, tribunals have on occasion made reference to them in an essentially parenthetical or expository manner, as dictating the issues which arise for decision; for instance, the tribunal in Electrabel observed, [i]n order to constitute a violation of the ECT, an act has to be both attributable to the State and a violation of an international obligation under the ECT.32

Article 2 was also considered in Hamester v. Ghana, in which the tribunal ob- 33 served [i]t is clear that Article 2 is not an autonomous basis for attribution. Rather, its purpose is to give a general definition of what constitutes an internationally wrongful act of a State. Article 2 does not create a general obligation on the part of States to prevent any act interfering with an investor’s rights. The article only articulates the elements of the definition of an internationally wrongful act of a State, which can be an action or an omission. Either has to fulfil two cumulative conditions: it must be attributable to the State and it must violate an international obligation of the State.33

Further, the precision, contained in Article 2, that both actions and omissions 34 are capable of giving rise to the international responsibility of a State is generally not a matter of dispute.34 Nevertheless, that issue was considered by the tribunal in Eureko BV v. 35 Poland,35 as a preliminary question, prior to the assessment of the conduct of the respondent in the light of its obligations under the applicable BIT. Relying on the use of the words ‘measure taken’ in the jurisdictional provision of the applicable BIT, and the fact that the provision setting out protection for investors against ‘deprivation’ of their investment (a form of prohibition of expropriation) likewise used the term ‘measure’, the respondent had argued that the parties had intended to limit the scope of application of the BIT to disputes relating to positive actions, to the exclusion of omissions.36 32 Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, para. 7.58. 33 Gustav F. W. Hamester GmbH & Co KG v. Ghana, ICSID Case No. ARB/07/24, Award, 18 June 2010, para. 173. 34 See e.g. the passing observation of the tribunal in Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 247, that ‘[o]bviously the courts of a State are organs of that State, and the State may bear responsibility for the acts or omissions of its courts.’ 35 Eureko BV v. Poland, Partial Award, 19 August 2005.

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The tribunal disposed of the argument succinctly, observing that ‘[i]t is obvious that the rights of an investor can be violated as much by the failure of a Contracting State to act as by its actions’.37 In support of its conclusion, it made reference to, inter alia, a number of passages from the commentary to Articles 1 and 2 of the Articles, in which the ILC had observed variously that ‘[a]n internationally wrongful act of a State may consist in one or more actions or omissions or a combination of both’; that ‘the term “act” is intended to encompass omissions’; and that ‘[c]ases in which the international responsibility of a State has been invoked on the basis of an omission are at least as numerous as those based on positive acts, and no difference in principle exists between the two.’38 37 The principle contained in Article 3 of the Articles constitutes a specific embodiment in the field of State Responsibility of the wider principle, also evident in Article 27 of the Vienna Convention on the Law of Treaties (VCLT), that characterisation of a specific act as lawful or unlawful under a State’s internal law is not determinative of the characterisation of that act under international law.39 From the viewpoint of international law, the provisions of national law are in general a mere question of fact,40 such that internal law and international law in principle operate in distinct spheres. Different facets of the same proposition, i.e. that the internal law of a State cannot affect the characterisation of an act under international law and cannot provide a justification for the State’s failure to comply with its international obligations, are contained in Article 7, which provides that conduct is attributable to a State even if it was taken by the actor in question in excess of authority or in contravention of instructions, and in Article 32, which states that a responsible State cannot rely on its internal law as a justification for its failure to comply with the secondary obligations arising as a result of an internationally wrongful act. 38 As the ILC explained in the Commentary, the principle laid down in Article 3, which addresses the specific question of the basis on which the assessment of whether an internationally wrongful act has occurred is to be carried out, encompasses two complementary elements: 36

First, an act of a State cannot be characterized as internationally wrongful unless it constitutes a breach of an international obligation, even if it violates a provision of the State’s own law. Secondly and most importantly, a State cannot, by pleading that its conduct conforms to the provisions of its internal law, escape the characterization of that conduct as wrongful by international law. An act of a State must be characterized as internationally wrongful if it constitutes a breach of an international

36 Eureko BV v. Poland (n. 35) para. 185. 37 Eureko BV v. Poland (n. 35) para. 186. 38 Ibid., para. 188, quoting Commentary to Art. 1, paras. (1) and (8) and Commentary to Art. 2, para. (4). 39 Cf., however, the position in the context of whether a person or entity constitutes an ‘organ’ of the State for the purposes of attribution of that conduct under Art. 4; as discussed further below, in that specific context, exceptionally, a State is not permitted to deny that a person or entity constitutes its organ under its own internal law such that the conduct of such a person or entity is therefore attributable to it. 40 See e.g. Certain German Interests in Polish Upper Silesia (Germany v. Poland), PCIJ Judgment, Merits (1926) PCIJ (Ser. A) No 7, 19.

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D. Attribution

The principal way in which questions of State responsibility have arisen in in- 39 vestment disputes is in relation to the question whether conduct which is alleged to constitute a breach of one or more of the substantive standards of protection contained in a BIT or multilateral treaty is attributable to the State. The ILC’s Articles contain, in Articles 4 to 11, a set of rules which are widely 40 accepted as representing customary international law as to questions of attribution of conduct for the purposes of State responsibility. The customary status of these rules has also been recognised by tribunals considering international investment disputes. For example, in Noble Ventures v. Romania, the tribunal in prefacing its discussion of whether the conduct of two separate entities created in order to manage a process of privatisation was attributable to the respondent State observed: [a]s States are juridical persons, one always has to raise the question whether acts committed by natural persons who are allegedly in violation of international law are attributable to a State. The BIT does not provide any answer to this question. The rules of attribution can only be found in general international law which supplements the BIT in this respect. Regarding general international law on international responsibility, reference can be made to the Draft Articles on State Responsibility as adopted on second reading 2001 by the International Law Commission and as commended to the attention of Governments by the UN General Assembly in Res. 56/83 of 12 December 2001 (…). While those Draft Articles are not binding, they are widely regarded as a codification of customary international law. The 2001 ILC Draft provides a whole set of rules concerning attribution (…).42

Similarly, the tribunal in Jan de Nul NV and Dredging International NV v. 41 Egypt, decided in its decision on jurisdiction to join the issue of attribution of the conduct of certain para-statal entities to the merits of the dispute, and called on the parties to submit further pleadings on the question. In so doing, it made clear that [w]hen assessing the merits of the dispute, the Tribunal will rule on the issue of attribution under international law, especially by reference to the Articles on State Responsibility as adopted on second reading in 2001 by the International Law Commission and as commended to the attention of Governments by the UN General Assembly in Resolution 56/83 of 12 December 2001 (…) as a codification of customary international law.43

41 Commentary to Art. 3, para. (1). 42 Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 69 (emphasis added). Although, if taken out of the context, the passage could be understood as endorsing the entirety of Articles as a codification of customary international law, it appears that the tribunal’s endorsement was in fact aimed specifically at the provisions of the Articles on attribution. 43 Jan de Nul NV and Dredging International NV v. Egypt, ICSID Case No. ARB/04/13, Decision on Jurisdiction, 16 June 2006, para. 89. See also the near identical passage in Saipem SpA v. Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures, 21 March 2007, para. 148, and see Noble Energy, Inc. and Machalapower Cia. Ltda. v. Ecuador and Consejo Nacional de Electricidad, ICSID Case No. ARB/

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Given that investment protection disputes relate essentially to breach of the standards of protection for investments by actions of the State, the rules which have been cited most frequently are those relating to the attribution of conduct of organs (Article 4 of the Articles); attribution of conduct of persons or entities exercising elements of governmental authority (Article 5 of the Articles); and attribution of conduct of persons or entities acting under the instructions, direction or control of the State (Article 8 of the Articles) and it is on those rules that attention will be focussed. Nevertheless, occasional mention has been made of the other bases for attribution, including attribution on the basis of acknowledgment and adoption.44 1. Attribution of the Conduct of Organs

43

In 1999, in the Cumaraswamy Advisory Opinion, the ICJ displayed little hesitation in affirming the ‘well-established rule of international law’, which it asserted was of a customary character, that ‘the conduct of any organ of a State must be regarded as an act of that State’.45 It later affirmed that ‘the conduct of an organ of a State – even an organ independent of the executive power – must be regarded as an act of that State’.46 Similarly, in Bosnian Genocide, the Court referred to the fact that the conduct of persons or entities constituting the organs of a State is ‘necessarily attributable to it, because they are in fact the instruments of its action’,47 before reaffirming the well-established rule, one of the cornerstones of the law of State responsibility, that the conduct of any State organ is to be considered an act of the State under international law, and therefore gives rise to the responsibility of the State if it constitutes a breach of an international obligation of the State.48

44

The rule is embodied in Article 4 of the Articles (expressly endorsed by the Court in Bosnian Genocide as reflecting customary international law),49 which provides: 1.

44 45

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The conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever

05/12, Decision on Jurisdiction, 5 March 2008, para. 166 (where the tribunal omitted the closing specification that the Articles constituted a codification of customary international law). See also Electrabel S.A. v. Hungary (n. 32) para. 7.60. See e.g. Ioannis Kardassopoulos and Ron Fuchs v. Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award, 3 March 2010, para. 274. Difference Relating to Immunity from Legal Process of a Special Rapporteur of the Commission on Human Rights, Advisory Opinion, ICJ Rep. 1999, 62, 87, para. 62. In support, the Court referred to Art. 6 of the ILC’s draft Articles on State Responsibility, as adopted on first reading in 1996, the provision which subsequently became, with changes in the drafting, Art. 4 ARSIWA (ibid.). Ibid., at 88, para. 63. Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro), ICJ Judgment, ICJ Rep. 2007, 43. Ibid., at 202, para. 385. Ibid.

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2.

position it holds in the organization of the State, and whatever its character as an organ of the central government or of a territorial unit of the State. An organ includes any person or entity which has that status in accordance with the internal law of the State.

The formulation of the principle of attribution to the State of the conduct of its organs contained in Article 4 of the Articles makes clear a number of points. First, the notion of organs is expansive; the conduct of all organs is attributable to the State, and thus may result in its responsibility, whether the organ in question forms part of the executive, legislative or judicial branch. Accordingly, the conduct of the courts of a State is, in principle, attributable to the State to the same extent as the acts of the executive.50 Second, the conduct of an organ is in principle attributable whatever position the particular organ may hold in the organisational hierarchy of the State. In particular, in States having a federal structure, the conduct of an organ is in principle attributable to the State whether the organ forms part of the structure of the central federal government or whether it belongs to a constituent sub-federal entity.51 Third, whether or not a particular person or entity is to be treated as an organ depends in large part on the domestic law of the State in question, albeit subject to certain limitations imposed by international law. As the ILC’s Commentary explains, ‘[i]n determining what constitutes an organ of a State for the purposes of responsibility, the internal law and practice of each State are of prime importance’.52 In this connection, the normal principle that a State cannot invoke its own domestic law in order to escape its international responsibility applies fully: a State is unable to avoid the attribution of conduct of entities which form part of what may be called the ‘core’ categories of organs, merely by ensuring that they are not defined as such under its domestic law. However, by contrast, to the extent that a particular person or entity is recognised as constituting an organ under the domestic law of the State, that logic is inverted. In such a situation, the characterisation as an organ under domestic law is the end of the enquiry; the entity is conclusively to be regarded as constituting an organ for the purposes of attribution, and the State cannot deny that characterisation in order to argue that the conduct of that person or entity is nevertheless not attributable. Fourth, the State is responsible for all conduct of an organ. As Article 7 of the Articles makes clear, this is the case whether or not the relevant person or entity is acting ultra vires or in contravention of instructions.53 It is irrelevant that the particular organ may be engaging in conduct which, for other purposes (includ50 Although the question of whether a particular substantive standard of protection has been breached may differ, in particular insofar as, at least in relation to certain substantive standards, the conduct of courts may only rise to the level of a breach insofar as it is shown that there has been a denial of justice, with the accompanying substantive precondition for such a wrong to have occurred that all effective available remedies should have been exhausted. 51 See e.g., Compañía de Aguas del Aconquija SA and Vivendi Universal v. Argentina (n. 9) fn. 17. 52 Introductory Commentary to Part One, Ch. II, para. (6).

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ing for example, the invocation of jurisdictional immunity), might be properly characterised as ‘commercial’ or as ‘acta iure gestionis’. As the reference to ‘any other functions’ in Article 4(1) makes clear, the particular purpose or character of the conduct in which an organ is engaged is irrelevant in the context of deciding whether that conduct is attributable to the State. Even the act of an organ in entering into a purely commercial contract might, in an appropriate case, be regarded as attributable to the State.54 However, whilst the act of an organ in entering into a contract might be attributable and might in theory be relied upon as constituting a breach of an international obligation of the State, the question whether certain conduct amounted to a breach of the contract is distinct, and is in any case separate from the question of whether that same conduct results in a breach of an international obligation; as the tribunal in Alpha Projekt GmbH v. Ukraine observed, the breach by a State of a contract does not as such entail a breach of international law. Something further is required before international law becomes relevant, such as a denial of justice by the courts of the State in proceedings brought by the other contracting party. But the entry into or breach of a contract by a State organ is nonetheless an act of the State for the purposes of article 4, and it might in certain circumstances amount to an internationally wrongful act.55

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Quite apart from the situation of organs of the State having that status as a matter of the State’s domestic law (whether or not expressly characterised as such under the domestic law of the State in question) (so-called ‘de jure’ organs), the ICJ in Bosnian Genocide identified a further situation in which conduct of a person or entity could properly be regarded as attributable to the State, even if they did not have that status, and did not act on the instructions, or under the direction and control of the State within the meaning of Article 8 of the Articles. The ICJ, interpreting its judgment in Military and Paramilitary Activities, concluded that, secreted in that judgment was a further basis of attribution, namely where the actions were those of an actor which did not constitute a de jure organ of the State in question under its internal law, and did not act under its instructions, direction and control, but nevertheless constituted a ‘de facto organ’. As the Court explained, (…) persons, groups of persons or entities may, for purposes of international responsibility, be equated with State organs even if that status does not follow from internal law, provided that in fact the persons, groups or entities act in ‘complete dependence’ on the State, of which they are ultimately merely the instrument. In such a case, it is appropriate to look beyond legal status alone, in order to grasp the reality of the relationship between the person taking action, and the State to which he is so closely attached as to appear to be nothing more than its agent: any other solution would allow

53 ARSIWA Art. 7; see also Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro) (n. 47) 207, para. 397, where the Court affirmed that in the case of organs and persons or entities assimilated to organs ‘all their actions performed in such capacity would be attributable to the State for purposes of international responsibility’. 54 ARSIWA, Commentary to Art. 4, para. (6). 55 Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 402.

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Although the possibility of attributing to the State the conduct of de facto or- 51 gans was first identified as a separate basis for attribution in very different factual situations (the various actions of the contras at issue in Military and Paramilitary Activities, and the genocide committed by military and paramilitary groups in Bosnian Genocide), there is no reason of principle why attribution on this basis should not be equally applicable in the context of investment protection disputes.57 But as the Court emphasised in Bosnian Genocide, attribution of conduct of persons or groups on this basis ‘must be exceptional, for it requires proof of a particularly great degree of State control over them, a relationship which the Court [in Military and Paramilitary Activities] expressly described as “complete dependence”’.58 As such, cases in which conduct may be attributed to the State on this basis are likely to be extremely rare. The basic principle that the State is responsible for all of the conduct of its 52 organs (whether de jure or de facto), and at whatever level they may be, is one of the least controversial rules of the law of State responsibility. As such, it is often not disputed by respondent States, at least as regards those entities which unequivocally constitute organs. For instance, in the NAFTA case of Mondev International Limited v. USA, the United States did not dispute that actions of municipal State authorities and decisions of State courts were attributable to it for the purposes of assessing whether it had complied with its obligations under NAFTA (although it did deny that any decisions of the State courts taken prior to the entry into force of NAFTA on 1 January 1994 could constitute a breach of the standards of protection contained in Chapter 11 of NAFTA).59 Again, in Grand River Enterprises Six Nations Ltd v. USA, the tribunal expressly took note that the United States ‘acknowledge[d] that it is internationally responsible under NAFTA’ for the actions taken by its various constituent states.60 Similarly, in Electrabel S.A. v. Hungary, there was no dispute that the actions of the Hungarian government were attributable to the State.61 However, disputes before investment treaty tribunals have thrown up a num- 53 ber of more difficult cases as to whether or not particular entities or individual were to be treated as ‘organs’. 56 Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro) (n. 47) 205, para. 392. 57 Cf. the Court’s observation (ibid., at 208–209, para. 401) that ‘The rules for attributing alleged internationally wrongful conduct to a State do not vary with the nature of the wrongful act in question in the absence of a clearly expressed lex specialis’. 58 Ibid., at 205, para. 393. 59 Mondev International Ltd. v. USA, ICSID Additional Facility Case No. ARB(AF)/99/2, Award, 11 October 2002, para. 67. 60 Grand River Enterprises Six Nations Ltd et al. v. USA, Decision on Objections to Jurisdiction, 20 July 2006, para. 1; see also Grand River Enterprises Six Nations Ltd et al. v. USA, Final Award, 12 January 2011, para. 1. 61 Electrabel S.A. v. Hungary (n. 32).

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For instance, in Waste Management, Inc. v. Mexico, although Mexico did not deny that conduct of the City of Acapulco and the state of Guerrero was attributable to it, it did deny that this was the case as regards the conduct of Banobras, a development bank partly owned and substantially controlled by Mexican government agencies.62 In this regard, the tribunal canvassed the various possible bases under Chapter II of Part One of the Articles on the basis of which the conduct of Banobras might be attributable to the Mexican State, in particular Articles 4, 5 and 8. Although the tribunal in the event did not have to express a concluded view, it did set out its tentative opinion. It thought it was ‘doubtful’ whether Banobras could be considered to be an organ, observing that ‘[s]hares in Banobras were divided between the public and private sector, with the former holding a minimum of 66 %. The mere fact that a separate entity is majority-owned or substantially controlled by the state does not make it ipso facto an organ of the state.’63 But even if the conduct of Banobras was attributable to Mexico there had been no breach. 55 In Vivendi II, the question arose whether individual members of a provincial legislature (principally members of the opposition), constituted organs, such that their statements and other acts were attributable to Argentina. The claimant argued that the members of the local legislature ‘exercising as they do “legislative” functions at “a territorial unit of the State”, individually and collectively are “State organs” whose conduct shall be considered an act of the state under international law.’64 The tribunal, with some apparent relief, concluded that it was not required to decide that question, as it was able to find a breach of the fair and equitable treatment standard on the basis of conduct of persons and entities which it was not disputed constituted organs of the State; in contrast to the position in relation to the conduct of an ombudsman, which it was also argued was attributable, it did not even provide a tentative view of what its conclusion would otherwise have been.65 However, there is a world of difference between legislation (the act of an organ) and expressions of view or opinion by legislators who are mere constituent elements of that organ, have no legislative power of their own and represent the public, not the State. Barring very special circumstances, the action of such representatives is not that of State organs.66 56 In Plama v. Bulgaria, it was argued that ‘syndics’ (i.e., under the Bulgarian insolvency regime, individuals appointed by the courts to manage, under the supervision of the courts, companies which are bankrupt) constituted organs of the 54

62 Waste Management, Inc. v. Mexico, ICSID Additional Facility Case No. ARB(AF)/00/3 (‘Waste Management II’), Award, 30 April 2004, para. 75. 63 Ibid. 64 Compañía de Aguas del Aconquija SA and Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Award, 20 August 2007 (‘Vivendi II’), at para. 5.4.2. 65 Ibid., para. 7.4.44. 66 An ombudsman – depending on the precise status and scope of powers under the constituent legislation – might well be considered an Article 4 organ. But the ombudsman is normally confined to making recommendations, which would not in themselves generally involve any breach of an international obligation.

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State. The tribunal, after consideration of the expert evidence as to the status of syndics under Bulgarian law, concluded that they ‘were not instruments or organs of the State for whose acts the State is responsible’.67 Despite the well-settled nature of the rule embodied in Article 4 of the Arti- 57 cles, attempts have been made on occasion to escape the application of the principle, and to argue that even the conduct of what is prima facie an organ of the State should not be regarded as being attributable to the State. In Eureko v. Poland, the respondent attempted to argue that conduct of the Minister of the State Treasury in relation to a share purchase agreement and subsequent agreements entered into between the State Treasury and the claimant in respect of the privatisation of a State-owned insurance company were not attributable to it. It did so on the basis that the State Treasury in entering into the relevant agreements was, as a matter of Polish law, to be treated as acting as a ‘private commercial actor’.68 As a result, it was argued, the entry into the share purchase agreement was not the result of the exercise of governmental powers, and was not attributable to Poland.69 The tribunal rejected that argument, noting that it ‘flies in the face of well rec- 58 ognized rules and principles of international law,’70 and observed that: [i]n the perspective of international law, it is now a well settled rule that the conduct of any State organ is considered an act of that State and that an organ includes any person or entity which has that status in accordance with the internal law of that State.71

In the alternative, the tribunal held that even if the conduct of the State Trea- 59 sury were not attributable on the basis that it was acting as an organ in entering into the various agreements, it would nevertheless be attributable on the basis that it was exercising elements of governmental authority in doing so (i.e. under Article 5 of the Articles). It concluded that, ‘whatever may be the status of the State Treasury in Polish law’, from the perspective of international law: (…) the Republic of Poland is responsible to Eureko for the actions of the State Treasury. These actions, if they amount to an internationally wrongful act, are clearly attributable to the Respondent.72

Similarly, in Generation Ukraine, Inc. v. Ukraine, the respondent challenged 60 the tribunal’s jurisdiction ratione personae, arguing that Ukraine was not the proper party to the proceedings on the basis that the dispute related to the acts or 67 Plama Consortium Limited v. Bulgaria (n. 34) para. 253. 68 As a matter of Polish law, the State Treasury is the residual repository of the State’s right of ownership of all State property not belonging to other legal persons forming part of the State: see Eureko BV v. Poland (n. 35) paras. 119–120. Although apparently not regarded as having separate legal personality, the State Treasury is referred to as the ‘State’ when taking sovereign actions, but as the ‘State Treasury’ when exercising the State’s rights of property or ownership: see the summary of the expert evidence as to Polish law: ibid., para. 133. 69 Ibid., para. 123; the question relating to the attributability of actions of the State Treasury to Poland was raised by the tribunal, inviting comments on the question in the light of the Articles and the relevant provisions of international law: ibid., para. 122. 70 Ibid., para. 125. 71 Ibid., para. 127. 72 Ibid., para. 134.

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omissions of the Kyiv City State Administration and that ‘being the embodiment of the state executive power at the local level, the [Kyiv City State Administration] does not act on behalf of Ukraine as a State at the international arena’.73 The tribunal rejected Ukraine’s objection to its jurisdiction on this basis, explaining that [t]he Respondent has failed to differentiate between disputes arising under domestic law and disputes arising under the BIT. Insofar as this statement relates to a cause of action based on the BIT, it discloses a confusion about the juridical nature of such a cause of action. By invoking [the prohibition of expropriation contained in the applicable BIT], the Claimant is seeking to invoke the international responsibility of Ukraine on the basis that various acts or omissions of officials of the Kyiv City State Administration are attributable to Ukraine in accordance with the rules of international law and that such acts or omissions amount to an expropriation. […] There is no doubt that the conduct of a municipal authority such as the Kyiv City State Administration, which is listed as an organ of State power by the Ukrainian Constitution, is capable of being recognised as an act of the State of Ukraine under international law. […] The Respondent is correct to affirm that ‘the [Kyiv City State Administration] does not act on behalf of Ukraine as a State at the international arena’. This is precisely the reason that Ukraine rather than the Kyiv City State Administration is the proper party to these international arbitration proceedings, where the international obligations of the former are alleged to have been breached by the conduct of the latter. […] There is no difficulty in applying the international rules of attribution in this case. The proper focus is instead on whether the Claimant can establish that the conduct of the Kyiv City State Administration, or other relevant Ukrainian State organs, amounts to a breach of an international obligation set out in the BIT.74

Finally, it should be noted that the rule concerning attribution of the conduct of organs for the purposes of State responsibility has on occasion been misused, insofar as investment protection tribunals have purported to apply it in relation to questions which are not in fact questions of international responsibility at all. 62 For instance, in ADF Group Inc. v. USA,75 a case brought under NAFTA, the tribunal referred to Article 4 of the Articles as a subsidiary confirmation of its interpretation of the scope of the term ‘Party’ in Article 1108 of NAFTA. The scope of that term was relevant in ascertaining the applicability of the substantive standards relating to national treatment (Article 1102 of NAFTA) and performance requirements (Article 1106 of NAFTA), as a result of the exceptions to the applicability of those provisions contained in Article 1108(7) and (8) in relation to ‘public procurement by a Party’.76 The investor had argued that the term ‘Party’ in that context covered procurement by only the federal government of the United States, to the exclusion of procurement by state or provincial governments. 63 The tribunal concluded that the term ‘Party’ was apt to cover public procurement by all levels of government within a federal State. In that regard, it had re61

73 Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003, para. 10.1. 74 Ibid., paras. 10.2–10.7. 75 ADF Group Inc. v. USA, ICSID Additional Facility Case No. ARB(AF)/00/1, Award, 9 January 2003. 76 The tribunal in any case concluded that the claimant had failed to establish on the merits that the measures in question were inconsistent with the national treatment requirements of NAFTA Art. 1102: ibid., paras. 155–158.

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gard to the definition of ‘government procurement’ contained in Article 1001(1) of NAFTA,77 as well as to the provisions of Article 1108(1) relating to ‘existing non-conforming measures’, as to which it concluded that the term was sufficiently broad to cover not only ‘a federal government measure but also a state or provincial government measure and even a measure of a local government’.78 However, in support of that interpretative conclusion, the tribunal in addition 64 observed, referring to Article 4 of the Articles, that its interpretation was: (…) in line with the established rule of customary international law that acts of all its governmental organs and entities and territorial units are attributable to the State and that that State as a subject of international law is, accordingly, responsible for the acts of all its organs and territorial units.79

The tribunal clearly took the view that the rule relating to attribution of the conduct of organs was both the appropriate and applicable rule for these purposes. Although the tribunal’s views on this point were put forward as a subsidiary argument, supportive of a conclusion already reached based on the ordinary meaning of the terms of the relevant provisions, read in their context, some doubts may be expressed as to its appropriateness of the invocation of the rules of attribution from the law of State responsibility. In particular, Article 1108 of NAFTA, the provision which the tribunal was called upon to interpret, is concerned with express exceptions to the applicability of the substantive standards of protection contained in Chapter 11 of NAFTA; the scope of those exceptions, and the conduct of a party covered by them, is essentially a question of interpretation of the relevant treaty provisions. Conversely, the customary rule of international law embodied in Article 4 of the Articles, upon which the tribunal relied, is concerned with attribution of conduct to the State for the purposes of State responsibility as a result of internationally wrongful acts, and the specific question of which bodies or entities are to be considered as constituting organs for that purpose such that their conduct is to be treated as that of the State. These two questions are conceptually distinct, and operate in different areas, namely, on the one hand, the scope of the obligations in question (or put another way, identification of the entities in relation to the conduct of which a State party is bound by them), and on the other, the attributability of acts potentially constituting a breach of those obligations. In other words, whether or not an act of an organ, at whatever level, is attributable to the State of which it forms part for the purposes of responsibility is a fundamentally different question from whether or not an entity falls within the notion of ‘Party’ in a treaty provision such as that at issue in ADF. A further illustration is provided by Siag and Vecchi v. Egypt, in which the tribunal invoked Article 4 in order to dispose of the respondent’s argument that it should not be fixed with knowledge of the acts of its own courts (in particular, the making of a bankruptcy order against one of the claimants, an issue which 77 Ibid., para. 164. 78 Ibid., para. 165. 79 Ibid., para. 166.

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arose in the context of whether the respondent should be held to have waived an objection to jurisdiction by not raising it at the appropriate juncture in the proceedings). In that connection, the respondent State submitted that ‘Article 4 (…) applied only to the responsibility of a state for the acts of its organs. It did not attribute to the state the knowledge of every decision rendered by its courts.’80 In response, the claimants asserted that Article 4 was ‘a general principle of international law, which was not limited to the wrongful acts of a state organ.’81 69 The tribunal, having referred to Article 4 and the principle contained in Article 7 of the Articles that conduct of an organ is attributable even if it is ultra vires, reasoned that acts of a State’s organs that are not contrary to law or in excess of authority will be applied a fortiori to the State. Accordingly the non-wrongful acts of Egypt’s judiciary are the acts of the Egyptian State. As the Claimants have submitted, Egypt cannot deny knowledge of its own acts.82

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The tribunal’s ultimate conclusion is unobjectionable; but, to the extent that the tribunal relied on the Articles as relevant and as providing the applicable rule to determine whether the State should be held to have been aware of the relevant decisions of its own courts, it is open to criticism. The question of attribution arose in circumstances in which the actions of the courts were not relied upon as being breaches of the applicable BIT. As the ILC’s Commentary makes clear, the purpose of the rules contained in Chapter II of Part One is ‘to specify the conditions under which conduct is attributed to the State as a subject of international law for the purposes of determining its international responsibility’,83 and ‘the rules concerning attribution set out in this chapter are formulated for this particular purpose, and not for other purposes for which it may be necessary to define the State or its Government’.84 This is so even if the content or effect of those rules may be similar or the same. 2. Attribution of Conduct of Entities Exercising Elements of Governmental Authority

The second basis on which particular action is often argued to be attributable to the State in international investment disputes is that the conduct alleged to constitute a breach of the applicable treaty, although not that of an organ, was adopted by a person or entity exercising elements of governmental authority. 72 The relevant rule of customary international law is codified in Article 5 of the ILC’s Articles, which provides that 71

80 Waguih Elie George Siag and Clorinda Vecchi v. Egypt, ICSID Case No. ARB/05/15, Award, 1 June 2009, para. 171. 81 Ibid., para. 194. 82 Ibid., para. 195. 83 ARSIWA, Introductory Commentary to Part One, Ch. II, para. (7). 84 ARSIWA, Introductory Commentary to Part One, Ch. II, para. (5). For recognition of the point, see Noble Ventures, Inc. v. Romania (n. 42) para. 84.

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III. The Application of the Rules of State Responsibility The conduct of a person or entity which is not an organ of the State under article 4 but which is empowered by the law of that State to exercise elements of the governmental authority shall be considered an act of the State under international law, provided the person or entity is acting in that capacity in the particular instance.

Reliance has often been placed on Article 5 for the purposes of arguing that 73 conduct allegedly in breach of the substantive standards contained in investment protection instruments is attributable to the State. In this regard, there is a clear trend of relying on Article 5 of the Articles in the alternative to Article 4 (normally accompanied in the further alternative by an argument that the particular conduct is attributable because performed upon the instructions, or under the direction and control of the State under Article 8). This has been particularly the case in relation to para-statal entities and State-owned companies. However, as the Commentary to Article 5 explains: [t]he fact that an entity can be classified as public or private according to the criteria of a given legal system, the existence of a greater or lesser State participation in its capital, or, more generally, in the ownership of its assets, the fact that it is not subject to executive control – these are not decisive criteria for the purpose of attribution of the entity’s conduct to the State. Instead, article 5 refers to the true common feature, namely that these entities are empowered, if only to a limited extent or in a specific context, to exercise specified elements of governmental authority.85

As regards companies which are owned and controlled by the State, the Com- 74 mentary to Article 8 makes clear that international law in general recognizes and gives effect to their separate legal personality: [i]nternational law acknowledges the general separateness of corporate entities at the national level, except in those cases where the ‘corporate veil’ is a mere device or a vehicle for fraud or evasion. The fact that the State initially establishes a corporate entity, whether by a special law or otherwise, is not a sufficient basis for the attribution to the State of the subsequent conduct of that entity. Since corporate entities, although owned by and in that sense subject to the control of the State, are considered to be separate, prima facie their conduct in carrying out their activities is not attributable to the State unless they are exercising elements of governmental authority within the meaning of article 5.86

As such, the touchstone for attribution under Article 5 is that the entity was in 75 fact exercising elements of governmental authority which have been conferred upon it under domestic law. In EDF (Services) Ltd v. Romania, the tribunal characterised the rule contained in Article 5 as constituting a ‘functional’ basis for attribution, in contradistinction to the ‘structural’ basis of attribution under Article 4 and attribution on the basis of ‘control’ under the rule codified in Article 8 of the Articles.87 The principal point to note is that, in contrast to the position of an organ, the 76 conduct of which is always attributable to the State, the conduct of an individual or entity will only be attributable on the basis that it was exercising governmental authority if the individual or entity was in fact acting in exercise of that au85 ARSIWA, Commentary to Art. 5, para. (3). 86 ARSIWA, Commentary to Art. 8, para. (6). 87 EDF (Services) Ltd v. Romania, ICSID Case No. ARB/05/13, Award, 3 October 2009, para. 187; Gustav F. W. Hamester GmbH & Co KG v. Ghana (n. 33).

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thority in carrying out the relevant conduct (i.e. it was ‘acting in that capacity in the particular instance’). The limited nature of this basis for attribution has been highlighted by a number of tribunals. For instance, the tribunal in EDF (Services) Ltd v. Romania observed that, in order to be attributable under the rule contained in Article 5 of the Articles, ‘the act in question must be performed by the entity in the exercise of the delegated governmental authority’;88 and later stated that, ‘in order for an act of a legally independent entity to be attributed to the State, it must be shown that the act in question was an authorized exercise of specified elements of governmental authority.’89 77 The statement of the tribunal in EDF that the exercise of governmental authority should be ‘authorized’ is perhaps unfortunate insofar as it might be understood as implying that the particular action in exercise of governmental authority had to have been specifically authorised by the government. However, this would be to misunderstand the point the tribunal was making. 78 The relevant question for the purposes of attribution on this basis is not whether the specific act was as such authorised and strictly within the vires of the person or entity as a matter of the relevant domestic law, but rather whether the person or entity was authorised under the State’s domestic law to carry out acts of that type insofar as they involved the exercise of governmental authority. In that connection, the observations of the tribunal in EDF are also misleading insofar as they might be taken to imply that unauthorised actions (even if purportedly consisting of the exercise of governmental authority) are not attributable. However, the principle contained in Article 7 of the Articles that conduct which is unauthorised or contravenes instructions is nevertheless attributable applies equally to the conduct of non-organs exercising elements of governmental authority in the same manner as it applies to organs. The relevant question is again whether the person or entity was authorised to exercise governmental authority of the type in issue; if so, any such acts carried out in purported exercise of powers implicating governmental authority are attributable to the State, and that is so whether or not the particular act in question may have been unauthorised, illegal or ultra vires as a matter of domestic law. 79 Whilst, the conduct of an organ is attributable whether or not the conduct is commercial or governmental in character, the very basis of the rule contained in Article 5 means that if the conduct in question is commercial in character, by the same token, it will not normally constitute the exercise of governmental authority. As the ILC’s Commentary to Article 5 makes clear: If it is to be regarded as an act of the State for purposes of international responsibility, the conduct of an entity must accordingly concern governmental activity and not other private or commercial activity in which the entity may engage.90

88 EDF (Services) Ltd v. Romania (n. 87) para. 191. 89 EDF (Services) Ltd v Romania (n. 87) para. 193. See also Gustav F. W. Hamester GmbH & Co KG v. Ghana (n. 33) para. 176. 90 ARSIWA, Commentary to Art. 5, para. (5).

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The mutual exclusivity of commercial and governmental activity for the pur- 80 poses of Article 5 has been recognised in a number of decisions. For instance, at the merits stage in Jan de Nul NV and Dredging International NV v. Egypt, although the tribunal held that the Suez Canal Authority (SCA) constituted ‘a public entity empowered to exercise elements of governmental authority’, in the circumstances of the case the relevant acts of the SCA in relation to the claimants were not attributable on the basis of Article 5 of the Articles, ‘as they were not performed pursuant to the exercise of governmental authority’.91 The tribunal had earlier held in that connection that the fact that the subject matter of the Contract related to the core functions of the SCA, i.e., the maintenance and improvement of the Suez Canal, is irrelevant. The Tribunal must look to the actual acts complained of. In its dealing with the Claimants during the tender process, the SCA acted like any contractor trying to achieve the best price for the services it was seeking. It did not act as a State entity. The same applies to the SCA’s conduct in the course of the performance of the Contract. It is true though that the Contract was awarded through a bidding process governed by the laws on public procurement. This is not a sufficient element, however, to establish that governmental authority was exercised in the SCA’s relation to the Claimants and more particularly in relation to the acts and omissions complained of. What matters is not the ‘service public’ element, but the use of ‘prérogatives de puissance publique’ or governmental authority. In this sense, the refusal to grant an extension of time at the time of the tender does not show either that governmental authority was used, irrespective of the reasons for such refusal. Any private contract partner could have acted in a similar manner.92

Similarly, in Bayindir Insaat Turizm Ticaret ve Sanayi v. Pakistan, it was ar- 81 gued that the conduct of the National Highways Authority (NHA), a body having separate personality under Pakistani law, was attributable to Pakistan. Having rejected the argument that the relevant conduct of the NHA was attributable on the basis that the NHA constituted an organ (relying principally on its separate existence and personality), the tribunal likewise dismissed the argument that the NHA had been acting in the exercise of governmental authority in taking steps to terminate a contract with the investor. In that regard, the tribunal observed that attribution on this basis requires that ‘the instrumentality acted in a sovereign capacity in that particular instance’, and noted that ‘[i]f it is to be regarded as an act of the State for purposes of international responsibility, the conduct of an entity must accordingly concern governmental activity and not other private or commercial activity in which the entity may engage.’93 Similarly, in Hamester v. Ghana, the tribunal in discussing whether acts of Cocobod, a Stateowned corporation, were attributable to the State, explained that [u]nder Article 5 of the ILC Articles, if the acts of Cocobod which are the subject of complaint were performed in the exercise of governmental power, they will be attributed to the State. If they were performed in the fulfilment of commercial relations, they will not be attributable on that basis to the State.94

91 Jan de Nul NV and Dredging International NV v. Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008, para. 171. 92 Ibid., paras. 169–170. 93 Bayindir Insaat Turizm Ticaret ve Sanayi v. Pakistan, ICSID Case No. ARB/03/29, Award, 24 August 2009.

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3. Attribution of Conduct of Entities acting under the Instructions, Direction or Control of the State

The final basis of attribution which has received particular attention in investment treaty disputes is that which permits attribution of the conduct of a person or entity which is not an organ of the State where that person or entity was acting upon the instructions, or under the direction and control of the State. The underlying logic in this context is that the State should not be able to avoid its international responsibility merely by reason of the fact that it has acted through individuals or entities the conduct of which is otherwise not attributable. 83 The rule is reflected in Article 8 of the Articles, which provides: 82

The conduct of a person or group of persons shall be considered an act of a State under international law if the person or group of persons is in fact acting on the instructions of, or under the direction or control of, that State in carrying out the conduct.

Article 8 has been recognised by the ICJ to reflect customary international law.95 85 The ILC’s formulation of Article 8 glossed over a divergence in international jurisprudence as to the level of control required in order for conduct to be attributable on the basis of direction and control. In Military and Paramilitary Activities, the ICJ had held that, in order for conduct of individual entities to be attributable on the basis of instructions, direction or control, it was necessary to show that the State had exercised ‘effective control’ over the particular conduct alleged to constitute a breach.96 However, in Tadić, the Appeals Chamber of the International Criminal Tribunal for the former Yugoslavia refused to apply that test, and suggested that ‘overall control’ might be sufficient for the purposes of attribution.97 The divergence has now been resolved, with the ICJ in Bosnian Genocide reaffirming the ‘effective control’ standard from Military and Paramilitary Activities as constituting the appropriate test, and expressly disapproving the approach in Tadić for the purposes of State responsibility.98 Again, the fact that the relevant test was elaborated in relation to the action of paramilitary groups appears not to affect the applicable standard which must be fulfilled in order for conduct to be attributable on this basis,99 although some tribunals have expressed doubts.100 84

94 Gustav F. W. Hamester GmbH & Co KG v. Ghana (n. 33) para. 197; see also ibid., paras. 180 and 201. 95 Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro) (n. 47) 207, para. 398. 96 Military and Paramilitary Activities in and against Nicaragua (Nicaragua v. USA), ICJ Judgment, ICJ Rep. 1986, 14, 64–65, para. 115. 97 See ICTY, Case IT–94–1, Prosecutor v. Tadić, (1999) 38 ILM 1518, 1546, para. 145. 98 Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro) (n. 47) 209–211, paras. 402–407; the Court was careful not to express a view on whether the ‘overall control’ test might nevertheless be appropriate for the purposes of whether a conflict has been ‘internationalized’, such that the body of international humanitarian law relating to international armed conflict is applicable (the question actually in issue in Tadić (ibid., at 210, para. 404).

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III. The Application of the Rules of State Responsibility

Investors have sought to argue that the conduct of particular individuals or en- 86 tities was attributable to the State on the basis that they were acting on the instructions, or under the direction and control of the State. Such arguments are most often put forward as an alternative line of argument in the event that it is found that the relevant person or entity is not an organ under Article 4, and was not exercising elements of governmental authority under Article 5 of the Articles,101 although in some instances, Article 8 has been relied upon alone.102 A recurring question has been whether the acts of State-owned corporations 87 or other entities having separate legal personality can be attributed to the State to the extent that they are not exercising elements of governmental authority within the meaning of Article 5. However, as is made clear by the Commentary to Article 8, the conduct of State-owned corporations is in general not attributable to the State, and the mere fact that the State owns, or to some extent otherwise exercises control over a corporation, is not in and of itself sufficient for the actions of a State-owned corporation to be held to be attributable, Although such matters have on occasion been taken into account, the better view is that expressed by the tribunal in White Industries Australia Limited v. India, to the effect that [t]o the extent that [the Claimant] relies on the organisational structure of Coal India, the manner of appointment of its directors and the frequency of consultation on issues such as pricing, these matters are largely irrelevant with regard to Article 8.103

Further, as the ICJ has highlighted, in contrast to the position of the acts of 88 organs (whether de jure or de facto), the conduct of which is always attributable to the State, the rejection of the ‘overall control’ test implies that it must be shown that the person or entity in fact acted in accordance with instructions or under the ‘effective control’ of the State, and in particular that ‘“effective control” was exercised, or that the State’s instructions were given, in respect of each operation in which the alleged violations occurred, not generally in respect of the overall actions taken by the persons or groups of persons having committed the violations.’104 That particularity of attribution of conduct on the basis of the giving of in- 89 structions, or exercise of direction or control has been recognised by a number of tribunals. For instance, the tribunal in Jan de Nul NV and Dredging International NV v. Egypt observed

99 Cf. the observations of the International Court of Justice in Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro) (n. 47) 208–209, para. 401, quoted above note 57. 100 See in particular Bayindir Insaat Turizm Ticaret ve Sanayi v. Pakistan (n. 93) para. 130. 101 See e.g. Saipem SpA v. Bangladesh (n. 43); EDF (Services) Ltd v. Romania (n. 87); Jan de Nul NV and Dredging International NV v. Egypt (n. 43). 102 See for example, White Industries Australia Limited v. India, UNCITRAL, Final Award, 30 November 2011, where the claimants invoked only ARSIWA, Art. 8. 103 White Industries Australia Limited v. India (n. 102) para. 8.1.6. 104 Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v Serbia and Montenegro) (n. 47) 208, para. 400.

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Any enquiry as to whether conduct may be regarded as attributable on this basis will thus require close scrutiny of the instructions given, and/or the extent of the control actually exercised over the conduct which is alleged to constitute a breach. 91 Finally, in common with the position as regards organs, and in contrast to the situation under Article 5, the distinction between sovereign and commercial acts has no role to play in determining whether particular conduct is attributable on the basis of instructions, or direction and control.106 This has been explicitly recognised by tribunals; for instance, the tribunal in Bayindir Insaat Turizm Ticaret ve Sanayi v. Pakistan, observed that ‘attribution under Article 8 is without prejudice to the characterization of the conduct under consideration as either sovereign or commercial in nature. For the sake of attribution under this rule, it does not matter that the acts are commercial, jure gestionis, or contractual’ and emphasised that ‘a finding of attribution does not necessarily entail that the acts under review qualify as sovereign acts.’107 90

E. Breach of an Obligation 92

The basic principle of State responsibility governing when there is a breach of an obligation (i.e. that there is a breach whenever conduct attributable to the State ‘is not in conformity with what is required of it by an obligation’)108 is uncontroversial and infrequently referred to in decisions concerning investment disputes. Disputes tend to focus not on the (secondary) rules governing whether there has been a breach of an international obligation, but rather on the content of the (primary) substantive standards of protection, and on disputed questions of fact as to whether there has been a breach.109

105 Jan de Nul NV and Dredging International NV v. Egypt (n. 91) para. 173; cf. the similar observation in Gustav F. W. Hamester GmbH & Co KG v. Ghana (n. 33) paras. 179 and 199; and see White Industries Australia Limited v. India (n. 102) paras. 8.1.16–8.1.18. 106 Cf. Commentary to Art. 8, para. (2), which notes that, for the purposes of Art. 8, ‘it does not matter that the person or persons involved are private individuals nor whether their conduct involves “governmental activity”.’ 107 Bayindir Insaat Turizm Ticaret ve Sanayi v. Pakistan (n. 93) (ICSID Case No. ARB/03/29) para. 129; see also Gustav F. W. Hamester GmbH & Co KG v. Ghana (n. 33) para. 180; Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Final Award, 26 March 2008, para. 31. 108 ARSIWA, Art. 12. 109 For an example of reference to the applicable standard under the law of State responsibility as to breach, see the decision in Petrobart Limited v. Kyrgyzstan, SCC Case No. 126/2003, Award, 29 March 2005, in which the tribunal referred to Art. 12 of the Articles, before observing that the ‘crucial issue in this case is whether there has been a violation of the Treaty’ (ibid., at 24). See also the decision of the ad hoc committee in Compañía de Aguas del Aconquija SA and Vivendi Universal v. Argentina (n. 9) (ICSID Case No. ARB/97/3) foot-

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III. The Application of the Rules of State Responsibility

Nevertheless, reference to the detailed rules relating to the timing of a breach 93 is relatively frequent in circumstances in which the relevant BIT (or multilateral instrument) was in force for only part of the period during which the alleged breaches are alleged to have occurred. The fact that investment protection instruments, in addition to setting out standards of protection, also generally grant investors the right to resort to arbitration has as a consequence that issues relating to the applicability of the instrument ratione temporis may arise in the form of objections to the jurisdiction of the tribunal, rather than as questions of the applicability of the substantive standards of protection.110 The rule reflected in Article 13 of the Articles that a State can only breach an 94 obligation insofar as that obligation is in force for it at the time of the relevant conduct, is a more or less self-evident proposition, and has been applied by tribunals in a number of investment disputes.111 The same principle is also implicit in Articles 26 (pacta sunt servanda) and 28 (non-retroactivity) of the VCLT. To the extent that obligations to accord treatment of a particular standard to an investor have not entered into force, a State cannot breach them. In order to avoid the inexorable logic that a State cannot breach an obligation 95 that was not in force for it, investors have resorted to a number of arguments. In particular, various decisions have considered the extent to which an investor can rely on acts which, although occurring prior to the entry into force of the relevant instrument (and therefore its substantive standards of protection), are alleged to give rise to a continuing situation which is inconsistent with the obligations of the State and extends beyond the point in time at which the instrument entered into force. Some investors have also argued in that context that acts prior to the entry into force of the applicable instrument were inconsistent with parallel obligations under customary international law.112 Further, some investors have alleged that the breach complained of consists of a composite act (i.e., in the formulation of Article 15 of the Articles, ‘a series of actions or omissions defined in aggregate as wrongful’), such that they can rely on acts of the State occurring prior to the entry into force of the instrument as forming part of the alleged composite wrongful act.

note 17, in which reference was made to the principle embodied in Art. 12 in a different context. 110 See the decision in Mondev International Ltd. v. USA (n. 59), which is not entirely clear as to whether the basis of the tribunal’s dismissal of the claims other than that for denial of justice was (a) that the claims related to conduct prior to the entry into force of NAFTA and were therefore incapable of amounting to a violation of the substantive standards of protection contained therein and for that reason failed on the merits, or (b) that the tribunal had no jurisdiction ratione temporis over conduct alleged to constitute a breach of the substantive protections of Chapter 11 NAFTA prior to its entry into force, and the claims in that regard were for that reason inadmissible. 111 Chevron Corporation and Texaco Petroleum Company v. Ecuador, PCA Case No. 34877 (UNCITRAL), Interim Award, 1 December 2008, para. 282. 112 Mondev International Ltd. v. USA (n. 59); M.C.I. Power Group L.C. and New Turbine Inc. v. Ecuador (n. 27).

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In some cases, appeals to the notion of ‘continuing’ wrongful acts have met with success.113 By contrast, as regards attempts to rely on the notion of ‘composite’ wrongful acts, the general trend of decisions is to affirm the principle contained in Article 13 that events prior to the entry into force of the relevant obligations cannot constitute a breach. As a result, attempts by the investor to avoid the consequences thereof by reference to the notions of ‘composite’ internationally wrongful acts, or prior breaches of customary international law, will normally be unavailing.114 97 However, much depends on the particular breach alleged, the particular acts relied upon, and their configuration in time, including in particular to what extent relevant events occurred before the entry into force of the obligation alleged to have been breached (and are thus within the jurisdiction of the tribunal). For instance, it appears that denial of justice, although constituting a composite internationally wrongful act involving the cumulative failures of the various levels of the courts of the State, only in fact crystallises at the point at which those failings rise to the level of a breach, and that such a claim may be within the jurisdiction of a tribunal even if the initial stages of the court proceedings took place before the entry into force of the relevant BIT.115 Further, it is possible that, although events which would otherwise have constituted a breach occurred prior to the entry into force of the relevant obligation, there may be sufficient conduct post-dating the critical date nevertheless to justify a finding of breach of a substantive standard of protection. 98 In that connection, it bears emphasising that the fact that conduct occurred prior to the entry into force of the relevant substantive obligations (and is outside the jurisdiction ratione temporis of a tribunal) does not necessarily mean that it is irrelevant or that a tribunal is precluded from considering it in reaching its decision on claims which do relate to conduct occurring after the date of entry into force of the relevant BIT and are therefore within its jurisdiction. The fact that conduct cannot constitute a breach of the relevant obligations is a separate question, and a number of tribunals have held that they are entitled to consider such ‘prior events’ in order to understand ‘the background, the causes, or scope of violations of the BIT that occurred after its entry into force’.116 As the tribunal in M.C.I. Power Group L.C. and New Turbine Inc. v. Ecuador observed 96

113 See e.g. White Industries Australia Limited v. India (n. 102). 114 Mondev International Ltd. v. USA (n. 59) para. 68; M.C.I. Power Group L.C. and New Turbine Inc. v. Ecuador (n. 27) para. 96. 115 Chevron Corporation and Texaco Petroleum Company v. Ecuador (n. 111) paras. 300–301. 116 M.C.I. Power Group L.C. and New Turbine Inc. v. Ecuador (n. 27) para. 93; see also ibid., para. 135, and para. 136. See also Mondev International Ltd. v. USA (n. 59) paras. 69–70; Técnicas Medioambientales Tecmed S.A. v. Mexico, ICSID Additional Facility Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 66; Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Decision on Jurisdiction, 6 July 2007, para. 87; Victor Pey Casado and ‘President Allende’ Foundation v. Chile, ICSID Case No. ARB/98/2, Award, 8 May 2008, paras. 611–612. See also Commentary to Art. 13, para. (9); Commentary to Art. 15, para. (11).

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III. The Application of the Rules of State Responsibility [a]cts or omissions prior to the entry into force of the BIT may be taken into account by the Tribunal in cases in which those acts or omissions are relevant as background, causal link, or the basis of circumstances surrounding the occurrence of a dispute from the time the wrongful act was consummated after the entry into force of the norm that had been breached.117

F. Conclusions

The rules of State responsibility form an essential part of the applicable law 99 against the background of which any investment dispute relating to the alleged breach of investment protection obligations under international law has to be determined. Admittedly, there may be disputes in which there is little disagreement as to the application of the rules of State responsibility, and in which the difference between the parties focusses rather on the content of the substantive obligations of protection of the investor and its investment, or upon the particular facts of the case (for instance, in a case where the conduct complained of is that of the central government of the respondent State). Nevertheless, together with the law of treaties, the rules of State responsibility constitute the basic underlying international law framework which governs any dispute relating to breach of an international obligation under an international investment protection instrument; as such, it dictates the questions which have to be answered (attribution, breach, reparation) in order to resolve such disputes.

117 M.C.I. Power Group L.C. and New Turbine Inc. v. Ecuador (n. 27) para. 136.

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IV. Circumstances Precluding Wrongfulness

Christina Binder A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Historical Appraisal: the Necessity Defence in Older State Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Necessity Defence under Customary International Law: Article 25 of the ILC Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Jurisprudence: The Necessity Defence in the Investment Arbitration Cases Against Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Elements of the Necessity Defence in the Cases Brought Against Argentina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) The Tribunals’ Diverging Approaches to the Relationship between the Customary Law Based Necessity Defence and Treaty Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Appreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 5 8 10 11 13 20 26

C. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Force Majeure Defence Under Customary International Law: Article 23 of the ILC Articles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Jurisprudence: The Force Majeure Defence in Aucoven v. Venezuela . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Appreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29 29

D. Countermeasures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Countermeasures Defence Under Customary International Law: Articles 22 and 49–53 of the ILC Articles . . . . . . . . . . . . . . . . . . . . . 3. Jurisprudence: Mexico’s Countermeasures Defence Against US Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Decisions: ADM v. Mexico (2007), CPI v. Mexico (2008), Cargill v. Mexico (2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Appreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44 45

E. Consequences of Reliance on a Circumstance Precluding Wrongfulness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Temporary Nature of Reliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Question of Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31 36 43

47 51 51 52 57 59 60 63 70

F. Cross-Cutting Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Article 26 of the ILC Articles: Non Interference with Ius Cogens Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Possible Reliance vis-à-vis Individuals/Investors? . . . . . . . . . . . . . . . . . . . a) Necessity and Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Countermeasures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Defences’ Relationship to Treaty Provisions . . . . . . . . . . . . . . . . . . . . a) Generalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Necessity and Treaty-Based Emergency Exceptions . . . . . . . . . . . . . . c) Countermeasures and Secondary Rules in Treaty Regimes . . . . . . d) Appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71 73 74 78 79 80 83 84 85

G. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: José E. Alvarez and Kathryn Khamsi, ‘The Argentine Crisis and Foreign Investors: a Glimpse into the Heart of the Investment Regime’ (2008–2009) YB Int’l Inv. L. &

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IV. Circumstances Precluding Wrongfulness Pol’y 379–478; Christina Binder and August Reinisch, ‘Economic Emergency Powers. A Comparative Law Perspective’ in Stephan W. Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010) 503–540; Christina Binder, ‘Changed Circumstances in Investment Law. Interfaces between the Law of Treaties and the Law of State Responsibility with special Focus on the Argentine Crisis’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law in the 21st Century. Essays in Honour of Christoph Schreuer (Oxford University Press, 2009) 608–630; Christina Binder, ‘Non Performance of Treaty Obligations in Cases of Necessity’ (2008) 13 ARIEL 3–34; Andrea K. Bjorklund, ‘Economic Security Defenses in International Investment Law’ (2008–2009) YB Int’l Inv. L. & Pol’y 479–503; Andrea K. Bjorklund, ‘Emergency Exceptions: State of Necessity and Force Majeure’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), Oxford Handbook of International Investment Law (Oxford University Press, 2008) 459–523; William W. Burke-White and Andreas von Staden, ‘Investment Protection in Extraordinary Times: the Interpretation and Application of Non-precluded Measures Provisions in Bilateral Investment Treaties’ (2007) 48 Va. J. Int’l L. 307– 410; Théodore Christakis, ‘Les «circonstances excluant l’illicéité»: une illusion optique?’ in Droit du pouvoir, pouvoir du droit – Mélanges offerts à Jean Salmon (Bruylant, 2007) 223– 270; Théodore Christakis, ‘«Nécessité n’a pas de loi»? La nécessité en droit internationale’ in Colloque de Grenoble. La Nécessité en Droit International (Pedone, 2007) 11–63; James Crawford, ‘Revisiting the Draft Articles on State Responsibility’ (1999) 10 EJIL 435–460; James Crawford and Simon Olleson, ‘The Exception of Non-Performance: Links between the Law of Treaties and the Law of State Responsibility’ (2001) 21 Austl. YB Int’l L. 55–74; Andrea Gattini, Zufall und force majeure im System der Staatenverantwortlichkeit anhand der ILC Kodifikationsarbeit (Duncker & Humblot, 1991); Tarcisio Gazzini, ‘Necessity in International Investment Law: Some Critical Remarks on CMS v. Argentina’ (2008) 26 JERL 450– 469; Sarah Heathcote, ‘Est-ce que l'état de nécessité est un principe de droit international coutumier?’ (2007) 40 R.B.D.I. 53–89; S. P. Jagota, ‘State Responsibility: Circumstances Precluding Wrongfulness’ (1985) 16 NYIL 249–277; Vaughan Lowe, ‘Precluding Wrongfulness or Responsibility: a Plea for Excuses’ (1999) 10 EJIL 405–411; Martins Paparinskis, ‘Investment Arbitration and the Law of Countermeasures’ (2009) 79 BYIL 264–352; August Reinisch, ‘Necessity in Investment Arbitration’ (2010) 41 NYIL 137–158; August Reinisch, ‘Sachverständigengutachten zur Frage des Bestehens und der Wirkung des völkerrechtlichen Rechtfertigungsgrundes „Staatsnotstand“’ (2008) 68 ZaöRV 3–34; August Reinisch, ‘Necessity in International Investment Arbitration – an Unnecessary Split of Opinions in Recent ICSID Cases?’ (2007) 8 JWIT 191–214; Stephan W. Schill, ‘Der völkerrechtliche Staatsnotstand in der Entscheidung des BVerfG zu Argentinischen Staatsanleihen – Anachronismus oder Avantgarde?’ (2008) 68 ZaöRV 45–67; Michael Waibel, ‘Two Worlds of Necessity in ICSID Arbitration: CMS and LG&E’ (2007) 20 Leiden J. Int’l L. 637–648.

A. Introduction

Any examination of circumstances precluding wrongfulness, which, to quote 1 Crawford, ‘protect the State against an otherwise well-founded accusation of wrongful conduct’,1 has its starting point in the 2001 Articles on State Responsibility (ILC Articles).2 From the therein enumerated,3 three have proven of rele1 James Crawford, Second Report on State Responsibility, 1999, A/CN.4/498/Add. 2, 6–7, para. 224. See also Sandra Szurek, ‘The notion of circumstances precluding wrongfulness’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 427.

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vance in international investment law. They include, firstly, the state of necessity, as evidenced in the context of the Argentine economic crisis 2001–02 where Argentina extensively relied on the defence against claims brought by foreign investors. Likewise force majeure – especially in connection with civil unrest, revolutions or mob violence – has gained some, albeit limited, importance in investment arbitration. Finally, the countermeasures defence has been at stake in three recent cases brought under ICSID Additional Facility Rules (NAFTA) where Mexico argued that the wrongfulness of its measures which prejudiced foreign investors was precluded because of alleged breaches of international law by the investors’ home state (the USA).4 2 A study of circumstances precluding wrongfulness in investment proceedings is of particular interest in view of the specific features of international investment law. Investment arbitration’s hybrid nature, as a form of enforcement of international treaty obligations, on the one hand, and as direct dispute settlement between private parties and States on the other hand, necessarily raises questions as to the suitability of the abstract elements of the defences which are primarily designed to apply to interstate relations or, in the terms of the fragmentation debate, questions as to the application of general international law in the subsystem of investment law. 3 Accordingly, in the following, the respective circumstances precluding wrongfulness – state of necessity, force majeure and countermeasures – will be discussed while laying special emphasis on relevant investment cases (Parts B., C., D.). Then, the consequences of a successful reliance on the circumstances precluding wrongfulness, especially the question of compensation, will be examined (Part E.). Likewise, some cross-cutting issues of relevance for all defences will be looked at, namely the prohibition to derogate from ius cogens obligations, the availability of the defences against private parties (investors) and their relationship to treaty provisions (Part F.). Part G. concludes. B. Necessity 4

Necessity is – especially since the Argentine economic crisis 2001–2002 and Argentina’s extensive reliance on the defence – the perhaps best known and most discussed circumstance precluding wrongfulness in the context of international investment arbitration.

2 Draft Articles on Responsibility of States for Internationally Wrongful Acts, adopted by the ILC in its 53rd Session (2001), and submitted to the General Assembly as part of the Commission’s report covering the work of that Session, UN Doc. A/56/10 (2001), UN Doc. A/RES/56/83 (2001). 3 The other circumstances precluding wrongfulness incorporated in the ILC Articles on State Responsibility are consent (Art. 20), self-defence (Art. 21) and distress (Art. 24). 4 See parts B.–D. for case references and details on the jurisprudence.

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1. Historical Appraisal: the Necessity Defence in Older State Practice

In classic international law, especially in older State practice, necessity was 5 viewed as inherent in the ‘right to self preservation of a State’.5 Consequently, and given the importance of the interest involved, no rules were said to govern reliance on necessity. The German occupation of, the then neutral, Belgium and Luxemburg in 1914 which was justified by ‘necessity’ illustrates only too well the evident danger of such an excuse which lends itself to abuse.6 This resulted in a considerable mistrust vis-à-vis the necessity defence. As late as 1990, the Rainbow Warrior arbitration tribunal thus referred to the ‘controversial’ doctrine of the state of necessity.7 At the same time, when drafting the Articles on State Responsibility, the In- 6 ternational Law Commission was convinced that a complete omission of necessity was not appropriate, as it would not prevent States from relying on necessity. The most detailed study on the topic was conducted by the Commission’s Special Rapporteur Roberto Ago who, in 1980, concluded that in spite of its controversial nature ‘the concept of “state of necessity” is far too deeply rooted in the consciousness of the members of the international community and of individuals within States. If driven out of the door it would return through the window, if need be in other forms.’8 Consequently, the ILC chose another approach: namely, to ‘domesticate’ the 7 necessity defence and to subject it to such stringent conditions that it would be available only in exceptional circumstances. The ILC thus incorporated ‘necessity’ as Article 25 (former Article 33)9 in Chapter V on Circumstances Precluding Wrongfulness of the 2001 Articles on State Responsibility. Today, it is no longer

5 See e.g. Roberto Ago, ‘Addendum to the Eighth Report on State Responsibility’, UN Doc. A/CN.4/318/ADD.5–7, (1980) YBILC, vol. II/1, 13, 17–18; see also Julio Barboza, ‘Necessity (revisited) in International Law’ in Jerzy Makarczyk (ed), Essays in International Law in Honour of Judge Manfred Lachs (Nijhoff, 1984) 27, 28. 6 See, in particular, the note presented on 2 August, 1914 by the German Minister in Brussels to the Belgian Minister for Foreign Affairs, in James Brown Scott (ed), Diplomatic Documents Relating to the Outbreak of the European War, Part I (Oxford University Press, 1916) 749–750, and the speech in the Reichstag by the German Chancellor, von Bethmann-Hollweg, on 4 August 1914, ‘[W]ir sind jetzt in der Notwehr; und Not kennt kein Gebot!’ (‘[W]e are in a state of self-defence and necessity knows no law’), Jahrbuch des Völkerrechts, vol. III, (Institut für internationales Recht, 1916) 728. See furthermore: Commentaries to the Draft Articles on Responsibility of States for Internationally Wrongful Acts, adopted by the International Law Commission at its fifty-third session (2001), in Official Records of the General Assembly, Fifty-sixth session, Supplement No. 10 (A/56/10), ‘Article 25’, para. 2. (In the following also ILC Commentary; the page numbers refer to the ILC Commentary as reprinted in James Crawford, The International Law Commission’s Articles on State Responsibility. Introduction, Text and Commentaries (Cambridge University Press, 2002) 178). 7 Rainbow Warrior (New Zealand v. France), 30 April 1990, 20 RIAA 217, 254. See also the criticism concerning necessity in LAFICO v. Burundi: ‘It is not desired here to express a view on the appropriateness of seeking to codify rules on “state of necessity” and the adequacy of the concrete proposals made by the International Law Commission.’ Libyan Arab Foreign Investment Company v. Burundi, 4 March 1991, 96 ILR 279, 319. 8 Roberto Ago (n. 5) 51.

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disputed in principle that a state of necessity may provide a ‘ground for precluding the wrongfulness of an act not in conformity with an international obligation’ – as expressed in Article 25 of the ILC Articles. Necessity has been explicitly recognised as a customary international law rule by the ICJ in the Gabčíkovo-Nagymaros case10 as well as in the Israel Security Wall opinion.11 Legal doctrine generally affirms the existence of necessity as a valid ground for precluding wrongfulness under customary international law as well.12 2. The Necessity Defence under Customary International Law: Article 25 of the ILC Articles 8

Central to the question whether a State can rely on the state of necessity under international law in international investment disputes – i.e. generally in the context of economic emergencies – are thus the conditions outlined in Article 25 of the ILC Articles on State Responsibility.13 This article provides: 1.

2.

9

Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a) Is the only way for the State to safeguard an essential interest against a grave and imminent peril; and (b) Does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if: (a) The international obligation in question excludes the possibility of invoking necessity; or (b) The State has contributed to the situation of necessity.

Article 25 of the ILC Articles subjects reliance on necessity to strict limitations. To start with, it is phrased as a double negative, ‘may not … unless’, which indicates that the necessity defence only will be rarely and most excep9 Art. 33 was adopted by the ILC in the first reading. Art. 25 differs slightly from Art. 33 as it omits the qualifying addendum ‘of the State’ after ‘essential interest’ and denies reliance on necessity when interests of the ‘international community as a whole’ would be impaired. 10 See Gabčíkovo-Nagymaros Project (Hungary v. Slovakia), ICJ Judgment, 25 September 1997, ICJ Rep. 1997, 7, para. 51: ‘The Court considers (...) that the state of necessity is a ground recognized by customary international law for precluding the wrongfulness of an act not in conformity with an international obligation.’ 11 In its Advisory Opinion the Court referred to ‘a state of necessity as recognized in customary international law.’ Legal Consequences of the Construction of a Wall in the Occupied Palestinian Territory, ICJ Advisory Opinion, 9 July 2004, (2004) 43 ILM 1009, para. 140. See also International Tribunal for the Law of the Sea, M/V Saiga (No. 2) Case, 1 July 1999, (1999) 38 ILM 1323, para. 134. 12 ‘Necessity is an admitted cause in international law for preclusion of responsibility for State conduct not in conformity with an international obligation (...)’, Julio Barboza (n. 5) 41; Antonio Cassese, International Law (Oxford University Press, 2001) 194. See also Jörn Axel Kämmerer, ‘Der Staatsbankrott aus völkerrechtlicher Sicht’ (2005) 65 ZaöRV 651, 656; Thomas Pfeiffer, ‘Zahlungskrisen ausländischer Staaten im deutschen und internationalen Rechtsverkehr’ (2003) 102 ZVglRWiss 141, 149; Knut Ipsen, Völkerrecht (Beck, 2004) 655; August Reinisch, ‘Sachverständigengutachten zur Frage des Bestehens und der Wirkung des völkerrechtlichen Rechtfertigungsgrundes „Staatsnotstand“’ (2008) 68 ZaöRV 3–34. 13 ILC Articles, n. 2.

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tionally available. Furthermore, numerous detailed and narrowly defined conditions must be cumulatively satisfied for reliance on necessity to be permissible. Non-performance of international (here: treaty) obligations is only justifiable when the non-performance is the only way for the State to safeguard an essential interest against a grave and imminent peril. The ILC’s Commentary explicates that the danger must be objectively established and not merely apprehended as possible,14 that reliance on necessity is precluded if there are other (lawful) means available, even if they are more costly or less convenient,15 and that any measures going beyond the strictly necessary will not be covered.16 In addition, in accordance with Article 25(1)(b) of the ILC Articles, the conduct in question must not seriously impair the interest of the State(s) to which the obligation is owed or of the international community as a whole. According to the ILC Commentary ‘the interest relied on must outweigh all other considerations, not only from the point of view of the acting State but on a reasonable assessment of the competing interests’.17 Respectively, and although not explicitly stated in Article 25(1)(b), weighty arguments support the view that the balancing test should also take the interests of individual(s) (investors) into account.18 Two additional general limits are likewise imposed by Article 25: reliance on necessity is prevented, even if the above mentioned conditions are fulfilled, when the international obligation in question excludes (explicitly or implicitly) the invocation of necessity, or when the State has contributed to the situation of necessity. 3. Jurisprudence: The Necessity Defence in the Investment Arbitration Cases Against Argentina

The Argentine financial and economic crisis in the late 1990s and early 2000 10 resulted in the Argentine government, in order to address the crisis, derogating from certain obligations it had undertaken vis-à-vis foreign investors. The aftermath in international dispute settlement evidences the most extensive application of the necessity defence so far. It also illustrates certain shortcomings as regards the necessity defence’s application in investment related contexts.

14 15 16 17 18

International Law Commission (n. 6) ‘Article 25’, para. 15 (James Crawford, 183–184). Ibid. Ibid. Ibid., para. 17 (James Crawford, 184). See e.g. the ICJ’s reference to individual interests in the Barcelona Traction case: Barcelona Traction Light and Power Company Limited, Second Phase (Belgium v. Spain), ICJ Judgment, 5 February 1970, ICJ Rep. 1970, 3, 32; see furthermore August Reinisch: ‘Also the fact that the ILC Commentary clearly states that “[the Articles on State Responsibility] apply to the whole field of the international obligations of States, whether the obligation is owed to one or several States, to an individual or group, or to the international community as a whole”, supports the conclusion that rights and interests of individuals may have to be balanced against the interests of the state taking necessity measures.’ August Reinisch, ‘Necessity in International Investment Arbitration – An Unnecessary Split of Opinions in Recent ICSID Cases? Comments on CMS v. Argentina and LG&E v. Argentina’ (2006) 3/5 TDM 1–26, III.C.

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a) Facts

The Argentine government took a series of measures to address the economic and financial crisis which had struck the country at the end of the 1990s. It restructured the public utility system, eliminated the parity between the US dollar and the Argentine peso and stopped the pegging of tariffs in government contracts to inflation adjusted dollars.19 These measures especially disadvantaged foreign investors who had invested in the public service sector in the course of Argentina’s privatisation efforts starting in 1989.20 These investors typically held extensive US dollar denominated debts and were forced to collect tariffs from customers in an increasingly devalued Argentine peso. 12 In considering claims brought against Argentina following the crisis, the Argentine government consistently argued that its measures were justified in light of a national emergency and in response to a state of necessity.21 It based its contention on the severity of the crisis and the belief that the events unfolding at the time threatened the very existence of the Argentine State. Argentina relied on the necessity defence under customary international law (Article 25 of the ILC Articles), on the one hand, and argued that its measures were compatible with the treaty-based emergency exceptions, on the other.22 11

b) The Elements of the Necessity Defence in the Cases Brought Against Argentina 13

Following the crisis, roughly 40 cases were brought against Argentina.23 Many of the cases decided as of September 2012 – ten ICSID cases (CMS v. Argentina,24 LG&E v. Argentina,25 Enron v. Argentina,26 Sempra v. Argentina,27 Continental Casualty Company v. Argentina,28 Metalpar v. Argentina,29 Suez v. Argentina30 Total v. Argentina,31 Impregilo v. Argentina32 and El Paso v. Ar19 See, e.g., Freshfields Bruckhaus Deringer, Annual Report 2002, cited after Luke Peterson, ‘Bilateral Investment Treaties and Development Policy-Making’ (International Institute for Sustainable Development, 2004) 18. 20 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, (2005) 44 ILM 1205, para. 53 et seq. 21 See e.g. ibid., para. 263; LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 200; Enron Corporation Ponderosa Assets L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007, para. 288 et seq.; Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 325 et seq. 22 See e.g. CMS v. Argentina (n. 20) para. 304 et seq., para. 344 et seq. 23 As of September 2012. See ICSID Website, http://icsid.worldbank.org/ICSID/Index.jsp; see Investment Treaty Arbitration Website, http://ita.law.uvic.ca/. 24 CMS v. Argentina (n. 20). 25 LG&E v. Argentina (n. 21). 26 Enron v. Argentina (n. 21). 27 Sempra v. Argentina (n. 21). 28 Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008. 29 Metalpar S.A. and Buen Aire S.A. v. Argentina, ICSID Case No ARB/03/5, Award, 6 June 2008. In Metalpar, the tribunal did not consider it necessary to examine the elements of Ar-

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gentina)33 and two UNCITRAL cases (BG v. Argentina34 and National Grid v. Argentina35) – were brought on the basis of the 1991 United States–Argentina BIT36 and all concerned the same emergency measures adopted by the Argentine government after 2000. Decisions in annulment proceedings were handed down by the CMS, Enron, Sempra and Continental Casualty Annulment Committees, with the Enron and Sempra decisions subsequently being annulled.37 All tribunals addressed the impact of an economic emergency on host State obligations at length and have been widely commented upon.38

30 31 32 33 34 35 36

37

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gentina’s necessity defence more closely because the claimants could not prove in any case that their investments were negatively affected by Argentina’s measures, ibid., para. 211. 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. Total S.A. v. Argentina, ICSID Case No. ARB/04/1, Decision on Liability, 27 December 2010. Impregilo S.p.A. v. Argentina, ICSID Case No ARB/07/17, Award, 21 June 2011. El Paso Energy International Company v. Argentina, ICSID Case No. ARB/03/15, Award, 31 October 2011. BG Group Plc v. Argentina, UNCITRAL, Final Award, 24 December 2007. National Grid plc v. Argentina, Award, 3 November 2008. Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investments, signed on 14 November 1991, entered into force on 20 October 1994. Two of the cases (BG and National Grid) were brought under the 1990 Argentina–UK BIT; Metalpar was brought under the 1995 Argentina–Chile BIT; Suez and Total under the 1991 Argentina–France BIT (1728 UNTS 298) and Impregilo under the 1988 Argentina–Italy BIT. CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Decision of the Ad Hoc Committee on the Application of Annulment by the Argentine Republic, 25 September 2007, available at http://ita.law.uvic.ca/documents/CMSAnnulmentDecision.pdf; Enron Creditors Recovery Corp. (formerly Enron Corporation) and Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Decision on the Application for Annulment of the Argentine Republic, 30 July 2010; Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Decision on the Argentine Republic’s Application for Annulment of the Award, 29 June 2010; Continental Casualty Company v. Argentina, ICSID Case No ARB/03/9, Decision on the Application for Partial Annulment of the Award by of the Argentine Republic, 16 September 2011. See August Reinisch, ‘Necessity in Investment Arbitration’ (2010) 41 NYIL 137–158; Andrea Bjorklund, ‘Emergency Exceptions: State of Necessity and Force Majeure’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), Oxford Handbook of International Investment Law (Oxford University Press, 2008) 459–523; William W. Burke-White and Andreas von Staden, ‘Investment Protection in Extraordinary Times: the Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties’ (2007) 48 Va. J. Int’l L. 307–410; Tarcisio Gazzini, ‘Necessity in International Investment Law: Some Critical Remarks on CMS v. Argentina’ (2008) 26 JERL 450–469; Jürgen T. Kurtz, ‘ICSID Annulment Committee Rules on the Relationship between Customary and Treaty Exceptions on Necessity in Situations of Financial Crisis’, Vol. 11, Issue 30, ASIL Insight (20 December 2007); August Reinisch, ‘Necessity in International Investment Arbitration – An Unnecessary Split of Opinions in Recent ICSID Cases?’ (2007) 8 JWIT 191–214, TDM 1–26 (n. 18); Michael Waibel, ‘Two Worlds of Necessity in ICSID Arbitration: CMS and LG&E’ (2007) 20 Leiden J. Int’l L. 637–648; Stephan W. Schill, ‘International Investment Law and the Host State’s Power to Handle Economic Crises’ (2007) 24 J. Int’l Arb. 265–286; Christina Binder, ‘Changed Circumstances in Investment Law. The Argentine Crisis before ICSID Tribunals’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law in the 21st Century, Essays in Honour of Christoph Schreuer (Oxford University Press, 2009) 608–630; Jürgen T. Kurtz, ‘Adjudging the Exceptional at International Law: Security, Public Order and Financial Crisis’ (2008) Jean Monnet Working Paper 06/08, 30–31,

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The problems linked to any application of the necessity defence in the context of investment disputes are illustrated especially by the fundamentally different decisions which have been rendered. Despite the largely similar factual situations, the tribunals have diverged crucially in their material findings. The tribunals in LG&E and Continental Casualty accepted Argentina’s reliance on necessity and found that the economic crisis constituted a state of necessity precluding the wrongfulness of BIT violations.39 CMS and, later, Enron, Sempra, BG Group, National Grid, Suez, Impregilo and El Paso oppositely concluded that the Argentine situation could not justify the abrogation of investment obligations under the applicable BIT.40 Again another approach was adopted by the Total tribunal which took account of Argentina’s economic emergency already in its examination of the respective BIT provisions. As it did not find a violation of the ‘fair and equitable treatment’ standard of Article 3 of the 1991 France– Argentina BIT during the core times of the crisis,41 the examination of Article 25 of the ILC Articles became to a large extent unnecessary. Still, the different investment tribunals all held that it was possible, in principle, to extend the invocation of a state of necessity to situations of economic emergencies.42 15 The tribunals’ divergent approaches presented a particularly problematic issue: in which manner to assess the ‘only way/means’ criterion when considering the measures Argentina employed to deal with the economic crisis. Given the various methods of addressing crisis situations, ascertaining whether a measure was the ‘only way’ of safeguarding the interest of the State proved to be problematic. The CMS tribunal held that Argentina had a choice of measures and declared that: ‘[t]he necessity plea is excluded if there are other (otherwise lawful) means available, even if they may be more costly or less convenient’.43 The Sempra and Enron tribunals followed the same approach.44 The LG&E tribunal, to the contrary, stated that an economic response was needed and that ‘an economic recovery package was the only means to respond to the crisis’.45 As such, the tribunal implied that even if the measures adopted were wholly inadequate to respond to the crisis, it still would have exempted Argentina from its responsibility vis-à-vis the foreign investors. The Continental Casualty tribunal chose 14

39

40 41 42 43 44 45

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available at http://www.jeanmonnetprogram.org/papers/08/080601.pdf; José E. Alvarez and Kathryn Khamsi, ‘The Argentine Crisis and Foreign Investors: A Glimpse into the Heart of the Investment Regime’ (2008–2009) YB Int’l Inv. L. & Pol’y 379–478. To be precise, both tribunals accepted the applicability of the BIT’s emergency exception (Art. XI of the US–Argentina BIT), but drew heavily, in their interpretation of Art. XI, on the elements of the customary law necessity defence; see e.g. Continental Casualty (n. 28) paras. 160–236. As stated above (n. 29), Metalpar did not examine the details of Argentina’s necessity defence. Total (n. 31) para. 184. See e.g. CMS v. Argentina (n. 20) para. 319; LG&E v. Argentina (n. 21) para. 251. CMS v. Argentina (n. 20) para. 323. Enron v. Argentina (n. 21) para. 309; Sempra v. Argentina (n. 21) para. 350. LG&E v. Argentina (n. 21) para. 257.

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again a different approach by maintaining that also another economic policy would not have put the claimant in a better position.46 The tribunals’ diverging reasons evidence the challenges presented in deter- 16 mining whether the measures employed were the ‘only way’ of dealing with the crisis. These problems were aptly summarised by the CMS tribunal: A different issue, however, is whether the measures adopted were the ‘only way’ for the State to safeguard its interests. This is indeed debatable. The views of the parties and distinguished economists are wide apart on this matter, ranging from the support of those measures to the discussion of a variety of alternatives, including dollarization of the economy, granting of direct subsidies to the affected population or industries and many others. Which of these policy alternatives would have been better is a decision beyond the scope of the Tribunal’s task, which is to establish whether there was only one way or various ways and thus whether the requirements for the preclusion of wrongfulness have or have not been met.47

Article 25(1)(b) of the ILC Articles prohibits reliance on necessity when it 17 would ‘seriously impair an essential interest of the State or States towards which the obligation exists or of the international community as a whole.’ None of the investment tribunals substantively discussed whether the ‘balancing element’ introduced by Article 25(1)(b) includes the interests of individuals (i.e., the investors).48 LG&E merely found that ‘[it could not] be said that any other State’s rights were seriously impaired by the measures taken by Argentina during the crisis.’49 The CMS tribunal recognised but did not clearly address the issue.50 Likewise, the limitations introduced by Article 25(2) of the ILC Articles, 18 which exclude reliance on the necessity defence, pose difficulties in times of economic emergencies. The jurisprudence of the investment tribunals points to problems especially regarding the defence’s ‘contribution’ element by which a State invoking necessity must not have contributed to the situation of necessity (Article 25(2)(b) of the ILC Articles). While all tribunals concurred that a State’s contribution to a state of necessity excluded the possibility of invoking it, they disagreed considerably on the level of State contribution needed to bar reliance on the necessity defence. The CMS tribunal stated that ‘government policies and their shortcomings 19 significantly contributed to the crisis and the emergency and while exogenous factors did fuel additional difficulties they do not exempt the Respondent from 46 Continental Casualty v. Argentina (n. 28) para. 230. The BG tribunal does not deal in detail with the different elements of Art. 25 of the ILC Articles including the contribution element, arguing inter alia that the restrictive elements of the defence impeded reliance in any case; BG v. Argentina (n. 34) paras. 407–412. 47 CMS v. Argentina (n. 20) para. 323. 48 See e.g. CMS v. Argentina (n. 20) para. 325; LG&E v. Argentina (n. 21) para. 257; Enron v. Argentina (n. 21) para. 310; Sempra v. Argentina (n. 21) para. 352. 49 LG&E v. Argentina (n. 21) para. 257. 50 CMS v. Argentina (n. 20) para. 325. Also the Enron and Sempra tribunals adopted similarly vague approaches: Enron v. Argentina (n. 21) para. 310; Sempra v. Argentina (n. 21) para. 352. The Continental Casualty tribunal did not address the issue as it based its conclusions primarily on the treaty-based emergency provision and referred to Art. 25 of the ILC Articles only insofar as was necessary for the interpretation of Article XI of the US–Argentina BIT; Continental Casualty v. Argentina (n. 28) para. 168.

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its responsibility in the matter.’51 The Enron and Sempra tribunals closely followed this approach,52 and the National Grid tribunal rejected Argentina’s reliance on necessity largely because Argentina’s contribution to the crisis had been substantial.53 So did the Impregilo and the El Paso tribunals.54 The LG&E tribunal, on the other hand, concluded that there was ‘no serious evidence in the record that Argentina contributed to the crisis resulting in the state of necessity.’55 However, the LG&E tribunal arrived at this conclusion only by relying on a doubtful burden of proof rule that shifted the burden of proof to the claimant.56 Likewise rejecting the claimant’s contribution argument, the Continental Casualty tribunal held that Argentina had not contributed to the emergency in a way which would bar it from relying on the necessity defence, arguing that Argentina’s economic policy had been praised by outside experts and previously benefited the country.57 c) The Tribunals’ Diverging Approaches to the Relationship between the Customary Law Based Necessity Defence and Treaty Exceptions

In addition to the tribunals’ different views on the defence’s material elements, they also adopted diverging approaches regarding the relationship between the customary law based necessity defence and the respective treaty provisions (non-precluded measures (NPM) clauses). Three methods can be distinguished. 21 The CMS, Enron and Sempra tribunals chose a rather similar method to approach the relationship between the treaty-based emergency exception and the necessity defence under customary international law. It may be called the ‘interpretation or conflation approach’. The tribunals considered the treaty-based emergency exception (Article XI of the US–Argentina BIT) as too imprecise and found that it had to be concretised by reference to relevant customary law.58 For instance, the Sempra tribunal stated that ‘the Treaty itself did not deal with the legal elements necessary for the legitimate invocation of a state of necessity. The rule governing such questions will thus be found under customary law.’59 In effect, the tribunals based their findings on the elements of Article 25 of the ILC Articles.60 The Sempra tribunal furthermore explicitly held that the CMS award 20

51 52 53 54 55 56 57

CMS v. Argentina (n. 20) para. 329. Enron v. Argentina (n. 21) paras. 311–312; Sempra v. Argentina (n. 21) paras. 353–354. National Grid v. Argentina (n. 35) para. 262. Impregilo v. Argentina (n. 32) para. 358; El Paso v. Argentina (n. 33), para. 665. LG&E v. Argentina (n. 21) para. 257. See also Stephan Schill (n. 38) 279–281. Continental Casualty v. Argentina (n. 28) paras. 234–236. The BG tribunal did not examine the issue in detail. 58 See e.g. Sempra v. Argentina (n. 21) para. 388; CMS v. Argentina (n. 20) paras. 308 and 374. 59 Sempra v. Argentina (n. 21) para. 378. The Enron tribunal held that, as the BIT did not further define what was understood by ‘essential security interest’, it had to rely on the requirements of customary international law (Article 25) ‘so as to evaluate whether such requirements have been met in [the] case’; Enron v. Argentina (n. 21) para. 333.

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had been correct to discuss Article XI of the US–Argentina BIT in connection with necessity under customary international law.61 Likewise, the tribunals opted to start with an examination of the necessity defence under customary law (Article 25 of the ILC Articles),62 and then turned to the relevant treaty standards (Articles IV(3) and XI of the US–Argentina BIT).63 The tribunals concluded that Argentina could not justify its derogation from treaty obligations with reference to a state of emergency.64 This seems also to have been the approach of the Enron Annulment Committee, which based its criticism of the Enron decision to a large extent on the criteria of Article 25 of the ILC Articles.65 The LG&E tribunal’s approach to the relationship between Article XI of the 22 US–Argentina BIT and Article 25 of the ILC Articles may be characterised as one which attempts to enhance the legitimacy of its findings (‘legitimisation approach’). The LG&E tribunal based its conclusions on the treaty provisions: it found that the protections of Article XI of the US–Argentina BIT had been triggered and that Argentina was exempted from liability for the period from 1 December 2001 until 26 April 2003.66 The tribunal was furthermore satisfied that there had not been a breach of Article IV(3) of the US–Argentina BIT as Argentina’s measures were taken ‘across the board’.67 Subsequently, the tribunal devoted an extensive discussion to Article 25 of the ILC Articles, in order to confirm its findings. The tribunal held that the customary law standard was supportive of its conclusions.68 The approach which was suggested by the CMS Annulment Committee – and 23 which was also followed by the Continental Casualty tribunal, by the BG tri60 The Sempra tribunal, for instance, equalled the requirements of Article XI with those of Article 25. ‘(…) Since the Tribunal found that the crisis invoked does not meet the customary law requirements of Article 25 of the Articles on State Responsibility (…) there is no need to undertake a further judicial review under Article XI given that this Article does not set out conditions different from customary law in such regard.’; Sempra v. Argentina (n. 21) para. 388. 61 Ibid., para. 376. Note that, inversely, the CMS Annulment Committee criticised the CMS tribunal’s inadequate reasoning with respect to Article XI: ‘(…) the Tribunal evidently considered that Article XI was to be interpreted in the light of the customary international law, concerning the state of necessity and that, if the conditions fixed under that law were not met, Argentina’s defence under Article XI was likewise to be rejected. (…) The motivation of the Award on this point is inadequate. (…)’ [footnotes omitted]; CMS v. Argentina, Decision on Annulment (n. 37) paras. 124–125. 62 CMS v. Argentina (n. 20) paras. 315–331; Enron v. Argentina (n. 21) paras. 294–313; Sempra v. Argentina (n. 21) paras. 333–354. 63 CMS v. Argentina (n. 20) paras. 332–378; Enron v. Argentina (n. 21) paras. 314–342; Sempra v. Argentina (n. 21) paras. 356–391. 64 CMS v. Argentina (n. 20) para. 331; Enron v. Argentina (n. 21) para. 313; Sempra v. Argentina (n. 21) para. 355. 65 Enron v. Argentina, Decision on Annulment (n. 37) para. 395; see also para. 400 et seq. 66 LG&E v. Argentina (n. 21) paras. 226, 245. 67 Ibid., para. 244. 68 Ibid., para. 245: ‘While the Tribunal considers that the protections afforded by Article XI have been triggered in this case, and are sufficient to excuse Argentina’s liability, the Tribunal recognizes that satisfaction of the state of necessity standard as it exists in international law (reflected in Article 25 of the ILC’s Draft Articles on State Responsibility) supports the Tribunal’s conclusion.’ See also ibid., para. 258.

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bunal and the Sempra Annulment Committee – may be characterised as a ‘separation’ or ‘two step’ approach. It is based on a differentiation between primary and secondary rules; or, put differently, on a distinction between the emergency exception in treaty law and the necessity defence under the customary law of state responsibility. The two step approach implies that the necessity defence under the law of state responsibility is considered only when a breach of the (primary) treaty obligation is established, i.e. when the emergency exception in the treaty is found inapplicable. 24 Adopting the two step approach, the CMS Annulment Committee observed that the ILC’s position had been to consider the necessity defence under customary law as part of the secondary rules of international law and held that, [i]n this case, the [CMS] Tribunal would have been under an obligation to consider first whether there had been any breach of the BIT and whether such a breach was excluded by Article XI. Only if it concluded that there was conduct not in conformity with the Treaty would it have had to consider whether Argentina’s responsibility could be precluded in whole or in part under customary international law.69

25

Likewise the Continental Casualty tribunal clearly distinguished between the customary law based necessity defence and the respective treaty standard, with extensive reference to the CMS annulment decision.70 It reasoned its reference to the treaty-based necessity provision as follows: ‘(…) the application of Art. XI in the present case (if warranted) may be such as to render superfluous a detailed examination of the defence of necessity under general international law applied to the particular facts of the present dispute.’71 In the case of a successful reliance on the treaty exception there was thus no breach of the treaty and no need to refer to the customary law based necessity defence.72 Finally, also the reasoning of the Sempra Annulment Committee seems to be based on the separation approach. The Committee referred to the treaty standard as the applicable stan-

69 Ibid., para. 134; footnotes omitted. Also the CMS Annulment Committee’s criticism of the CMS tribunal’s reference to Article 27 of the ILC Articles when dealing with the consequences of Argentina’s reliance on emergency evidences the Committee’s preference for the two step approach. ‘(…) Article 27 concerns, inter alia, the consequences of the existence of the state of necessity in customary international law, but before considering this Article, even by way of obiter dicta, the Tribunal should have considered what would have been the possibility of compensation under the BIT if the measures taken by Argentina had been covered by Article XI. …’; ibid., para. 146. 70 See e.g., Continental Casualty v. Argentina (n. 28, 236, 239, 241, 246, 411 and para. 300). See also BG v. Argentina (n. 34) para. 382 et seq. 71 Continental Casualty v. Argentina (n. 28) para. 162. 72 As stated by the Continental Casualty tribunal: ‘The ordinary meaning of the language used, together with the object and purpose of the provision (as here highlighted and interpreted under Article 31 of the Vienna Convention on the Law of Treaties) clearly indicates that either party would not be in breach of its BIT obligations if any measure has been properly taken because it was necessary, as far as relevant here, either “for the maintenance of the public order” or for “the protection of essential security interests” of the party adopting such measures. The consequence would be that, under Art. XI, such measures would lie outside the scope of the Treaty so that the party taking it would not be in breach of the relevant BIT provision (…)’; ibid., para. 164.

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dard and criticised the Sempra tribunal for its failure to apply Article XI of the US–Argentina BIT.73 On this basis, the Annulment Committee established that the Sempra tribunal ‘failed to apply the applicable law’, ‘committed a manifest excess of powers’ and annulled the decision.74 4. Appreciation

The investment cases against Argentina illustrate the difficulties associated 26 with a reliance on the necessity defence in situations of economic emergencies. For one, the invocation of necessity is hindered by the abstract and general wording of the customary international law defence. While this abstractness is required to ensure the defence’s applicability to a variety of situations, some of its elements are ill-suited for economic emergencies. This is true, in particular, with regard to the ‘only way’ criterion75 and the ‘contribution’ element.76 Since States in some way or another regularly contribute to arising economic crisis situations and there are usually different ways to address them, it is difficult to decide on the defence’s admissibility.77 Furthermore, the tribunals’ different methodological approaches to the rela- 27 tionship between the treaty-based emergency exceptions and the customary law necessity defence78 resulted in the application of different standards. The CMS, Enron and Sempra tribunals, by using the ‘interpretation approach’, based their rejection of Argentina’s reliance on necessity on the (in principle narrower) customary law standard. The ‘legitimisation’ and ‘separation approach’, to the contrary, took the wider treaty standard as the basis of assessment. The Sempra Annulment Committee even annulled the Sempra decision on these grounds. The Argentine crisis evidences, thus, on the one hand, the possible impor- 28 tance of the necessity defence in severe economic crisis situations. At the same time, it also shows the uncertainties surrounding the application of Article 25 of the ILC Articles in the context of investment arbitration.

73 Sempra v. Argentina, Decision on Annulment (n. 37) para. 159; see also para. 165 et seq. and para. 198 et seq. 74 Ibid., paras. 219 and 223. An only seemingly different approach is adopted by the Impregilo tribunal which considers the compensation for losses clause (Art. 4 of the Italy–Argentina BIT) as lex specialis (Impregilo v. Argentina (n. 32) para. 355) to the customary law-based necessity defence. Since Art. 4 only deals with the consequences of emergencies, the result equals the two step approach. 75 Cf. Art. 25(1)(a) of the ILC Articles. 76 Cf. Art. 25(2)(b) of the ILC Articles. 77 With respect to the ‘only way’ criterion it was suggested accordingly, that considerations of adequacy or proportionality should be applied when deciding about the admissibility of the defence. See generally August Reinisch, last in (2010) NYIL (n. 38) 154. 78 As will be shown below (Part E.2.), nor did they find a common solution as regards the question of compensation.

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C. Force Majeure 1. Overview

Force majeure, or the principle ad impossibilia nemo tenetur, has been a classic cause of exoneration from responsibility in domestic legal systems since antiquity. While for long, the concepts of force majeure and necessity were used interchangeably, the ILC introduced a clear distinction between the two defences when drafting the ILC Articles. At present, the force majeure defence is characterised by the elements of unforeseeability, irresistibility and externality as regards the entity relying on force majeure. It thus differs from the state of necessity because the conduct of the State which would otherwise be wrongful is involuntary or at least contains no element of free choice. 30 Force majeure plays an important role in the field of international commerce and State contracts.79 Also more generally, the defence is firmly rooted in international law. The ILC, for instance, qualified force majeure as a general principle of law.80 Likewise in the Rainbow Warrior and LAFICO v. Burundi arbitrations as well as in the ICSID award Aucoven v. Venezuela, Article 23 (or the largely corresponding former Article 31) of the ILC Articles was explicitly or implicitly recognised as part of the international legal framework.81 29

2. The Force Majeure Defence Under Customary International Law: Article 23 of the ILC Articles 31

Any scrutiny of the elements of the force majeure defence and its applicability to economic emergencies finds its logical starting point in Article 23 of the ILC Articles which reads as follows: 1.

2.

The wrongfulness of an act of a State not in conformity with an international obligation of that State is precluded if the act is due to force majeure, that is the occurrence of an irresistible force or of an unforeseen event, beyond the control of the State, making it materially impossible in the circumstances to perform the obligation. Paragraph 1 does not apply if: (a) The situation of force majeure is due, either alone or in combination with other factors, to the conduct of the State invoking it; or (b) The State has assumed the risk of that situation occurring.

79 Sandra Szurek, ‘Circumstances Precluding Wrongfulness in the ILC Articles on State Responsibility: Force Majeure’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 475–480. 80 International Law Commission (n. 6) ‘Article 23’, para. 6 (James Crawford, 172). See also Simon Hentrei and Ximena Soley, ‘Force Majeure’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law, last updated 2011, available at http://mpepil.com. 81 The Rainbow Warrior tribunal implicitly accepted the defence when stating that France could not rely on force majeure to exclude the wrongfulness of the repatriation of its agents from Hao; Rainbow Warrior (n. 7) 253. Also the LAFICO tribunal examined Burundi’s alleged impossibility of performance with reference to the elements of draft Article 31; LAFICO v. Burundi (n. 7) 318, para. 55; Autopista Concesionada de Venezuela, CA (‘Aucoven’) v. Venezuela, ICSID Case No ARB/00/5, Award, 23 September 2003, para. 108.

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The requirements of force majeure, as outlined in Article 23 of the ILC Arti- 32 cles, are stringent. In the words of the ILC Commentary, force majeure ‘involves a situation where the State in question is in effect compelled to act in a manner not in conformity with the requirements of an international obligation incumbent upon it.’ 82 Looked at more closely, Article 23 distinguishes between ‘irresistible force’ – a constraint which the State was unable to avoid or oppose by its own means – and ‘unforeseen event’ as possible causes.83 Both, natural (e.g. earthquakes, floods or droughts) and man-made (e.g. loss of control over a State’s territory due to civil unrest, a revolution or mob violence) causes can give raise to force majeure situations. The required externality, i.e. that a situation must be ‘beyond the control of 33 the State’, does not refer to the question whether the acts or omissions involved are those of the obligor or external to him. Rather, it supposes that they cannot be attributed to a State as a result of its own wilful behaviour.84 When specifying the relevant standards in the case of civil unrest and similar situations, the 1978 Survey of State practice, international judicial decisions and doctrine on force majeure and fortuitous event prepared by the UN Secretariat stated respectively that ‘[t]he Government is liable (…) where it fails to show due diligence in preventing or suppressing a riot, or where the circumstances indicate an insufficiency of protective measures or a complicity of government officers or agents in the disorder.’85 The defence’s perhaps most demanding criterion is the required material im- 34 possibility, which excludes situations where performance merely becomes more difficult or burdensome.86 Economic emergencies or political difficulties seem thus outside the scope of Article 23 of the ILC Articles87 and must give rise to civil unrest or mob violence for the defence to become available. Even then, the 82 International Law Commission (n. 6) ‘Article 23’, para. 1 (James Crawford, 170). 83 The event must be neither foreseeable nor of an easily foreseeable kind for reliance on force majeure to be permissible. See ibid., ‘Article 23’, para. 2. To exemplify, already in the 19th century, Venezuela’s responsibility for the looting of Indian tribes of property of a US consul on a vessel on the Venezuelan coast was precluded, because ‘the raid was one of those occasional and unexpected outbreaks against which ordinary and reasonable foresight could not provide’; Wipperman Case (United States of America v. Venzuela) 1889 onwards, John Basset Moore, History and Digest of the International Arbitrations to which the United States has been a Party, vol. III (1898) 3040–3043. See also ‘“Force majeure” and “Fortuitous event” as circumstances precluding wrongfulness: Survey of State practice, international judicial decisions and doctrine – Study prepared by the Secretariat’, A/CN.4/315, (1978) YBILC, vol. II/1, 156 (para. 349) (hereinafter Secretariat Survey). 84 This, obviously, in accordance with the general rules of attributability of the law of State responsibility (ibid., at 69 (para. 15)). 85 Ibid., at 215. See also the Secretariat Survey’s reference to the findings of Max Huber in the British Claims in the Spanish Zone of Morocco case (Great Britain v. Spain), 23 October 1924, (1925) II RIAA, 615, 644. (Ibid., at 171–172). 86 International Law Commission (n. 6) ‘Article 23’, para. 3 (James Crawford, 171); see furthermore the Rainbow Warrior tribunal: ‘New Zealand is right in asserting that the excuse of force majeure is not of relevance in this case because the test of its applicability is of absolute and material impossibility, and because a circumstance rendering performance merely more difficult or burdensome does not constitute a case of force majeure.’ Rainbow Warrior (n. 7) 253.

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usually long duration and general features of these situations may pose difficulties for the applicability of the stringently formulated force majeure defence.88 35 Also when the above requirements are fulfilled, paragraph 2 of Article 23 of the ILC Articles excludes reliance where the force majeure situation arises due, either alone or in combination with other factors, to the conduct of the State invoking it.89 Furthermore, the defence’s invocation is prevented, when the State has assumed the risk of the force majeure situation occurring, such as through treaty clauses where a State has accepted a particular risk. 3. Jurisprudence: The Force Majeure Defence in Aucoven v. Venezuela 36

The demanding requirements for reliance on force majeure to be permissible are evidenced by the scarcity of (investment) jurisprudence dealing with the defence. Force majeure has rarely been invoked and only exceptionally been discussed by international investment tribunals.90 Article 23 of the ILC Articles was alluded to by the Enron and Sempra tribunals in the context of the Argentine crisis,91 without, however, any detailed discussion of its elements.92 Likewise in the ICC cases Himpurna v. PT (Persero) Perusahaan Listruik Negara 87 This is also confirmed in (older) jurisprudence. See e.g. PCA, Russian Indemnities Case (Russia v. Turkey) 11 November 1912, (1912) XI UNRIAA 431, 443. In the Serbian Loans case, the PCIJ stated that the ‘dislocations caused by the big war’ and France’s according economic difficulties were not sufficient for reliance on force majeure to be justified, PCIJ, Case concerning the Payment of various Serbian Loans issued in France (France v. Serbia), 12 July 1929, Ser. A, No. 20, 5, 39–40. 88 This especially in view of the high threshold of ‘material impossibility’ and the necessary causal link between the force majeure situation and the impossibility. See Sandra Szurek (n. 79) 478. 89 See e.g. LAFICO v. Burundi, where the Arbitral Tribunal rejected the plea of force majeure because ‘the alleged impossibility [was] not the result of an irresistible force or an unforeseen external event beyond the control of Burundi. In fact, the impossibility is the result of a unilateral decision by the state.’ LAFICO v. Burundi (n. 7) 318, para. 55. 90 Although not directly in the investment related context, also the important place of force majeure in the jurisprudence of the Iran–US Claims Tribunal is of interest. See e.g. AnacondaIran, Inc v. Iran, 10 December 1986, 13 Iran–US CTR 1986-II, 199; Mobil Oil Iran, Inc, et al v. Iran, 14 July 1987, 16 Iran–US CTR 1987-III, 3, 39; Gould Marketing, Inc v. Ministry of Defense of Iran, 27 July 1983, 3 Iran–US CTR 1983-II, 147, 152; International Schools Services, Inc v. National Defense Industries Organization, 29 January 1987, 14 Iran–US CTR 1987-I, 65, 72. See generally George H. Aldrich, The Jurisprudence of the Iran–United States Claims Tribunal (Clarendon Press, 1996) 306 et seq. 91 When force majeure was discussed in other investment cases, this was done primarily in the context of treaty provisions and without referring to Art. 23 of the ILC Articles in detail. See for instance Nykomb Synergetics Technology Holding AB v. Latvia, SCC Case No 118/2001, Award, 16 December 2003, IIC 182 (2003), para. 82 et seq.; Parkerings-Compagniet AS v. Lithuania, ICSID Case No ARB/05/8, Award on Jurisdiction and Merits, 14 August 2007, IIC 302 (2007), paras. 85–86, 131, 178, 244; Hrvatska elektroprivreda dd v. Slovenia, ICSID Case No ARB/05/24, Decision on the Treaty Interpretation Issue, 12 June 2009, IIC 377 (2009) 36– 37, 47; Burlington Resources Inc v. Ecuador, ICSID Case No ARB/08/5, Decision on Jurisdiction, 2 June 2010, IIC 436 (2010), para. 28 et seq., 291 et seq., 323. 92 The Enron tribunal made reference to Art. 23 and the ILC Commentary to discuss the domestic law defence of ‘imprevisión’ by stating: ‘(…) it must be kept in mind that, at least as the theory of “imprevisión” is expressed in the context of force majeure, this other concept requires, under Article 23 of the Articles on State Responsibility, that the situation should in ad-

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(Indonesia) (1999) and Karaha Boda (2000) force majeure was touched upon.93 Still, only the Aucoven tribunal appears to have dealt with the criteria of Article 23 of the ILC Articles in greater depth.94 The Aucoven tribunal’s findings are thus of most interest to delineate the con- 37 tours of the defence. The claimant Aucoven, who operated a motorway under a concession, had complained about Venezuela’s failure to increase the applicable toll rates which it was entitled to charge in accordance with the Concession Agreement.95 In response to the claims, Venezuela relied upon the public opposition to the increase in the tolls and related civil unrest as constituting force majeure and argued that Aucoven had failed ‘to demonstrate that the Republic’s inability to increase toll rates was not excused by force majeure events.’96 The Aucoven tribunal stated respectively that the force majeure defence was a 38 valid excuse for the non-performance of a contractual obligation in both Venezuelan and international law97 and confirmed the criteria of impossibility, unforeseeability and non-attributability as constituent elements of the defence: It is common ground between the parties that force majeure is a valid excuse for the non-performance of a contractual obligation in both Venezuelan and international law. It is further common ground that the following conditions must be fulfilled for a force majeure excuse: – – –

93

94 95 96 97 98

Impossibility (...) i.e., the force majeure event made performance impossible to achieve (…) Unforeseeability (…) i.e., the force majeure event was not foreseeable (…) Non-attributability (…), i.e., the force majeure event was not attributable to the defeating party (…).98

dition be the occurrence of an irresistible force, beyond the control of the State, making it materially impossible in the circumstances to perform the obligation. In the commentary to this article it is stated that “Force majeure does not include circumstances in which performance of an obligation has become more difficult, for example due to some political or economic crisis”.’ Enron v. Argentina (n. 21) para. 217. See also the somehow identical observation by the Sempra tribunal, again referring to Art. 23 and the ILC Commentary, Sempra v. Argentina (n. 21) para. 246. See Simon Olleson, The Impact of the International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts (British Institute of International and Comparative Law, 2009) 157. The cases arose in the context of the Asian financial crisis in 1997/98. In Himpurna, the Indonesian electricity corporation (PLN) relied on inter alia force majeure to avoid responsibility for defaults in contractual obligations after a Presidential decree had suspended the claimant’s contract concerning the exploitation of thermal fields. Still, PLN’s reliance on force majeure was denied on the basis of the insufficient separation between the State enterprise and government action and the corresponding attributability of the respective governmental acts to PLN; see ICC, Himpurna California Energy Ltd v. PT PLN (Persero), Final Award, 4 May 1999, (2000) XXV YCA 13, concerning the tribunal’s dealings with force majeure see especially 35 et seq. See furthermore ICC, Karaha Bodas Company LLC v. Perusahaan Pertambangan Minyak Dan Gas BumiNegara and PT PLN (Persero), Final Award, 18 December 2000, para. 56. Aucoven v. Argentina (n. 81). The claim was brought on the basis of breach of Venezuela’s contractual obligations under the concession agreement, but the ICSID tribunal relied extensively on Art. 23 of the ILC Articles to interpret the standard of ‘imprevisión’ in Venezuela’s national laws. Aucoven v. Argentina (n. 81) para. 106. See also Simon Olleson (n. 92) 154. Aucoven v. Argentina (n. 81) para. 108. Ibid.

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In result, the tribunal rejected Venezuela’s defence mainly because the civil unrest in relation to the toll raise was not unforeseeable because of similar protests in 1989 and concluded accordingly that (…) [g]iven the well known tragic precedent of the Caracazo and the similar impact on the population of the contractual toll increase, Venezuela did not convince the Tribunal that the possibility of civil unrest could not be foreseen at the time of the negotiation of the Concession Agreement. In conclusion, the Tribunal finds that the alleged impossibility of raising the toll was not unforeseeable. For lack of unforeseeability, Venezuela’s non-performance cannot be excused on the ground of force majeure. Hence, whether the conditions of impossibility and attributability are met is not decisive.99

40

Still, the Aucoven tribunal’s reasoning highlights various problems in the application of force majeure. At first, the tribunal recognised the delicate political judgment involved when the defence is applied to situations of civil unrest: Venezuela admits that the civil protest was not irresistible in the sense that it could not have been mastered by the use of force. This being so, the question then becomes: by all reasonable judgment how much force can a State be legally required to deploy to perform its contract obligations? The answer to this question implies a delicate assessment that calls in part for political judgment. Considering its determination on unforeseeability, the Arbitral Tribunal will not finally resolve it.100

Other problems related to the (non-)attributability of the unrests to Venezuela. The tribunal found that although municipal authorities had supported the protests, it was not apparent what the causative effect of that involvement had been. Since it had rejected Venezuela’s defence already for lack of unforeseeability, the tribunal abstained from reaching a conclusion on that point.101 42 Finally, also the difficulties linked to the required irresistibility and material impossibility when applying the force majeure defence in the context of longer and more general situations became apparent. Notwithstanding its rejection of Venezuela’s defence, the Aucoven tribunal seemed to lower the defence’s threshold by stating: ‘(…) it is not necessary that the force majeure event be irresistible; it suffices that by all reasonable judgment the event impedes the normal performance of the contract.’102 It also held that ‘(…) [s]uffice it to state that this Tribunal is rather inclined to find that, in consideration of the events of 1989 and of the risk of repetition, the impossibility requirement appears met.’103 41

4. Appreciation 43

Given its demanding substantive threshold – especially irresistibility and material impossibility –, force majeure is a highly exceptional defence. In investment related contexts an invocation seems most likely when economic or political emergencies give rise to civil unrest, riots or mob violence. Still, the Aucoven decision highlights the difficulties linked to the defence likewise in these situations. It also indicates the need for a – careful – flexibilisation of the de99 100 101 102 103

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fence’s criteria to even keep its application available. An approach which is shared by commentators: Szurek for instance maintains that in cases of general and permanent situations such as revolts or civil unrest the defence’s standard of applicability should be slightly lowered.104 D. Countermeasures

In certain isolated situations States have also invoked countermeasures as de- 44 fence in investment disputes: in particular Mexico’s reliance in three recent cases raised the question whether the host State of investments may take countermeasures against investors because of (alleged) breaches of international law by the investors’ home State.105 1. Overview

A historical appraisal of countermeasures in international law evidences an 45 evolution comparable to that of the necessity defence. Countermeasures have been subject to a historically broad and unqualified reliance. Initially, they were closely associated with reprisals, to cover otherwise unlawful actions, including forcible action taken by way of self-help in response to a breach.106 In the following, countermeasures were subjected to increasingly clear and tight criteria, culminating in their incorporation as a circumstance precluding wrongfulness in the ILC Articles on State Responsibility.107 Today, a distinction may be made between reprisals – limited to action taken in times of armed conflict (i.e. belligerent reprisals) – and countermeasures which are, in principle, not associated with armed conflicts,108 with this contribution restricting itself to the discussion of the latter.109 While the inclusion of countermeasures as a circumstance precluding wrong- 46 fulness in the ILC Articles proved controversial at first,110 today, countermea104 Szurek: ‘It is not always easy to determine the temporal scope of application of force majeure. The occurrence of a particular event is not sufficient in itself. It seems logical to consider that it is also necessary that the State has taken steps to overcome the event without success. This assessment could be more flexible when it concerns a general situation with which the State is confronted. (…)’ Sandra Szurek (n. 79) 478. 105 Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. Mexico, ICSID Case No. ARB(AF)/04/05, Award, 21 November 2007 (see also Concurring Opinion of Arthur W. Rovine); Corn Products International, Inc v. Mexico, ICSID Case No. ARB(AF)/04/01, Decision on Responsibility, 15 January 2008 (see also Separate Opinion of Andreas F. Lowenfeld); Cargill, Incorporated v. Mexico, ICSID Case No. ARB(AF)/05/2, Award, 18 September 2009 (in the following: ADM v. Mexico, CPI v. Mexico, Cargill v. Mexico). 106 See International Law Commission (n. 6) ‘Countermeasures’, para. 2 (James Crawford, 281). In fact, the term ‘countermeasure’ was hardly used before 1950. 107 Arts. 22 and 49–53 of the ILC Articles. 108 See International Law Commission (n. 6) ‘Countermeasures’, para. 2 (James Crawford, 281). 109 This is in line with the approach taken in the ILC Articles on State Responsibility. See ibid., para. 3.

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sures are a generally accepted defence and firmly enshrined in international law. As stated by the ILC: ‘[i]t is recognized both by governments and by decisions of international tribunals that countermeasures are justified under certain circumstances.’111 In the Gabčíkovo-Nagymaros case, the ICJ held that countermeasures might justify otherwise unlawful conduct ‘taken in response to a previous international wrongful act of another State and (…) directed against that State’.112 Similar recognition of the permissibility of such measures can be found already in the Naulilaa,113 Cysnee114 and the Air Services115 awards.116 Likewise the ADM tribunal referred to the ‘customary international law on countermeasures’.117 So did the CPI118 and the Cargill tribunals.119 Doctrine generally accepts countermeasures in certain limited conditions in response to an internationally wrongful act as well.120 2. The Countermeasures Defence Under Customary International Law: Articles 22 and 49–53 of the ILC Articles

The current law on countermeasures is outlined in Articles 22 and 49–53 of the ILC Articles of State Responsibility which specify the conditions, limitations and modalities of application. These requirements are stringent. 48 First, a number of material conditions have to be satisfied for countermeasures to be permissible: they must be 1.) non-forcible (Art. 50(1)(a) of the ILC Articles); 2.) taken in response to a prior breach of international law by another State (Art. 49(1) of the ILC Articles) and 3.) directed against the wrongdoing/ responsible State and not against third parties (Art. 22 and 49(1, 2) of the ILC Articles).121 4.) In addition, countermeasures must be taken for the purpose of inducing that State to comply with its international obligations (Art. 49(1) of the ILC Articles); 5.) be limited in time and, as far as possible, be taken in such a 47

110 As maintained by Szurek: ‘For some, countermeasures are a means of execution and have no role to play in the framework of the law of international responsibility.’ Sandra Szurek (n. 1) 430. 111 International Law Commission (n. 6) ‘Countermeasures’, para. 2 (James Crawford, 281). 112 Gabčíkovo-Nagymaros (n. 10) 55, para. 83. 113 Naulilaa Arbitration (Responsibility of Germany for damage caused in the Portuguese Colonies in the South of Africa) (Portugal v. Germany), 31 July 1928, II RIAA 1011, 1025– 1026. 114 ‘Cysne’ (Responsibility of Germany for Acts Committed Subsequent to 31 July 1914 and before Portugal entered into the War), 30 June 1930, II RIAA 1035, 1052. 115 Air Service Agreement of 27 March 1946 between the United States of America and France, Award, 9 December 1979, XVIII RIAA, 416. 116 See International Law Commission (n. 6) ‘Article 22’, para. 2 (James Crawford, 168). 117 ADM v. Mexico (n. 105) paras. 125, 133. 118 CPI v. Mexico (n. 105) paras. 145–149. 119 Cargill v. Mexico (n. 105) e.g. para. 420. 120 See for further reference, Elisabeth Zoller, Peacetime Unilateral Remedies: an Analysis of Countermeasures (Transnational, 1984); Omer Elagab, The Legality of Non-Forcible Counter-Measures in International Law (Oxford University Press, 1988) 37 et seq. 121 The ILC Commentary specifies that an act taken against a third State could not be justified as countermeasure, International Law Commission (n. 6) ‘Article 22’, para. 4 (James Crawford, 169). See also Gabčíkovo-Nagymaros (n. 10) 55, para. 83.

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way as to permit resumption of the performance of the obligations in question as soon as the responsible State has complied with its obligations (Art. 49(2, 3) and 53 of the ILC Articles). What is more, countermeasures have to be 6.) proportionate to the injury caused, taking into account the gravity of the original wrongful act and the rights in question (Art. 51 of the ILC Articles) and 7.) must not involve departure from certain basic obligations such as fundamental human rights, certain obligations linked to humanitarian law or ius cogens (Art. 50(1) (b)–(d) and 26 of the ILC Articles). Also the implementation of countermeasures is tied to conditions:122 counter- 49 measures do not relieve a State from its obligations under any dispute settlement procedure which is in force between the two States and applicable to the dispute (Art. 50(2)(a) of the ILC Articles). Nor may they be taken in a way as to impair diplomatic or consular inviolability (Art. 50(2)(b) of the ILC Articles). In addition, procedural requirements have to be met: countermeasures must be preceded by the injured State’s demand that the responsible State comply with its obligations (Art. 52(1)(a) of the ILC Articles) as well as by a notification of the decision to take countermeasures accompanied by an offer to negotiate (Art. 52(1) (b) of the ILC Articles).123 Finally, countermeasures have to be suspended without undue delay if the internationally wrongful act has ceased124 or the dispute is submitted in good faith to a court or tribunal with the authority to make decisions binding on the parties,125 unless the State responsible for the original wrong fails to implement the dispute settlement procedures in good faith.126 These numerous and tight conditions make countermeasures a most excep- 50 tional remedy. In the investment context, their application is particularly complex. Since countermeasures are to be directed against the wrongdoing State and not against third parties (Art. 49(1, 2) of the ILC Articles), their acceptance in investment proceedings presupposes the indirect nature of investors’ rights as derivative from their home State. Inversely, to consider investors’ rights as direct would confer them a de facto ‘third party’ status and thus exclude any interference with their rights for allegedly wrongful acts of their home States. As will be shown, the question proved controversial and was viewed differently by the (few) investment tribunals dealing with the matter.

122 See International Law Commission (n. 6) 283. 123 In accordance with Art. 52(2) of the ILC Articles the injured State may nonetheless take such urgent countermeasures as are necessary to preserve its rights. 124 A countermeasure must be terminated as soon as the State responsible for the original wrong has complied with its obligations, Art. 53 of the ILC Articles. 125 See International Law Commission (n. 6) ‘Countermeasures’, para. 7 (James Crawford, 283). 126 Art. 52(3, 4) of the ILC Articles.

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3. Jurisprudence: Mexico’s Countermeasures Defence Against US Investors a) Background 51

The exceptional nature of countermeasures becomes particularly obvious in the context of international investment disputes. There seem to have been only three cases as of September 2012, ADM, CPI and Cargill versus Mexico,127 which expressly considered the applicability of countermeasures.128 All tribunals were constituted under Chapter Eleven of the North American Free Trade Agreement (NAFTA) and operated under ICSID Additional Facility Rules. Also the fact situation of the cases was largely identical. All concerned a Mexican tax on sweeteners (in force between 1 January 2002 and 31 December 2006) which allegedly favoured predominantly Mexican-owned sugar producers vis-à-vis foreign investors. Mexico defended its position, arguing, inter alia, that its actions were lawful countermeasures, being enacted as a response to violations by the US Government of its obligations towards Mexico regarding access of Mexicanproduced sugar to the US market and for failure to take part in the NAFTA Chapter Twenty dispute settlement process.129 b) Decisions: ADM v. Mexico (2007), CPI v. Mexico (2008), Cargill v. Mexico (2009)

All tribunals rejected Mexico’s countermeasures defence and established a breach of (inter alia) NAFTA Article 1102 (rule on national treatment). Still, they differed widely in their reasoning to reach this conclusion. Most controversial was the question of the nature of investors’ rights, namely whether they were direct – thus preventing reliance on countermeasures for their home State’s breach – or derivative of their home State.130 53 The ADM tribunal (2007)131 accepted the permissibility of countermeasures in principle, since it assumed that the investors’ rights were derivative of their home State and that investors did not enjoy direct and independent rights.132 However, the material conditions of the application of countermeasures, as to 52

127 ADM v. Mexico (n. 105); CPI v. Mexico (n. 105); Cargill v. Mexico (n. 105). 128 For further reference see Martins Paparinskis, ‘Investment Arbitration and the Law of Countermeasures’ (2009) 79 BYIL 264–352, 334–335. 129 See ADM v. Mexico (n. 105) para. 110; CPI v. Mexico (n. 105) para. 150; Cargill v. Mexico (n. 105) para. 380. 130 The Cargill tribunal distinguishes three different approaches: ‘The ADM tribunal came to this conclusion after analysis of three theories of investor rights: 1. the “traditional derivative theory” that investors, when triggering arbitration proceedings against a state, are “in reality stepping into the shoes and asserting the rights of their home State;” 2. an “intermediate theory” whereby investors are “vested only with an exception procedural right to claim state responsibility under Section B” which will be decided in accordance “with the rights and obligations defined under Section A, which remain inter-state;” and 3. a “direct theory” that “there are two distinct legal relationships under an investment treaty: the investor and the host State on one hand, and the State Parties on the other hand.”’ Cargill v. Mexico (n. 105) para. 415. 131 ADM v. Mexico (n. 105) paras. 110–180.

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the tribunal, were not met. The ADM tribunal thus denied Mexico’s countermeasures defence because there was insufficient evidence that Mexico had enacted the measures in response to alleged breaches or to induce the US to comply with its obligations as required by Article 49 of the ILC Articles.133 Nor did the measures, according to the tribunal, comply with the proportionality requirement of Article 51 of the ILC Articles.134 In sum, the tribunal rejected Mexico’s arguments as follows: 180. Notwithstanding the Tribunal’s finding that investors’ [sic] do not enjoy individual or independent rights under Section A of Chapter Eleven (…) the Tribunal believes that the Tax was not a valid countermeasure because it was not adopted to induce US’ [sic] compliance with the NAFTA; nor does the Tax meet the proportionality requirements under customary international law.135

The tribunal in Corn Products International (CPI) v. Mexico (2008), con- 54 versely, denied Mexico’s reliance on countermeasures on the basis that investors enjoyed direct rights, thus making them third parties who could not be deprived of their rights for alleged breaches of their home State:136 176. The Tribunal therefore concludes that the investor, such as CPI, has rights of its own under Chapter XI of the NAFTA. As such, it is a third party in any dispute between its own State and another NAFTA Party and a countermeasure taken by that other State against the State of nationality of the investor cannot deprive that investor of its rights. To revert to the two different examples given by the ILC in its Commentary on Article 49(1), this is a case involving the rights of a third party and not merely its interests. Mexico owed obligations to CPI under Chapter XI of NAFTA which were separate from the obligations it owed to the United States under the NAFTA as a whole. Even if the doctrine of countermeasures could operate to preclude the wrongfulness of the HFCS tax vis-à-vis the United States (…) they cannot do so vis-à-vis CPI.137

In addition, the CPI tribunal held that in any case Mexico had failed to prove 55 that the US had committed a prior breach of international law.138 Along similar lines, the Cargill tribunal (2009) rejected Mexico’s counter- 56 measures defence on the basis that investors were granted direct rights.139 This was also the position taken in two concurring/separate opinions in ADM and CPI. Arbitrator Rovine in ADM based his affirmation of the direct nature of investors’ rights on an extensive discussion of different international instruments dealing with individual rights.140 Arbitrator Lowenfeld concurred with the ma-

132 See e.g. ADM v. Mexico: ‘For the reasons that follow, the Tribunal believes that the approach supported by the Respondent respects the traditional structure of international law and the object and purpose of Chapter Eleven. The Respondent is correct in its position that Section A of Chapter Eleven sets forth substantive obligations which remain inter-State, without accruing individual rights for the Claimants.’, ibid., para. 168. Still, a procedural right of investors to trigger arbitration against the host is admitted by the ADM tribunal, ibid., para. 173; see generally ibid., para. 168 et seq. 133 Ibid., para. 151. 134 Ibid., para.160. 135 Ibid., para.180. 136 CPI v. Mexico (n. 105) para. 161 et seq. 137 Ibid., para. 176. 138 Ibid., e.g. paras. 189–191. 139 Cargill v. Mexico (n. 105) para. 420 et seq.; especially paras. 428–429.

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jority view in CPI concerning the direct nature of investors’ rights but found the majority’s arguments to be partly misleading.141 4. Appreciation 57

The three investment cases against Mexico highlight the problems of the countermeasures defence’s invocation against investors, which seem intrinsically linked to the position one takes as to the nature of investors’ rights.142 Strong arguments support the views of the CPI and Cargill tribunals and two separate/ concurring opinions on the issue, namely that investors’ rights are not merely derivative but substantive (direct) and that obligations arising from investment protection are owed to both, investors and their home State.143 This may also be derived from Crawford’s reasoning in the comparable case of human rights and countermeasures: (…) The position with respect to human rights is at one level the same as the position with respect to the rights of third States. Evidently, human rights obligations are not owed to States as the primary beneficiaries, even though States are entitled to invoke those obligations and to ensure respect for them. (…) Thus it is obvious that human rights obligations (…) may not themselves be the subject of countermeasures, in other words, that human rights obligations may not be suspended by way of countermeasures, and that conduct inconsistent with human rights obligations may not be justified or excused except to the extent provided for by the applicable regime of human rights themselves.144

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Consequently, given the generally direct nature of investors’ rights, countermeasures will hardly ever be an available defence in investment arbitration.145 E. Consequences of Reliance on a Circumstance Precluding Wrongfulness

59

The consequences flowing from the reliance on a circumstance precluding wrongfulness are dealt with – in a ‘one fits all approach’ – in Article 27 of the ILC Articles (Consequences of invoking a circumstance precluding wrongfulness). Article 27, which is generally held to reflect customary international law,146 is thus the applicable rule in case of a successful invocation of force ma140 ADM v. Mexico (n. 105), Concurring Opinion of Arthur W. Rovine, Issues of Independent Investor Rights, Diplomatic Protection and Countermeasures, paras. 46–47. 141 CPI v. Mexico (n. 105) Separate Opinion of Andreas F. Lowenfeld. Lowenfeld criticised e.g. the CPI tribunal’s argument to consider investors as ‘third parties’, ibid., para. 4. 142 See e.g. Paparinskis: ‘(…) the most persuasive conceptualization would treat countermeasures as not excluded in principle but as not applicable to the investor’s rights under the treaty, provided that these rights are considered to be direct.’ Martins Paparinskis (n. 128) 268. 143 In this sense also ibid., at 351. 144 James Crawford, Third Report on State Responsibility, A/CN.4/507 Add. 3, paras. 312d, 349. 145 See for further reference Tillmann R. Braun, Ausprägungen der Globalisierung: Der Investor als partielles Subjekt im Internationalen Investitionsrecht (Nomos, 2012). 146 For instance, Art. 27 is referred to by the CMS tribunal as establishing ‘the appropriate rule on the issue.’ CMS v. Argentina (n. 20) para. 390. See also LG&E v. Argentina (n. 21) paras. 225, 260, 264; Patrick Mitchell v. Congo, ICSID ARB/99/7, Decision on the Application for Annulment of the Award, 1 November 2006, para. 57, n. 30.

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jeure, necessity and countermeasures. It is framed broadly, distinguishing between the consequences of reliance for the underlying obligation (Art. 27(a)) and the issue of compensation (Art. 27(b)).147 1. Temporary Nature of Reliance

Article 27 of the ILC Articles affirms the temporary functioning of the cir- 60 cumstances precluding wrongfulness as follows: ‘The invocation of a circumstance precluding wrongfulness in accordance with this chapter is without prejudice to: (a) Compliance with the obligation in question, if and to the extent that the circumstance precluding wrongfulness no longer exists; (…)’ The ILC Commentary confirms the temporary effect: Paragraph (a) of article 27 addresses the question of what happens when a condition preventing compliance with an obligation no longer exists or gradually ceases to operate. It makes clear that Chapter V has merely preclusive effect. When and to the extent that a circumstance precluding wrongfulness ceases (…) the obligation in question (assuming it is still in force) will again have to be complied with (…).148

What is more, as indicated particularly by the terms ‘and to the extent’, the 61 duty of compliance may also revive successively when the circumstance precluding wrongfulness gradually ceases to exist. International tribunals corroborate the defences’ temporary nature which was, 62 for instance, prominently affirmed by the ICJ in the Gabčíkovo-Nagymaros case (1997). When considering Hungary’s argument that the wrongfulness of its conduct in discontinuing the work on the dam project was precluded by a state of necessity, the Court stated that ‘[a]s soon as the state of necessity ceases to exist, the duty to comply with treaty obligations revives.’149 Likewise, investment tribunals have referred to the temporary nature of the circumstances precluding wrongfulness. To exemplify, in the context of the Argentine crisis the investment tribunals agreed that reliance on the necessity defence had to be temporary, i.e., only as long as the emergency situation persisted. The CMS tribunal held, in form of an obiter dictum, that ‘[e]ven if the plea of necessity were accepted, compliance with the obligation would re-emerge as soon as the circumstance precluding wrongfulness no longer existed, which is the case at present.’150 Similarly, the LG&E tribunal affirmed that Argentina’s obligations under the BIT would revive after the end of the state of necessity.151 Thus, the temporary

147 The ILC Articles do not outline a ‘procedure’ for reliance on the circumstances precluding wrongfulness. 148 International Law Commission (n. 6) ‘Article 27’, para. 2 (James Crawford, 189). See also Szurek: ‘These circumstances [precluding wrongfulness] authorize the temporary non-observance of the rule or non-performance of obligations, but the non-observance or non-performance is no longer acceptable once the reasons which justified it cease to exist.’, Sandra Szurek (n. 1) 434. 149 Gabčíkovo-Nagymaros (n. 10) 63, para. 101. See also Rainbow Warrior (n. 7) 251–252. 150 CMS v. Argentina (n. 20) para. 382. 151 LG&E v. Argentina (n. 21) para. 263.

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nature of reliance on a circumstance precluding wrongfulness (here: necessity, force majeure or countermeasures) seems rather uncontroversial. 2. The Question of Compensation

Whether a successful reliance on a circumstance precluding wrongfulness entails a duty of compensation is not resolved in the ILC Articles. Formulated as a ‘non-prejudice clause’ Article 27 of the ILC Articles deliberately avoids a final determination as to whether compensation is to be paid. It states that ‘[t]he invocation of a circumstance precluding wrongfulness in accordance with this chapter is without prejudice to: (…) (b) The question of compensation for any material loss caused by the act in question.’ In so doing, Article 27 is, in Christakis’ words, a ‘clause de non dire’ with the only purpose of keeping the door open for possible compensation.152 64 The ILC’s pragmatic and open approach may be explained, inter alia, with the fact that Article 27 applies to the entire Chapter V, which comprises circumstances precluding wrongfulness as diverse as self-defence, countermeasures or necessity.153 Still, further differentiation seems warranted. First arguments for this may be derived from the drafting history. Whereas draft Article 35 of the first reading in 1980 left open the possibility of compensation for consent, force majeure, necessity and distress, no such possibility was foreseen for self-defence or countermeasures.154 In its draft proposal for the second reading, Special Rapporteur Crawford limited the possibility of compensation to necessity and distress.155 Among the reasons given for this limitation were, amongst others, the element of free choice of the State relying on necessity (or distress) and the need to balance the positions of the State acting in a situation of necessity and that of the other State(s) whose rights were encroached upon.156 65 Also the current ILC Commentary argues along similar lines. In the case of necessity, the ILC approvingly refers to Hungary’s willingness to compensate its partner in the Gabčíkovo-Nagymaros case: 63

Without the possibility of [compensation] the State whose conduct would otherwise be unlawful might seek to shift the burden of the defence of its own interests or concerns to an innocent third State. This principle was accepted by Hungary in invoking the plea of necessity in the GabčíkovoNagymaros Project case. As the Court noted, ‘Hungary expressly acknowledged that, in any event, such a state of necessity would not exempt it from the duty to compensate its partner.’157

152 Théodore Christakis, ‘Les «circonstances excluant l’illicéité»: une illusion optique?’ in Droit du pouvoir, pouvoir du droit – Mélanges offerts à Jean Salmon (Bruylant, 2007) 223, 236. 153 The range of situations covered by Art. 27 of the ILC Articles made it inappropriate to lay down a detailed compensation regime. See International Law Commission (n. 6) ‘Article 27’, para. 6 (James Crawford, 190). 154 Draft Art. 35, Report of the ILC, 32nd Session (1980) YBILC, vol. II/2, 61. 155 James Crawford (n. 1) para. 356. 156 See the comments of the Special Rapporteur to draft Art. 35, Report of the ILC on the Work of its 51st Session, (1999) YBILC, vol. II/2, 84–85, para. 402 et seq.

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Doctrine favours a duty of compensation in particular in cases of necessity 66 (and distress) as well.158 Such obligation is furthermore confirmed in jurisprudence. To exemplify, while the umpire accepted in the Company General of the Orinoco case159 Venezuela’s annulation of a French company’s concessions in order to avoid an armed conflict with Colombia, it upheld its duty of compensation: ‘It [the Government of Venezuela] considered the peril superior to the obligation and substituted therefore the duty of compensation.’160 Also some of the investment decisions rendered in the context of the Argentine crisis confirmed a duty of compensation. The CMS tribunal stated, for instance, by way of an obiter dictum, that ‘[t]he plea of state of necessity may preclude the wrongfulness of an act, but it does not exclude the duty to compensate the owner of the right which had to be sacrificed.’161 Conversely, the LG&E tribunal and the CMS Annulment Committee refrained from taking a position and referred to the no-prejudice character of Article 27.162 Still, it seems safe to conclude that there is a duty to compensation in cases of successful reliance on necessity. With respect to force majeure, conversely, no such duty exists. The concept of 67 ‘act of god’, ad impossibilia nemo tenetur, implies that ‘the loss lies where it 157 International Law Commission (n. 6) ‘Article 27’, para. 5 (James Crawford, 190). See also Vaughan Lowe, ‘Precluding Wrongfulness or Responsibility: a Plea for Excuses’ (1999) 10 EJIL 405, 410 (Lowe refers to the comparable situation of distress). 158 Théodore Christakis, ‘«Nécessité n’a pas de loi»? La nécessité en droit internationale’ in Colloque de Grenoble. La Nécessité en Droit International (Pedone, 2007) 11, 51 et seq. According to Christakis: ‘(...) il y a un prix à payer pour l’Etat qui choisit de violer les droits d’un Etat tiers pour conjurer un danger qui menace ses propres intérêts. (…) Si (…) l’Etat lésé est «innocent», le Juge peut, en fonction de la situation, décider de maintenir en partie une obligation de réparation ne retenant l’excuse de l’état de nécessité comme une simple circonstance atténuante.’ Ibid., at 54. See also Sandra Szurek (n. 1) 436. Generally in favour of compensation: Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 170; Andrea Bjorklund (n. 38) 510 et seq.; August Reinisch (n. 18) III.G with reference to the ILC Commentary. 159 Company General of the Orinoco Case, 31 July 1905, X RIAA, 184. Although labelled ‘force majeure’ the constitutive elements of the defence are rather those of necessity. 160 Ibid., 280. The ILC referred to it as follows: ‘[The Umpire] ruled that, in the exceptional circumstance of the case, it was lawful under international law (…) to rescind the concessions, although he agreed that the company was entitled to compensation for the consequences of an act which had been internationally lawful.’ Report of the ILC, 32nd Session, (1980) YBILC, vol. II(2), 40, para. 17. See also Properties of Bulgarian Minorities in Greece case (1926) SDN, JO, 7e année, No. 2, February 1926, Annex 815; see also reference made in Roberto Ago (n. 5) 26, para. 32, (1979) YBILC, vol. II/1, 53, para. 115. 161 CMS v. Argentina (n. 20) para. 388. 162 The LG&E tribunal did not find a duty of compensation. It held that Art. 27(b) ‘[did] not specify if any compensation is payable to the party affected by losses during the state of necessity’ and decided that the damages suffered during the state of necessity should be borne by the investor. LG&E v. Argentina (n. 21) para. 264. This may be explained, however, by the fact that the tribunal primarily relied on the treaty provision (Art. XI of the US–Argentina BIT). See also CMS v. Argentina, Decision on Annulment (n. 37) paras. 145–146. The Continental Casualty tribunal found that with respect to the claims where Art. XI BIT was applicable – the emergency exception did not cover some measures of December 2004 – Argentina had not breached its obligations, Continental Casualty v. Argentina (n. 28) para. 266. The tribunal, thus, did not examine the applicability of Art. 27 of the ILC Articles. The Sempra tribunal referred to the non-prejudice character of Art. 27 of the ILC Articles but also

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falls’. Likewise literature seems to follow along these lines, with e.g. Christakis rejecting a duty of compensation in cases of force majeure.163 Such denial also finds backing in jurisprudence.164 Especially older cases, such as the Ottoman Empire Lighthouses Concession case165 are revealing: when accepting the Greek force majeure defence with respect to the destruction of a French company’s lighthouse during the First World War through Turkish bombs, the PCA declined any duty of compensation. 68 This does not prevent ex gratia compensations. The UN Secretariat Survey lists several instances where States agreed to compensate for the losses suffered by other States in case of measures adopted under force majeure conditions; this, however, generally with the addition that the compensation was not awarded because of a legal obligation.166 The denial of such duty to pay compensation a fortiori applies to countermeasures. It would indeed be illogic to compensate a State for measures adopted as reaction to the latter’s prior wrongful acts. 69 In conclusion, there is no ‘one fits all’ answer to the question of compensation which depends on the circumstance precluding wrongfulness at stake. No duty of compensation arises in cases of force majeure or lawful countermeasures, being, in Christakis’ terms, ‘true’ circumstances precluding wrongfulness.167 In case of a successful reliance on necessity, conversely, a State arguably has to compensate investors for their losses. This is even more so, as the State is still in a better position than when found in breach of its obligations. At first, the concept of damage is narrower, since Article 27 of the ILC Articles limits the maximum amount to compensation for ‘material loss’.168 Accordingly, only actual losses are to be adjusted, but neither lost profits nor indirect dam-

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164 165

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stated that Argentina’s crisis situation had to be taken into account when determining the compensation to be paid, Sempra v. Argentina (n. 21) paras. 393–397. Théodore Christakis (n. 152) 256 et seq. See however Forteau who argues in favour of a burden sharing, Mathias Forteau, ‘Reparation in the Event of a Circumstance Precluding Wrongfulness’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 887, 893. The question of compensation in case of a successful reliance on force majeure does not seem to have been raised in investment arbitration so far. PCA, The Ottoman Empire Lighthouses Concession case (France v. Greece), Award, 27 July 1956, Claim No. 15, XII RIAA, 155, 219–220. See also the reference made in the Secretariat Survey (n. 83) 187–188, para. 483 et seq. See furthermore Andrea Gattini, Zufall und force majeure im System der Staatenverantwortlichkeit anhand der ILC Kodifikationsarbeit (Duncker & Humblot, 1991) 60–61. See e.g. Saida Incident, Algeria, 1881, where France agreed to compensate the Spanish victims for the damages suffered in riots. This, however, with explicit reference that it was not because of a legal duty: ‘Such measures of indemnification plainly cannot in the present case derive from a legal obligation. The events at Saida belong to the category of inevitable circumstances to which all those dwelling in the land are exposed, as though to the ravages of a plague, and for which the State cannot be held responsible.’, Alexandre Charles Kiss, Répertoire de la pratique française en matière de droit international public, vol. III, (CNRS, 1965), 618; Secretariat Survey (n. 83) 112–113, para. 190 et seq. See also the 1885 Rock Spring Riot (USA) in John Bassett Moore, History and Digest of the International Arbitrations to which the United States has been a Party, vol. VI, (Gov. Print. Off., 1898), 822– 823; Secretariat Survey (n. 83) 115, paras. 202–203. Théodore Christakis (n. 152) 251 et seq.

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ages. What is more, compensation is due only after the end of the state of necessity, once the circumstance precluding wrongfulness ceases to exist, at the same time with the revival of the obligation.169 Also potential interests start to run only at that point in time.170 There are thus advantages for a State whose necessity defence is accepted notwithstanding its general duty to pay compensation. F. Cross-Cutting Issues

Certain general and cross-cutting issues are of relevance for the application of 70 all defences (necessity, force majeure and countermeasures); some of them being of special concern in the context of investment arbitration. In addition to the relatively uncontroversial issue of non-derogability from ius cogens obligations (1.), of most interest seems the defences’ availability vis-à-vis private persons/ investors (2.) and their relationship to specific treaty provisions (3.). 1. Article 26 of the ILC Articles: Non Interference with Ius Cogens Obligations

Article 26 of the ILC Articles generally prevents derogations from ius cogens 71 obligations in reliance on circumstances precluding wrongfulness: Compliance with peremptory norms. Nothing in this chapter precludes the wrongfulness of any act of a State which is not in conformity with an obligation arising under a peremptory norm of general international law.

The ILC Commentary confirms that ‘[w]here there is an apparent conflict be- 72 tween primary obligations, one of which arises for a State directly under a peremptory norm of general international law, it is evident that such an obligation must prevail.’171 The ILC Articles do not solve, however, the difficult issue of what qualifies as ius cogens. Taking the view that this was a matter of interpretation of the primary obligation, the ILC Commentary limits itself to enumerating some ‘clearly accepted and recognised’ peremptory norms by way of example, namely ‘the prohibitions of aggression, genocide, slavery, racial discrimination, crimes against humanity and torture and the right to self determination.’172 Nevertheless, despite the doubts surrounding the identification of ius cogens obligations173 and the merely exemplary mention made by the ILC, the 168 The ILC Commentary confirms that ‘[t]he reference to “material loss” is narrower than the concept of damage elsewhere in the articles: article 27 concerns only the adjustment of losses that may occur when a party relies on a circumstances covered by Chapter V’, International Law Commission (n. 6) ‘Article 27’, para. 4 (James Crawford, 190). 169 See in this sense e.g. Andrea Bjorklund (n. 38) 515. 170 See also Art. 38 of the ILC Articles. 171 International Law Commission (n. 6) ‘Article 26’, para. 3 (James Crawford, 187). 172 Ibid., ‘Article 26’, para. 5 (James Crawford, 188). 173 Lauri Hannikainen, Peremptory Norms (jus cogens) in International Law: Historical Development, Criteria, Present Status (Lakismiesliiton Kustannus, 1988); Karl Zemanek, ‘The Metamorphosis of Jus Cogens: From an Institution of Treaty Law to the Bedrock of the International Legal Order?’ in Enzo Cannizzaro (ed), The Law of Treaties Beyond the Vienna

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matter does not seem to have ever posed any problems in investment related contexts. Very few tribunals, such as the CMS tribunal, referred to Article 26 of the ILC Articles at all; and this only briefly and without further details.174 Investment law thus reflects the generally very limited relevance of peremptory norms.175 2. Possible Reliance vis-à-vis Individuals/Investors? 73

A next ‘cross-cutting issue’ concerns the possible reliance on circumstances precluding wrongfulness vis-à-vis individuals (investors). Since the ILC Articles on State Responsibility apply in principle to interstate relations, the question arises whether a State may rely on the defences vis-à-vis private persons such as investors. It seems useful to distinguish between a possible reliance on necessity or force majeure, which do not presuppose a prior wrongful act, and countermeasures which are only lawful if taken in response to a breach of international law by another State (Art. 49(1) of the ILC Articles).176 a) Necessity and Force Majeure

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Several arguments support the view that a State may invoke necessity (or force majeure) vis-à-vis private persons (investors). At first, the availability of the necessity defence may be derived from de maiore ad minus considerations. It is indeed difficult to conceive why a State would not be allowed to suspend the fulfilment of its payment obligations to the extent necessary to protect elementary concerns of the bien commun, such as the protection of the life and health of its citizens, also towards investors.177 This view is also shared by the ILA Committee on International Monetary Law which affirms the availability of the defence in its Report 1988 along similar lines.178 What is more, the availability of

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Convention (Oxford University Press, 2011) 381–410. Allott states: ‘(…) peremptory norms are an unconvincing limitation on the power of states to set aside the law in the name of exceptional circumstances. The peoples of the world are likely to gain very little reassurance from the concept of peremptory norms as a defense against the abuses of power by governments acting in the name of states in the current state of international law.’ Philip Allott, ‘State Responsibility and the Unmaking of International Law’ (1988) 29 Harv. Int’l L. J. 1, 21. According to the CMS tribunal: ‘(…) It does not appear (…) that a peremptory norm of international law might have been compromised, a situation governed by Article 26 of the Articles.’ CMS v. Argentina (n. 20) para. 325. According to Ian Brownlie: ‘the vehicle of ius cogens has rarely, if ever, left the garage of article 53 of the Vienna Convention on the Law of Treaties.’ Cited by James Crawford, ‘The Relationship between Sanctions and Countermeasures’ in Vera Gowlland-Debbas (ed), United Nations Sanctions and International Law (Kluwer, 2001) 57. See also Martins Paparinskis (n. 128) 342. In this sense e.g. August Reinisch (n. 12) 27. ILA Committee on International Monetary Law, ‘The International Law of External Debt Management. Some Current Aspects’, in ILA-Report, 1988, 418. The ILA Committee also states that ‘(…) it would be surprising if an individual or institution were to receive a higher degree of protection than a state. In general, aliens will enjoy only a minimum standard of protection, whereas the rules on the relationship between States reflect the principle of

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the defence corresponds to the growing material position of the individual in contemporary international law. This change of paradigms is most visible in subregimes such as international human rights law, international criminal law but also in ICJ findings on diplomatic protection.179 Likewise, doctrine supports the availability of the necessity defence against 75 private persons, inter alia investors. Paparinskis for instance affirms: (…) those circumstances precluding wrongfulness that do not require an anterior breach (like necessity, distress and force majeure) can in principle also apply to obligations owed to investors. Consequently, the application of law of necessity to obligations owed under US-Argentina BIT is in principle uncontroversial: the protection of essential interests of the State is a circumstance that could preclude wrongfulness of an obligation owed also to individuals.180

The possible availability of the defence in private–State relationships is fur- 76 thermore confirmed in jurisprudence, as already in the Serbian Loans181 and French Company of Venezuelan Railroads cases.182 Likewise in the Company General of the Orinoco Case the Umpire accepted Venezuela’s termination of concession contracts with the French company in reliance on force majeure because of the danger of an imminent war with Colombia.183 Although these are inter-State cases brought in the exercise of the individuals’/companies’ home State’s diplomatic protection, they clearly indicate a possible relevance of necessity (force majeure) towards private persons as in effect, it is their rights that are at stake.184 What is more, none of the investment tribunals which have decided on the Argentine cases so far has declined the general availability of the defence.185 Accordingly, the decision of the German Federal Constitutional Court of 8 77 May 2007 (Second Senate, Judge Lübbe-Wolff dissenting), which rejected Argentina’s reliance on necessity on the basis that the ILC Articles governed interState relations and that international practice would not be sufficient to find a

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180 181 182 183 184

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sovereign equality.’; ibid., at 432. Also Schill supports the availability of the necessity defence towards investors: Stephan W. Schill, ‘Der völkerrechtliche Staatsnotstand in der Entscheidung des BVerfG zu Argentinischen Staatsanleihen – Anachronismus oder Avantgarde?’ (2008) 68 ZaöRV 45–67. See e.g. Case concerning Ahmadou Sado Diallo (Guinea v. Congo), ICJ Judgment, 24 May 2004, paras. 49–96. See also Stephan Schill (n. 178) 55–56. Such approach finds support in a generally accepted line of jurisprudence that States are entitled to unilaterally modify or terminate contracts with private investors in the public interest, provided that they pay adequate compensation; see ibid., at 60 et seq. for further reference. Martins Paparinskis (n. 128) 342. Serbian Loans (n. 87) 39–40. French Company of Venezuelan Railroads case, 31 July 1905, X RIAA 285, 353–354. Company General of the Orinoco case (n. 159) 280. See also the Russian Indemnities case where the Permanent Court of Arbitration stated explicitly that force majeure was available in international as well as in private law. ‘L’exception de la force majeure (…) est opposable en droit international public aussi bien qu’en droit privé (…)’ Russian Indemnities case (n. 87) 443. See e.g. CMS v. Argentina (n. 20); LG&E v. Argentina (n. 21). The BG tribunal avoids taking a clear position on the availability of the defence, BG v. Argentina (n. 34) para. 408 et seq.

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customary law rule that a State could rely on necessity also vis-à-vis individuals,186 seems at odds with contemporary international law.187 Rather, one is inclined to follow Judge Lübbe-Wolff’s dissenting opinion, who forcefully argued that the necessity defence was an accepted general principle of law, reliance on which was not to be restricted towards private persons in the way as perceived by the majority of the Court.188 In result, it seems safe to assume that a State may rely on necessity (and force majeure) to preclude the wrongfulness of noncompliance with its obligations also vis-à-vis individuals, i.e. investors. b) Countermeasures 78

A different approach is warranted in case of countermeasures whose invocation seems generally excluded. Since, as was argued before, investors’ rights should not be considered as merely derivative from their home State but as direct, conferring them a quasi third party status, countermeasures may not be adopted because of the investors’ home State’s breach of international law. On the other hand, since Article 49(1) allows for countermeasures only in response to a prior breach of international law by another State, investors are structurally incapable of committing the required internationally wrongful act themselves.189 This de facto prevents the availability of the countermeasures defence.190 It also finds support in jurisprudence: as is well known, the CPI and Cargill tribunals declined Mexico’s reliance on countermeasures, arguing with investors’ direct rights. Also arbitrators Lowenfeld and Rovine, in their separate/concurring opinions, reasoned along similar lines. Thus, Paparinskis’ conclusion seems correct: 186 German Federal Constitutional Court, Decision of 8 May 2007, 2 BvM 1-5/03; NJW 2007, 2610. The cases were brought by private persons in German courts for Argentina’s default on sovereign bonds in early 2002. While the Court accepted that necessity was recognised as circumstance precluding the wrongfulness of a breach of international law, it held that ‘currently no rule of general international law can be ascertained entitling a State, vis-à-vis private individuals, to suspend the performance of due obligations for payment arising under private law by invoking necessity based on an inability to pay.’, ibid. (translated by author). 187 See also Stephan Schill (n. 178) 45; Stephan W. Schill and Yun-I Kim, ‘Sovereign bonds in economic crisis: Is the necessity defense under international law applicable to investor-State relations? A critical analysis of the decision by the German Constitutional Court in the Argentine bondholder cases’, (2010–2011) YB Int’l Inv. L. & Pol’y 489–516; Stephan Hobe, ‘Völkerrechtlicher Notstand im internationalen Investitionsrecht’, 2011 KSzW 121–127. 188 Dissenting Opinion of Judge Lübbe-Wolff (n. 186) paras. 75–95. 189 See Martins Paparinskis (n. 128) 332, on the ratione personae limits of countermeasures with reference to James Crawford’s Third Report (n. 144) paras. 312d, 349. 190 See also Paparinskis comparable reasoning concerning human rights: ‘(…) the rationale of non-applicability of countermeasures to human rights seems to lie in the “quasi-third party” role of the individual who is structurally incapable of triggering the entitlement for the State to adopt countermeasures.’ Ibid., at 334. See furthermore Paparinskis: ‘(…) the lack of such an earlier act (because it has not been committed or because it has been committed by another State) would mean that countermeasures may not be applied. (…) the obligations owed to individuals could conceptually be assimilated to obligations owed to States under this rule, and since individuals are structurally incapable of breaching international obligations owed to states, the conditions for lawful application of countermeasures against them will never be fulfilled.’ Ibid., at 332.

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IV. Circumstances Precluding Wrongfulness (…) the relationship between countermeasures as a circumstance precluding wrongfulness and investment protection obligations is not entirely clear, but the most plausible conceptualization would treat countermeasures as not excluded in principle but as not applicable to the investors’ direct rights under the treaty.191

3. The Defences’ Relationship to Treaty Provisions

Further questions concern the relationship between the circumstances pre- 79 cluding wrongfulness of the general international law of State responsibility and possible treaty provisions. This seems of particular relevance given the numerous non-precluded measures clauses in BITs (e.g. Art. XI of the US–Argentina BIT) and the NAFTA’s and WTO Agreement’s secondary rules dealing with consequences of their breach.192 As will be shown below, in view of the distinction between primary and secondary rules, between the law of treaties and the law of State responsibility, different approaches are needed. The following analysis proceeds from the assumption that there are no completely closed subsystems, i.e. ‘self-contained’ regimes, which would prevent resorting to general international law.193 a) Generalities

The ILC, when drafting the Articles on State Responsibility, distinguished be- 80 tween primary and secondary rules.194 The ILC Commentary explicitly states that the conditions whether or not there is a breach of a treaty are ‘not the function of the articles’.195 Put differently, the Articles on State Responsibility do not define the content and extent of State obligations, the breach of which gives rise to State responsibility.196 They are merely concerned with the consequences which flow from their breach. An (apparent) breach of a primary obligation may thus be viewed as a precondition for the application of the law of State responsibility.

191 Ibid., at 351. 192 See e.g. Arts. 22 and 23 of the WTO Dispute Settlement Understanding; see also Chapters 11, 19 and 20; and especially Art. 2019 of the North American Free Trade Agreement (NAFTA). 193 See Bruno Simma and Dirk Pulkowski, ‘Of Planets and the Universe. Self Contained Regimes in International Law’ (2006) 17 EJIL 483–529; Bruno Simma and Dirk Pulkowski, ‘Leges Speciales and Self-Contained Regimes’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 139–164 for further reference. 194 See the discussion reported in (1999) YBILC, vol. II/2, 73–74, 85; International Law Commission (n. 6) ‘Circumstances Precluding wrongfulness’, paras. 2–4 and 7 (James Crawford, 160 et seq.). 195 International Law Commission (n. 6) ‘Introduction’, para. 4 (James Crawford, 75). 196 Ibid., para. 1 (James Crawford, 74).

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This distinction of primary and secondary rules broadly corresponds to the differentiation between the law of treaties and the law of State responsibility.197 According to Reuter (…) the points of contact and interactions between the theory of treaties and the theory of responsibility are both numerous and intricate. Still, they remain distinct sets of rules separated by a basic difference: the rules of the law of treaties chronologically and logically come first, or rather are primary rules, whereas the rules of responsibility come later, or in other words are secondary, applying only once a primary rule is breached.198

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The ICJ drew upon the distinction between the law of treaties and the law of State responsibility in the Gabčíkovo-Nagymaros case.199 Likewise the Rainbow Warrior tribunal distinguished between the law of treaties and the law of State responsibility and held that both fields of law could be applied sequentially to the same situation.200 b) Necessity and Treaty-Based Emergency Exceptions

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Concerning the relationship between the customary necessity defence and treaty-based emergency exceptions, the distinction between primary and secondary norms induces a two step approach. First, one has to determine with reference to the relevant primary rule (the law of treaties) whether a prima facie breach of treaty obligations has in effect occurred. Only if a violation is established, the (secondary) law of State responsibility comes into play to deal with the consequences of the breach. In the Argentine cases, this implies that when the treaty exception is found to be applicable or, put differently, when a measure 197 For further reference, see James Crawford and Simon Olleson, ‘The Exception of Non-Performance: Links between the Law of Treaties and the Law of State Responsibility’ (2000) 21 Austl. YB Int’l L. 55; Prosper Weil, ‘Droit des traités et droit de la responsabilité’ in Manuel Rama-Monaldo (ed), Le droit international dans un monde en mutation. Liber Amicorum Eduardo Jimenez de Aréchaga (vol. 1, Fundación de Cultura Univ., 1994) 523, 528 et seq.; Derek W. Bowett, ‘Treaties and State Responsibility’ in Le droit international au service de la paix, de la justice et du développement. Mélanges Michel Virally (Pedone, 1991) 137, 140 et seq.; Pierre-Marie Dupuy, ‘Droit des traités, codification et responsabilité internationale’ (1997) 43 Annuaire Français de Droit International 7–30. See however below, Part F.3.c), as to the limitations of the mentioned transposition of the differentiation between primary and secondary rules to the relationship between the law of treaties and the law of State responsibility in case of treaties which establish their own system of secondary rules to address the consequences of their breach. 198 Paul Reuter, Introduction to the Law of Treaties (Kegan Paul, 1995) 187. 199 According the ICJ: ‘(…) those two branches of international law [the law of treaties and the law of state responsibility] obviously have a scope that is distinct. A determination of whether a convention is or is not in force, and whether it has or has not been properly suspended or denounced, is to be made pursuant to the law of treaties. On the other hand, an evaluation of the extent to which the suspension or denunciation of a convention, seen as incompatible with the law of treaties, involves the responsibility of the State which proceeded to it, is to be made under the law of state responsibility.’ ICJ, Gabčíkovo-Nagymaros (n. 10) para. 47. 200 Rainbow Warrior (n. 7) 251–252, para. 75. See for further details James Crawford and Simon Olleson (n. 197) 57. Art. 73 of the Vienna Convention on the Law of Treaties (VCLT) confirms the distinction between the law of treaties and the law of State responsibility insofar as it excludes questions of State responsibility from the VCLT’s scope of application.

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is permissible under Article XI of the US–Argentina BIT, there is no violation of treaty obligations and, consequently, no need to refer to the law of State responsibility. As no violation of the primary norm occurred in the first place, no need arises to apply the secondary norm concerning the preclusion of wrongfulness. Likewise, no question of compensation arises.201 The law of State responsibility is only relevant when an emergency situation falls outside the scope of the treaty exception and a State is found to be in apparent breach of its treaty obligations. In this case, one has to establish with reference to the elements of Article 25 of the ILC Articles whether the wrongfulness of the respective State’s breach is in effect precluded. The two step approach adopted by the CMS and Sempra Annulment Committees as well as by the Continental Casualty (and BG) tribunals seems to be most in line with these considerations. c) Countermeasures and Secondary Rules in Treaty Regimes

The transposition of the differentiation between primary and secondary rules 84 to the law of treaties and the law of State responsibility is more complex in case of treaties which establish their own system of secondary rules to address the consequences of their breach, such as human rights treaties,202 the NAFTA 203 or the GATT/WTO regime.204 As both constitute secondary rules of international law and thus are on the same footing, one has to turn to the lex specialis principle of Article 55 of the ILC Articles205 which determines the relationship between the ILC Articles and other (secondary) rules of international law.206 The lex specialis principle will generally point to the more specific treaty provision to be applicable. Also Article 52(3)(b) of the ILC Articles may be considered as reflection of the lex specialis rule (in a broad sense), since it excludes countermeasures when: ‘(…) b. The dispute is pending before a court or tribunal which has the authority to make decisions binding on the parties.’207 Put differently, countermeasures are a means of last resort. Likewise jurisprudence generally 201 According to the CMS Annulment Committee: ‘(…) Article XI, if and for so long as it applied, excluded the operation of the substantive provisions of the BIT. That being so, there could be no possibility of compensation being payable during that period.’ CMS v. Argentina, Decision on Annulment (n. 37) para. 146. 202 See for instance Art. 41 ECHR concerning compensation. See in general Bruno Simma, ‘Human Rights and State Responsibility’, in August Reinisch and Ursula Kriebaum (eds), The Law of International Relations – Liber Amicorum Hanspeter Neuhold (Eleven, 2007) 359. 203 See e.g. Chapters 11, 19 and 20 NAFTA. 204 See e.g. restrictions on countermeasures in the GATT/WTO regime, Arts. 22 and 23 of the DSU. For further reference see Mitsuo Matsushita, Thomas J. Schoenbaum and Petros C. Mavroidis, The World Trade Organization. Law, Practice, and Policy (Oxford University Press, 2006) 143 et seq. 205 Art. 55 of the ILC Articles: ‘These articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or the content or implementation of the international responsibility of a State are governed by special rules of international law.’ 206 International tribunals rely on Art. 55 of the ILC Articles as well. See e.g. United Parcel Services, Inc. v. Canada, NAFTA Arbitration, 11 June 2007, para. 54 et seq.

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confirms the lex specialis approach. The CPI tribunal affirmed accordingly that: ‘(…) The rules on State responsibility (of which, it is accepted, the most authoritative statement is to be found in the ILC Articles) are in principle applicable under the NAFTA save to the extent that they are excluded by provisions of the NAFTA as lex specialis.’208 d) Appreciation 85

As becomes clear from the above, there are different techniques to determine the relationship between the defences of the general law of State responsibility and specific treaty provisions. In the case of necessity (and force majeure), a two step approach is warranted. Conversely, the lex specialis rule is called for with respect to countermeasures when treaties establish their own systems of secondary rules regulating the consequences of their breach. Still, both approaches privilege the treaty over general international law: the two step approach starts with the examination of the treaty exception and the lex specialis rule takes the generally more specific treaty standard as primarily applicable. This seems important since it honours the will of the State parties as expressed in the treaty. G. Conclusion

86 1.

Among the circumstances precluding wrongfulness incorporated in the ILC Articles, necessity, force majeure and countermeasures have gained certain relevance in investment arbitration. Amid these, of comparatively most importance proved the necessity defence which enables a State to derogate from its obligations towards foreign investors in cases of economic emergencies under certain restricted conditions. Conversely, the high substantive threshold of force majeure, which requires irresistibility and material impossibility, is hardly ever reached in investment contexts. Likewise the countermeasures defence seems generally precluded with respect to investors’ direct rights. This is also reflected in jurisprudence: while especially the cases brought in the context of Argentina’s economic crisis showed the relevance of the necessity defence (Art. 25 of the ILC Articles), the importance of

207 See also Art. 50(2)(a) of the ILC Articles: ‘A state taking countermeasures is not relieved from fulfilling its obligations: a. under any dispute settlement procedure applicable between it and the responsible state (…)’. 208 CPI v. Argentina (n. 105) para. 76. The CPI tribunal examined whether the ruling by a WTO dispute settlement body excluded the applicability of countermeasures on the basis of the lex specialis argument which it rejected. Ibid., para. 159. The tribunal concluded that ‘(…) In such a case (…) an act which was contrary to such lex specialis would involve the responsibility under the lex specialis in question but it would not prevent the countermeasures principle operating to preclude wrongfulness in respect of obligations arising under other international agreements or rules of customary international law.’ Ibid., para. 159. The tribunal thus concluded: ‘(…) the proceedings before the WTO and the decisions of the Panel and Appellate Body do not prevent Mexico from relying on the countermeasures principle in the present proceedings.’ Ibid., para. 160.

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force majeure and countermeasures has been minor, with both defences having never been accepted so far. 2.

The investment tribunals’ decisions highlight the complex questions which 87 arise from the application of the circumstances precluding wrongfulness in the context of investment arbitration. These include the relationship between the customary law based defences and specific treaty provisions, the distinction between primary and secondary norms, the law of treaties and the law of State responsibility, and the nature of investors’ rights – either derivative of their home State or direct. The tribunals’ inconsistent decisions in the context of the Argentine crisis, as well as their diverging positions with respect to Mexico’s countermeasures defence, evidence the tribunals’ struggling in finding a common approach. Especially in the context of the Argentine crisis, the contradictory decisions rendered were criticised for the ensuing legal insecurity.209 They impeded predictability and, in von Bogdandy’s and Venzke’s terms, the ‘stabilisation of normative expectations’210 and thus further contributed to the argued legitimacy crisis of international investment arbitration.211

3.

At the same time, especially the Argentine decisions point towards possible 88 solutions. These should include, in this author’s view, the adoption of a firm public international law approach to investment arbitration, in line with predominant doctrinal and ILC approaches in areas such as treaty interpretation, the relationship between primary and secondary norms or the nature of investor rights. Likewise, reference to previous decisions, a system building by (de facto) precedent, is called for.212 This would favour coherence which is, in Thomas Franck’s terms, an important factor of legitimacy.213 Such legitimacy seems particularly warranted in view of international investment arbitration’s impact on the regulatory powers of States.214 Especially cases of reliance on circumstances precluding wrongfulness are usually caused by

209 See e.g. Michael Waibel (n. 38) 647; Christina Binder (n. 38). 210 Armin von Bogdandy and Ingo Venzke, ‘Beyond Dispute: International Judicial Institutions as Law Makers’ (2011) 12 German L. J. 979–1004. 211 See generally Michael Waibel, Asha Kaushal, Kyo-Hwa Chung and Claire Balchin (eds), The Backlash against Investment Arbitration (Kluwer Law International 2010); see also the ‘Public Statement on the International Investment Regime’, 31 August 2010, available at http://www.osgoode.yorku.ca/public-statement/documents/Public%20Statement%20%28Jun e%202011%29.pdf. 212 See generally Marc Jacob, ‘Precedents: Lawmaking Through International Adjudication’ (2011) 12 German L. J., 1005–1032, for further reference on precedents. 213 Thomas Franck, Fairness in International Law and Institutions (Clarendon Press, 1995) 30– 46. See also Tullio Treves, ‘Aspects of Legitimacy of Decisions of International Courts and Tribunals’ in Rüdiger Wolfrum and Volker Röben (eds), Legitimacy in International Law (Springer, 2008) 169, 175. Positively, inter alia the Continental Casualty (n. 28, paras. 169, 179 et seq.), the Total (n. 31, para. 177) and the Cargill (n. 105, paras. 380, 385 and 410 et seq.) tribunals drew on previous decisions. 214 On the public law dimension of investment arbitration see e.g. Stephan W. Schill, ‘International Investment Law and Comparative Public Law – An Introduction’ in Stephan W. Schill

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(economic) crisis situations at the heart of State sovereignty and thus touch upon a particularly sensitive field. 89 4.

A consistent application of public international law may thus benefit the sub-regime international investment law. At the same time, investment arbitration enlightens the body of general international law: given its specific features and hybrid nature, the issues raised in the investment tribunals’ handling of the circumstances precluding wrongfulness provide useful insights for the latter. So, in the ideal, one might envisage a fruitful dialogue between investment law and general international law.

(ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010) 3.

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Chapter 6: The Scope of Application of International Investment Agreements I. Ratione Temporis

Noah Rubins and Ben Love* A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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B. Application to Acts Before a Treaty’s Entry into Force . . . . . . . . . . . . . . . . . . 1. Non-Retroactivity of Treaty Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Continuous Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Composite Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Provisional Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Article 18 of the Vienna Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Non-Treaty Causes of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 5 11 16 20 24 29

C. Disputes Arising Before a Treaty’s Entry into Force . . . . . . . . . . . . . . . . . . . . .

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D. Laches and Extinction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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E. Termination and Survival Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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F. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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A. Introduction

The temporal jurisdiction conferred by a given treaty constitutes one of the 1 most difficult issues in international law, and investment treaties present no exception. In general, investment treaty tribunals have adopted the basic rule that a State’s obligations under an investment treaty do not extend to periods before a treaty’s entry into force. Yet this rule is subject to qualification, in particular with respect to the question of temporal jurisdiction, an issue that is further complicated by difficult factual questions and specific language in many bilateral investment treaties (BITs). Tribunals have accordingly produced a body of inconsistent case law that of- 2 ten falls short of clearly delineating basic temporal concepts. Some decisions have distinguished between the temporal application of an investment treaty’s substantive provisions and the temporal jurisdiction of the same treaty, which is usually defined by the treaty’s dispute resolution clause. Still, other decisions have applied purportedly general rules of international law articulated in other decisions applying specific treaty language to derive the supposed rule in question. These inconsistencies in the jurisprudence underscore the importance of examining specific treaty language when reconciling temporal issues. This chapter provides an overview of the basic temporal rules and issues that 3 arise in investment treaty cases, noting contrary jurisprudence where applicable. * The views expressed in this chapter do not necessarily represent the views of Freshfields Bruckhaus Deringer or its clients.

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This chapter addresses: (i) jurisdiction to consider acts before a treaty’s entry into force; (ii) jurisdiction over disputes that arise before a treaty’s entry into force; (iii) the availability of arguments of laches or extinction to preclude jurisdiction over a claim; and (iv) the effect of termination and survival clauses in investment treaties. 4 Although this chapter is aimed primarily at addressing the ratione temporis coverage of investment treaties,1 the analysis below extends to the temporal scope of a treaty’s substantive protection, which often limits the temporal scope of admissible claims due to the narrow wording of the dispute resolution clauses found in many investment treaties. B. Application to Acts Before a Treaty’s Entry into Force 1. Non-Retroactivity of Treaty Obligations 5

It is a basic rule of international law that ‘[a] judicial fact must be appreciated in light of the law contemporary with it, and not of the law in force at the time such a dispute in regard to it arises or falls to be settled.’2 Article 13 of the International Law Commission Articles on State Responsibility for Internationally Wrongful Acts (ILC Articles) reflects this rule against non-retroactivity of international law obligations: An act of a State does not constitute a breach of an international obligation unless the State is bound by the obligation in question at the time the act occurs.3

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Article 28 of the Vienna Convention on the Law of Treaties (Vienna Convention) retained the non-retroactivity rule in the context of treaty obligations: Unless a different intention appears from the treaty or is otherwise established, its provisions do not bind a party in relation to any act or fact which took place or any situation which ceased to exist before the date of the entry into force of the treaty with respect to that party.4

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Investment treaty tribunals have consistently followed the non-retroactivity rule when determining the temporal scope of a State’s treaty obligations. The tribunal in Mondev v. USA observed: The basic principle is that a State can only be internationally responsible for breach of a treaty obligation if the obligation is in force for that State at the time of the alleged breach.5

1 The focus of this chapter is on the practice of investment treaty tribunals (namely decisions issued through June 2012). We accordingly do not reference numerous decisions of relevance issued outside of the investment treaty context. For an analysis of such decisions, including their relevance to temporal issues in investment treaty arbitration, see generally Nick Gallus, The Temporal Scope of Investment Protection Treaties (BIICL, 2009). 2 Island of Palmas case (Netherlands v. USA), 4 April 1928, (2006) II UNRIAA 829, 845. 3 James Crawford, The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries (Cambridge University Press, 2002) Art. 13, 131–134. 4 Vienna Convention on the Law of Treaties of 23 May 1969, in force 27 January 1980, 1155 UNTS 331, Art. 28. 5 Mondev International Ltd. v. USA, ICSID Case No. ARB(AF)/99/2, Award, 11 October 2002, para. 68.

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Other tribunals have cited this baseline rule favourably, leading to a presump- 8 tion that a State is not liable under an investment treaty for acts and omissions that occurred before the treaty’s entry into force.6 A finding that all of the acts giving rise to a claim occurred before a treaty’s entry into force therefore forms a strong basis for dismissing a claim when the scope of admissible disputes is limited to treaty violations. The non-retroactivity rule does not prevent a tribunal from considering acts 9 before a treaty entered into force when determining whether a State violated the treaty through acts after the treaty entered into force.7 But the rule does prevent tribunals from considering whether those acts, subject to certain qualifications discussed below, can form part of a treaty violation in their own right. Nor does the non-retroactivity rule prevent tribunals from deciding disputes 10 arising out of investments that were made before the treaty’s entry into force or exclude investments made by investors who were not qualifying nationals at the time of the investment, though some investment treaties contain provisions limiting the protection afforded to pre-ratification investments.8 2. Continuous Acts

Continuous acts that violate treaty obligations constitute one qualification to 11 the rule of non-retroactivity. Article 28 of the Vienna Convention, quoted above, reflects this principle by limiting the application of the non-retroactivity rule to prior acts and ‘any situation which ceased to exist before the date of the entry into force of the treaty (…).’9 It follows that the non-retroactivity rule would not preclude a treaty’s applica- 12 tion to a ‘situation’ which continued to exist as of the treaty’s entry into force. 6 Pac Rim Cayman LLC v. El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections, 1 June 2012, para. 2.103; Victor Pey Casado and Fondation ‘Presidente Allende’ v. Chile, ICSID Case No. ARB/98/2, Award, 8 May 2008, para. 610; Salini Costruttori S.p.A. and Italstrade S.p.a. v. Jordan, ICSID Case No. ARB/02/13, Award, 31 January 2006, paras. 170, 175; Generation Ukraine v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003, para. 11.2; Tradex Hellas S.A. v. Albania, ICSID Case No. ARB/94/2, Decision on Jurisdiction, 24 December 1996, 14 ICSID Rev.–FILJ 161 (1999) 178–180. 7 Pac Rim Cayman LLC v. El Salvador (n. 6) para. 2.105; Chevron Corporation and Texaco Petroleum Corporation v. Ecuador, PCA Case No. 34811 (UNCITRAL), Interim Award, 1 December 2008, para. 283. Victor Pey Casado and Fondation ‘Presidente Allende’ v. Chile (n. 6) para. 611; MCI Power Group L.C. and New Turbine v. Ecuador, ICSID Case No. ARB/03/6, Award, 31 July 2007, para. 93; Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/ 05/18, Decision on Jurisdiction, 6 July 2007, para. 255; Técnicas Medioambientales Tecmed, S.A. v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 66; Mondev International Ltd. v. USA (n. 5) paras. 69–70. 8 See, e.g., Agreement Between the Republic of Chile and the Kingdom of Spain for the Reciprocal Protection and Promotion of Investments of 2 October 1991, in force 28 March 1994, Art. 2(2) (‘El presente Tratado se aplicará a las inversiones que se realicen a partir de su entrada en vigor por inversionistas de una Parte Contratante en el territorio de la otra. No obstante, también beneficiaría a las inversiones realizadas con anterioridad a su vigencia y que, según la legislación de la respectiva Parte Contratante, tuvieren la calidad de inversión extranjera.’). 9 Vienna Convention on the Law of Treaties (n. 4) Art. 28.

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The ILC’s Commentary to Article 28 of the Vienna Convention confirms this interpretation: If (…) an act or fact or situation which took place or arose prior to the entry into force of a treaty continues to occur or exist after the treaty has come into force, it will be caught by the provisions of the treaty. The non-retroactivity principle cannot be infringed by applying a treaty to matters that occur or exist when the treaty is in force, even if they first began at an earlier date.10

13

Investment treaty tribunals have recognised the possibility that acts occurring before a treaty’s entry into force can violate a treaty if they continue after the date of the treaty’s entry into force. The tribunal in Mondev observed that: [I]n certain circumstances conduct committed prior to the entry into force of a treaty might continue in effect after that date, with the result that the treaty could provide a basis for determining the wrongfulness of the continuing conduct.11

The tribunal in SGS v. Philippines observed that ‘it is clear that [the applicable investment treaty] (…) applies to breaches which are continuing’ past the date of the treaty’s entry into force.12 The tribunal in Tecmed likewise held that a treaty protected investors from acts that ‘upon consummation or completion of their consummation after entry into force of the Agreement constitute a breach of the Agreement (…).’13 15 A related issue consists in identifying whether a course of conduct straddling a treaty’s entry into force constitutes a continuing breach. As Judge Rosalyn Higgins has noted, the concept of continuing breach ‘is not an easy one.’14 Examples of continuing breaches found by investment treaty tribunals include: (i) a failure to perform a contractual obligation (e.g., to pay a debt owed under a contract) amounts to a continuing act;15 (ii) undue delay by national courts that continued after a treaty entered into force;16 (iii) the implementation of legislation in breach of a guarantee toward a foreign investor;17 and (iv) the continued with14

10 International Law Commission, ‘Draft Articles on the Law of Treaties with commentaries’, (1966) YBILC vol. II, 187, 212 (commenting on what was then Article 24, but became Article 28). 11 Mondev International Ltd. v. USA (n. 5) para. 57. 12 SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction, 29 January 2004, para. 167. 13 Técnicas Medioambientales Tecmed, S.A. v. Mexico (n. 7) para. 68. See also United Parcel Service of America v. Canada, UNCITRAL, 24 May 2007, para 28 (‘continuing courses of conduct constitute continuing breaches of legal obligations’). 14 Rosalyn Higgins, ‘Time and the Law: International Perspectives on an Old Problem’ (1997) 46 ICLQ 501, 506. 15 SGS Société Générale de Surveillance S.A. v. Philippines (n. 12) para. 167. Cf. Impregilo S.p.A. v. Pakistan, ICSID Case No. ARB/03/30, Decision on Jurisdiction, 22 April 2005, paras. 312–313 (refusing to classify non-payment of an obligation as a continuing act because the respondent did not recognise its obligation to pay under the contract). 16 Chevron Corporation and Texaco Petroleum Corporation v. Ecuador (n. 7) para. 298. 17 LG&E Energy Corporation, LG&E Capital Corporation, and LG&E International v. Argentina, ICSID Case No. ARB/02/1, Award, 25 July 2007, para. 85 (‘the abrogation of the basic guarantees of the gas tariff regime constitutes a continuous breach that extends to the entire period during which such abrogation continues and remains not in conformity with the Treaty’). See also James Crawford (n. 3) 136 (citing ‘the maintenance in effect of legislative

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holding of permits and concessions necessary to carry out investment operations.18 By contrast, the tribunal in Pey Casado held that a single act of formal expropriation did not constitute a continuing act.19 3. Composite Acts

Composite acts that violate treaty obligations constitute another qualification 16 to the rule of non-retroactivity. The ILC defined the notion of a composite act in Article 15 of the ILC Articles: Breach consisting of a composite act 1.

2.

The breach of an international obligation by a State through a series of actions or omissions defined in aggregate as wrongful, occurs when the action or omission occurs which, taken with the other actions or omissions, is sufficient to constitute the wrongful act. In such a case, the breach extends over the entire period starting with the first of the actions or omissions of the series and lasts for as long as these actions or omissions are repeated and remain not in conformity with the international obligation.20

It follows from Article 15(2) that a State can violate applicable treaty obliga- 17 tions through a composite act that straddles the date the treaty came into force. Investment treaty tribunals have applied this principle to hold a State liable 18 for courses of conduct that began before a treaty’s entry into force. In Tecmed, the claimant argued that Mexico breached its treaty obligations through a series of actions that included delay and irregularities in granting a landfill permit before the treaty came into force and failing to renew the permit after the treaty came into force. The tribunal held that Mexico’s conduct constituted a composite breach of the treaty: INE’s contradictory and ambiguous conduct at the beginning of the relationship between INE (…) and Tecmed before the entry into force of the Agreement has the deficiencies as those encountered in such conduct during the last stage of the relationship, immediately preceding the Resolution [declining to renew the landfill permit]. Thus, INE’s conduct during such time is added to the prejudicial effects of its conduct during the last stage, which breached Article 4(1) of the Agreement.21

Other investment treaty tribunals have recognised the possibility of a compos- 19 ite breach spanning the periods before and after the entry into force of a treaty.22

18 19 20 21 22

provisions incompatible with treaty obligations of the enacting State’ as an example of a continuing breach). Pac Rim Cayman LLC v. El Salvador (n. 6) para. 3.43. Victor Pey Casado and Fondation ‘Presidente Allende’ v. Chile (n. 6) para. 608. James Crawford (n. 3) Article 15, 141–144. Técnicas Medioambientales Tecmed, S.A. v. Mexico (n. 7) para. 172. See, e.g., Société Générale in respect of DR Energy Holdings Limited and Empresa Distribuidora de Electricidad del Este, S.A. v. Dominican Republic, LCIA Case No. UN 7927, Award on Preliminary Objections to Jurisdiction, 19 September 2008, para. 91; Victor Pey Casado and Fondation ‘Presidente Allende’ v. Chile (n. 6) paras. 619–623.

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4. Provisional Application 20

The possibility that a treaty may apply provisionally, pending its entry into force, raises a third qualification to the retroactivity rule. The Vienna Convention provides the following rules on the provisional application of a treaty: 1.

2.

21

A treaty or a part of a treaty is applied provisionally pending its entry into force if: (a) the treaty itself so provides; or (b) the negotiating States have in some other manner so agreed. Unless the treaty otherwise provides or the negotiating States have otherwise agreed, the provisional application of a treaty or a part of a treaty with respect to a State shall be terminated if that State notifies the other States between which the treaty is being applied provisionally of its intention not to become a party to the treaty.23

The issue of provisional application in investment arbitration has arisen most prominently with respect to the Energy Charter Treaty (ECT), Article 45 of which provides in relevant part: 1.

2.

Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory (…), to the extent that such provisional application is not inconsistent with its constitution, laws or regulations. (a) Notwithstanding paragraph (1) any signatory may, when signing, deliver (…) a declaration that it is not able to accept provisional application. The obligation contained in paragraph (1) shall not apply to a signatory making such a declaration.24

Several tribunals constituted under the ECT have applied this provision to bind States to the ECT’s investment obligations from the date of signing the treaty, even if the requisite procedures for entry into force (especially ratification) had not yet been carried out. For example, in Petrobart v. Kyrgyzstan, the tribunal found that Great Britain’s signature of the treaty on behalf of Gibraltar bound Gibraltar to the ECT’s obligations on a provisional basis, even though Great Britain’s later ratification of the ECT excluded Gibraltar.25 The tribunal in Kardassopoulos v. Georgia likewise applied the ECT provisionally to take jurisdiction over the claim that Georgia had expropriated the claimant’s investment after signing, but before ratifying, the ECT.26 23 Most recently, a tribunal deciding a trio of arbitrations arising out of the Yukos affair, which involves claims in the tens of billions of dollars, considered the issue of provisional application to Russia, which had never ratified the ECT.27 The tribunal considered that Russia was entitled to rely on Article 45(1) 22

23 Vienna Convention on the Law of Treaties (n. 4) Art. 25. 24 The Energy Charter Treaty of 17 December 1994, Art. 45. 25 Petrobart Limited v. Kyrgyzstan, SCC Arbitration No. 126/2003, Award, 29 March 2005, 62– 63. See also Georgios Petrochilos and Noah Rubins, ‘Final Arbitral Award Rendered in 2005 in SCC Case 126/2003, Petrobart Ltd. v. The Kyrgyz Republic: Observations by Georgios Petrochilos & Noah Rubins’ (2005) 3 Stockholm Int’l Arb. Rev. 100–128, paras. 12–18. 26 Ioannis Kardassopoulos v. Georgia (n. 7) paras. 247, 248. The tribunal later found that Georgia had expropriated the claimant’s investment. 27 Yukos Universal Limited (Isle of Man) v. Russia, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009; Hulley Enterprises Ltd. v. Russia, PCA Case No. AA 226, Interim Award on Jurisdiction and Admissibility, 30 November 2009; Vet-

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to preclude the provisional application of the ECT, but that the conditions for invoking that article (i.e., the inconsistency of provisional application with Russian law) were not present.28 Accordingly, the tribunal found that the ECT provisionally applies to investments made in Russia before 19 October 2009 (the date Russia withdrew its signature of the ECT) for 20 years until 19 October 2029,29 meaning that the tribunal could assume jurisdiction over the claims brought by the claimants. 5. Article 18 of the Vienna Convention

Yet another qualification to the non-retroactivity rule stems from Article 18 of 24 the Vienna Convention, which imposes the following obligation on States that have signed, or otherwise consented to be bound by, a treaty before that treaty’s entry into force: A State is obliged to refrain from acts which would defeat the object and purpose of a treaty when: (a) it has signed the treaty or has exchanged instruments constituting the treaty subject to ratification, acceptance or approval, until it shall have made its intention clear not to become a party to the treaty; or (b) it has expressed its consent to be bound by the treaty, pending the entry into force of the treaty and provided that such entry into force is not unduly delayed.30

Only two known tribunals have addressed Article 18’s application in the in- 25 vestment treaty context. The tribunal in Tecmed specifically stated it would take Article 18 into account when assessing Mexico’s liability for acts pre-dating the Spain–Mexico BIT’s entry into force: Writings of publicists point out that Article 18 of the Vienna Convention does not only refer to the intentional acts of States but also to conduct which falls within its provisions, which need not be intentional or manifestly damaging or fraudulent to go against the principle of good faith, but merely negligent or in disregard of the provisions of a treaty or of its underlying principles, or contradictory or unreasonable in light of such provisions or principles.31

The tribunal in Tecmed ultimately did not decide whether Mexico’s conduct 26 breached Article 18, because it found that Mexico’s pre-treaty acts were subsumed as part of a composite breach of the treaty. The tribunal in MCI v. Ecuador took a more restrictive view when consider- 27 ing an argument that Ecuador breached Article 18 through bad faith conduct. It held: [T]he distinction between the extent of the obligation not to defeat the object and purpose of a treaty and the retrospective application of clauses of that treaty to situations prior to the date of entry into

28 29 30 31

eran Petroleum Ltd v. Russia, PCA Case No. AA 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009. Yukos Universal Limited (Isle of Man) v. Russia (n. 27) para. 394; Hulley Enterprises Ltd. v. Russia (n. 27) para. 394; Veteran Petroleum Ltd v. Russia (n. 27) para. 394. Yukos Universal Limited (Isle of Man) v. Russia (n. 27) para. 388; Hulley Enterprises Ltd. v. Russia (n. 27) para. 388; Veteran Petroleum Ltd v. Russia (n. 27) para. 388. Vienna Convention on the Law of Treaties (n. 4) Art. 18. Técnicas Medioambientales Tecmed, S.A. v. Mexico (n. 7) para. 71, fn. 42.

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28

The MCI tribunal observed that the successful invocation of Article 18 in other contexts depended on the retroactive language in the applicable treaty or State conduct specifically designed to evade a treaty’s temporal application.33 Accordingly, under the MCI tribunal’s view at least, the potential use of Article 18 to achieve increased investment protection appears limited. 6. Non-Treaty Causes of Action

29

Although a treaty’s substantive provisions cannot be presumed to apply to acts that clearly took place only before its entry into force, the scope of the treaty’s dispute resolution provision may render admissible claims that such acts violated a State’s non-treaty obligations existing at the time of the relevant act. This principle reflects a distinction between the temporal jurisdiction a treaty confers over a dispute and the temporal application of the treaty’s substantive provisions. This distinction has been recognised in several investment treaty decisions, including Impregilo v. Pakistan, in which the tribunal observed: In the Tribunal’s view, care must be taken to distinguish between (1) the jurisdiction ratione temporis of an ICSID tribunal and (2) the applicability ratione temporis of the substantive obligations contained in a BIT. (…) Impregilo complains of a number of acts for which Pakistan is said to be responsible. The legality of such acts must be determined, in each case, according to the law applicable at the time of their performance. The BIT entered into force on 22 June 2001. Accordingly, only the acts effected after that date had to conform to its provisions.34

30

By contrast, tribunals have held that when a treaty’s dispute resolution provision limits the scope of admissible claims to those alleging violation of the treaty’s substantive provisions, the temporal jurisdiction of the treaty is co-extensive with the temporal application of its substantive provisions. The tribunal in Feldman v. Mexico made this clear: The Tribunal (…) observes that its jurisdiction under NAFTA Article 1117(1)(a), which is relied upon in this arbitration, is only limited to claims arising out of an alleged breach of an obligation under (…) the NAFTA. Thus, the Tribunal does not have, in principle, jurisdiction to decide upon claims arising out of an alleged violation of general international law or domestic Mexican law. (…) The reliance of the Tribunal on an alleged violation of NAFTA (…) also implies that the Tribunal’s jurisdiction ratione materiae becomes jurisdiction ratione temporis as well.35

32 MCI Power Group L.C. and New Turbine v. Ecuador (n. 7) para. 116. 33 MCI Power Group L.C. and New Turbine v. Ecuador (n. 7) paras. 108–117. 34 Impregilo S.p.A. v. Pakistan (n. 15) paras. 309, 311. See also Victor Pey Casado and Fondation ‘Presidente Allende’ v. Chile (n. 6) para. 423. Cf. Walter Bau AG v. Thailand, UNCITRAL, Award, 1 July 2009, para. 9.71 (stating that a BIT’s jurisdictional clause is also a substantive provision when it allows investor-State claims for the first time, even though Art. 10 of the Germany–Thailand BIT does not expressly limit admissible disputes to those for breach of the treaty). 35 Marvin Roy Feldman Karpa v. Mexico, ICSID Case No. ARB(AF)/99/1, Interim Decision on Preliminary Jurisdictional Issues, 6 December 2000, paras. 61–62. See also Railroad Development Corporation (RDC) v. Guatemala, ICSID Case No. ARB/07/23, Second Decision on Objections to Jurisdiction, 18 May 2010, para. 116.

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The Feldman tribunal observed the jurisdiction ratione temporis of a tribunal 31 constituted under NAFTA is co-extensive with the temporal application of the treaty’s substantive provisions. Not all treaties are so limited, however. For example, the US–Ecuador BIT extends jurisdiction to ‘investment disputes’ which it defines in Article VI(1) as follows: For purposes of this Article, an investment dispute is a dispute between a Party and a national or company of the other Party arising out of or relating to (a) an investment agreement between that Party and such national or company; (b) an investment authorization granted by that Party’s foreign investment authority to such national or company; or (c) an alleged breach of any right conferred or created by this Treaty with respect to an investment.36

Professor Vandevelde, the former chief BIT negotiator for the United States, 32 has observed that provisions with this approximate wording can be read to allow an investor to initiate arbitration for a dispute over pre-existing disputes (e.g., those that arise out of or relate to an investment agreement or authorisation).37 This example illustrates the importance of reading the terms of a treaty’s dispute resolution clause carefully to determine whether its temporal scope for jurisdictional purposes might differ from the temporal application of its substantive provisions. C. Disputes Arising Before a Treaty’s Entry into Force

Because of a requirement in the applicable treaty, several tribunals have fo- 33 cused their jurisdictional inquiries on when a dispute arises. For instance, the tribunals in Lucchetti v. Peru and Vieira v. Chile relied on specific treaty language to hold that they had no jurisdiction over disputes that arose before the applicable treaty’s entry into force.38 An example of such language is that applied by the Lucchetti tribunal in the Peru–Chile BIT: ‘[The treaty] shall not, however, apply to differences or disputes that arose prior to its entry into force.’39 The oft-cited Lucchetti decision proffered a subject-matter test for determin- 34 ing when claims relating to acts straddling a treaty’s entry into force arise out of

36 Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment of 27 August 1993, in force 11 May 1997, Art. VI(1). 37 Kenneth Vandevelde, United States International Investment Agreements (Oxford University Press, 2009) 188–189 (‘during negotiation of the Panama BIT [which contains the standard US BIT dispute resolution clause], it was assumed by both parties that investors could invoke the investor-to-state disputes provision for disputes existing at the time a BIT entered into force’). See also Kenneth Vandevelde, United States Investment Treaties: Policy and Practice (Kluwer, 1992) 66. 38 Empresas Lucchetti S.A. and Lucchetti Peru S.A. v. Peru, ICSID Case No. ARB/03/4, Award, 7 February 2005, para. 59; Societa Anónima Eduardo Vieira v. Chile, ICSID Case No. ARB/ 04/7, Award, 21 August 2007, paras. 218–219. 39 See Convention between the Government of the Republic of Peru and the Government of the Republic of Chile for the Reciprocal Promotion and Protection of Investments (2 February 2000; in force 11 August 2001), Art. 2 (‘It shall not, however, apply to differences or disputes that arose prior to its entry into force’).

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the same dispute. This test consisted of (i) establishing if pre-ratification acts continue to be central to deciding whether post-ratification acts breached the treaty (i.e., whether the acts have the same ‘origin or source’), and (ii) whether other legal elements exist that would distinguish the dispute arising out of postratification acts from that arising out of pre-ratification acts.40 Other tribunals (e.g., Jan de Nul v. Egypt) have taken a more formal approach to defining the term ‘dispute’ that turns on the basis of the investor’s cause of action.41 35 Some tribunals have held, often in reliance on the jurisprudence above, that a BIT cannot apply to disputes arising before its entry into force, even where the BIT contains no language to that effect. For instance, the tribunal in Salini v. Jordan held that dispute resolution clauses with no temporal qualifications whatsoever could not extend to disputes arising before the applicable treaty’s entry into force.42 The tribunal in Walter Bau v. Thailand also held that an investment treaty’s arbitration clause does not extend to disputes that arose before its entry into force.43 36 There is no general rule prohibiting an investment treaty from applying to a dispute that arises before its entry into force, however. Article 28 of the Vienna Convention, quoted above, does not list the date a dispute arises among the considerations of a treaty’s temporal scope. It instead focuses on the date of the act under examination and implies that a treaty would apply to a situation which continued to exist after its entry into force. 37 This principle is reflected in international jurisprudence. The Permanent Court of International Arbitration concluded in Mavrommatis: [I]n case of doubt, jurisdiction based on an international agreement embraces all disputes referred to after its establishment. (…) The reservation made in many arbitration treaties regarding disputes arising out of events previous to the conclusion of the treaty seems to prove the necessity for an explicit limitation of jurisdiction (…).44

38

The exclusion of disputes arising before a treaty’s entry into force, absent specific language to that effect, would appear to ignore this basic observation and, with it, the distinction outlined above between the temporal scope of a treaty’s substantive provisions and the treaty’s jurisdictional scope.

40 Empresas Lucchetti S.A. and Lucchetti Peru S.A. v. Peru (n. 38) paras. 50–54. 41 See Jan de Nul N.V. and Dredging International N.V. v. Egypt, ICSID Case No. ARB/04/13, Decision on Jurisdiction, 16 June 2006, paras. 126–129. See also Railroad Development Corporation (RDC) v. Guatemala (n. 35) para. 131 (applying the triple identity test to define ‘dispute’ for ratione temporis purposes). 42 Salini Costruttori S.p.A. and Italstrade S.p.a. v. Jordan (n. 6) para. 170. 43 Walter Bau AG v. Thailand (n. 34) para. 9.67. 44 Mavrommatis Palestine Concessions (Greece v. Great Britain), ICJ Judgment, 30 August 1924, 1924 PCIJ Series A, No. 2, at 35.

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D. Laches and Extinction

Although the tribunal in Grand River v. USA held that ‘[t]he principle of ex- 39 tinctive prescription (bar of claims by lapse of time) is widely recognized as a general principle of law constituting part of international law,’45 it is generally accepted that international law does not formally contemplate concepts of laches and extinction of claims. It is thus left to treaties to stipulate any specific time periods within which claims must be brought. Where treaties have not included such limitation periods, tribunals have been 40 reluctant to dismiss claims on grounds of prescription. The tribunal in Wena Hotels v. Egypt found that the claimant’s expropriation claim, brought seven years after the expropriatory act, was not time-barred, because the claimant had diligently pursued its claim and Egypt had ample notice of the dispute.46 The tribunal in Kardassopoulos v. Georgia likewise found that the investor was not precluded from bringing its claim after a ten-year delay, because the claimant reasonably believed that a non-litigious solution could be reached and Georgia received ample notice of the dispute and therefore suffered no prejudice from the delay.47 The tribunal in H&H v. Egypt extended the pattern established in Wena and 41 Kardassopoulos, finding that a delay of seven years since the termination of the claimant’s investment did not preclude the claimant from bringing its treaty claim. That decision provided: The Tribunal is of the view that the burden of proof rests on the Respondent to establish the existence of a prescription rule. Respondent has not demonstrated the existence of a prescription rule under the ICSID rules or the BIT. The Tribunal contends that references to other systems such as NAFTA are neither relevant nor demonstrative of a trend or so persuasive that the Tribunal should consider them.48

By distinguishing its case from those under NAFTA, which provides a three- 42 year limitation period for treaty claims, the H&H tribunal calls into question the efficacy of arguments that an investment treaty claim, absent extreme delay, is time-barred. Even under NAFTA, the tribunal in UPS v. Canada noted that a continuing breach could extend the limitations period,49 providing yet an addi-

45 Grand River Enterprises Six Nations, et al. v. USA, UNCITRAL, Decision on Objections to Jurisdiction, 20 July 2006, para. 33. 46 Wena Hotels Ltd. v. Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, paras. 104– 106. 47 Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Award, 3 March 2010, paras. 258–268. 48 H&H Enterprises Investments v. Egypt, ICSID Case No. ARB/09/15, Decision on Jurisdiction, 5 June 2012, para. 87. See also Emilio Agustín Maffezini v. Spain, ICSID Case No. ARB/ 97/7, Award, 13 November 2000, paras. 92–93. 49 United Parcel Service of America v. Canada (n. 13) para. 28 (‘The generally applicable ground for our decision is that, as UPS urges, continuing courses of conduct constitute continuing breaches of legal obligations and renew the limitation period accordingly.’ See also Marvin Roy Feldman Karpa v. Mexico (n. 35) para. 62 (holding that the portion of continuous

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tional limitation on arguments that a tribunal should decline jurisdiction on grounds of laches or extinctive prescription. E. Termination and Survival Clauses

An increasingly relevant temporal issue in investment arbitration concerns the jurisdictional effects of terminating investment treaties. Bolivia, Venezuela, and Ecuador have all recently revoked several BITs.50 The Czech Republic has also terminated several BITs with other EU member States.51 44 Article 42(2) of the Vienna Convention provides the basic rule for terminating or withdrawing from treaty obligations: ‘The termination of a treaty, its denunciation or the withdrawal of a party, may take place only as a result of the application of the provisions of the treaty or of the present Convention.’52 Article 56(1) of the Vienna Convention establishes a rebuttable presumption against termination: 43

1.

A treaty which contains no provision regarding its termination and which does not provide for denunciation or withdrawal is not subject to denunciation or withdrawal unless: (a) it is established that the parties intended to admit the possibility of denunciation or withdrawal; or (b) a right of denunciation or withdrawal may be implied by the nature of the treaty.53

Article 56(2) further provides that termination requires advance notice of twelve months.54 46 The effects of termination are defined in Article 70 of the Vienna Convention: 45

1.

50

51

52 53 54 55

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Unless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty under its provisions or in accordance with the present Convention: (a) releases the parties from any obligation further to perform the treaty; (b) does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination.55

State action that postdates NAFTA’s entry into force (and falls within NAFTA’s three-year limitations period) is not time-barred under NAFTA Article 1116). UNCTAD, IIA Issues Note No 2: Denunciation of the ICSID Convention and BITs: Impact on Investor-State Claims (December 2010), 1, fn. 3. (‘In 2008, Ecuador terminated nine BITs – with Cuba, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, Romania and Uruguay. Other denounced BITs include those between (…) the Netherlands and the Bolivarian Republic of Venezuela. In 2010, Ecuador’s Constitutional Court declared arbitration provisions of six more BITs (China, Finland, Germany, the UK, Venezuela and United States) to be inconsistent with the country’s Constitution. It is possible that Ecuador will take action to terminate these (and possibly other) BITs.’). The Czech Republic has recently terminated BITs with Denmark, Slovenia, Malta, and Italy. See Luke Eric Peterson, ‘Czech Republic Terminates Investment Treaties in Such a Way as to Cast Doubt on Residual Legal Protections for existing investments’, IAR, 1 February 2011, available at http://www.iareporter.com/articles/20110201_13. Vienna Convention on the Law of Treaties (n. 4) Art. 42(2). Vienna Convention on the Law of Treaties (n. 4) Art. 56(1)(a)(b). Vienna Convention on the Law of Treaties (n. 4) Art. 56(2) (‘A party shall give not less than twelve months’ notice of its intention to denounce or withdraw from a treaty’). Vienna Convention on the Law of Treaties (n. 4) Art. 70.

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Most investment treaties contain clauses governing their own termination, 47 however. These include clauses governing renewal of obligations under the treaty, specifications of the point at which a State can terminate the treaty, the notice period before termination becomes effective, and the duration for which the treaty remains applicable after termination. Clauses governing the post-termination application of the treaty – known as 48 ‘sunset’ or ‘survival’ clauses – have garnered recent attention. Such clauses typically provide that a treaty remains in force for a certain period following termination. Article XII(3) of the US–Ecuador BIT is one such clause: With respect to investments made or acquired prior to the date of termination of this Treaty and to which this Treaty otherwise applies, the provision of all the other Articles of this Treaty shall thereafter continue to be effective for a further period of ten years from such a date of termination.56

Such survival clauses limit the alacrity with which a State may escape its 49 obligations under an investment treaty. The Czech Republic has recently attempted to avoid the application of sur- 50 vival clauses through a two-step process.57 The process consists of (i) obtaining the consent of the other contracting party to amend the survival clause so that it ‘shall no longer apply’ and (ii) then terminating the BIT by mutual consent. The efficacy of the process, which has yet to be tested in a specific case, de- 51 pends on the ability of the contracting parties to the BIT to deprive qualifying investors of the protection that survival clauses provide through a process of mutual consent.58 This issue raises difficult questions about the extent to which investors may claim that the rights conferred under investment treaties are vested rights that may not be revoked simply by agreement of the two contracting parties.59 The success of the Czech Republic’s effort could have significant implications for similar efforts by other countries, in particular those seeking to terminate intra-EU BITs.60

56 Treaty between the United States of American and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment, 27 August 1993, in force 11 May 97, Art. XII(3). 57 See Luke Eric Peterson (n. 51). The Czech Republic employed this method to terminate its BITs with Denmark, Italy, Malta, and Slovenia. 58 Some of the Czech Republic’s BIT also stipulate that survival clauses only apply in case of unilateral termination. See, e.g., Agreement between the Czech and Slovak Republic and the Kingdom of Denmark for the Promotion and Reciprocal Protection of Investments, 6 March 1991, in force 19 September 1992, Art. 16. 59 See Occidental Exploration & Production Company v. Ecuador, [2005] EWCA Civ. 1116, [2006] QB, paras. 17–18 (noting that the right under investment treaties belong to investors and that ‘[i]t would potentially undermine the efficacy of the protection held out to individual investors, if such protection was subject to the continuing benevolence and support of their national State’). 60 See Luke Eric Peterson, ‘Denmark and Czech Rep to Terminate BIT; But Not All EU Members Agree With Czech View That Intra-EU BITs Are Unnecessary’, IAR, 17 July 2009, available at http://www.iareporter.com/articles/20090719_2.

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F. Conclusions

The above overview of ratione temporis issues illustrates that investment treaty tribunals continue to give inconsistent treatment to the issue. There is broad consensus that the substantive provisions of investment treaties cannot afford protection for acts occurring before the treaty’s entry into force, but the application of rules governing variations on that rule (e.g., for composite and continuing acts) and the distinction between a treaty’s substantive and jurisdictional scope have both received inconsistent treatment from tribunals. Investment treaty tribunals have likewise differed on whether the question ‘when a dispute arises’ is a relevant consideration for determining the jurisdictional application of an investment treaty. 53 The importance of clarity on temporal issues is nonetheless vital to many claims. The differences in the jurisprudence outlined above can mark the difference between an investor receiving complete protection from sovereign actions harming its investment and receiving no protection at all; likewise, distinctions on ratione temporis issues such as provisional application or termination clauses can impact the temporal period during which a State is subject to claims by a matter of tens of years. One can therefore suspect that the ratione temporis coverage of investment treaties will remain a highly-litigated issue in the years to come. 52

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II. Ratione Materiae A. The Notion of Investment

Jan Asmus Bischoff and Richard Happ 1. Significance of the Term ‘Investment’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Sources of ‘Investment’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Definitions of Investment in Investment Protection Treaties. . . . . . . . a) Asset-Based Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Restrictive, Closed-List Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Additional Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. The Notion of Investment under the ICSID Convention . . . . . . . . . . . . a) The Historical Development of Investment under the ICSID Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Subjective or Objective Approach to Investment. . . . . . . . . . . . . . . . . . c) Criteria for the Finding of an Investment . . . . . . . . . . . . . . . . . . . . . . . . . 5. Interrelationship Between the ICSID Definition and ‘BIT’ Definition: an Overarching Concept of Investment? . . . . . . . . . . . . . . . . . . . . . . . . 6. Case Groups/Particular Cases and Problems . . . . . . . . . . . . . . . . . . . . . . . . . a) Unity of an Investment Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Case Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Applicable Standard for Determining the Existence of an Asset (1) Provisions in Investment Treaties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Case Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Forms of Holding an Investment/Ownership and Control . . . . . . . (1) Definitions of Ownership and Control in Treaties . . . . . . . . . . . Approaches to Ownership and Control in Case Law . . . . . . . . (3) Distinguishing Ownership and Control . . . . . . . . . . . . . . . . . . . . . . . (4) Indirectly Held Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) A Test for Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Pre-Investment Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Topical Examples of Investments in Arbitral Practice. . . . . . . . . . . . (1) Contractual Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Loans and Debt Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Arbitral Awards and Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Intellectual Property Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 7 8 12 14 17 18 24 35 45 48 49 50 64 67 69 72 79 84 86 91 101 104 106 108 113 113 124 135 146 149

Literature: The Proposed Convention to Protect Private Foreign Investment’ (1960) 9 J. Pub. L. 115–124; Chittharanjan F. Amerasinghe, ‘Interpretation of Article 25(2)(b) of the ICSID Convention’ in Richard B. Lillich and Charles N. Brower (eds), International arbitration in the 21st century: Towards ‘judicialization’ and uniformity? (Transnational Publishers, 1994) 223–244; Jürgen Basedow, ‘Depositivierungstendenzen in der Rechtsprechung zum Internationalen Einheitsrecht’ in Claus-Wilhelm Canaris, Andreas Heldrich, Klaus J. Hopt, Claus Roxin, Karsten Schmidt and Gunter Widmaier (eds), 50 Jahre Bundesgerichtshof: Festgabe aus der Wissenschaft (C.H. Beck, 2000) 777–798; Jan Asmus Bischoff, ‘Völkerrechtlicher Rechtsschutz bei Staatsbankrott?’ (2012) WM 1371–1374; Jan Asmus Bischoff, ‘Current trends in investment arbitration relating to sovereign bond defaults’ in Eugenio Bruno (ed), Sovereign Debt and Sovereign Debt Restructuring (Globe Law and Business, 2013) 101–116; Jan A. Bischoff, ‘Interpretation of International Uniform Law’ in Jürgen Basedow, Klaus J. Hopt and Reinhard Zimmermann (eds), Max Planck Encyclopedia of European Private Law (Oxford University Press, 2011) 982–986; Jan A. Bischoff, ‘Just a little BIT of “mixity”?, The

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II.A. The Notion of Investment ment, World Investment Report 2010: Investing in a low-carbon economy (United Nations Publications, 2010); Alfred Verdroß, ‘Les règles internationales concernant le traitement des étrangers’ (1931) 37 RC 323–411; Michael Waibel, Sovereign defaults before international courts and tribunals (Cambridge University Press, 2011); Mark C. Wedemaier, ‘Disputing Boilerplate’ (2009) 82 Temp. L. Rev. 1–54.

1. Significance of the Term ‘Investment’

Naturally, the term ‘investment’ plays a central role in international invest- 1 ment protection law. Two key functions of this term can be identified: first, only the qualification of an asset as an ‘investment’ will provide it resp. the investor the substantive protection granted by international investment agreements. Second, the term investment is a jurisdictional requirement ratione materiae1 for ICSID arbitration. Only where a dispute arises out of an investment under a given investment treaty or domestic investment legislation as well as Article 25(1) of the ICSID Convention,2 an investor who has suffered harm is entitled to seek legal redress before an ICSID arbitral tribunal instead of domestic courts. In addition to these key functions, the term investment in other treaties also serves as a requisite for obtaining guarantees3 or a criterion defining competences.4 The term ‘investment’ as a legal term seems to have received its significance 2 only after the Second World War,5 most notably with the conclusion of the 1959 Germany–Pakistan BIT,6 which contained a first definition of the term investment. Although already Article 12 of the 1948 Havana Charter7 had recognised the necessity of promoting foreign investment, it contained no definition; besides, as is well-known, the Charter never entered into force. However, as the 1 A question raised by arbitrator Cremades in his dissenting opinion in Fraport AG Frankfurt Airport Services Worldwide v. Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007, para. 37 et seq., is whether a different scale for determining the validity of an investment applies for finding jurisdiction compared to the merits; similarly also IBM World Trade Corporation v. Ecuador, ICSID Case No. ARB/02/10, Decision on jurisdiction and competence, 22 December 2003, para. 16. 2 According to ICSID Additional Facility Rules Article 2(b), ICSID arbitrations can also be conducted with regard to disputes that do not arise directly out of an investment. However, in this case the underlying transaction must have ‘features which distinguish it from an ordinary commercial transaction’, see Article 4(3) of the Additional Facility Rules. 3 See MIGA Convention Article 12. 4 According to TFEU Article 207(1), the ‘common commercial policy shall be based on uniform principles, particularly with regard to (…) foreign direct investment’. Cf. Jan A. Bischoff, ‘Just a little BIT of “mixity”?, The EU’s role in the field of international investment protection law’ (2011) 48 CMLR 1527–1569, 1527. 5 Patrick Juillard, ‘L’évolution des sources du droit des investissements’ (1994) 250 RC 9–216, 22; he points out, however, that the PCIJ in Factory at Chorzów (Germany v. Poland), PCIJ Judgment, (1928) PCIJ (Ser. A) No. 17 (13 September), para. 142, mentions the word ‘investment’. 6 Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments, 11 November 1959, BGBl. 1961 II, 793; as to the wording of the definition, see infra 1.c)(1). 7 Final Act of the United Nations Conference on Trade and Employment: Havana Charter for an International Trade Organization, available at http://www.wto.org/english/docs_e/legal_e/ prewto_legal_e.htm.

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1959 Germany–Pakistan BIT did not provide for a dispute settlement mechanism available to the investor, the practical relevance of the term investment still remained limited. This slowly changed when, in 1965, the ICSID Convention was concluded, making access to its dispute settlement facilities contingent on the existence of an investment. 3 Despite the fact that the law of aliens generally is considered the predecessor of international investment law,8 the term investment seems not to have played a role under that regime. The protection afforded by treaties (e.g. FCNs) or customary international law until then focused on the foreign national and his property.9 This remained true even after the Second World War: The Abs–Shawcross Draft Convention on Investment Abroad10 – despite its title – and also the 1961 Harvard Draft11 and the 1967 OECD Draft Convention on the Protection of Foreign Property12 focused on the protection of foreign property and/or the alien itself. This is not to say that the meaning of property as defined by these draft treaties is without any resemblance of modern definitions of investment.13 Nevertheless, there are considerable differences between the law of aliens and the evolving law of investment: first, the evolving regime of international investment law also covered the admission of investments.14 Second, the alien per se is not protected under the investment treaties. A company or a person is only protected and entitled in their function as an investor.15 Third, it is arguable that the term investment is more limited compared to the term property; certain criteria proposed for the finding of an investment, like the regularity of profit and return or the economic risk,16 would certainly not be required to find property.17

8 See supra Stephan Hobe, ‘The Development of the Law of Aliens and the Emergence of General Principles of Protection under Public International Law’, ch. 2.I., 6–22. 9 Cf. Alfred Verdroß, ‘Les règles internationales concernant le traitement des étrangers’ (1931) 37 RC 323–411, 348–388; as to the notion of property under the law of aliens see ibid., at 364. 10 Text reprinted at ‘The Proposed Convention to Protect Private Foreign Investment’ (1960) 9 J. Pub. L. 115–124. 11 Draft Convention on the International Responsibility of States for Injuries to Aliens (1961) 55 AJIL 548–558. 12 Available at http://www.oecd.org/dataoecd/35/4/39286571.pdf. 13 Article IX(b) of the Abs–Shawcross Draft Convention on Investment Abroad defines property as follows: ‘“property” includes all property, rights, and interests, whether held directly or indirectly. A member of a company shall be deemed to have an interest in the property of the company.’ Harvard Draft Convention on Responsibility of States for Injuries to the Economic Interests of Aliens, Article 10(7) defines property as follows: ‘The term “property” as used in this Convention comprises all movable and immovable property, whether tangible or intangible, including industrial, literary, and artistic property, as well as rights and interests in any property.’ 14 Patrick Juillard (n. 5) 24–25. 15 For an analysis of the position of the investor as a functional subject of international law see Richard Happ, Schiedsverfahren zwischen Staaten und Investoren unter Art. 26 Energiechartavertrag (Peter Lang, 2000) 163–164, 201–202. 16 See infra II.1.d)(3). 17 Patrick Juillard (n. 5) 24 thus distinguishes the dynamic notion of investment and the static notion of property.

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2. Sources of ‘Investment’

Bearing in mind the significance of the term investment for this field of law, it 4 may be surprising that no single uniform definition of the term investment as a legal term exists. This fact may be retraced to the multitude of instruments and legal sources governing investment, as well as the different purposes pursued by these instruments. A plethora of treaties governing the protection of investments has also effected a large number of different definitions of the term ‘investment’ in the respective treaties; the attitude towards the term in theses treaties is showing an evolution in the light of the general zeitgeist. Besides, since a State can also express his consent as required by Article 25(1) of the ICSID Convention in his domestic investment legislation, ICSID tribunals may also face definitions of investment contained in domestic laws when considering whether they have jurisdiction.18 In addition to the field of international investment protection, the term is used 5 by other international instruments: MIGA offers guarantees for investments particularly in developing countries; although the term investment is not defined, the investments eligible for these guarantees are described in Article 12 of the MIGA Convention.19 Among the WTO treaties is the Agreement on Trade Related Investment Measures (TRIMS), which again contains no definition of the term investment. A comprehensive definition of the term foreign direct investment or FDI can be found in international reference documents like the IMF Balance of Payments Manual or the OECD Benchmark Definition of FDI. For example, the OECD Benchmark Definition describes FDI as a category of cross-border investment made by a resident in one economy (…) with the objective of establishing a lasting interest in an enterprise (…) that is resident in an economy other than that of the direct investor.

The term FDI is used in contrast to mere portfolio and other investments that 6 do not qualify as such. Directly, these documents have no legal significance; their purpose is to serve as reference documents for statistics. Nevertheless, they indirectly play an important role for legal instruments referring to the term FDI. For example, FDI is eligible for guarantees according to Article 12(a) of the MIGA Convention. Under the auspices of the WTO, a future multilateral investment framework on FDI had been discussed during the sessions of the Working Group on the Relationship between Trade and Investment. Furthermore, the

18 Cf. e.g. Petrobart Limited v. Kyrgyzstan, UNCITRAL, Award, 13 February 2003, p. 50, where the jurisdiction of the tribunal was based solely on domestic legislation and the tribunal discussed the relation between the domestic and the international approach to investment. 19 Ibrahim Shihata and Antonio R. Parra, ‘The Experience of the International Centre for Settlement of Investment Disputes’ (1999) 14 ICSID Rev.–FILJ 299–361, 318, point out that, although there is not a ‘necessary link between MIGA’s activities and those of ICSID (…) the MIGA classifications may conveniently be used to describe the transactions involved in the cases submitted to arbitration under the ICSID Convention.’

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term FDI is used by the Treaty on the Functioning of the European Union (TFEU).20 3. Definitions of Investment in Investment Protection Treaties 7

Today, an estimated 3000 BITs and multilateral investment treaties govern the protection of investments.21 Therefore, it is hardly possible to draw here a comprehensive picture of all investment definitions in these treaties. However, some general lines of development and approaches can be summarised. a) Asset-Based Definitions

8

The 1959 Germany–Pakistan BIT not only was the first BIT. Its approach to the term investment, referring to the term asset (‘Kapitalanlage’), also became a model for so-called ‘asset-based’ definitions, which are used by many or even the most contemporary investment treaties. Article 8(1) of the 1959 Germany– Pakistan BIT defined the term investment as follows: (a) The term ‘investment’ shall comprise capital brought into the territory of the other Party for investment in various forms in the shape of assets such as foreign exchange, goods, property rights, patents and technical knowledge. The term ‘investment’ shall also include the returns derived from and ploughed back into such ‘investment’. (b) Any partnerships, companies or assets of similar kind, created by the utilization of the above mentioned assets shall be regarded as ‘investment’.

9

In modern asset-based definitions, the term investment is defined as ‘every kind of asset’, which is then described by reference to a non-exhaustive list of examples. It is either said expressly that the list is not exhaustive (e.g. ‘in particular, though not exclusively’) or it can be implied from the wording (e.g. ‘includes’). For example, ECT Article 1(6) defines the term investment as follows: (6) ‘Investment’ means every kind of asset, owned or controlled directly or indirectly by an Investor and includes: (a) (b)

(c) (d) (e)

tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges; a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise; claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment; Intellectual Property; Returns;

20 See TFEU Articles 64(2), 206, 207(1); see also Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty, OJ L 178, 8.7.1988, p. 5; ECJ, 12.12.2006, Case C-446/04, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, (2006) ECR I-11753, paras. 177–182; furthermore Jan Bischoff (n. 4) 1534– 1539. 21 United Nations Conference on Trade and Development, World Investment Report 2010: Investing in a low-carbon economy (United Nations Publications, 2010) 81.

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any right conferred by law or contract or by virtue of any licenses and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.

(…).’

For instance, Article II(2) of the Draft MAI, Art. 1(3) of the ASEAN,22 Arti- 10 cle 1(1) of the Protocol of Colonia23 or Article 1(1) of the German Model BIT also follow this approach.24 But as has been said above: there are variations and different nuances in the definitions contained in treaties sharing the asset-based approach, and also an evolution of the definitions’ scope – sometimes all-encompassing, sometimes more restrictive – can be observed. Thus, despite treaties sharing the general approach, tribunals have to take care of the potential peculiarities of the definition of the treaty at stake.25 Often tribunals seem to try to pigeonhole assets that are claimed to be invest- 11 ments into the categories mentioned in the applicable investment treaty. However, at least in theory, an exact determination into which category of listed assets a potential investment falls is not decisive under open asset-based definitions. The list of examples is not exhaustive in order to offer comprehensive and far-ranging protection. The examples were not (intended to be) strictly delineated by the drafters; rather, it is conceivable that an asset falls into one, several or even none of the categories listed. This does not render the examples meaningless: first, it is more easily justifiable that an asset exists if it fits into one of the categories. Second, in case a potential investment cannot be classified as one of the examples, a tribunal would have to reassure that this un-named asset shares at least some characteristics of those named assets that are considered examples for the general term asset. b) Restrictive, Closed-List Definitions

In contrast, some treaties include a closed-list definition of investment. For 12 instance, NAFTA Article 1131 takes such a more restrictive approach. It contains an exhaustive list of assets that are considered an investment as well as a list of assets that are explicitly not considered an investment. The respective section of NAFTA Article 113126 reads as follows:

22 Agreement among the Government of Brunei Darussalam, the Republic of Indonesia, Malaysia, the Republic of the Philippines, the Republic of Singapore, and the Kingdom of Thailand for the Promotion and Protection of Investments, Manila, 15 December 1987, available at http://www.asean.org/6464.htm. 23 Protocol of Colonia for the Promotion and Reciprocal Protection Of Investments in Mercosur, 17 January 1994, available at http://www.cvm.gov.br/ingl/inter/mercosul/coloni-e.asp. 24 The text of the 2008 German Model BIT is available at http://italaw.com/documents/2008GermanModelBIT.doc. 25 As to the interpretation of investment treaties, see supra August Reinisch, ‘The Interpretation of International Investment Agreements’, ch. 5.II., 372–410. 26 Compare also Article 1 of the 2004 Canadian Model BIT, available at http://italaw.com/documents/Canadian2004-FIPA-model-en.pdf.

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(d)

(e) (f) (g) (h)

(i)

(j)

an enterprise; an equity security of an enterprise; a debt security of an enterprise (i) where the enterprise is an affiliate of the investor, or (ii) where the original maturity of the debt security is at least three years, but does not include a debt security, regardless of original maturity, of a state enterprise; 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, but does not include a loan, regardless of original maturity, to a state enterprise; an interest in an enterprise that entitles the owner to share in income or profits of the enterprise; an interest in an enterprise that entitles the owner to share in the assets of that enterprise on dissolution, other than a debt security or a loan excluded from subparagraph (c) or (d); real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes; and interests arising from the commitment of capital or other resources in the territory of a 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 Party, including turnkey or construction contracts, or concessions, or (ii) contracts where remuneration depends substantially on the production, revenues or profits of an enterprise; but investment does not mean, claims to money that arise solely from (i) commercial contracts for the sale of goods or services by a national or enterprise in the territory of a Party to an enterprise in the territory of another Party, 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 any other claims to money, that do not involve the kinds of interests set out in subparagraphs (a) through (h);

(…).’

13

Unlike in the case of open asset-based definitions, the exact classification of an asset is relevant for treaties that define the term investment by reference to an exhaustive list of assets. c) Additional Requirements

14

Treaties may contain additional requirements in their definition of the term investment. For instance, they stipulate that the investment has to be made in the territory of the host State,27 that it must be in accordance with the laws of the host State28 or that the investment requires approval by local authorities.29 27 See infra Christina Knahr, ‘The Territorial Nexus between an Investment and the Host State’, ch. 6.II.F., 590–597. 28 See infra Katharina Diel-Gligor and Rudolf Hennecke, ‘Investment in Accordance with the Law’, ch. 6.II.D., 566–576; Ralph Alexander Lorz and Manuel Busch, ‘Investment in Accordance with the Law – Specifically Corruption’, ch. 6.II.E., 577–590. 29 Agreement between the Government of the Republic of the Philippines and the Government of the People’s Republic of Bangladesh for the Promotion and Reciprocal Protection of Investments, 8 September 1971, available at http://www.unctad.org/sections/dite/iia/docs/bits/ bangladesh_philippines.pdf.

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But beside these general requirements, a trend can be observed in more recent 15 BITs to narrow down the scope of asset-based definitions of application, either by excluding specific assets or by imposing requirements as to the nature of the assets. For instance, Article I(2)(1) of the 2007 Colombia Model BIT excludes public debt or claims to money arising from sales contracts from its scope.30 As to requirements to the nature of the assets, some treaties exist that specify that only assets ‘invested in connection with economic activities’31 are protected. The drafters of the MAI intended to add to the asset-based definition of Article II.2 an interpretative note, which provided that, in order to qualify as an investment, an asset must have the characteristics of an investment; these are then defined as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.32 A similar approach has been followed, for instance, in the 2012 US Model BIT, the Norway Draft Model BIT of 2007 or the United States-Korea Free Trade Agreement (KORUS FTA) of 2007.33 Article 11.28 of the KORUS FTA reads as follows: [I]nvestment 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.

As to Article 1(6)(c) of the ECT, it is worth noting that the term investment is 16 defined by reference to the term ‘claim (…) associated with an Investment’.34 Such circular elements are not uncommon in investment treaties.35 4. The Notion of Investment under the ICSID Convention

Under Article 25(1) of the ICSID Convention, one of the key jurisdictional 17 requirements for ICSID is that the dispute at stake is ‘arising directly out of an investment’. However, the ICSID Convention contains no definition of the term 30 As to public debts as investments, see infra 2.a)(2) with further references. 31 See United Nations Conference on Trade and Development, Bilateral Investment Treaties 1995–2006: Trends in Investment and Rulemaking (United Nations, 2007) 12; but compare also Article 1(3)(a) of the 2008 German Model BIT, which imposes similar requirements ratione personae; an investor is a foreign national who ‘in the context of entrepreneurial activity is the owner, possessor or shareholder of an investment in the territory of the other Contracting State, irrespective of whether or not the activity is directed at profit’; as to requirements ratione personae see Lucy Reed and Jonathan Davis, ‘Who is a Protected Investor?’, ch. 6.III.A., 614–637. 32 Cf. also the tribunal in Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, para. 75, stipulating that ‘[t]he ordinary meaning of “invest” is to “expend (money, effort) in something from which a return or profit is expected” (…)’. 33 Free Trade Agreement between the United States of America and the Republic of Korea, 30 June 2007, text available at http://www.ustr.gov/trade-agreements/free-trade-agreements/ korus-fta/final-text; also Article 10.28 of the United States–Peru Trade Promotion Agreement (PTPA), 12 April 2006, available at http://www.ustr.gov/trade-agreements/free-trade-agreements/peru-tpa/final-text. 34 Cf. Petrobart Limited v. Kyrgyzstan (n. 18), SCC Arb. No. 126/2003, Award, 29 March 2005, p. 72. 35 Rudolf Dolzer and Christoph Schreuer, Principles of international investment law (Oxford University Press, 2008) 64.

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‘investment’. Despite the requirement that the dispute arises ‘directly’ out of the investment, tribunals and writers agree that this cannot be understood as to refer to direct investments only in the abovementioned sense. Rather, it addresses the relation between the dispute and the investment. a) The Historical Development of Investment under the ICSID Convention 18

As regards the term ‘investment’, the Report of the Executive Directors of the International Bank for Reconstruction and Development on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States expounds: No attempt was made to define the term ‘investment’ given the essential requirement of consent by the parties, and the mechanism through which Contracting States can make known in advance, if they so desire, the classes of disputes which they would or would not consider submitting to the Centre (Article 25(4)).36

As authors have pointed out,37 this statement is not entirely correct, as there have been plenty attempts to define the term investment, which however all failed. Hence, in the end the drafters agreed not to include a definition of the term investment in the Convention. 20 The first draft of the ICSID Convention38 of 1962 prepared by the General Counsel, Mr Aron Broches, contained no definition of the term investment. The only requirements stipulated by Art. IV(1) of the Draft Convention were consent and an amount in dispute exceeding USD 100,000. But it was discussed subsequently to limit the scope of the Centre’s jurisdiction. To this end, the second draft contained of 1963 a reference to the term ‘investment dispute’ in its Article II(1).39 The draft provides for a definition in order to avoid ‘frequent disagreements as to the applicability of the Convention (…), thus undermining the primary objective’, which was to create legal certainty for investors.40 21 When representatives from the member States were invited to discuss the draft in 1963/64, they disagreed about the need to determine the exact scope of the Centre’s jurisdiction by defining the term investment. While representatives from developing countries preferred the inclusion of a definition, capital-exporting countries disapproved of it. In the light of these discussions, the following definition of the term investment was included in the Draft Convention’s Article 30: 19

36 Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of other States, para. 27. 37 Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID convention: A commentary on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Cambridge University Press, 2009) Art. 25, para. 86; Julian D. Mortenson, ‘The Meaning of “Investment”: ICSID’s Travaux and the Domain of International Investment Law’ (2010) 51 Harv. Int’l L. J. 257–318, 292. 38 History II-1, 19. 39 History II-1, 202. 40 History II-1, 204.

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II.A. The Notion of Investment For the purpose of this Chapter (i) ‘investment means any contribution of money or other asset of economic value for an indefinite period or, if the period be defined, for not less than five years; (…).41

However, at the next meeting of representatives of the World Bank member 22 States in late 1964, this definition was heavily criticised. Again, the case for a definition was disputed among the member States, but also several new definitions were prepared during the meeting. For instance, the Secretariat proposed the following definition: The term ‘investment’ means the acquisition of (i) property rights or contractual rights (including rights under a concession) for the establishment or in the conduct of an industrial, commercial, agricultural, financial or service enterprise; (ii) participations or shares in any such enterprise; or (iii) financial obligations of a public or private entity other than obligations arising out of short-term banking or credit facilities.42

The whole matter was transferred to a working group, which, however, could 23 not break the deadlock. Finally, the delegate of the United Kingdom made a proposal on which the current provisions on jurisdiction are based. The Convention would not define the term investment, but allow each State to limit the scope of disputes covered by making a declaration to this end. This proposal was finally accepted by the representatives.43 b) Subjective or Objective Approach to Investment

As has been pointed out, consent has been considered the cornerstone of 24 ICSID’s jurisdiction. But despite the fact that the impasse during the negotiations was finally bro- 25 ken by adopting a flexible approach, tribunals and writers recently started to disagree on whether the term ‘investment’ should be understood as a (more or less) strict objective requirement44 or whether generally the consent of the parties to ICSID arbitration is sufficient to consider a certain dispute as arising out of an investment.45 Thus, the fundamental disagreement among the drafters on the case for an objective requirement ‘investment’, which seemed to be surmounted by the proposal by the United Kingdom, has been revived again. During the first 25 years of ICSID, this issue did not come up. Most disputes 26 arose out of investment contracts between the investor and a State, some also out 41 42 43 44

History II-1, 623. These criteria have been considered by tribunals, see infra 1.d)(2) and (3). History II- 2, 844. Julian Mortenson (n. 37) 291. Emmanuel Gaillard, ‘Identify or define?, Reflections on the evolution of the concept of investment in ICSID practice’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International investment law for the 21st century: Essays in honour of Christoph Schreuer (Oxford University Press, 2009) 411–416. 45 Pantechniki S.A. Contractors & Engineers v. Albania, ICSID Case No. ARB/07/21, Award, 30 July 2009, para. 41; Aron Broches, ‘The Convention on the Settlement of Investment Disputes between States and Nationals of other States’ (1972) 136 RC 331–410, 363 speaks of a ‘large measure of discretion of the parties’; he clarifies this statement that ‘this discretion is not unlimited and cannot be exercised to the point of being clearly inconsistent with the purposes of the Convention.’

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of domestic investment legislation.46 Tribunals either did not discuss the existence of an investment at all47 or they were content with finding that the parties had consented to ICSID arbitration, reasoning that such consent also implied that the respective contract constituted an investment.48 But also in the early cases arising out of investment treaties like AAPL v. Sri Lanka, the requirement was not discussed at all.49 27 Conversely, legal doctrine started quite early to discuss different criteria that had to be met in order to consider an asset an investment. For instance, Delaume suggested already in 1980 the contribution to the development of the host State as a criterion.50 Carreau proposed the criteria of a contribution, duration and risk.51 But this academic discussion was not reflected in case law for quite a long time. The tribunal in Fedax v. Venezuela was the first one to consider the different approaches to the term investment discussed in legal writing as well as in the travaux préparatoires. It then considered five requirements for finding an investment, which became later known as the Salini test: 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.52

28

These criteria were then taken up by the tribunals in RFCC v. Morocco53 and Salini v. Morocco.54 The tribunal in Salini held: 46 Cf. Southern Pacific Properties (Middle East) Limited v. Egypt, ICSID Case No. ARB/84/3, Award, 20 May 1992; for an overview over the development see Richard Happ and Noah Rubins, Digest of ICSID Awards and Decisions 1974-2002 (Oxford University Press 2013) 324– 326. 47 Cf. Adriano Gardella S.p.A. v. Côte d’Ivoire, ICSID Case No. ARB/74/1, Award, 29 August 1977; AGIP S.p.A. v. Congo, ICSID Case No ARB/77/1, Award of 30 November 1979. 48 Kaiser Bauxite Company v. Jamaica, ICSID Case No ARB/74/3, Decision on Jurisdiction and Competence of 6 July 1975, para. 17; in Société Oest-Africaine des Bétons Industriels (SOABI) v. Sénégal, Case No. ARB/82/1, Award, 9 February 1988, para. 4.38, the tribunal merely stated that the term investment could not be interpreted according to domestic law; however, in Alcoa Minerals of Jamaica, Inc v. Jamaica, ICSID Case No. ARB/74/2, Decision on Jurisdiction and Competence, 6 July 1975, at 9 (cited according to John T. Schmidt, ‘Arbitration under the Auspices of the International Centre for Settlement of Investment Disputes (ICSID), Implications of the Decision in Alcoa Minerals of Jamaica, Inc. v. Government of Jamaica’ (1976) 17 Harv. Int’l L. J. 90–109, 99), the tribunal refuted the proposition that consent would be the only criterion. 49 Asian Agricultural Products Ltd (AAPL) v. Sri Lanka, ICSID Case No ARB/87/3, Final Award of 27 June 1990; compare also Ceskoslovenska Obchodni Banka, A.S. v. Slovakia, ARB/97/4, Decision on Jurisdiction of 24 May 1999, para. 66, referring largely only to the parties’ consent. 50 Georges R. Delaume, ‘Le Centre International pour le règlement des Différends relatifs aux Investissements (CIRDI)’ (1982) 109 JDI 775–843, 801. 51 Dominique Carreau, Patrick Juillard and Thiébaut Flory, Droit international économique (Librairie générale de droit et de jurisprudence, 1990) 560–563. 52 Fedax N.V. v. Venezuela, ICSID Case No. ARB/96/3, Award on Jurisdiction, 11 July 1997, para. 43. 53 Consortium RFCC v. Morocco, ICSID Case No. ARB/00/6, Decision on Jurisdiction, 16 July 2001, paras. 59–60. 54 Salini Costruttori SpA and Italstrade SpA v. Morocco, ICSID Case No ARB/00/4, Decision on Jurisdiction, 23 July 2001.

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II.A. The Notion of Investment The doctrine generally considers that investment infers: contributions, certain duration of performance of the contract and a participation in the risks of the transaction (…). In reading the Convention’s Preamble, one may add the contribution to the economic development of the host State of the investment as an additional condition. In reality, these various elements may be interdependent. Thus, the risks of the transaction may depend on the contributions and the duration of performance of the contract. As a result, these various criteria should be assessed globally even if, for the sake of reasoning, the Tribunal considers them individually here.55

The reaction to the award in Salini v. Morocco was divided. Some tribunals 29 agreed with the general approach taken in the award and tried either to specify the criteria developed by the tribunal or added further criteria.56 Others disagreed and preferred a more flexible approach, emphasising role of the parties’ consent.57 The tribunal in Autopista Concesionada58 conceded that the existence of an investment was an objective requirement, but it also attributed great importance to the parties’ consent: In reliance on the consensual nature of the Convention, they [the drafters] preferred giving the parties the greatest latitude to define these terms themselves, provided that the criteria agreed upon by the parties are reasonable and not totally inconsistent with the purposes of the Convention. (emphasis added)59

Therefore, the tribunal could not see a reason to discard the parties’ choice as 30 long as the requirements are not deprived of their objective significance.60 The tribunal in MCI v. Ecuador61 recalled the Report of the Executive Directors and pointed out that ‘the Convention does not define the term “investments” because it wants to leave the parties free to decide what class of disputes they would submit to the ICSID’.62 It then assessed whether the dispute at hand concerned an investment as defined in the BIT, arguing that the ‘BIT complements Article 25 of the ICSID Convention, for purposes of defining the Competence of the Tribunal with respect to any legal dispute arising directly out of an investment.’63 It

55 Salini Costruttori SpA and Italstrade SpA v Kingdom of Morocco (n. 54) para. 52. 56 Joy Mining Machinery Limited v. Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction, 6 August 2004, para. 53; Helnan International Hotels A/S v. Egypt, ICSID Case No. ARB/ 05/19, Decision on Jurisdiction, 17 October 2006, para. 77; Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 100; as to the criteria, see also infra 1.d)(3). 57 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/08/8, Decision on Jurisdiction, 8 March 2010, paras. 130–131; Biwater Gauff (Tanzania) Ltd. v. Tanzania, ICSID Case No. ARB/05/22, Award, 24 July 2008, paras. 312–318; Malaysian Historical Salvors, SDN, BHD v. Malaysia, ICSID Case No. ARB/05/10, Decision on the Application for Annulment, 16 April 2009, paras. 75–79; compare also RSM Production Corp. v. Grenada, ICSID Case No. ARB/05/14, Award, 13 March 2009, paras. 236–238. 58 Autopista Concesionada de Venezuela, C.A. v. Venezuela, ICSID Case No. ARB/00/5, Decision on Jurisdiction, 27 September 2001, para. 97. 59 Ibid. 60 Id., para. 99. 61 MCI Power Group, LC and New Turbine, Inc. v. Ecuador, ICSID Case No. ARB/03/6, Award, 31 July 2007. 62 Id., para. 159. 63 Id., para. 160.

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considered the criteria that were discussed by other tribunals to be mere examples.64 31 The discussion is far from being over. Good arguments seem to speak in favour of an objective approach that takes the requirement an investment serious. First, the drafters included the requirement in the text. Recurring solely to the existence of consent would render the wording meaningless.65 Furthermore, the Report of the Executive Directors expressly rejected the contention that consent alone could be considered sufficient: While consent of the parties is an essential prerequisite for the jurisdiction of the Centre, consent alone will not suffice to bring a dispute within its jurisdiction. In keeping with the purpose of the Convention, the jurisdiction of the Centre is further limited by reference to the nature of the dispute and the parties thereto. (emphasis added)66

On the other hand, as the sole arbitrator Paulson in Pantechniki67 correctly points out, Art. 25(1) of the ICSID Convention stipulates other objective requirements, i.e. the existence of a legal dispute and the nationality of the investor; thus, consent alone will not suffice even if one is considering the mention of ‘investment’ as merely declaratory. Also, the imposition of a strict requirement ‘investment’, which does not take account of the existence of a consent between the parties, can entail serious negative consequences: in case the tribunal considers an asset not to be an investment under ICSID although it would qualify as investment under a BIT or an investment contract, the tribunal would have to decline jurisdiction.68 Unless there are alternative options for dispute settlement agreed between the parties, the investor would be without legal protection on the international level69 unless the host State is willing to agree ex post to another dispute settlement option. Thus, although the State has agreed to grant the investor certain enforceable rights on an international level and to protect his investments, there would be no way to enforce these rights. 33 A great concern of some member States seems to have been that ‘political or commercial’ disputes would be subject to ICSID jurisdiction.70 This concern 32

64 Id., para. 165; cf. also Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair (n. 37) Art. 25, paras. 170–174. 65 Alcoa Minerals of Jamaica, Inc v. Jamaica (n. 48), ICSID Case No. ARB/74/2, Decision on Jurisdiction and Competence, 6 July 1975, at 9 (cited according to John Schmidt (n. 48) 99); Saba Fakes v. Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, para. 108; Joy Mining Machinery Limited v. Egypt (n. 56) paras. 49–50. 66 Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of other States, para. 25. 67 Pantechniki S.A. Contractors & Engineers v. Albania (n. 45) para. 41; compare also Malaysian Historical Salvors, SDN, BHD v. Malaysia (n. 57) para. 72. 68 Cf. Georges Delaume (n. 50) 806. Recourse to the additional facility rules would be an alternative choice, but the parties have to agree first. 69 However, in case that conducting arbitration is impossible national courts may be willing to disregard the arbitration agreement between the parties; see also UNCITRAL, Explanatory Notes to the Model Law, para. 21. 70 Cf. History II-1, 33; compare also Georges Delaume (n. 50) 806; however, Aron Broches (n. 45) 362 points out that the mention of ‘commercial disputes’ as one example of disputes was a mistake.

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seems to be unwarranted. First, despite the fact that most investment disputes arise out of State measures adopted for political reasons (excluding which would render the investment protection treaties pointless), tribunals tend to refuse passing judgment on the political questions themselves that are underlying the (legal) investment disputes; rather they rule on whether legal rights have been violated.71 Second, due to the participation of State entities,72 the dispute is unlikely to be a purely commercial dispute.73 Furthermore, the State can effectively prevent – by excluding certain types of disputes pursuant to Art. 25(4) of the ICSID Convention, by limiting its consent expressed in investment treaties or by not agreeing to ICSID arbitration at all – that a dispute is submitted to ICSID arbitration that it considers inappropriate.74 Thus, there will be no ‘floodgates’ opened up in case one considers the mentioning of the term ‘investment’ in Article 25(1) of the ICSID Convention merely hortatory. Nor is it necessary to protect the host State by interpreting his consent to jurisdiction narrowly; quite to the contrary: it can be argued contra proferentem that the host State should have made this expressly if he had wanted to limit his consent. The investor, on the other hand, was not present when the BIT was negotiated. Thus, the investor should be allowed to rely on that an investment under the BIT is also considered an investment under the ICSID Convention. Finally, the argument, ‘violence would be done to that [i.e. of the term “investment”] ordinary meaning’ if any rights having economic value would be included under Article 25(1) of the ICSID Convention,75 is not convincing: if the ordinary meaning of investment is that clear, there hardly would have been such a debate on what actually is an investment.

71 Cf. CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Decision on Jurisdiction, 17 July 2003; compare likewise the decision of the ICJ in Case concerning Military and Paramilitary Acivities in and against Nicaragua (Nicaragua v. USA), Jurisdiction of the Court and Admissibility, ICJ Judgment, ICJ Rep. 1984, 392, 435: ‘The Court has never shied away from a case brought before it merely because it had political implications’. 72 Even after the end of most communist regimes, some States still operate State trading organisations, cf. e.g. Global Trading Resource Corp. and Globex International, Inc. v. Ukraine, ICSID Case No. ARB/09/11, Award, 1 December 2010, or GEA Group Aktiengesellschaft v. Ukraine, ICSID Case No. ARB/08/16, Award, 31 March 2011; although contracts concluded by these entities are generally considered acta iure gestionis, one should not jump to the conclusion that claims arising out of contracts with such State entities are, as a matter of fact, enforceable like a contract concluded with an ordinary private party. 73 Ibrahim Shihata and Antonio Parra (n. 19) 308, report that the Secretary-General refused registration of a request for arbitration in respect of a dispute arising out of a contract for the sale of goods, on the basis that the transaction manifestly could not be considered an investment, although the request was based on a BIT that included in its definition of investment also mere contractual claims. 74 Cf. also Ambiente Ufficio S.p.A. and others v. Argentina, ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility, 8 February 2013, para. 462; but see also Patrick Mitchell v. Congo, ICSID Case No. ARB/99/7, Decision on the Application for Annulment of the Award, 1 November 2006, para. 25. 75 Zachary Douglas, The international law of investment claims (Cambridge University Press, 2009) 164.

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The question nevertheless remains whether it is possible to reconcile the language (mentioning the criterion ‘investment’) and the purpose of ICSID Convention Article 25(1). A viable way could be to consider the requirement of an investment an objective one that is, however, confined to a mere test of reasonableness. Thus, there should be a presumption in favour of an investment, and a tribunal is bound by the parties’ agreement unless (in a second step) the tribunal comes to the conclusion that on the basis of the facts of the case the asset cannot reasonably be considered an investment.76 There are many conceivable legal relations between a State and a foreign national that do not come even close to the term investment, like e.g. employment contracts or claims for compensation resulting from breaches of human rights obligations. There can be little doubt that the drafters did not contemplate such disputes and that submitting them to ICSID would be, as Mr Broches said, ‘clearly inconsistent with the purposes of the Convention’.77 Conversely, if a State agrees to settle merely commercial disputes – whatever the difference between commercial disputes and investment disputes may be – by ICSID arbitration and if one cannot reasonably argue that it should have known that ICSID arbitration is not appropriate in this case, why should it be excluded? This seems to be the only way of excluding uncertainties for investors, which otherwise have to fear that a tribunal comes up – years after the investment has been made – with new additional criteria for the finding of an investment that are allegedly borne by the spirit of the Convention. It should not be forgotten that legal certainty is one of the primary purposes of the Convention.78 c) Criteria for the Finding of an Investment

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As has been mentioned before, tribunals have discussed different criteria that should be considered when finding whether the dispute directly arises out of an investment. The so-called Salini test includes duration, risk, a financial contribution as well as a contribution to the host State’s development.79 Some tribunals considered only the first three criteria relevant;80 however, these three criteria 76 Cf. also Chittharanjan F. Amerasinghe, ‘Interpretation of Article 25(2)(b) of the ICSID Convention’ in Richard B. Lillich and Charles N. Brower (eds), International arbitration in the 21st century: Towards ‘judicialization’ and uniformity? (Transnational Publishers, 1994) 232, arguing in favour of a presumption that the jurisdictional requirements are met if the parties agree to submit disputes to ICSID; a similar approach seems to have been taken by the tribunal in Ambiente Ufficio S.p.A. and others v. Argentina (n. 74) paras. 470, 481. 77 Aron Broches (n. 45) 363. 78 See Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of other States, para. 9, which reads as follows: ‘The creation of an institution designed to facilitate the settlement of disputes between States and foreign investors can be a major step toward promoting an atmosphere of mutual confidence and thus stimulating a larger flow of private international capital into those countries which wish to attract it.’ 79 Cf. also supra 1.d)(1) as to the criteria discussed during the drafting process. 80 Saba Fakes v. Turkey (n. 65) para. 110; Consortium Groupement L.E.S.I.–DIPENTA v. Algeria, ICSID Case No. ARB/03/08, Award, 10 January 2005, para. II.13(iv).

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are not the same as those identified, e.g., by the Draft MAI. Other tribunals added further criteria like the aim of a regular profit and return;81 or that the investment was made in good faith and in accordance with the laws of the host State.82 Besides, tribunals disagree on whether all criteria identified by them have to be met cumulatively or whether it is sufficient that an overall assessment considering some of these requirements is warranted.83 This is indicative for the great uncertainty associated with an objective test for an investment. But even if it were possible to identify a certain set of criteria, features or hallmarks, most of these would be associated with further uncertainties, as will be shown in the following. A criterion often required is certain duration. As has been mentioned above, 36 already the 1964 Draft stipulated that the contribution be made for an indefinite period or at least for five years. Today, legal writing and tribunals consider a period of two to five years sufficient.84 But even if one was willing to accept such a criterion, the entailing question would be how this duration should be calculated? For instance, an issue discussed by some tribunals is whether the intended or the actual duration was decisive.85 81 Joy Mining Machinery Limited v. Egypt (n. 56) para. 53; Helnan International Hotels A/S v. Arab Republic of Egypt (n. 56) para. 77. 82 Phoenix Action, Ltd. v. Czech Republic (n. 56) para. 100; see criticism at Saba Fakes v. Turkey (n. 65), paras. 112–114. 83 Emmanuel Gaillard (n. 44) 407, considers that first a method of defining, while the second is considered a mere identification of characteristics. Similarly, the sole arbitrator in Malaysian Historical Salvors, SDN, BHD v. Malaysia, ICSID Case No. ARB/05/10, Decision on Jurisdiction, 17 May 2007, para. 70, distinguishes between a typical characteristics approach and a jurisdictional approach. The cumulative/jurisdictional approach seems to be taken by Salini Costruttori SpA and Italstrade SpA v. Morocco (n. 54) para. 52; Consortium RFCC v. Morocco (n. 53) para. 60; Consortium Groupement L.E.S.I.–DIPENTA v. Algeria (n. 80) para. II. 13(iv); Patrick Mitchell v. Congo (n. 74) para. 27; however, most tribunals consider an overall assessment of these criteria is admissible; for instance, the tribunal in Joy Mining Machinery Limited v. Egypt (n. 56) para. 53 et seq., argues that an investment ‘must’ fulfil certain criteria identified by it, but on the other hand reasoned that a ‘complex operation should not be examined in isolation because what matters is to assess the operation globally or as a whole’. The identification/typical characteristics approach is taken for instance by Biwater Gauff (Tanzania) Ltd. v. Tanzania (n. 57) paras. 312–318; Malaysian Historical Salvors, SDN, BHD v. Malaysia (n. 57) Decision on the Application for Annulment of 16 April 2009, paras. 75–79; MCI Power Group, LC and New Turbine, Inc. v. Ecuador (n. 61) para. 165; RSM Production Corp. v. Grenada (n. 57) paras. 236–238. 84 Dominique Carreau, Patrick Juillard and Thiébaut Flory (n. 51) 558–578; Consortium RFCC v. Morocco (n. 53) para. 62; Salini Costruttori SpA and Italstrade SpA v. Morocco (n. 54) para. 54; Malaysian Historical Salvors, SDN, BHD v. Malaysia (n. 57) paras. 110–111. 85 See, e.g. the discussion in Jan de Nul N.V. and Dredging International N.V. v. Egypt, ICSID Case No. ARB/04/13, Decision on Jurisdiction, 16 June 2006, para. 94, whether the investment covers a period beginning with ‘the pre-tender or the tender stage’; in L.E.S.I. S.p.A. et ASTALDI S.p.A. v. Algeria, ICSID Case No. ARB/05/3, Decision, 12 July 2006, para. 73(ii), the tribunal held that the suspension of a contract would have no effect on the duration; rather the originally planned duration would be decisive. Compare also Saipem S.p.A. v. Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures, 21 March 2007, para. 102; in Malaysian Historical Salvors, SDN, BHD v. Malaysia (n. 57) para. 111, the sole arbitrator distinguished even between duration in a quantitative sense and duration in a qualitative sense.

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International transactions are inescapably connected with risk. But the requirement of ‘risk’ as a criterion of an investment implies more than this general risk: the commitment of capital that will have to amortise over a long time makes the investor especially liable to political changes.86 Nevertheless, tribunals considering risk an objective requirement of an investment hardly have declined jurisdiction on the basis that the investor took no risk. Instead, the existence of a dispute over large sums of capital was considered sufficient for finding also a risk. 38 Most tribunals agree that there has to be a contribution ‘in money, in kind and in industry’87 on behalf of the investor. Although the first draft of the ICSID Convention did not contain the jurisdictional requisite of an investment, it was required that the amount in dispute (which should not be confused with the amount actually invested) must exceed USD 100,000.88 But considering the enormous costs of ICSID arbitration, which can easily surmount the fivefold amount, only in very few cases an investor would submit a case to ICSID arbitration unless there are substantial amounts of money involved.89 Tribunals have considered contributions of USD 1.5 million or of USD 3.8 million as minor, but sufficient.90 A question closely connected with the duration in case of pre-investment expenditures91 is whether only actual contributions or also intended contributions have to be considered. Also, like in case of the contribution to the host State’s development discussed in the following, the methodological problems as to the calculation of the financial contribution arise. 39 A highly disputed92 criterion is the contribution to the host State’s development, which was first inferred by the tribunals in RFCC v. Morocco93 and Salini v. Morocco94 from the wording of the preamble (‘Considering the need for international cooperation for economic development, and the role of private interna37

86 See Noah Rubins and N. Stephan Kinsella, International investment, political risk and dispute resolution: A practitioner’s guide (Oceana Publications, 2005) 1–3; Rudolf Dolzer and Christoph Schreuer (n. 35) 21–22. 87 Salini Costruttori SpA and Italstrade SpA v. Morocco (n. 54) para. 53; Malaysian Historical Salvors, SDN, BHD v. Malaysia (n. 57) para. 109. 88 See above 1.d)(1). 89 Jan Paulsson in Pantechniki S.A. Contractors & Engineers v. Albania (n. 45) para. 45. 90 SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003, para. 136; Malaysian Historical Salvors, SDN, BHD v. Malaysia (n. 57) paras. 109, 134; cf. also Pantechniki S.A. Contractors & Engineers v. Albania (n. 45). 91 See infra 2.d). 92 Criticism at Saba Fakes v. Turkey (n. 65) para. 111: ‘The promotion and protection of investments in host States is expected to contribute to their economic development. Such development is an expected consequence, not a separate requirement, of the investment projects carried out by a number of investors in the aggregate. Taken in isolation, certain individual investments might be useful to the State and to the investor itself; certain might not. Certain investments expected to be fruitful may turn out to be economic disasters. They do not fall, for that reason alone, outside the ambit of the concept of investment.’ 93 Consortium RFCC v. Morocco (n. 53) para. 65. 94 Salini Costruttori SpA and Italstrade SpA v. Morocco (n. 54) para. 52.

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tional investment therein (…)’). Although the explicitly mentioned purpose of ICSID in Article 1(2) of the ICSID Convention does not mention ‘development’, it is nevertheless arguable that the promotion of development is one aim of the Convention.95 But a purposive interpretation of the term ‘investment’ does not warrant a positive criterion ‘significant contribution to development’.96 By excluding investments that are insignificant or neutral to the host State’s development from the term investment, the purpose of the Convention is not furthered. Also, assessing whether an investment contributes to the development is connected with methodological uncertainties: by what standard is development to be measured97? Whether a contribution exists may lie in the eyes of the beholder and may depend on the very success of the investment.98 Tribunals can hardly be supposed to make a cost-benefit analysis for each case before proceeding to the merits. Despite these methodological problems, the idea of excluding economic activity that clearly has negative effects on the economic development (e.g. exploitation of certain raw materials causing severe environmental damages and thus costs that are not reimbursed by the investor) has some appeal. But arguably this question is better left to the merits of the dispute and the assessment of a violation of the standards of treatment.99 In addition to the four so-called Salini criteria just mentioned, the tribunal in 40 Joy Mining v. Egypt introduced a fifth criterion: a regularity of profit and return.100 Others just require the ‘expectation of a commercial return’;101 a similar criterion can also be found in some new investment treaties as has been mentioned above.102 Recently, several tribunals have proposed that an investment has to be made 41 in good faith and in accordance with the laws of the host State.103 This has been 95 Cf. Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of other States, para. 9. 96 Cf. Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair (n. 37) Art. 25, para. 121. Compare also Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Bolivia, ICSID Case No. ARB/06/2, Decision on Jurisdiction, 27 September 2012, paras. 220, 235; Pantechniki v. Albania (n. 45), paras. 36, 43. 97 The uneasiness of tribunals in handling this requirement is illustrated by Patrick Mitchell v. Congo (n. 74) para. 33: ‘[T]hat (…) the existence of a contribution to the economic development of the host State as an essential (…) criterion of the investment, does not mean that this contribution must always be sizable or successful; and, of course, ICSID tribunals do not have to evaluate the real contribution of the operation in question. It suffices for the operation to contribute in one way or another to the economic development of the host State, and this concept of economic development is, in any event, extremely broad but also variable depending on the case.’ 98 See Saba Fakes v. Turkey (n. 65). 99 Compare also paras. 35–37 of Dissenting Opinion of Mr Bernardo Cremades to Fraport AG Frankfurt Airport Services Worldwide v. Philippines (n. 1). 100 Joy Mining Machinery Limited v. Egypt (n. 56) para. 53; Helnan International Hotels A/S v. Egypt (n. 56) para. 77. 101 Zachary Douglas (n. 75) 191. 102 See supra 1.c). 103 Phoenix Action, Ltd. v. Czech Republic (n. 56) para. 114; Gustav F. W. Hamester GmbH & Co KG v. Ghana, ICSID Case No. ARB/07/24, Award, 18 June 2010, para. 123.

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heavily criticised by other tribunals.104 As has been mentioned,105 some investment treaties explicitly stipulate that the investment has to be made in accordance with the laws of the host State. Applying such a criterion certainly has some merit, as it cannot have been intended to offer the protection of investment treaties to investors, who made their investments fraudulently or intentionally circumventing essential host State laws. However, one could first question whether, in order to exclude this type of assets from the protection of investment treaties, an additional jurisdictional hurdle is warranted or whether this discussion should be left to the merits of the dispute.106 Second, several tribunals required that there must be a ‘serious illegality’, and not any inconsistency with local laws was deemed to be sufficient. The Tokios Tokelės tribunal noted that minor violations, such as failure to obtain correct registrations or lack of signatures on documents, were insufficient to deny protection of the investment under the BIT: Even if we [the tribunal] were able to confirm the Respondent’s allegations, which would require a searching examination of minute details of administrative procedures in Ukrainian law, to exclude an investment on the basis of such minor errors would be inconsistent with the object and purpose of the Treaty.107

The tribunals in Alpha Projektholding v. Ukraine108 and Desert Line v. Yemen agreed, pointing inter alia to the fact that in many countries laws are unclear and intransparent and mistakes could be made in good faith.109 43 It has to be emphasised that investors are in particular dependent on the protection by investment treaties in countries with intransparent or incoherent legislation. 44 To conclude: the criteria put forward for the finding of an investment only purport to provide rationality and legal certainty. This perceived certainty is, however, treacherous as in the end tribunals tend to emphasise the importance of different criteria differently as they seem fit. Thus, they replace the parties’ subjective considerations by their own.110 Nevertheless, the criteria might be helpful when (as proposed here) assessing whether – despite the parties’ consent – it would be clearly unreasonable to consider a given asset an investment.111 42

104 Saba Fakes v. Turkey (n. 65) paras. 112–114. 105 See supra 1.c)(3). 106 Compare also paras. 35–37 of Dissenting Opinion of Mr Bernardo Cremades to Fraport AG Frankfurt Airport Services Worldwide v. Philippines (n. 1). 107 Tokios Tokelės v. Ukraine (n. 32) para. 86. 108 Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 297. 109 Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, paras. 116–117, quoting Fraport AG Frankfurt Airport Services Worldwide v. Philippines (n. 1) para. 396. 110 Criticism also by Zachary Douglas (n. 75) 190 (‘unacceptably subjective’); sole arbitrator Jan Paulsson in Pantechniki S.A. Contractors & Engineers v. Albania (n. 45) para. 36. 111 See supra 1.d)(3); cf. also Ambiente Ufficio S.p.A. and others v. Argentina (n. 74) para. 481.

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5. Interrelationship Between the ICSID Definition and ‘BIT’ Definition: an Overarching Concept of Investment?

Based on the approach endorsed above, the role of the requirement of an in- 45 vestment contained in Article 25(1) of the ICSID Convention can only be an unreasonableness test. Thus, although there is technically a ‘double barrelled’ approach that considers the ICSID and the BIT terms separately,112 the ICSID term generally does not add additional requirements to the ones stipulated by a BIT (or MIT). A similar approach has also been taken by the tribunal in Abaclat v. Argentina, which defined the term investment under the ICSID Convention as a contribution, which in turn is a value protected by the BIT.113 Conversely, the tribunal in Romak v. Uzbekistan interpreted the term invest- 46 ment as contained in the BIT in the light of the term ‘investment’ under the ICSID Convention – based on three assumed criteria (duration, contribution, risk).114 The tribunal argued that – although the BIT defined its term ‘investment’ as every kind of asset – this should not mean that every contractual claim could be subject to arbitration. To avoid this, the term ‘asset’ should be interpreted also in the light of an assumed overarching concept of ‘investment’.115 Although it would be possible for the parties of a BIT to agree on a definition that would go beyond these criteria, this would require a clear indication in the wording of the treaty: Contracting States can even go as far as stipulating that a ‘pure’ one-off sales contract constitutes an investment, even if such a transaction would not normally be covered by the ordinary meaning of the term ‘investment.’ However, in such cases, the wording of the instrument in question must leave no room for doubt that the intention of the contracting States was to accord to the term ‘investment’ an extraordinary and counterintuitive meaning.116

The dogmatic difficulty of the tribunal’s argumentation is evident. Similarly, 47 some authors argue that violence would be done to the ordinary wording of the term investment if any asset, like for instance a metro ticket, would be considered an investment.117 Although recent investment treaties have included the criteria ‘commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk’ in their definition of the term investment, the intense discussion during the drafting of the ICSID Convention as well as the different approaches in jurisprudence to the term investment shows that these three criteria are not apparently inherent in the meaning of the word ‘investment’. This does not mean that there are no inherent limits in the concept of investment; probably most people would agree that a metro ticket cannot reasonably be qualified as investment – even though it certainly is an asset. Conversely, to exclude 112 Cf. also Ambiente Ufficio S.p.A. and others v. Argentina (n. 74) para. 438. 113 Abaclat and Others v. Argentina, ICSID Case No. ARB/07/5, Decision on Jurisdiction, 4 August 2011, para. 365. 114 Romak S.A. v. Uzbekistan, UNCITRAL, Award, 26 November 2009, paras. 192–207. 115 Romak S.A. v. Uzbekistan (n. 114) para. 188. 116 Romak S.A. v. Uzbekistan (n. 114) para. 205. 117 Zachary Douglas (n. 75) 164.

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cases like a metro ticket that are clearly no investment implying the abovementioned criteria is not warranted; the unreasonableness test endorsed above would be sufficient. Although a clear-cut test would be preferable in the interest of legal certainty over an imprecise unreasonableness control. But: first, these criteria are neither undisputed nor is their content clear; thus, they hardly serve legal certainty. Second, there is absolutely no legal basis for these criteria unless they are explicitly mentioned in the respective treaty. 6. Case Groups/Particular Cases and Problems 48

In the practice of investment tribunals, several issues relating to the issue of ‘investment’ have gained prominence. Those issues partially stem from possible frictions between what is an ‘investment’ under an applicable BIT/MIT and what it is under the ICSID Convention, but partially also from economic reality, which has created some quite complex forms for investing in foreign countries. a) Unity of an Investment Operation

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According to Article 25(1) of the ICSID Convention, the dispute must arise ‘directly’ out of an investment. Despite this wording, it is not necessary that each and every asset, the prejudice of which is alleged by a claimant investor, itself qualifies as investment. Rather, it is well accepted by tribunals that, for determining whether an investment was affected, it is sufficient that the prejudiced asset forms a part of an overarching investment operation. (1) Case Law

50

This concept of the unity of an investment operation was already suggested by the PCIJ in the Chorzów Factory case. A nitrate plant (‘Chorzów Factory’) belonging to the German company Oberschlesische Stickstoffwerke (‘Oberschlesische’) was expropriated by the Polish State. However, another company, the Bayerische Stickstoffwerke (‘Bayerische’), actually operated the factory and received remuneration for the use of its patents. The tribunal came to the following conclusion: The question is whether, by taking possession of the Chorzów factory (…), Poland has unlawfully expropriated the contractual rights of that Company (…) it is clear that the rights of the Bayerische to the exploitation of the factory and to the remuneration fixed by the contract for the management of the exploitation and for the use of its patents, licences, experiments, etc. have been directly prejudiced by the taking over of the factory by Poland.118

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In its judgment on indemnity, the Court stressed the economic unity of this undertaking: The economic unity of the Chorzow undertaking, pointed out by the Court in its Judgment No. 6, is shown above all in the fact that the interests possessed by the two Companies in the undertaking are

118 Case concerning certain German interests in Polish Upper Silesia (Germany v Poland), Judgment, 25 May 1925, PCIJ Rep. (Ser. A) No. 7, 44.

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II.A. The Notion of Investment interdependent and complementary; (…) The whole damage suffered by the one or the other Company as the result of dispossession, in so far as it concerns the cessation of the working and the loss of profit which would have accrued, is determined by the value of the undertaking as such; (…).119

Also in the first ICSID arbitration, Holiday Inns v. Morocco, the tribunal em- 52 phasised the need for a holistic approach: It is well known, and it is being particularly shown in the present case, that investment is accomplished by a number of juridical acts of all sorts. It would not be consonant either with economic reality or with the intention of the parties to consider each of these acts in complete isolation from the others. It is particularly important to ascertain which is the act which is the basis of the investment and which entails as measures of execution the other acts which have been concluded in order to carry it out.120

This general approach seems to be undisputed, and it is regularly applied by 53 tribunals. In CSOB v. Slovakia,121 the dispute arose out of Slovakia’s failure to repay a loan granted by the claimant to a Slovak collection company despite an agreement. The tribunal first considered that, in isolation, a failure to cover losses could not be considered an investment: CSOB’s claim is based on the allegation that the Slovak Republic breached its obligation [as agreed] by failing and refusing to cover the losses incurred by the Slovak Collection Company. Viewed in isolation, this undertaking does not involve any spending, outlays or expenditure of resources by CSOB in the Slovak Republic. Standing alone, therefore, it does not constitute an investment.122

Nevertheless, the tribunal found that the dispute arose out of an investment 54 because the obligation to cover the losses by the Slovak collection company had to be seen in connection with the loans granted by CSOB to the Slovak collection company: [A] dispute that is brought before the Centre must be deemed to arise directly out of an investment even when it is based on a transaction which, standing alone, would not qualify as an investment under the Convention, provided that the particular transaction forms an integral part of an overall operation that qualifies as an investment.123

55 These loans, the tribunal found, would qualify as investment.124 In Joy Mining v. Egypt, the claimant and the State-owned company IMC con- 56 cluded a contract according to which IMC would purchase mining equipment from the claimant. The claimant provided a bank guarantee that IMC could hold until it was satisfied with the quality of the equipment. IMC claimed that the equipment did not meet the quality requirements and refused to release the guarantee. When assessing whether the dispute concerned an investment, the tribunal did not only consider the bank guarantee: 119 Factory at Chorzów (Claim for Indemnity) (Merits) (Germany v. Poland), PCIJ Judgment, 17 September 1928, PCIJ (Ser. A) No. 17, 49. 120 Holiday Inns S.A. and others v. Morocco, ICSID Case No. ARB/72/1, Decision on Jurisdiction, 1 July 1973, cited according to Pierre Lalive, ‘The First “World Bank” Arbitration (Holiday Inns v. Morocco), Some Legal Problems’ (1980) 51 BYIL 123–161, 159. 121 Ceskoslovenska Obchodni Banka, a.s. v. Slovakia (n. 49). 122 Ceskoslovenska Obchodni Banka, a.s. v. Slovakia (n. 49) para. 69. 123 Ceskoslovenska Obchodni Banka, a.s. v. Slovakia (n. 49) para. 72. 124 Ceskoslovenska Obchodni Banka, a.s. v. Slovakia (n. 49) para. 82; see also infra 2.b)(2).

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Chapter 6: The Scope of Application of International Investment Agreements The requirement mentioned above, that a given element of a complex operation should not be examined in isolation because what matters is to assess the operation globally or as a whole, is a perfectly reasonable one in the view of the Tribunal. Accordingly, it has undertaken an examination of the Contract as a whole in order to determine whether it could qualify as an investment under Article 25 of the Convention, although as explained the Tribunal is only called to determine the status and implications of the bank guarantees.125

Nevertheless, the tribunal declined jurisdiction because the overall transaction could not be qualified as investment.126 58 In ADC v. Hungary, the dispute concerned an agreement on the renovation and operation of the State-owned airport between the claimant companies and the Hungarian Air Traffic and Airport Administration (ATAA). The claimants incorporated a domestic subsidiary for operating the airport. They, the subsidiary and ATAA, each concluded a series of contracts which mostly only involved the subsidiary and one claimant company.127 In referring to the different contracts concluded between different parties, Hungary disputed that there was an investment. The tribunal refuted this argument: 57

In considering whether the present dispute falls within those which ‘arise directly out of an investment’ under the ICSID Convention, the Tribunal is entitled to, and does, look at the totality of the transaction as encompassed by the Project Agreements.128

59

In the non-ICSID case of Mytilineos v. Serbia, the dispute arose out of a series of agreements concluded between the claimant and a State-owned enterprise for the cooperation in the mineral extraction and metallurgy business. As to the existence of an investment, the tribunal held: Even if one doubted whether the Agreements looked at in isolation would constitute investments by themselves, [it] seems clear that the combined effect of these agreements amounts to an investment.129

60

In Inmaris v. Ukraine, the tribunal was faced with claims on behalf of all four claimant companies that arose out of distinct, but interrelated contracts for the reconstruction and operation of the Ukrainian sail-training vessel Khersones. Similar to the tribunal in ADC, the tribunal considered these different interrelated contracts between different entities as one integrated investment: Accordingly, the Tribunal can step back to consider their claimed investments as component parts of a larger, integrated investment undertaking. It is not necessary to parse each component part of the

125 Joy Mining Machinery Ltd. v. Egypt (n. 56) para. 54. 126 Joy Mining Machinery Ltd. v. Egypt (n. 56) para. 57. 127 ADC Affiliate Ltd. and ADC & ADMC Management Ltd. v. Hungary, ICSID Case No. ARB/ 03/16, Award of the Tribunal, 2 October 2006, para. 123. 128 ADC Affiliate Ltd. and ADC & ADMC Management Ltd. v. Hungary (n. 127) para. 331; cf. also the decisions concerning contractual disputes in Amco Asia Corp. v. Indonesia, ICSID Case No. ARB/81/1, Decision on Jurisdiction, 25 September 1983, paras. 24, 31; SOABI v. Senegal (n. 48) paras. 4.13, 4.16, 4.24; Klöckner Industrie Anlagen GmbH et al. v. Cameroon, ICSID Case No. ARB/81/2, Award, 21 October 1983, Part III. These tribunals extended the scope of the ICSID arbitration clause to entities that were not parties to the contract containing the arbitration clause, but were part of the overall business operation. 129 Mytilineos Holdings SA v. State Union of Serbia & Montenegro and Republic of Serbia, UNCITRAL, Partial Award on Jurisdiction, 8 September 2006, para. 120.

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II.A. The Notion of Investment overall transaction and examine whether each, standing alone, would satisfy the definitional requirements of the BIT and the ICSID Convention.130

In assessing whether there was an integrated investment, the tribunal consid- 61 ered the question irrelevant whether it was an economic or legal necessity for the claimants to split up the project over different companies: We need not be persuaded that it was ‘necessary’ for the various [claimants] to arrange their respective activities and responsibilities as they did (…); we need only conclude that each was an integrated part of the Khersones [the Ukrainian sail-training vessel] project. Even if the financing, the bareboat charter, the sailing tour operations, and the marketing all could have been performed by a single entity (as apparently was the case under [previous contracts]), the fact that Claimants allocated these responsibilities among different Inmaris entities in connection with the Bareboat Charter Contract does not change the essential nature or scope of the Khersones venture.131

The tribunal was not persuaded by the argument brought forward by Ukraine 62 that this would allow the claimants to create investments by sub-delegation.132 In Sedelmayer v. Russia, the claimant not only claimed the reimbursement of 63 his equity contribution to the joint venture KOC; he also claimed damages for the seizure of his personal belongings that were at the premises of the joint venture. However, the tribunal rejected the claimant’s proposition to consider these as part of his investment: The Claimant has classified all the items as personal belongings. The articles listed are also such that they, typically, belong to a private household. It might be assumed that the items in question were to some extent used in connection with KOC’s activities. The Tribunal finds, all the same, that the items cannot be considered so closely related to KOC that they shall be regarded as investment under the Treaty.133

(2) Analysis

From the viewpoint of economic realities, the holistic view suggested by the 64 concept of the unity of an investment operation is convincing. It is quite common to split up one project into different transactions (e.g. financing, holding of real estate, procurement, distribution, construction and operation) and also to conduct one business through different, interconnected companies, e.g. in order to reduce the insolvency risk or to take advantage of tax regulations. In most cases, this concept has served as means for determining at the juris- 65 dictional stage the extent (of the subject matter) of legal transactions (first only in case of contractual disputes, later also for treaty disputes) included as investment under Article 25(1) of the ICSID Convention. In ADC v. Hungary and Inmaris v. Ukraine however, this also affected the investors included, as different claimant entities had concluded different contracts with the State entities. Finally, the tribunals in Inmaris v. Ukraine and Mytilineos v. Serbia implicitly extend130 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (n. 57) para. 92. 131 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (n. 57) para. 94. 132 Ibid. 133 Franz Sedelmayer v. Russia, SCC Arbitration, Award, 7 July 1998, para. 3.4.3.

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ed the findings of previous tribunals also to the BIT’s scope of protection.134 While extending the scope of the investment might also extend the scope of potentially affected rights and also the number of investors, it might on the other hand also set a higher hurdle for finding an expropriation: it happens more often that a single claim or right is prejudiced compared to the destruction of a whole business. 66 However, neither tribunals nor legal writing have yet developed clear-cut criteria for determining whether a certain business transaction still forms an integral part of a certain investment operation. This is unfortunate from a dogmatic perspective as there is indeed a danger that a light-hearted extension of the (integrated) investment and thus the inclusion of further investors might indeed lead to a creation of investments by sub-delegation that had been criticised by Ukraine in Inmaris v. Ukraine.135 Consider for example the following case: company A, a Utopian car manufacturer, incorporates the domestic subsidiary B in Xandia. The produced cars are marketed and sold by the Utopian company C to customers in Utopia. It is conceivable that, under certain circumstances, also C might be considered taking part in an overall investment operation, while certainly customers in Utopia – although they are necessary for the success of the project marketing Xandian cars in Utopia – cannot be considered to do so. It is questionable what criteria can be considered relevant. In Inmaris v. Ukraine, the tribunal considered inter alia relevant that all claimants filed their claim together. It expressed doubts as to whether a single claimant company could have invoked a ‘claim to performance’ under the BIT.136 Also, it took into account that the Ukrainian contracting partner was aware of the complex contractual structure and that there were cross-references between the different contracts.137 In addition to these criteria, one might also consider relevant to which degree the players or the business components are exchangeable. If, in our example, C sells cars manufactured by B and it plays no role whether they were built in Xandia or elsewhere, it is questionable whether C is part of an integrated investment project. But if, for example, selling cars from Xandia is a totally new business model, the assessment might look different. Indeed, also the criterion of risk (sharing)138 might play a role here. But much will be dependent on the facts of each individual case. Having experienced counsel and experienced arbitrators

134 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (n. 57) paras. 91–93; Mytilineos Holdings SA v. State Union of Serbia & Montenegro and Republic of Serbia (n. 129) paras. 118–125. 135 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (n. 57) para. 94. 136 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (n. 57) para. 91. 137 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (n. 57) para. 95 et seq.; compare also ADC Affiliate Ltd. and ADC & ADMC Management Ltd. v. Hungary (n. 127) para. 331. 138 See also above 1.d)(3).

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might be more important to determine whether a certain transaction still forms part of an investment than abstract principles. b) Applicable Standard for Determining the Existence of an Asset

When considering the question of an investment’s existence, tribunals are 67 quite often faced with objections raised by the respondent State that a certain investment has not been made in conformity with its domestic laws and thus is void.139 Also, as has been explained above,140 many BITs require that an investment is made in accordance with the laws of the host country. However, provisions of this type are generally read narrowly – as will be discussed below141 – and concern only the question of whether the investment was illegal.142 This question of illegality has to be distinguished – although it is not totally 68 unrelated – from the question of whether a (valid) investment/asset exists at all. On its face, the finding of an asset on the basis of the examples given under most BITs143 seems to be merely an economic or factual operation. But the examples given to explain the term ‘asset’ usually are legal rights like property, shares or claims under a contract or law. Therefore, one is tempted to say that, in order to constitute an asset, a property right, a share or a claim actually has to exist. For example, in Libananco v. Turkey144 and Saba Fakes v. Turkey,145 the tribunals had to decide whether the claimants had validly been assigned shares, which they claimed to be their investments. Such question is not only one of fact, but also of law. The consequential question is: on the basis of what law to determine whether there is a right or a claim?

139 See, for instance, Tokios Tokelės v. Ukraine (n. 32) para. 72; Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (n. 57) para. 71, and in particular note 53. 140 Supra 1.c). 141 Infra Katharina Diel-Gligor and Rudolf Hennecke, ‘Investment in Accordance with the Law’, ch. 6.II.D., 566–576 and Ralph Alexander Lorz and Manuel Busch, ‘In Accordance with the Law – Specifically Corruption’, ch. 6.II.E., 577–590. 142 Rudolf Dolzer and Christoph Schreuer (n. 35) 64; Salini Costruttori SpA and Italstrade SpA v. Morocco (n. 54) para. 46; Tokios Tokelės v. Ukraine (n. 32) para. 86; Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Decision on Jurisdiction, 6 July 2007, para. 184; Alpha Projektholding v. Ukraine (n. 108) para. 297; Fraport v. Philippines (n. 1) para. 396; but see also Alasdair Ross Anderson et al. v. Costa Rica, Award, 19 May 2010, paras. 51–59; Elettronica Sicula S.p.A. (ELSI) (United States v. Italy), Award (Merits), 20 July 1989, ICJ Rep. 1989, 15, para. 72: ‘The reference to conformity with “the applicable laws and regulations” surely means no more than that Italian corporations and associations controlled by United States nationals must conform to the local applicable laws and regulations; moreover, they must do so even if they believe a law or regulation to be in breach of the FCN Treaty, and, indeed, even if it were in breach of the FCN Treaty’. 143 See supra 1.c). 144 Libananco Holdings Co. Limited v. Turkey, ICSID Case No. ARB/06/8, Final Award, 2 September 2011. 145 Saba Fakes v. Turkey (n. 65).

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(1) Provisions in Investment Treaties 69

Only few treaties contain explicit provisions on the applicable standard for determining whether an asset exists. In an explanatory footnote, the 2012 US Model BIT addresses the standard to determine as to licence, authorisation, permit, or similar instrument: Whether a particular type of license, authorization, 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 licenses, authorizations, 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. (…)

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Thus, the law of the host State is decisive in order to determine whether the investor actually holds a right and thus an investment. Furthermore, some BITs expressly mention with regard to intellectual property rights that they are assessed on the basis of the law of the host State. For example, Article 1 of the Indian Model BIT defines as investment inter alia (iv) intellectual property rights, in accordance with the relevant laws of the respective Contracting Party.

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In case there are no specific provisions, the law applicable to the investment treaty will have to determine the standard.146 However, most investment treaties containing provisions on the law applicable refer to international law and not to domestic law.147 Only few treaties provide for a rule like Article 8(7) of the 1993 Albania–China BIT, which reads as follows: The tribunal shall adjudicate in accordance with the law of the Contracting Party 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 Parties.148

(2) Case Law 72

There is a tendency in case law to refer to the law of the host State for determining whether a claimant holds an asset. In the same moment, a certain uneasiness of some tribunals in applying the host State law can be observed. One of the first cases in which this occurred was SPP v. Egypt. Faced with a factual situation where Egypt’s highest authorities had approved a project which – as it turned out afterwards – was in clear breach of Egyptian law, the tribunal held: Whether legal under Egyptian law or not, the acts in question were the acts of Egyptian authorities, including the highest executive authority of the Government. These acts, which are now alleged to have been in violation of the Egyptian municipal legal system, created expectations protected by established principles of international law. A determination that these acts are null and void under mu-

146 Cf. Total S.A. v. Argentina, ICSID Case No. ARB/04/01, Decision on Liability, 27 December 2010, para. 39. 147 Cf. e.g. NAFTA Article 1131 or ECT Article 26(6). 148 Available at http://www.unctad.org/sections/dite/iia/docs/bits/china_albania.pdf.

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II.A. The Notion of Investment nicipal law would not resolve the ultimate question of liability for damages suffered by the victim who relied on the acts. If the municipal law does not provide a remedy, the denial of any remedy whatsoever cannot be the final answer.149

In Libananco v. Turkey and Saba Fakes v. Turkey, the tribunals applied Turk- 73 ish law to assess the validity of a transfer of the shares.150 In Total S.A. v. Argentina, the subsidiaries of the claimant held various licences and concessions, which were allegedly affected by the respondent’s measures. As to the applicable law, the BIT provided that the treaty itself as well as the law of the host State apply. The tribunal held that this provision also applies in order to determine the extent of rights granted by these licences: The first question concerns the role of Argentina’s domestic law in determining the content and the extent of Total’s economic rights as they exist in Argentina’s legal system. In this regard the Tribunal believes that Argentine law has a broader role than that of just determining factual matters. The content and the scope of Total’s economic rights (…) must be determined by the Tribunal in light of Argentina’s legal principles and provisions.151

In Kardassopoulos v. Georgia,152 the tribunal was asked to rule on a dispute 74 on the basis of the ECT and a BIT that concerned a concession agreement the validity of which was disputed. As to the applicable law the tribunal found: While this Tribunal is not authorized to apply Georgian law, it is well established that there are provisions of international agreements that can only be given meaning by reference to municipal law. In the present case, Georgian law is relevant as a fact to determine whether or not Claimant’s investment is covered by the terms of the ECT and the BIT. But, whatever may be the determination of a municipal court applying Georgian law to the dispute, this Tribunal can only decide the issues in dispute in accordance with the applicable rules and principles of international law.153

Nevertheless, the tribunal did not answer the question of whether the conces- 75 sion agreement was invalid under Georgian law: In these circumstances, the conclusion of a Georgian Court may well be that the JVA is void ab initio under Georgian law. But as observed earlier by the Tribunal, our remit as an ICSID Tribunal is to apply international law to resolve this dispute.154

The tribunal reasoned that Georgia, which based its argument as to the illegal- 76 ity of the concession on the fact that State officials acted ultra vires, was enjoined from arguing the agreement was invalid as a matter of international law.155 In Azinian v. Mexico,156 the claimants had concluded a concession agreement 77 with a Mexican municipality. Later, the municipality annulled the concession 149 Southern Pacific Properties (Middle East) Limited v. Egypt (n. 46) para. 83. 150 Libananco Holdings Co. Limited v. Turkey (n. 144) para. 122; Saba Fakes v. Turkey (n. 65) para. 125 et seq. 151 Total S.A. v. Argentina (n. 142) para. 39. 152 Ioannis Kardassopoulos v. Georgia (n. 146). 153 Id., paras. 145–146. 154 Id., para. 157. 155 Id., para. 184. 156 Robert Azinian et al. v. Mexico, ICSID Case No. ARB(AF)/97/2, Award of 1 November 1999.

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agreement, a decision that was upheld by the competent Mexican administrative tribunals. The arbitral tribunal found that, since the concession agreement was annulled and the annulment had been confirmed by the courts, there was no investment that could have been expropriated: [T]he Claimants have raised no complaints against the Mexican courts; (…) Without exception, they have directed their many complaints against the [municipality]. The Arbitral Tribunal finds that this circumstance is fatal to the claim, and makes it unnecessary to consider issues relating to performance of the Concession Contract. For if there is no complaint against a determination by a competent court that a contract governed by Mexican law was invalid under Mexican law, there is by definition no contract to be expropriated.157

78

In its decision on jurisdiction in Inmaris v. Ukraine, the tribunal was faced with a bareboat charter contract that provided for the application of English law. Basing its arguments on the Ukrainian civil code, Ukraine argued that this contract was invalid. Instead of deciding whether Ukrainian law governed the contract, the tribunal considered (and dismissed) the Ukrainian objection on its face.158 In its decision on the merits, the tribunal was again faced with a similar question concerning another contract. After having found that there was no choice of substantive law contained in the contract, the tribunal proceeded by referring to accepted conflict-of-laws principles: Having determined that the contract is silent on the applicable substantive laws, the Tribunal must decide the matter in accordance with generally accepted conflict-of-laws principles. Ukrainian law and other systems of law are no different in this regard: the fundamental rule is that the law of the state with the closest factual nexus to the contract should apply to its interpretation and application.159

(3) Analysis 79

Despite the fact that questions concerning the applicable law in investment arbitration have been discussed by several authors,160 the issue discussed here has so far only been raised by few authors. It seems to be the prevailing view that the law of the host State applies in order to determine whether the investor’s purported right exists.161 157 Id., para. 100. 158 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (n. 57) para. 69. 159 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/08/8, Award, 1 March 2012, para. 119. 160 As to questions of applicable law, see also contribution of Ole Spiermann, ‘Investment Arbitration: Applicable Law’, ch. 11.IV., 1374–1391. 161 Zachary Douglas, ‘The hybrid foundations of investment treaty arbitration’ (2003) 74 BYIL 151–289, 198; Zachary Douglas (n. 75) 52–72, 202–206; Andrew Newcombe and Lluís Paradell, Law and practice of investment treaties: Standards of treatment (Kluwer Law International, 2009) 95; unclear: Rudolf Dolzer and Christoph Schreuer (n. 35) 65: ‘Special issues may arise if the definition of an investment in treaties refers to rights governed by the domestic laws of the host state. This is especially so if the treaty recognizes as investments contractual rights or other rights granted under national law. In such situations, the existence of an investment will depend upon the examination of the relevant national law.’ (emphasis added). Cf. furthermore Ole Spiermann, ‘Applicable Law’ in Peter Muchlinski, Federico Or-

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The starting point for finding the law applicable for determining the existence 80 of an asset has to be the law applicable to the investment treaty – and thus generally international law.162 Recourse to domestic law can only be had in case an interpretation of the investment treaty calls for the interpretation that the mentioning of certain assets is a renvoi to domestic law. If the BIT contains a provision on the applicable domestic law like Article 8(7) of the abovementioned Albania–China BIT, it is reasonable to imply that this law (including its conflict of law rules) also applies to determine whether there is a right or a claim and thus an asset.163 However, contrary to the prevailing view in writing and case law, an automat- 81 ic renvoi to domestic law (of the host State) is not warrantable. Considering solely the host State’s law as decisive is at odds with attempts to interpret clauses providing that an investment has to be ‘in accordance with the host State laws’ narrowly.164 Whether the investor has a right would be totally dependent on – sometimes contradictory and intransparent – domestic regulations. Also, it is incompatible with the purpose of investment treaties if valuables lose their legal protection when and just because they are transferred into a legal system that does not recognise them.165 Furthermore, even if the parties have chosen foreign law to apply to their contracts, such a choice of law could only be considered by the tribunal if the conflict of law rules of the host State allow for a choice of law. This may lead to contradicting results if investors simultaneously invoke an investment treaty and an investment contract. While under Article 42(1) of the ICSID Convention, which is directly applicable to the contract, the tribunal would have to respect the choice of law clause, it would be prohibited to do so under the BIT if the host State law does not permit a choice of law. Instead of an automatic recourse to the host State’s domestic law, legal doc- 82 trine on uniform law conventions suggests two different approaches:166 either the provisions of the treaty have to be interpreted autonomously, i.e. whether there is a right or a claim has to be derived from the treaty alone, paying due regard to general principles of law. Or, if this is not feasible the terms of the treaty are interpreted in the light of the lex fori. In case of ICSID arbitration, Ar-

162 163 164 165 166

tino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford Univ. Press, 2008) 110–112. Ole Spiermann (n. 161) 107; Zachary Douglas (n. 75) 72. Compare also National Grid plc v. Argentina, UNCITRAL, Decision on Jurisdiction, 20 June 2006, para. 83; Total S.A. v. Argentina (n. 146) para. 39. See supra 1.d)(3). Cf. also Alfred Verdroß (n. 9) 361. Cf. Richard Happ and Marianne Roth, ‘Interpretation of Uniform Law Instruments According to Principles of International Law’ (1997) 2 Unif. L. Rev. n.s. 700–711, 702; Jürgen Basedow, ‘Depositivierungstendenzen in der Rechtsprechung zum Internationalen Einheitsrecht’ in Claus-Wilhelm Canaris, Andreas Heldrich, Klaus Hopt, Claus Roxin, Karsten Schmidt and Gunter Widmaier (eds), 50 Jahre Bundesgerichtshof: Festgabe aus der Wissenschaft (C.H. Beck, 2000) 785; Jan A. Bischoff, ‘Interpretation of International Uniform Law’ in Jürgen Basedow, Klaus J. Hopt and Reinhard Zimmermann (eds), Max Planck Encyclopedia of European Private Law (Oxford University Press, 2011) 982.

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ticle 42(1) of the ICSID Convention – although not directly applicable167 – suggests that indeed the law of the host State is relevant unless the parties have chosen a law and unless international law dictates a different result. Similarly, the tribunal in Inmaris referred to a concept underlying many arbitration rules and also a general principle underlying many international instruments on conflict of laws: if the parties have not chosen the law, the law having the closest connection to the case shall govern.168 83 It may be questioned that an autonomous approach will serve legal certitude, as the arbitrators would have to develop out of the blue what, for instance, would be the requirements for a concession’s validity under international law. While an autonomous understanding of terms like ‘claims arising out of contracts’ could be developed easily on the basis of uniform law conventions and general legal principles, it might prove to be difficult considering whether a concession has been granted without reference to some administrative regulations. On the other hand, this would allow focusing more on the factual transfer of values into the host State instead of trying to pigeonhole an actual economic operation into certain legal categories that were anyhow only meant to be mere examples for assets.169 If there is such transfer, it seems to be in accordance with the purpose of investment treaties to protect them regardless of the characterisation under the law of the host State. c) Forms of Holding an Investment/Ownership and Control 84

Frequently, investment treaties not only contain specifications on the type of assets protected as investments, but also on the relation that has to exist between the investor and the asset. A phrase that can be found in most modern treaties is that the investment has to be ‘owned or controlled directly or indirectly’.170 It is obvious that, even in those treaties that do not expressly describe the relation between the investor and the investment, these investments must somehow be held by the investor. However, authors disagree as to whether those treaties that do not explicitly mention indirectly held investments nonetheless protect indirectly held assets.171 But especially regarding older treaties, the omission of specifications on the way investments must be held should not be understood as a limitation only to directly held assets.172 167 Strictly speaking, Article 42(1) of the ICSID Convention determines the law applicable to the dispute as a whole, not to the separate question on the basis of what law the term ‘assets’ has to be concretised on the basis of the applicable international law. 168 Compare, e.g. Article 4(3) of the Rome I-Regulation. 169 See supra 1.c)(1). 170 See supra 1.c). 171 E.g. Zachary Douglas (n. 75) 311; for a differentiated approach Sergey Ripinsky and Kevin Williams, Damages in international investment law (British Institute of International and Comparative Law, 2008) 151–152. 172 Cf. Sedelmayer v. Russia (n. 133) p. 59; Siemens v. Argentina, ICSID Case No. ARB/02/8, Decision on Jurisdiction, 3 August 2004, para. 136 et seq.; Société Générale v. Dominican Republic, LCIA Case No. UN 7927, Award on Preliminary Objections to Jurisdiction, 19

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In general, questions of ownership and control become truly relevant in the 85 case of indirectly held investments, i.e. assets that – in the context of corporations – are held by the shareholder ‘through’ a juridical person, which in turn directly holds the investment. Also, it is conceivable that the actual investment is held through several corporate layers. In such cases, a relationship of ownership and control has to be ascertained separately for each corporate layer. (1) Definitions of Ownership and Control in Treaties

Although many investment treaties protect investments that are ‘owned or 86 controlled’, no definition of both ownership and control can be found in treaties on investment protection. A definition of both terms can only be found in GATS Article XXVIII(n). It defines the terms as follows: (n) a juridical person is: (i) (ii)

‘owned’ by persons of a Member if more than 50 per cent of the equity interest in it is beneficially owned by persons of that Member; ‘controlled’ by persons of a Member if such persons have the power to name a majority of its directors or otherwise to legally direct its actions (…).

A definition of only the term control can be found in Understanding No. 3 to 87 the ECT, regarding definition of investment in ECT Art. 1(6): For greater clarity as to whether an Investment made in the Area of one Contracting Party is controlled, directly or indirectly, by an Investor of any other Contracting Party, control of an Investment means control in fact, determined after an examination of the actual circumstances in each situation. In any such examination, all relevant factors should be considered, including the Investor’s (a) (b) (c)

financial interest, including equity interest, in the Investment; ability to exercise substantial influence over the management and operation of the Investment; and ability to exercise substantial influence over the selection of members of the board of directors or any other managing body. (emphasis added)

The US–Albania BIT also covers investments ‘owned or controlled directly 88 or indirectly’;173 the explanation in the letter of submittal indicates that ownership of over fifty percent of the voting stock of a company would normally convey control, but in many cases the requirement could be satisfied by less than that proportion, or by other arrangements. (emphasis added)174

Similarly, Article I(1)(c) of the US–Egypt BIT175 defines the term investment 89 as ‘every kind of asset owned or controlled’. No. 2 of the Protocol to the US– Egypt BIT then explains that ‘[c]ontrol means to have a substantial share of ownership rights and the ability to exercise decisive influence’ (emphasis added).

September 2008, para. 32; Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (n. 57) para. 97, fn. 109. 173 Article 1(1)(d). 174 Treaty Doc. 104-19, 6 September 1995, p. VII. 175 Available at http://www.unctad.org/sections/dite/iia/docs/bits/us_egypt.pdf.

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Article 25 (2)(b) of the ICSID Convention – although not relevant for determining whether an actual investment exists – refers to ‘foreign control’ for purposes of determining whether a juridical person organised under the laws of the host State has standing. During the negotiations of the ICSID Convention, it was disputed whether the term was an objective requirement or whether the parties could agree on that there was foreign control. As far as State representatives argued in favour of an objective test, they considered the holding of a majority of shares not to be decisive.176 However, they agreed that even the holding of a minority of shares of even 15 % could be sufficient to assume control if they conferred the right to block major changes.177 Approaches to Ownership and Control in Case Law

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Jurisprudence offers little guidance. In Plama Consortium Limited v. Bulgaria, the tribunal had to decide on whether the claimant was owned or controlled by a person that was not a national of a contracting State as stipulated by ECT Art. 17(1). The claimant argued that its shares were held directly or indirectly by trustees of a French national. Considering the terms ownership and control the tribunal found: In the Tribunal’s view, the word ‘or’ signifies that ownership and control are alternatives: in other words, only one need to be met for the first limb to be satisfied, (…) Also, in the Tribunal’s view, ownership includes indirect and beneficial ownership; and control includes control in fact, including an ability to exercise substantial influence over the legal entity’s management, operation and the selection of members of its board of directors or any other managing body.178

Thus, the tribunal distinguished both terms. Control was considered to describe de facto influence; the legal ability to avail oneself of a right that is nominally held by another person, i.e. beneficial ownership, was considered ownership. 93 Similarly, the tribunal in Saba Fakes v. Turkey was confronted with an alleged holding of shares by a trustee of the claimant. Although the applicable Netherlands–Turkey BIT does not define the term investment by reference to the terms ownership and control, it makes clear in a separate provision that the BIT applies ‘to investments owned or controlled by investors’.179 94 The tribunal held that holding of shares by a trustee does not influence the existence of an investment: 92

The Tribunal observes, in this respect, that the division of property rights amongst several persons or the separation of legal and beneficial ownership is commonly accepted in a number of legal systems, be it through a trust, a fiducie or any other similar structure. (…) The separation of legal title and beneficial ownership rights does not deprive such ownership of the characteristics of an investment within the meaning of the ICSID Convention or the Netherlands–Turkey BIT. (emphasis added)180

176 History II-1, 359 et seq., 396, 447 et seq., 538. 177 History II-1 447 et seq., 538. 178 Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, para. 170. 179 Article 2(2).

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Thus, like in Plama Consortium Limited v. Bulgaria, the tribunal reasoned 95 that ‘a trust, a fiducie or any other similar structure’ would fall into the category of ownership. As regards NAFTA, the tribunal in Thunderbird v. Mexico distinguished be- 96 tween legal control based on the corporate law of the host State and de facto control. It considered that the term control in accordance with its ordinary meaning could be exercised in various manners; therefore, it considered de facto control to be sufficient.181 In order to determine whether de facto control exists, even a minority shareholding could suffice: Despite Thunderbird having less than 50 % ownership of the Minority EDM Entities, the Tribunal has found sufficient evidence on the record establishing an unquestionable pattern of de facto control exercised by Thunderbird over the EDM entities. Thunderbird had the ability to exercise a significant influence on the decision-making of EDM and was, through its actions, officers, resources, and expertise, the consistent driving force behind EDM’s business endeavor in Mexico.182

The tribunal found that several factors could be considered in order to deter- 97 mine de facto control: Control can also be achieved by the power to effectively decide and implement the key decisions of the business activity of an enterprise and, under certain circumstances, control can be achieved by the existence of one or more factors such as technology, access to supplies, access to markets, access to capital, know how, and authoritative reputation. Ownership and legal control may assure that the owner or legally controlling party has the ultimate right to determine key decisions. However, if in practice a person exercises that position with an expectation to receive an economic return for its efforts and eventually be held responsible for improper decisions, one can conceive the existence of a genuine link yielding the control of the enterprise to that person. (emphasis added)183

Conversely, the tribunal in Vacuum Salt v. Ghana,184 the first tribunal address- 98 ing the understanding of ‘control’ under Article 25 (2)(b) of the ICSID Convention in detail, focused on the ownership of shares to assume the existence control. Nevertheless, it refused to consider only the holding of shares to be decisive: The Tribunal notes, and itself confirms, that ‘foreign control’ (…) does not require, or not imply, any particular percentage of share ownership. Each case arising under that clause must be viewed in its own particular context, on the basis of all of the facts and circumstances. There is no ‘formula’. It stands to reason, of course, that 100 percent foreign ownership almost certainly would result in foreign control, by whatever standard, and that a total absence of foreign shareholding would virtually preclude the existence of such control. How much is ‘enough’, however, cannot be determined abstractly. (emphasis added)185

180 Saba Fakes v. Turkey (n. 65) para. 134. 181 International Thunderbird Gaming Corporation v. Mexico, UNCITRAL (NAFTA), Arbitral Award, 26 January 2006, para. 105. 182 Id., para. 107. 183 Id., para. 108. 184 Vacuum Salt Products Limited v. Ghana, ICSID Case No. ARB/92/1, Award, 16 February 1994; for an overview of the case law regarding ICSID Convention Article 25(2)(b), see also Richard Happ and Noah Rubins (n. 46) 319–321. 185 Id., para. 43.

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In Aguas del Tunari S.A. v. Bolivia, the parties disagreed about the relationship of ownership and control: For the claimant, 100 percent ownership necessarily equals control and majority shareholding itself is sufficiently determinative of control. For the Respondent, the word ‘control’ means there must be more than ‘ownership’. For the Respondent, control means the exercise of powers or direction, not merely the legal potential to do so. (emphasis added)186

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The tribunal was convinced by the claimant’s argument and held ‘that “control” is a quality that accompanies ownership’.187 The owner of 100 % of the shares in a company would necessarily also control the company. However, in the case at hand, the foreign investor owned only 50 % of the shares in the domestic company. Nevertheless, the tribunal came to the conclusion that ownership of 50 % of the shares and voting rights would be sufficient to constitute control.188 (3) Distinguishing Ownership and Control

Having regard to the different approaches in treaties and case law, it seems doubtful whether it is possible to draw an exact demarcation line between ownership and control; especially, if the term control is defined by reference to ownership rights and thus definitions become circular. Also, it has to be recalled that, for instance, the ICSID Convention only makes use of the concept control, while other treaties distinguish between ownership and control. Therefore, one may question whether it is feasible to develop an overarching concept of ownership and control, claiming validity for all investment treaties. 102 As far as treaties use both terms, the general approach taken by the tribunal in Plama Consortium Limited v. Bulgaria – distinguishing between the more formal holding of title and the de facto ability to exercise influence – seems an apposite starting point. Douglas questions the distinction between de facto control and de iure ownership. He rightly points out that the ability to exercise control over a piece of land by virtue of a pledge, title to which is held by another person, is a control de iure.189 Nevertheless, cases are conceivable where control is exercised merely de facto based on ‘factors such as technology, access to supplies, access to markets, access to capital, know how, and authoritative reputation’ as envisaged by the tribunal in Thunderbird v. Mexico.190 Therefore, limiting control to de iure control seems to be too narrow. 103 In ‘normal’ cases, ownership and control run in parallel and the holder of legal title prima facie also is the controller.191 However, since most treaties do not 101

186 Aguas del Tunari S.A. v. Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21 October 2005, para. 222. 187 Id., para. 245. 188 Id., para. 317. 189 Zachary Douglas (n. 75) 301. 190 International Thunderbird Gaming Corporation v. Mexico (n. 181) para. 108. 191 Zachary Douglas (n. 75) 300; Vacuum Salt Products Limited v. Ghana (n. 184) para. 43; but see also Elettronica Sicula S.p.A. (ELSI) (United States v. Italy) (n. 142) para. 99, where the

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require having ownership and control, it can be argued that investments owned by an investor are protected even if they are not controlled by him, and vice versa. The consequence would be that the owner and the controller could have cumulative claims under an investment treaty. But jurisprudence and scholarly writing suggests that co-ownership of a company alone is not sufficient; rather, a co-owner of a company also has to control an asset in order to be considered investor/investment.192 This is without prejudice to the ownership of the share in the company, which can itself be considered a separate asset.193 The question remains whether this reasoning can also be transferred to co-owned investments if the right of co-ownership does not constitute a separate right under investment treaties like in case of shares. (4) Indirectly Held Investments

Questions of ownership and control mostly become relevant in case of indi- 104 rectly held investments, i.e. assets held by a company that in turn is held by the investor. Then, ownership or control has to be ascertained on two or even more levels: first, concerning the relation between the investor and the company; second, concerning the relation between the company and the asset (which, in turn, might again be a company holding assets). Speaking in such cases merely of indirect ownership or indirect control (like most investment treaties do) tends to blur that there are separate ‘layers’ and that a different ‘manifestation’ of holding can be established for each respective layer. Thus, the overall relation between the investor and the investment can be a combination of owning and controlling. A consequential question is whether the investor not only has to exercise 105 ownership and/or control on the first layer, but also some kind of ‘overall control’. In a globalised world, there might be a chain of ownership spanning several companies and several countries. It has been discussed, within the context of ‘consent’, whether there should be a cut-off point somewhere in the chain, beyond which there no longer is consent of the State to arbitration.194 Similarly, one might consider whether at some point in a chain of companies an investor loses ‘control’ over the investment company, even if a chain of control from one link to the next could be established.

ICJ reasoned that, if ELSI was legally insolvent, the liquidation plan could have been implemented by the creditors so that the stockholders no longer had rights of control and management to be protected by the FCN Treaty. 192 Cf. the two cases of Camuzzi International SA v. Argentina, ICSID Case No. ARB/03/2 and Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16. Camuzzi and Sempra were co-shareholders of two Argentine companies, and both were found to control the companies. 193 Cf. Sergey Ripinsky and Kevin Williams (n. 171) 153. 194 Cf. also Enron Corporation and Ponderosa Assets, L.P v. Argentina, ICSID Case No. ARB/ 01/3, Decision on Jurisdiction, 14 January 2004, paras. 52–57; Société Générale v. Dominican Republic (n. 172) para. 118.

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(5) A Test for Control

As regards the holding of companies, it has been discussed whether there is a test to assert control over a company and whether this test is merely quantitative or also takes qualitative factors into account. Often, this question is boiled down to the question of whether a minority shareholder can also exercise control.195 Again, it seems doubtful that it is possible to develop a test that can claim validity for all investment treaties. For instance, the ECT considers other factors than the mere holding of equity interest relevant, like the influence on the operation of the investment. Similarly, the US–Egypt BIT cited above merely requires ownership of a ‘substantial’ part of ownership rights, but in addition requires the ability to exercise ‘decisive’ influence. The tribunal in Autopista v. Venezuela has considered ‘negative control’ to be sufficient,196 meaning that certain decisions cannot be taken without the consent of the respective shareholder (e.g. in case both own 50 % of the shares or unanimity is required). In Kardassopoulos v. Georgia,197 the Greek investor held 50 % in the Panama-based company Tramex, which in turn founded together with the Georgian State enterprise SakNavtobi a joint-venture called GTI. Tramex and SakNavtobi each held 50 % of the shares in GTI. The tribunal nevertheless considered Mr Kardassopoulos an indirect owner of GTI.198 107 While most authors require ‘effective’ control as regards Art. 25 (2)(b) of the ICSID Convention, Amerasinghe has considered ‘reasonable’ control to be sufficient:199 pursuant to Amerasinghe, also a minority shareholder can be considered controlling a company depending on the allocation of the shares between several minority shareholders. However, it has to be borne in mind that Art. 25 (2)(b) of the ICSID Convention addresses the nationality of the investor; thus, a concept of ‘joint foreign control’, which has been envisaged by Amerasinghe,200 seems not viable for the issues at stake here. However, the proposal by Douglas, to determine the content of the term control by reference to domestic law,201 has to be rejected emphatically. Domestic company law might be considered in assessing whether the investor is able to exercise decisive/effective/reasonable/ negative influence but the test must be autonomous. This is not to say that comparative company law should be disregarded; however, its role in interpreting treaties is limited.202 106

195 Cf. Sergey Ripinsky and Kevin Williams (n. 171) 153. 196 Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Decision on Objections to Jurisdiction, 11 May 2005, para. 49. 197 Ioannis Kardassopoulos v. Georgia (n. 142). 198 Id., para. 125. 199 Chittharanjan Amerasinghe (n. 76) 240–242. 200 Ibid., at 242. Sempra Energy International v. Argentina (n. 196) para. 54. 201 Zachary Douglas (n. 75) 303–306. 202 Cf. Jan Bischoff (n. 166) 985.

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d) Pre-Investment Activities

As a rule of thumb, treaties on investment protection govern only the protec- 108 tion of investments already made, while the admission of investments is governed by free trade agreements like GATS.203 However, an investor may already have incurred considerable expenditures before the actual investment has been made. In Mihaly v. Sri Lanka,204 Sri Lanka had called for expressions of interest in 109 the construction of power plant. After the claimant had expressed its interest, Sri Lanka issued several Letters of Intent with a view on reaching agreement on the project. All three letters stated ‘not to constitute an obligation binding upon any party’. Following the first letter, the claimant started to work. Negotiations failed and ultimately no contract was concluded between the parties. With its claim, the claimant sought reimbursement of its expenditures. However, the tribunal dismissed the claim. Since the letters contained no binding obligation, the tribunal was unable to find an investment. That the claimant considered these investments was irrelevant: The Tribunal is consequently unable to accept as a valid denomination of ‘investment’, the unilateral or internal characterization of certain expenditures by the Claimant in preparation for a project of investment.205

Also in PSEG v. Turkey, the dispute arose out a project to build a power plant 110 in Turkey. After initial approval of the project contracts, additional analysis revealed that there would be significantly higher costs than previously estimated. The claimant sought revision of the project to change certain fundamental terms. Although essential terms were still missing in the original contract, the tribunal found that the contracts were valid and thus could not be compared to Mihaly v. Sri Lanka.206 Therefore, also an investment existed.207 In assessing the damages, the tribunal found that – despite the fact that the construction of the plant never started – the claimant could nevertheless claim damages: An investment can take many forms before actually reaching the construction stage, including most notably the cost of negotiations and other preparatory work leading to the materialization of the Project, even in connection with pre-investment expenditures, particularly when, like in this case, there is a valid and binding Contract duly executed between the parties.208

203 See infra contribution of Michael Hahn, ‘WTO Rules and Obligations related to Investment’, ch. 7.I., 653–670. 204 Mihaly International Corporation v. Sri Lanka, ICSID Case No. ARB/00/2, Award, 15 March 2002. 205 Mihaly International Corporation v. Sri Lanka (n. 204) para. 61; but see also the Separate Concurring Opinion of arbitrator David Suratgar, para. 6. 206 PSEG Global, Inc., The North American Coal Corporation, and Konya Ingin Electrik Üretim ve Ticaret Limited Sirketi v. Turkey, ICSID Case No. ARB/02/5, Decision on Jurisdiction, 4 June 2004, para. 81. 207 PSEG Global, Inc. v. Turkey (n. 206) para. 104. 208 PSEG Global, Inc. v. Turkey (n. 206) para. 304.

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Also, the reimbursement of pre-investment expenditures can be claimed if the investment later comes into existence. This was affirmed by the tribunal in Malicorp v. Egypt: In the case of a contract, it has been rightly held that the costs incurred during negotiations with a view to concluding a contract do not constitute an investment if in the end the State finally refuses to sign it (…). The situation in the present case is different since the Contract was indeed signed.209

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Bearing in mind the object and purpose of investment treaties, it only is reasonable to protect also as assets certain expenditures that are made in view of establishing the later investment.210 One may question whether the existence of a contract that is signed and valid should be considered decisive at least in BIT cases. First, the question of validity entails the question regarding the standard by which validity is tested.211 Second, even if in the end a contract is not validly concluded under the applicable law, an investor might have a claim to money (i.e. reliance damages) against the State if the contract is not signed due to fault of the State; thus, there might be an investment. e) Topical Examples of Investments in Arbitral Practice (1) Contractual Claims

Even after the end of communism, many States entertain trading companies or are otherwise involved in general economic activities. Besides, governments conclude contracts for the procurement of goods required for the fulfilment of its duties. Thus, quite a few investment disputes haven arise out of contracts concluded between sellers and State entities. 114 It seems to be widely accepted that contracts and claims arising out of a contract generally can constitute an investment under Article 25(1) of the ICSID Convention as well as most treaties on investment protection. For instance, ECT Article 1(6)(c) and (f) explicitly mentions contractual claims as one example for an investment. But this statement has to be qualified. Some treaties exclude certain types of contracts from their scope, like NAFTA Article 1139 reproduced supra.212 As to the ICSID Convention, which in the first place envisaged arbitrations arising out of investment contracts,213 it should be undisputed that contracts can constitute an investment. However, as has been mentioned above, some member States opposed the proposition that purely commercial contracts could be an investment. Likewise, many investment tribunals have considered 113

209 Malicorp Limited v. Egypt, ICSID Case No. ARB/ /18, Award, 7 February 2011, para. 113. 210 Cf. also Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability, 14 January 2010, para. 89: ‘Whether pre-investment activities merit treaty protection is debatable.’ 211 See supra 2.b). 212 1.c)(2). 213 Cf. Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of other States, para. 24.

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the term ‘investment’ as opposed to a ‘one-off sales transaction’.214 This is especially true in case of such a narrow definition like NAFTA Article 1139.215 In the case Joy Mining v. Egypt, the tribunal distinguished ordinary sales con- 115 tracts from investments: The Tribunal is also mindful that if a distinction is not drawn between ordinary sales contracts, even if complex, and an investment, the result would be that any sales or procurement contract involving a State agency would qualify as an investment. International contracts are today a central feature of international trade and have stimulated far reaching developments in the governing law, among them the [CISG], and significant conceptual contributions. Yet, those contracts are not investment contracts, except in exceptional circumstances, and are to be kept separate and distinct for the sake of a stable legal order. Otherwise, what difference would there be with the many State contracts that are submitted every day to international arbitration in connection with contractual performance, at such bodies as the International Chamber of Commerce and the London Court of International Arbitration?216

Conversely, the tribunal in Mytilineos v. Serbia and Montenegro and the Re- 116 public of Serbia did not interpret the term investment in such a restrictive way: Indeed, it has been pointed out that language including ‘claims to money or any other claim under contract having an economic/a financial value’ suggests that ‘investment’ may embrace contractual rights for the performance of services. Read literally there is also no reason why claims arising from pure commercial activities, such as sales contracts, should be excluded from such a broad definition of investment.217

The tribunal took into account that some BITs require that, in order to be an 117 investment, an asset must be ‘invested’. But in the absence of such language, a mere claim would be sufficient: The Tribunal’s finding is further supported by comparison with other BITs which make it quite clear that monetary or financial claims as such do not qualify as investments but need to be associated with or related to an investment in order to be covered by the applicable investment definition. Examples can be found in investment definitions which include ‘a claim to money or a claim to performance having economic value, and associated with an investment’ (…) In these cases, it is clear that loans or payment claims arising from sales contracts as such do not qualify as ‘investments’. Where such restrictive language is absent, (…) it would be improper for the Tribunal to read it into the text of the BIT.218

In Romak S. A. v. Uzbekistan,219 the UNCITRAL tribunal was asked to decide 118 over claims arising out of the failed execution of a Grain and Feed Trade Association (GAFTA) award in Uzbekistan. The dispute arose out of the non-payment of grain delivered to a State company. The tribunal denied that the investor’s claims constituted an investment under the pertinent BIT, despite the clear wording to the contrary. It held: 214 Alpha Projektholding GmbH v. Ukraine (n. 108) para. 314; MHS v. Malaysia, ICSID Case No. ARB/05/10, Decision on the Application for Annulment, 16 April 2009, para. 69; Global Trading Resource Corp. and Globex International Inc. v. Ukraine (n. 72) para. 55. 215 Cf. also The Canadian Cattlemen for Fair Trade v. USA, UNCITRAL, Award on Jurisdiction, 28 January 2008, para. 144. 216 Joy Mining Machinery Ltd. v. Egypt (n. 56) para. 58. 217 Mytilineos Holding v. Serbia and Montenegro and the Republic of Serbia (n. 129) para. 109. 218 Mytilineos Holding v. Serbia and Montenegro and the Republic of Serbia (n. 129) para. 134. 219 Romak S. A. v. Uzbekistan (n. 114).

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In Pantechniki v. Albania, the sole arbitrator reasoned with respect to the term ‘investment’ under the ICSID Convention: It may be objected that some types of economic transactions simply cannot be called ‘investments’ no matter what a BIT may say; one cannot deem a person to be 10 feet tall. The typical example given is that of a ‘pure’ sales contract. There is force in the argument. Yet it may quickly lose traction in the reality of economic life. It is admittedly hard to accept that the free-on-board sale of a single tractor in country A could be considered an ‘investment’ in country B. But what if there are many tractors and payments are substantially deferred to allow cash-poor buyers time to generate income? Or what if the first tractor is a prototype developed at great expense for the specificities of country B on the evident premise of amortization? Why should States not be allowed to consider such transactions as investments to be encouraged by the promise of access to ICSID?221

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Also in Inmaris v. Ukraine, one of the claimant companies had concluded a charter contract concerning the Ukrainian sail training vessel Khersones. Furthermore, the claimant companies concluded contracts among each other concerning the management, advertising and operation of the vessel. The tribunal first took a restrictive view on the interpretation of the phrase ‘claims to performance’: Had the claims in this arbitration been presented only on behalf of one of these companies, relying on ‘claims to performance’ or ‘claims to money’ under its respective contract(s) in this chain, the Tribunal might have faced difficult questions as to the requisite degree of legal and factual proximity to the underlying investment operations. It might have been necessary to consider factors such as the scope of the various entities’ legal rights (…), the degree of direct involvement in the Khersones project (…), and the degree of integration of the contractual rights (…)222

But in the end, the tribunal considered such an approach unnecessary because it could consider all contracts together as part of one integrated investment.223 122 In Global Trading Resource Corp. and Globex International, Inc. v. Ukraine,224 the claimant US companies concluded contracts for sale and delivery of poultry meat with the Ukrainian company Alan Trade LLC upon request of the Ukrainian government. When Alan Trade LLC did not pay the purchase price, the companies sued Ukraine for damages under the US–Ukraine BIT. In referring to the language of the BIT, which required ‘a claim to money or a claim to performance having economic value and associated with an investment’, the tribunal found that the claimants’ ‘contracts were simply contracts which lacked the essential connecting factor of being “associated with an investment.”’225 121

220 Romak S. A. v. The Republic of Uzbekistan (n. 114) para. 242. 221 Pantechniki S.A. Contractors & Engineers v. Albania (n. 45) para. 44. 222 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine (n. 57) para. 91. 223 See supra 2.a)(1). 224 Global Trading Resource Corp. and Globex International, Inc. v. Ukraine (n. 72). 225 Global Trading Resource Corp. and Globex International, Inc. v. Ukraine (n. 72) para. 51.

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To conclude: it is undisputed that mere contractual claims can constitute an 123 investment. However, some tribunals take a restrictive approach and try to exclude certain ‘purely commercial’ contracts because of assumed inherent limitations of the term investment. It has already been stated above that such a restrictive approach is unwarranted.226 Nevertheless, it should be understood that not every breach of contract can amount to an expropriation of contractual rights. But this is a question concerning the requirements of expropriation227 and not a question of the scope of the term investment. (2) Loans and Debt Instruments

The history of the modern sovereign State is closely connected with the phe- 124 nomenon of sovereign debt. For financing the performance of their duties, most States have to indebt themselves, mostly by either issuing bonds or by borrowing money from banks. Likewise, the history of the modern State shows a considerable record of State defaults.228 While in the last 50 years, sovereign debt disputes were mostly resolved by recourse to domestic courts, investment arbitration over sovereign debt disputes has recently gained some attraction.229 Some investment treaties explicitly mention debt instruments.230 For example 125 the 2012 US Model BIT explicitly mentions in its Article 1 as investments also ‘(c) bonds, debentures, other debt instruments, and loans’. But the explanatory footnote contains a limitation to this broad definition: 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, such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics.

Likewise, ‘bonds, debentures, loans and other forms of debt, and rights de- 126 rived therefrom’ were considered as investment pursuant to Article II(1)(iii) of the Draft MAI. However, the drafters agreed that the MAI should not interfere with sovereign debt restructuring.231 Other investment treaties expressly exclude certain debt instruments. For instance, Article 2(1)(f) of the Colombian Model BIT of 2007 lists as investment ‘[a]ll operations of foreign loan, as established

226 See supra 1.d)(2). 227 See contribution of Ursula Kriebaum, ‘Expropriation’, ch. 8.VIII., 959–1030. 228 Compare Michael Waibel, Sovereign defaults before international courts and tribunals (Cambridge University Press, 2011) 8–14. 229 Cf. as to legal writing Otto Sandrock, ‘Ersatzansprüche geschädigter deutscher Inhaber von griechischen Staatsanleihen’ (2012) RIW 429–456; cf. also Otto Sandrock, ‘Drei Ergänzungen zu möglichen Ersatzansprüchen geschädigter deutscher privater Inhaber von griechischen Staatsanleihen’ (2013) RIW 12–24; Jan Asmus Bischoff, ‘Völkerrechtlicher Rechtsschutz bei Staatsbankrott?’ (2012) WM 1371–1374; Jan Asmus Bischoff, ‘Current trends in investment arbitration relating to sovereign bond defaults’ in Eugenio Bruno (ed), Sovereign Debt and Sovereign Debt Restructuring (Globe Law and Business, 2013) 101–116. 230 Compare Michael Waibel (n. 228) 244–247. 231 See OECD, ‘The Multilateral Agreement on Investment: Commentary to the consolidated text’, DAFFE/MAI(98)8/REV1, 22 April 1998, p. 23.

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by the law of each Contracting Party, related to an investment.’ However, this statement is later qualified, as the following assets are excluded: i. ii.

public debt operations; c1aims to money arising solely from:

(…) b.

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Credits granted in relation with a commercial transaction (…).

In general, the drafters of the ICSID Convention seemed to have been critical as to the inclusion of sovereign lending.232 A differentiated approach was proposed by the representative of Norway: Surely short-term credits for the import of non-durable consumer goods were not the kind of transaction that would require protection though a case could be made for a loan of say twelve years or more for the purchase of capital goods.233

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The first ICSID tribunal that was facing questions of sovereign debt was in the case Fedax v. Venezuela.234 The dispute arose out of promissory notes issued by Venezuela and assigned by way of endorsement to Fedax NV. The tribunal affirmed that such credit instruments as well as a transaction concerning their transfer could qualify as investment: (…), as explained above, loans qualify as investment within ICSID’s jurisdiction, as does, in given circumstances, the purchase of bonds. Since promissory notes are evidence of a loan and a rather typical financial and credit instrument, there is nothing to prevent their purchase from qualifying as an investment under the Convention in the circumstances of a particular case such as this.235

In CSOB v. Slovakia, the claimant CSOB extended a credit facility to the Slovak Collection Company under a loan agreement. CSOB had furthermore concluded an agreement with the Slovak government, which provided that Slovakia would cover the losses the Collection Company might incur. In referring to the Fedax case, the tribunal found that loans generally could qualify as investments.236 In the specific case, the tribunal considered the loan as part of an overarching investment operation.237 Similarly, the tribunal in OKO Pankki Oyi v. Estonia238 considered a loan provided to a State company as part of an integrated investment operation. But the tribunal also stressed that the loan, even if considered separately, would qualify as investment.239 130 In Abaclat v. Argentina, the tribunal had to rule on the Argentinian default concerning its State bonds as a consequence of the financial crisis and the entailing sovereign debt restructuring. The bonds at stake were subscribed to by cer129

232 233 234 235 236 237 238

History II-1 261, 474, 668, 709. History II-1, 451. Fedax N.V. v. Venezuela (n. 52). Id., para. 29. Ceskoslovenska Obchodni Banka, a.s. v. Slovakia (n. 49) para. 77. Ceskoslovenska Obchodni Banka, a.s. v. Slovakia (n. 49) para. 82. OKO Pankki Oyj and others v. Estonia, ICSID Case No. ARB/04/6, Award, 19 November 2007. 239 Id., para. 180.

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tain banks and sold to intermediary banks, which then divided and distributed security entitlements in the bonds to their individual customers, the claimants. Argentina argued that the security entitlements could not be considered an investment. The tribunal was not convinced by this argument: it found that the security entitlements had no value independent of the bonds; the process of distribution happened electronically, there was no physical transfer of title. In other words, whatever the technical nuances between bonds and security entitlements may be, they are part of one and the same economic operation and they make only sense together.240

Since the bonds themselves constituted investments under the BIT, also the security entitlements would be covered. As to Article 25 of the ICSID Convention, the tribunal rejected the Salini criteria241 and contented itself by finding that there was an investment in the sense of the ICSID Convention because there was a contribution on behalf of the claimants.242 The tribunal in Ambiente Ufficio v. Argentina,243 a dispute likewise concerning sovereign bonds, followed the reasoning of the tribunal in Abaclat v. Argentina and considered State bonds and security entitlements investments. The basic questions arising in case of loans and debt instruments are comparable to those discussed with regard to contractual claims: should purely commercial loans be excluded? And are only those debt instruments to be included that fulfil the inherent requirements of the term investment244? It has already been argued above that such a restrictive approach to the term investment seems unwarranted.245 A different question is whether investment arbitration is a suitable forum for the resolution of disputes arising out of sovereign debt restructurings.246 Indeed, it is questionable whether creditors that refuse to take part in restructurings should be allowed to challenge, solely on the basis of legal criteria, complex economic decisions that were taken in close cooperation with the World Bank and other institutions. However, this is not a problem to be solved by just defining the term investment narrowly.

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132

133

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(3) Arbitral Awards and Judgments

Arbitral awards resulting from commercial arbitration against States frequent- 135 ly happen not to be honoured by the respondent State. At first sight, it may seem awkward that the claimant, who is already holding an award or judgment against State entities in his hand, would initiate a second arbitration. Even if judicial authorities of the host State refuse the enforcement of the award, it would still re240 241 242 243 244 245 246

Abaclat and Others v. Argentina (n. 113) para. 359. As to the Salini criteria, see supra 1.d)(2) and (3). Abaclat and Others v. Argentina (n. 113) para. 365. Ambiente Ufficio S.p.A. and others v. Argentina (n. 74) para. 472. Michael Waibel (n. 228) 250. See supra 1.d)(2). Cf. Mark C. Wedemaier, ‘Disputing Boilerplate’ (2009) 82 Temp. L. Rev. 1–54, 14–23.

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main enforceable nearly worldwide under the 1958 New York Convention.247 Despite the fact that ICSID awards are easier enforceable at least in theory, the practical differences compared to normal awards are limited and hardly justify the costs of a second arbitration. 136 Nevertheless, there may be reasons for investors holding judgments or awards seeking recourse to ICSID arbitration: first, the respondent/debtor under an ICSID arbitration mostly is the State itself; this may offer advantages as to the finding of assets abroad compared to a State entity the assets of which are merely located in the host State. Also, the State entity may only have limited assets or even be insolvent. Second, while the consequences of a sub-State entity not honouring its obligations under, for instance, an ICC award might be limited, the political implications of a State not abiding by its obligations under the ICSID Convention are certainly different. 137 Express provisions on judgments or arbitral awards in investment treaties are extremely limited. Footnote 3 to the definition of investment in the 2012 US Model BIT expressly excludes judgments from the scope of protected investments: The term ‘investment’ does not include an order or judgment entered in a judicial or administrative action.

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However, there is some case law on this issue. In Romak v. Uzbekistan, the tribunal refused to discuss in general whether an arbitral award can constitute an investment under the BIT. Rather, the tribunal assessed the existence in light of the specific facts of the case: (…) the Arbitral Tribunal has come to the conclusion that the GAFTA Award is so inextricably linked to the Romak Supply Agreement that any determination as to whether Romak holds and[sic] investment under the BIT cannot be made without reference to the entire economic transaction that is the subject of these arbitral proceedings. The GAFTA Award merely constitutes the embodiment of Romak’s contractual rights (as determined by the GAFTA Arbitral Tribunal) stemming from the wheat supply transaction entered into by Romak. If the underlying transaction is not an investment within the meaning of the BIT, the mere embodiment or crystallization of rights arising thereunder in an arbitral award cannot transform it into an investment.248

Thus, in order to determine whether the arbitral award itself constituted an investment, the tribunal assessed the claim underlying the award. 140 In Saipem v. Bangladesh, the ICSID tribunal did not decide whether an award (at issue was expropriation through the failure to enforce the award) constituted an investment on its own: 139

This said, the rights embodied in the ICC Award were not created by the Award, but arise out of the Contract. The ICC Award crystallized the parties’ rights and obligations under the original contract. It can thus be left open whether the Award itself qualifies as an investment, since the contract rights which are crystallized by the Award constitute an investment within Article 1(1)(c) of the BIT.249

247 However, this may not be true if the seat of the arbitration is the host State and the award has been annulled by the courts of the host State, see Patricia Nacimiento and Marten Drop, ‘Recognition and Enforcement of Annulled Arbitral Awards’ (2009) SchiedsVZ 272–275. 248 Romak S.A. v. Uzbekistan (n. 114) para. 211.

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The tribunal also referred to the jurisprudence of the European Court of Hu- 141 man Rights, which considered rights under judicial decisions as protected property that can be the object of an expropriation.250 For instance, the European Court of Human Rights in a 2008 judgment against Ukraine considered arbitral awards, once recognised in a country, an asset which is protected as property.251 Similarly, the tribunal in GEA Group Aktiengesellschaft v. Ukraine, rejected 142 the idea that an arbitral award could in itself constitute an investment: Whether tested against the criteria of Article 1 of the BIT or Article 25 of the ICSID Convention, the ICC Award – in and of itself – cannot constitute an ‘investment.’ Properly analyzed, it is a legal instrument, which provides for the disposition of rights and obligations arising out of the [underlying] Agreement (neither of which was itself an ‘investment’ (…)).252

Nevertheless, the tribunal implicitly also rejected the reasoning by the afore- 143 mentioned tribunals that the award would share the nature of the underlying agreements: [T]he Tribunal considers that the fact that the Award rules upon rights and obligations arising out of an investment does not equate the Award with the investment itself. In the Tribunal’s view, the two remain analytically distinct, and the Award itself involves no contribution to, or relevant economic activity within, Ukraine (…).253

Recently, the tribunal in White v. India rejected the ruling of the tribunal in 144 GEA Group Aktiengesellschaft v. Ukraine as far as it held an award could not constitute an investment. Instead, it reasoned that the rights under an award constitute part of the original investment and a crystallisation of the rights contained e.g. in the contract underlying the arbitral award.254 It is hard to imagine a reason why e.g. a contractual claim that is not an in- 145 vestment should change its nature just because a court or arbitral tribunal affirms the existence of this claim. However, it is convincing to consider the award a crystallisation of the original investment that is likewise protected. (4) Intellectual Property Rights

Although TRIPS and the incorporated treaties on the international protection 146 of intellectual property offer a far reaching protection to these rights, there are no means afforded to the individual holder of rights to enforce them if the host State is unwilling or unable to implement TRIPS in practice. Thus, investment arbitration may seem a viable alternative.255 The tobacco plain packaging claims

249 250 251 252 253 254

Saipem v. Bangladesh (n. 85) para. 127. Saipem v. Bangladesh (n. 85) para. 130. ECHR, 3.4.2008, Application No. 773/03, Regent Company v. Ukraine. GEA Group Aktiengesellschaft v. Ukraine (n. 72) para. 161. Id., para. 162. White Industries Australia Limited v. India, UNCITRAL, Final Award, 30 November 2011, paras. 7.6.7–7.6.10. 255 See also infra Henning Grosse Ruse-Khan, ‘Investment Law and Intellectual Property Rights’, ch. 13.VI., 1694–1715.

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that are currently pending against Bolivia and Australia are evidence of this possibility.256 147 Already the 1959 Germany–Pakistan BIT provided for a protection of ‘patents, and technical knowledge.’ Often, recent BITs contain a provision that generally refers to ‘intellectual property’.257 Others specify the term more into detail. For instance, according to the 1994 US–Argentina BIT intellectual property includes, inter alia, rights relating to: literary and artistic works, including sound recordings, inventions in all fields of human endeavor, industrial designs, semiconductor mask works, trade secrets, know-how, and confidential business information, and trademarks, service marks, and trade names.258

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The finding259 that intellectual property rights are protected as investments seems to be quite obvious. But as has been explained above,260 some BITs explicitly require that the rights at stake exist under the law of the host State. Also, some authors argue that generally the law of the host State determines the validity of such rights.261 Consequently, in order to constitute an investment, it is necessary that, first, the general type of intellectual property rights at stake are protected at all under the laws of the host State and, second, that the specific right at stake (e.g. a patent concerning a specific invention) is protected.262 If for instance the protection of an intellectual property right requires registration, the specific right must be registered before. If for instance a patent application is denied in an arbitrary and discriminatory manner, no investment would have been affected.263 Conversely, if a patent has been granted and is then revoked, an in256 Philipp Morris is suing both Uruguay (ICSID Case No. ARB/10/7) and Australia (UNCITRAL, PCA Case No. 2012-12). 257 Concerning the different approaches found in BITs see Rachel A. Lavery, ‘Coverage of Intellectual Property Rights in International Investment Agreements, An Empirical Analysis of Definitions in a Sample of Bilateral Investment Treaties and Free Trade Agreements’ (2009) 6 TDM 1–49, 4–6. 258 Article 1(1)(iv) of the Treaty between the United States of America and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investment of 14 November 1991. 259 Cf. Julian D. Mortenson, ‘Intellectual Property as Transnational Investment, Some Preliminary Observations’ (2009) 6 TDM 1–10, 4. 260 See also supra 2.b)(1). 261 See also supra 2.b)(3). 262 Depending on the case, also the bundle of rights under domestic law that is connected with holding an intellectual property right has to be taken into account. 263 Marie L. Seelig, ‘Can Patent Revocation or Invalidation constitute a Form of Expropriation’ (2009) 6 TDM 1–12, 3. However, in case the patent application itself confers rights on the applicant, these rights may themselves constitute an investment, see Carlos M. Correa, ‘Investment Protection in Bilateral and Free Trade Agreements, Implications for the Granting of Compulsory Licenses’ (2003/2004) 26 Mich. J. Int’l L. 331–353, 340; Lahra Liberti, ‘Intellectual Property Rights in International Investment Agreements, An Overview’ (2009) 6 TDM 1–43, 10. During the drafting process of the MAI, the parties could not agree on a clause that the ‘creation, limitation, revocation, annulment, statutory licensing, compulsory licensing and compulsory collective management’ (emphasis added) in accordance with international conventions do not constitute an expropriation; see OECD, ‘The Multilateral Agreement on Investment: Commentary to the consolidated text’, DAFFE/MAI(98)7/REV1

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vestment is affected. Even if an intellectual property right like the copyright requires no registration and is generally protected ipso iure,264 but the domestic copyright law excludes e.g. censored works from its protection – although the host State is internationally obliged265 to protect these works under the TRIPS and the Berne Convention266 – no investment would exist. Depending on the wording of each respective BIT, also intellectual property that has not yet become a right under domestic law may be protected.267 For example, Article 1(1) (iv) of the US–Jamaica BIT extends the protection to ‘patentable inventions’. If the BIT not only protects intellectual property rights but also ‘trade-names, trade and business secrets, technical processes, know-how, and good-will’,268 it is tenable to argue that intellectual property, although is not de iure protected under the laws of the host State, is protected by this clause as de facto know-how. Also, it is conceivable to consider a patentable invention for which no patent has been granted an un-named ‘asset’.269 7. Conclusion

It is no surprise that the term ‘investment’ has been on the forefront of debate 149 in important investment arbitration cases. That is for several reasons: one is that, while the ICSID Convention does not define the term ‘investment’, most BITs and MITs do. This raises interesting questions about the relationship between both. Another reason is that both parties and tribunals rely too easily on concepts developed by other tribunals under certain fact-specific situations. The so-called ‘Salini criteria’ are a good example for this. Mentioned in early cases as typical characteristic of projects accepted as investments, these were soon considered as authoritative legal requirements until later tribunals stopped this development. Despite the fact that there is still uncertainty about the ‘correct’ approach to 150 the term ‘investment’, there has been a tremendous development in the last ten to fifteen years. Although case law is by no means unanimous and there are certainly discrepancies or even contradictions, the awards and decisions have set

264 265

266

267

268 269

(22 April 1998), p. 50. Thus, it could be argued e contrario that an investment exists that can be expropriated before the creation of the right. Cf. Carlos Correa (n. 263) 339–340. In certain cases it might be possible to argue that a certain right ought to be protected in the host State on the basis of TRIPS or another treaty on the protection on intellectual property. However, it would depend on, e.g., whether the obligation under the respective treaty is selfexecuting. Cf. a recent report by the panel in a dispute between the United States and China concerning the compatibility of the Chinese laws on copyright protection with TRIPS and the Berne Convention, Report of the Panel, China – Measures Affecting the Protection and Enforcement of Intellectual Property Rights, WT/DS362/R, 26 January 2009, para. 7.139. Marie Seelig (n. 263) 4, points out that the Canada–Argentina BIT protects ‘rights with respect to copyrights, patents (…).’ and argues that thus also rights with respect to patents are protected. However, from the wording of other BITs, it becomes clear that this clause only refers to the right connected with the copyright like the right of distribution, rental, etc. Article 1(1)(e) of the 2008 German Model BIT; as to the meaning of business secrets and goodwill, see Rachel Lavery (n. 258) 10. Ibid., at 3; see also the doubts expressed by Marie Seelig (n. 263) 4; see also 1.c)(1).

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some clear outer parameters for future cases, and there is a growing awareness for the problems connected with the finding of certain characteristics of an investment. Notwithstanding that legal uncertainty may be detrimental to stimulating investments, not having a definition of the term ‘investment’ carved in stone will allow tribunals to take into account and to consider as ‘investment’ economic operations that were impossible to conceive when the respective investment agreement was drafted and that nevertheless deserve protection.

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Sabine Konrad* 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. State-Affiliated Investment and Political Risk . . . . . . . . . . . . . . . . . . . . . . . 3. State-Affiliated Investors in Investment Treaty Arbitration . . . . . . . . . a) Chorzów Factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Protection of State-Affiliated Entities in BITs . . . . . . . . . . . . . . . . . . . . . c) State-Affiliated Claimants in ICSID Proceedings. . . . . . . . . . . . . . . . . 4. When is a State-Affiliated Entity an ‘Investor’ – When is It a ‘State’?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 6 6 8 18 22 26

Literature: Chittharanjan Felix Amerasinghe, ‘The International Centre for Settlement of Investment Disputes and Development Through The Multinational Corporation’ (1976) 9 Vand. J. Transnat’l L. 793–816; Claudia Annacker, ‘Protection and Admission of Sovereign Investment under Investment Treaties’ (2011) 10(3) Chinese J. Int’l L. 531–564; Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995); Mark Feldman, ‘The standing of State-owned entities under investment treaties’, (2010–2011) YB Int’l Inv. L. & Pol’y 615–637; Emmanuel Gaillard, ‘Effectiveness of Arbitral Awards, State Immunity from Execution and Autonomy of State Entities – Three Incompatible Principles’, in Emmanuel Gaillard and Jennifer Younan (eds), State Entities in International Arbitration, IAI Series on International Arbitration No. 4 (Juris Publishing, 2008), 179–193; Barry Garfinkel et al., ‘Bilateral Investment Treaties and Arbitration’, in AAA Handbook on International Arbitration & ADR (JurisNet, LLC 2010), 357–373; Kenneth Katzman, ‘The United Arab Emirates (UAE): Issues for U.S. Policy’ (Congressional Research Service, 3 October 2011); Gregory MacKenzie, ‘ICSID Arbitration as a Strategy for Levelling the Playing Field Between International Non-Governmental Organization and Host States’ (1993) 19 Syracuse J. Int’l L. & Com. 197–234; Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary (Cambridge University Press, 2009); Martin Sicker, Between Rome and Jerusalem: 300 Years of Roman-Judaean Relations (Praeger Publishers, 2001); Philip F. Sutherland, ‘The World Bank Convention on the Settlement of Investment Disputes’ (1979) 28 ICLQ 367–400; William Woodthorpe Tarn/Martin Percival Charlesworth, ‘The War of the East Against the West’, in Stanley Arthur Cook/Frank Ezra Adcock/Martin Percival Charlesworth (eds), The Cambridge Ancient History, vol. 10 (The Macmillan Company, 1934), 66–111; UNCTAD, World Investment Report 2011; Kristy E. Young, ‘The Committee on Foreign Investment in the United States and the Foreign Investment and National Securities Act of 2007: A Delicate Balancing Act That Needs Revision’ (2008) 15 UC Davis J. Int’l L. & Pol’y 43–70.

1. Introduction

Investments by States accounted for over USD 150 billion in foreign direct 1 investment (‘FDI’) in 2010,1 including both State-owned enterprises and sovereign wealth funds. State-owned enterprises comprise parent companies and their foreign affiliates in which the government has a controlling interest.2 Sovereign wealth funds, by contrast, are special purpose investment funds that * The author thanks Lisa Richman for her valuable assistance. 1 UNCTAD, World Investment Report 2011, 32. 2 Id., at 28.

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are owned by the government. They are neither conventional enterprises nor necessarily governed by the usual corporate mechanisms.3 Recently, sovereign wealth funds have experienced particularly explosive growth: assets under management increased to USD 4.7 trillion in 2011, marking an increase of USD 700 billion or nearly 15 percent over 2010.4 State-owned and State-sponsored investments are expected to continue to grow over the next years.5 2 State-owned and State-sponsored economic activity abroad is by no means a recent development.6 In fact, one of the most quoted cases in international law, the Chorzów Factory case, related to the expropriation of property of a Statecontrolled company nearly 100 years ago.7 3 Since then, a number of partly or completely State-owned entities have appeared as claimants in investment treaty cases.8 However, similarly States as respondents have been made responsible for the actions of State-owned or Statecontrolled entities.9 In some cases, State-owned or State-controlled entities can be found on both sides of the fence.10 2. State-Affiliated Investment and Political Risk 4

It can be argued that investments by States and State-affiliated entities do not face the same degree of political risk as privately owned investment: for some State-State projects, special treaties are established.11 Also politically, if another

3 Id., at 14. 4 Sovereign Wealth Fund Institute, ‘Sovereign Wealth Fund Rankings’, available at http:// www.swfinstitute.org/fund-rankings. 5 UNCTAD, World Investment Report 2011, 16. 6 See, e.g., Flavius Josephus, De bello judaico libri vii, I.18.5; id., Antiquitates Judaicae, XV. 4.2; Plutarch, Marcus Antonius, ch. 36; Cassius Dio, Historiae Romanae, XLIX.32; all available at http://www.perseus.tufts.edu/hopper/collections. See also Martin Sicker, Between Rome and Jerusalem: 300 Years of Roman–Judaean Relations (Praeger Publishers, 2001) 85; William Woodthorpe Tarn/Martin Percival Charlesworth, ‘The War of the East Against the West’ in Stanley Arthur Cook/Frank Ezra Adcock/Martin Percival Charlesworth (eds), The Cambridge Ancient History, vol. 10 (The Macmillan Company, 1934) 67, 70, 95. 7 Factory at Chorzów (Germany v. Poland), PCIJ Judgment, 13 September 1928, 1928 PCIJ (Series A) No. 17, 32, 39; see also Case concerning certain German interest in Polish Upper Silesia (Germany v. Poland), PCIJ Judgment, 25 May 1926, 1926 PCIJ (Series A) No. 7, 42. 8 See, e.g., Ceskoslovenska Obchodni Banka, A.S. v. Slovakia, ICSID Case No. ARB/97/4; Fraport A.G. Frankfurt Airport Services Worldwide v. Philippines, ICSID Case Nos. ARB/03/25 and ARB/11/12; Hrvatska elektroprivreda dd v. Slovenia, ICSID Case No. ARB/05/24; Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No. ARB/05/16; Opic Karimun Corporation v. Venezuela, ICSID Case No. ARB/10/14; Kaliningrad Region v. Lithuania, ICC (Russia–Lithuania BIT). 9 See, e.g., Emilio Agustín Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision of the Tribunal on Objections to Jurisdiction, 25 January 2000 and Award, 13 November 2000 (finding Spain liable for the actions of a State-owned, economic development entity); Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005 (finding the acts of two entities charged with enacting the State’s privatisation programme were attributable to Romania, although ultimately dismissing the claimant’s claims). 10 See, e.g., Hrvatska elektroprivreda dd v. Slovenia, ICSID Case No. ARB/05/24, Decision on the Treaty Interpretation Issue, 12 June 2009, paras. 3–5 (holding that other Slovenian stateowned entities, although not direct respondents were relevant to the claimant’s claims).

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State is ‘behind’ the investment, the host State may think twice before interfering with the investment. Moreover, the State-affiliated entity may have a better chance to motivate its own home State to enforce its claims on a State-State level. However, the number of State-affiliated claimants in investor-State arbitration 5 shows that in practice, they face many of the same political risks as private investors. It also demonstrates that if a dispute cannot be settled amicably, investor-State arbitration (rather than State-State arbitration) is the method of choice for resolving disputes also for State-affiliated investors. 3. State-Affiliated Investors in Investment Treaty Arbitration a) Chorzów Factory

Perhaps the best example of the fact that also investments, by State-owned 6 enterprises are entitled to protection is the Chorzów Factory case decided by the Permanent Court of International Justice (PCIJ). The case concerned a dispute resulting from Poland’s actions under the Treaty of Versailles and the 1922 Convention concerning Upper Silesia (between Germany and Poland). The two treaties required the divestment of certain German ‘investments’. Germany brought an action regarding Poland’s seizure of certain land and a 7 factory that were controlled by Germany. The Chorzów factory at the centre of the dispute had originally been owned by Germany. In 1920, the German government transferred ownership of the factory to the Oberschlesische Stickstoffwerke Company (‘Oberschlesische’), a new company the German government had created expressly for this purpose. Poland challenged the transfer before its own courts and confiscated the factory. The PCIJ, however, not only recognised the re-structuring, but also accepted that the rules for private owners (including some limited ‘investor’ protection) applied to the Oberschlesische despite the fact that it was State-controlled by Germany.12 b) Protection of State-Affiliated Entities in BITs

A number of investment treaties expressly identify State-owned entities as a 8 type of eligible investor. For example, the 2004 US Model BIT – and, by exten11 E.g. Treaty between Russia and Ukraine on Cooperation in the Development of Fuel and Energy Complexes of 7 September 1994, available (in Russian) at http://www.lawrussia.ru/texts/ legal_310/doc310a655x560.htm; see also Treaty between Ukraine and Tatarstan on Incorporation of Transnational Finance and Production Petroleum Company ‘Ukrtatnafta’ of 4 July 1995, available (in Russian) at http://tatarzakon.ru/1995-god/soglashenie-ot-4-iyulya-1995goda-mezhdu-pravitelstvom-respubliki-tatarstan-i-pravitelstvom-ukrainyi-o.html; see also Agreement between the Holy See and the Republic of Ivory Coast concerning the ‘International Foundation of Our Lady of Peace of Yamoussoukro’ of 20 May 1992, available (in French) at http://www.vatican.va/roman_curia/secretariat_state/archivio/documents/rc_segst_19920520_santa-sede-costa-avorio_fr.html. 12 Case concerning certain German interest in Polish Upper Silesia (Germany v. Poland), PCIJ Judgment, 25 May 1926, 1926 PCIJ (Series A) No. 7, 40–41.

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sion, many of the investment agreements for which it serves as a basis – extends protections to State enterprises.13 The US Model BIT defines ‘investor’ as ‘a Party or state enterprise thereof’. The definition of ‘enterprise’, in turn, is also broad and includes ‘any entity constituted or organized under applicable law (…) whether privately or governmentally owned or controlled’.14 9 The term ‘investor’ is defined similarly in many non-US BITs. For example, the Japan–Vietnam BIT defines an ‘investor’ as ‘a legal person or any other entity constituted or organized under the applicable laws and regulations of that Contracting Party, whether or not for profit, and whether private or government owned or controlled (…).’15 The Hungary–Kuwait BIT provides for a definition which is even broader: ‘[t]he term “investor” shall mean any natural or juridical person including the Government of a Contracting State who invests in the territory or maritime zones of the other Contracting State.’16 10 Conversely, we have not found evidence of a BIT excluding State-affiliated investments. BITs do not normally limit their application to ‘private’ investments.17 BIT definitions of investors tend to require the investor to be an ‘entity’ or ‘legal entity’, and use a ‘corporation’ as an example of an eligible investor. The ordinary meaning of these terms does not exclude State-affiliated investments.18 11 There are no reported decisions where tribunals rejected an investment because it was State-owned or State-affiliated. Indeed, to our knowledge, tribunals have consistently accepted such investors. For example, although the decision itself was not published, in Kaliningrad Region v. Lithuania, the tribunal report13 See, e.g., the US–Uruguay and the US–Rwanda BITs. 14 2004 US Model BIT, Article 1 (emphasis added). Some US BITs define ‘company’ as ‘any entity constituted or organized under applicable law, whether or not for profit, and whether privately or governmentally owned or controlled’. See US–Azerbaijan BIT, Art. 1(a); US–Argentina BIT, Art. 1(1)(b); US–Armenia BIT, Art. 1(1)(b). 15 Japan–Vietnam BIT, Article 1(b) (emphasis added). See also Article 2(e) of the ASEAN–Australia–New Zealand Free Trade Agreement which defines ‘juridical person[s]’ entitled to protection under it as: ‘any entity duly constituted or otherwise organised under applicable law, whether for profit or otherwise, and whether privately-owned or governmentally-owned (…).’ (emphasis added); Article 1(4) of the Jamaica–Italy BIT (‘The term “legal person”, in reference to either Contracting Party, shall be construed to mean any entity having an office in the territory of one of the Contracting Parties, and recognized by the latter Party in accordance with its national legislation as a government-owned institution (…).’). 16 Hungary–Kuwait BIT, Article 1(2). 17 The closest that a BIT appears to come to excluding State-affiliated investments is the limitation in Article 2(e) of the Belgium–Luxembourg Economic Union–Peru BIT that the term ‘investment’ does not include ‘a payment obligation, or granting of a loan to the State or to a State-owned company’. 18 On the protection of public law entities or entities owned by or affiliated with a State under the European Convention on Human Rights see European Court of Human Rights, The Holy Monasteries v. Greece, application nos. 13092/87 and 13984/88, Judgment of 9 December 1994, para. 48; Case of Islamic Republic of Iran Shipping Lines v. Turkey, application no. 40998/98, Judgment of 13 December 2007, para. 80; Transpetrol v. Slovakia, application no. 28502/08, Decision of 15 November 2011, para. 61; State Holding Company Luganskvugillya v. Ukraine, application no. 23938/05, Decision of 27 January 2009; Case of Kotov v. Russia, application no. 54522/00, Judgment of 3 April 2012, para. 94.

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edly held the Regional Government of Kaliningrad to be an investor pursuant to the Russia–Lithuania BIT.19 Article 1(1) of that BIT defines a Russian investor as ‘any legal person, constituted or established according to the legislation in force in the territory of the Russian Federation provided this legal person is authorised according to the legislation of the Russian Federation to invest in the territory of the Republic of Lithuania’.20 The question of whether or not a State intends to admit State-owned invest- 12 ments is a question for the admission stage. States regulate the conditions for admission. Investments that have been admitted (and, if required, approved of) are entitled to benefit from the provisions of the BIT.21 A standard clause can be found in the Germany–Guyana BIT: ‘Each Contracting Party shall in its territory promote as far as possible the investments by nationals or companies of the other Contracting Party and admit such investments in accordance with its legislation.’22 The exact steps an investor must take to have its investment admitted will de- 13 pend on the host State’s legislation. For example, the recently amended German Foreign Trade Act (Außenwirtschaftsgesetz) subjects certain investments in Germany to approval by a Ministry. It states that ‘foreigners,’ i.e. legal or natural persons from outside the European Union and outside the European Free Trade Agreement, that wish to acquire 25 % or more of the shares of that company must notify the German Federal Ministry for Economic Affairs and Energy. Following the notification the Ministry may within a period of two months deny its consent to the transaction if the acquisition presents a potential threat to public order or safety.23 US treaties follow a different model and do not contain a separate clause on 14 admission and approval.24 Instead, the issue is dealt with in the general article on treatment. US BITs are unique in this respect and restrict the host State’s right to make decisions on admission by effectively expanding national and/or most favoured nation treatment to the admission stage.

19 International Arbitration Reporter, Volume 2, No. 5, 17 March 2009, available at http:// www.iareporter.com/downloads/20100107_6/download (discussing the unreported February 2009 award on jurisdiction in Kaliningrad Region v. Lithuania). 20 Russia–Lithuania BIT, Article 1(1). 21 See, e.g., Rudolf Dolzer/Margarete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995) 50. An example for an approval-type BIT is the Malaysia–Netherlands BIT which states that an ‘“investment” shall comprise every kind of asset (…) provided that such asset when invested (…) in Malaysia, is invested in a project classified by the appropriate Ministry in Malaysia as an “approved project” under this Agreement (…).’ Malaysia–Netherlands BIT, Article 1(3). 22 Germany–Guyana BIT, Article 2(1). 23 See Article 4(1) No. 4 of the German Foreign Trade Act (Außenwirtschaftsgesetz) (of 6 June 2013) and Articles 55, 56 and 59 of the Implementing Regulation to the German Foreign Trade Act (Außenwirtschaftsverordnung) (as amended on 25 March 2014). 24 See, e.g., Rudolf Dolzer/Margarete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995) 50.

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For example, the 2004 US Model BIT provides that national treatment must be extended: ‘[e]ach Party shall accord to investors of the other Party treatment no less favorable 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.’25 16 Despite the liberal pro-investment regime of the US BITs, the situation may be markedly different on the political plane – at least in instances where there is no BIT.26 In 2006, Dubai Ports World, an entity owned by the government of Dubai, had entered into an agreement with a UK company whereby it would purchase a controlling interest in six major ports in the US. However, although the Committee on Foreign Investment in the United States (composed of twelve US government agencies and departments) had confirmed the transaction did not pose a threat to national security27 and although the deal was between two foreign companies (Dubai Ports and the UK company), the US Congress – after several attempts – moved towards passing a bill that would have required a second investigation of the – in the meantime completed – transaction by the US President over asserted concerns about security in the US.28 Ultimately, Dubai Ports, responding to the strong negative reaction to the transaction in the US Congress and in the media, announced that it would sell its port operations in the US to a US company.29 17 Notwithstanding the process that a State-owned investor has to go through to accomplish admission (whether under the US model or otherwise), once a Stateowned investment has been admitted, it is entitled to the same protections as other investments.30 15

c) State-Affiliated Claimants in ICSID Proceedings 18

Article 25 of the ICSID Convention limits the scope of its coverage to disputes ‘arising directly out of an investment, between a Contracting State (…) 25 2004 US Model BIT, Article 3.1 (emphasis added). See also US–Jamaica BIT, Article 2(1)(a) (‘Each Party shall permit and treat investments, and activities associated therewith, on a basis no less favorable than that accorded in like situations to investments or associated activities of its own nationals or companies (“national treatment”), or of nationals or companies of any third country (“most favored nation treatment”), whichever is the most favorable, subject to the right of each Party to make or maintain exceptions (…).’). 26 Although the US and United Arab Emirates have been in treaty discussions, there is no BIT between them. Kenneth Katzman, ‘The United Arab Emirates (UAE): Issues for U.S. Policy’ (Congressional Research Service, 3 October 2011). 27 Treasury Department (US), ‘CFIUS and the Protection of the National Security in the Dubai Ports World Bid for Port Operations’, press release, 24 February 2006. 28 Foreign Investment Security Improvement Act of 2006, p. 2333, 109th Cong., 2nd Sess. (2006). 29 Ronald D White, ‘AIG to Buy Dubai’s US Port Assets’, The Los Angeles Times (online), 12 December 2006; Kristy E. Young, ‘The Committee on Foreign Investment in the United States and the Foreign Investment and National Securities Act of 2007: A Delicate Balancing Act That Needs Revision’ (2008) 15 UC Davis J. Int’l L. & Pol’y 43, 54, 55. 30 Claudia Annacker, ‘Protection and Admission of Sovereign Investment Treaties’ (2011) 10 Chinese J. Int’l L. 531, 539.

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and a national of another Contracting State’.31 As the Maffezini tribunal correctly notes: ‘[u]nder the ICSID Convention, the Centre’s jurisdiction extends only to legal disputes arising directly out of an investment between a Contracting State and a national of another Contracting State. (…) However, neither the term “national of another Contracting State” nor the term “Contracting State” are defined in the Convention.’32 The definition of national is left to the contracting States.33 Although the 19 ICSID Convention’s Preamble refers to ‘private international investment,’ it is silent about whether it excludes State-owned entities. During the drafting of the Convention, there was a discussion about whether investor States should be included as ‘investors’, but the issue was quickly abandoned.34 Although there was no definitive decision reached as to State-owned, State-controlled or Stateaffiliated entities, the intention appears to have been to include such entities within the definition of ‘national’. Indeed, as Schreuer points out, the Comment to the Preliminary Draft of the ICSID Convention provides: ‘It will be noted that the term “national” is not restricted to privately-owned companies, thus permitting a wholly or partially government-owned company to be a party to proceedings brought by or against a foreign State.’35 Schreuer further proposes that the ‘best guideline’ for when a State-owned 20 entity should be regarded as ‘national’ under the ICSID Convention was articulated by Broches: ‘[I]n today’s world the classical distinction between private and public investment, based on the source of the capital, is no longer meaningful, if not outdated (…). It would seem, therefore, that for purposes of the Convention a mixed economy company or government-owned corporation should not be disqualified as a “national of another Contracting State” unless it is acting as an agent for the government or is discharging an essentially governmental function.’36 In support of this, a number of commentators have asserted that corporations, even if wholly owned or subsidised by a government, may proceed to ICSID arbitration provided they do not operate as agents of the government.37

31 ICSID Convention, Article 25 (emphasis added). 32 Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000, para. 74. 33 See, e.g., Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary (Cambridge University Press, 2009) 161; see also Chittharanjan F. Amerasinghe, ‘The International Centre for Settlement of Investment Disputes and Development Through The Multinational Corporation’ (1976) 9 Vand. J. Transnat’l L. 793, 807; Philip F. Sutherland, ‘The World Bank Convention on the Settlement of Investment Disputes’, (1979) 28 ICLQ 367, 385. 34 See, e.g., Christoph Schreuer, id., at 161. 35 Id., at 161 (quoting Aaron Broches, History of the ICSID Convention, Vol. II (1970) 230). 36 Id., at 161 (quoting Aaron Broches, History of the ICSID Convention, Vol. II (1970) 354– 355). 37 See, e.g., Gregory MacKenzie, ‘ICSID Arbitration as a Strategy for Levelling the Playing Field Between International Non-Governmental Organization and Host States’ (1993) 19 Syracuse J. Int’l L. & Com. 197, 230; Chittaranjan F. Amerasinghe, ‘The International Centre for Settlement of Investment Disputes and Development Through The Multinational Corpora-

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Arbitral decisions available on the topic have accepted that State-affiliated parties can be claimants without a detailed discussion.38 One of the few which does discuss the issue is CSOB v. Slovakia.39 The investor in that case, a Czechbased bank, was majority-owned by the Czech Republic. It acted for much of its existence on behalf of and at the request of the Czech Republic in ‘facilitating or executing the international banking transactions and foreign commercial operations’.40 Given the absence of a definition in the ICSID Convention, the tribunal analysed its legislative history and held that the term ‘national’ needs to be interpreted broadly since ‘the term “juridical persons” as employed in Article 25 and, hence, the concept of “national,” was not intended to be limited to privatelyowned companies, but to embrace also wholly or partially government-owned companies’.41 The tribunal concluded that the relevant inquiry is whether the activities are ‘essentially commercial rather than governmental in nature’42 noting that the bank’s activities did not differ in their nature ‘from the measures a private bank might take to strengthen its financial position’.43 4. When is a State-Affiliated Entity an ‘Investor’ – When is It a ‘State’?

The more intricate question is when is a State-affiliated entity an investor, i.e. a potential claimant, and when is it a ‘State’? 23 The tribunal in Maffezini v. Spain looked at State responsibility for the actions of a State-affiliated entity as the flipside of whether a State entity can be ‘national’ or an ‘investor’.44 Guided by the ILC’s (then draft) Articles on State Responsibility, the tribunal applied two tests – which it termed ‘structural’ and ‘functional’ – to determine whether an entity qualified as a private or a government 22

38

39 40 41 42 43

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tion’ (1976) 9 Vand. J. Transnat’l L. 793, 806; Philip F. Sutherland, The World Bank Convention on the Settlement of Investment Disputes’, (1979) 28 ICLQ 367, 385. E.g. Hrvatska elektroprivreda dd v. Slovenia, ICSID Case No. ARB/05/24; Tanzania Electric Supply Company Limited v. Independent Power Tanzania Limited, ICSID Case No. ARB/ 98/8, Final Award, 12 July 2001 (one of the few contractual ICSID cases). See also Barry Garfinkel et al., ‘Bilateral Investment Treaties and Arbitration’, in AAA Handbook on International Arbitration & ADR, 357–373 (JurisNet, LLC 2010) 367–368 (stating that it is ‘unlikely’ that state-owned enterprises would be ‘presumptively exclude[d]’ under Article 25 and that ‘a 100 % state-owned enterprise whose management was autonomous, and whose activities were commercial in nature, would appear to be a potential “national” of a contracting state, whereas an agency that was most closely tied with traditional state functions (e.g., a defense ministry) might not receive similar treatment’). Ceskoslovenska Obchodni Banka, A.S. v. Slovakia, ICSID Case No. ARB/97/4, Decision of the Tribunal on Objections to Jurisdiction, 24 May 1999. Id., para. 20. Id., para. 16 (emphasis added). Id., para. 20. Id., para. 24. The conclusion in Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, paras. 324-331, although it does not provide a detailed analysis, reaches a similar holding with respect to two companies that were put under the effective receivership of the Turkish government. Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000, paras. 79 et seq., also on the CSOB case.

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entity.45 It cautioned that State ownership alone was not determinative. Instead that a mix of factors should be evaluated to determine if the entity has acted as an instrumentality or agent of the State.46 The conclusion was that if the State is not internationally responsible for the actions of a State-affiliated entity, this entity qualifies as a ‘national’ and (potential) investor. In another case on the issue of State responsibility, Jan de Nul & Dredging 24 International v. Egypt, the tribunal determined that in order to attribute acts to the State, there must be a close link between the acts of the State-owned entity and the State.47 The tribunal looked at three characteristics to assess whether an entity qualified as commercial or governmental: (1) the entity’s commercial purpose, (2) whether it has an autonomous budget, and (3) what is the source of the managerial autonomy.48 Gaillard recently summarised three similar factors that the French courts 25 identify for a State entity to be considered an instrumentality of the State: (1) the members of its Board of Directors are primarily representatives of State bodies appointed by decree; (2) the company is under ‘strict control’ of the government or one of its agencies, which exercises actual discretion and control over the entity; and (3) the company is under the ‘economic and financial control of the State’.49 5. Conclusion

The general rule is, if an entity is not a State, it is an investor; if it is an in- 26 vestor, it is not a State. But the question arises, can a State-owned entity be both an ‘investor’ and a ‘State’, depending on its function? After all, a State-owned entity might have regulatory powers in one area, but 27 act as a commercial player in others. SODIGA, the State-affiliated entity in the Maffezini case, had ‘in fact a combination of both [functions], some to be regarded as functions essentially governmental in nature and others essentially commercial in character.’50 There are other examples. 45 Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000, paras. 48–50, 71–89. The ‘structural’ test, which involves an inquiry into whether there is direct or indirect ownership by the State, is ‘but one element to be taken into account’ and may not be conclusive. Id., paras. 50, 79. In particular, the tribunal noted that it also is important to look at other elements, including the degree of control over the company by the State and the objectives and functions for which the company was created. Id., paras. 48–50. The ‘functional test’ examines ‘whether specific acts or omissions are essentially commercial rather than governmental in nature’. Only the ‘governmental’ acts should be attributed to the State. Id., para. 52. 46 Id., paras. 48–52, 71–89. 47 Jan de Nul & Dredging Int’l v. Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008, para. 56. 48 Id., paras. 155–174. 49 See Emmanuel Gaillard, ‘Effectiveness of Arbitral Awards, State Immunity from Execution and Autonomy of State Entities – Three Incompatible Principles’, in Emmanuel Gaillard and Jennifer Younan (eds), State Entities in International Arbitration, IAI Series on International Arbitration No. 4 (Juris Publishing, 2008) 179, 191.

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It appears to be possible that there are areas where a State-owned entity is protected as an ‘investor’ and other areas where it exercises State functions and therefore cannot act as an ‘investor’ for the purposes of a BIT. 29 However, there may not be such a clear dichotomy in every case, especially if we look at the converse situation of a (foreign-owned) private entity acting as government agent. A foreign private entity may hold shares in a privately organised local entity. This local entity is commissioned by the government, for example, to oversee road safety and to remove unfit cars from circulation. Vis-à-vis car owners, the local entity acts as government agent. However, if the government revokes the concession, the foreign shareholder and – depending on the applicable BIT also the foreign-controlled local entity may have to rely on BIT protection. 28

50 Maffezini v. Spain, ICSID Case No. ARB/97/7, Award of the Tribunal, 13 November 2000, para. 57.

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Sabine Konrad* 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Are NGOs Investors?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Definition of Investor under BITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Definition of Investor under Article 25 of the ICSID Convention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Does an NGO have an Investment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Definition of Investment under BITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Definition of Investment under Article 25 of the ICSID Convention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Substantive Protections Available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Fair and Equitable Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Full Protection and Security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) National Treatment and Most Favoured Nation Clause . . . . . . . . . . 5. Investment Structuring for NGOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Concordats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 7 7 13 15 15 17 22 23 24 25 27 29 31

Literature: Paul Bater, The Tax Treatment of NGOs: Legal, Fiscal, and Ethical Standards for Promoting NGOs and their Activities (Kluwer Law International, 2003); Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008); EU Network of Independent Experts on Fundamental Rights, ‘Opinion No. 4-2005: The Right to Conscientious Objection and the Conclusion by EU Members States of Concordats with the Holy See’ (14 December 2005); Emmanuel Gaillard, ‘Establishing Jurisdiction Through a Most-Favored-Nation Clause’, 233 (105) New York Law Journal (2 June 2005); Emmanuel Gaillard, ‘Identify or Define? Reflections on the Evolution of the Concept of Investment in ICSID Practice’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (Oxford University Press, 2009), 403–416; Robert Jennings and Arthur Watts, Oppenheim’s International Law (Oxford University Press, 1992); Amokura Kawharu, ‘Participation of Non-governmental Organizations in Investment Arbitration as Amici Curiae’ in Michael Waibel, Asha Kaushal, Kyo-Hwa Chung and Claire Balchin (eds), The Backlash against Investment Arbitration (Kluwer Law International, 2010), 275–296; Anna-Karin Lindblom, Non-governmental Organisations in International Law (Cambridge University Press, 2005); Manfred Nowak, UN Convention on Civil and Political Rights (NP Engel Verlag, 2005); Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary (Cambridge University Press, 2009).

1. Introduction

International non-governmental organisations (NGOs) have been engaged in 1 relief work and the protection of civil rights for decades. Some of these organisations have substantial assets in need of protection in the respective host State. Such assets include hospitals, schools, churches, technical assistance centres or even media outlets and newspapers. At the same time, it is astonishing how little attention the protection of such NGOs under investment treaties has received.

* The author thanks Lisa Richman for her valuable assistance.

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Over the years, NGOs have faced political risk including incidents resulting in the loss of lives. The world has not become a safer place, in particular given the ‘recent wave of proposed restrictions on civil society’1 in many parts of the developing world. These include: –

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In Venezuela, in late 2010, parliamentary supporters of President Hugo Chavez successfully advanced legislation targeting NGOs dedicated to the ‘defense of political rights’ or ‘other political objectives.’ The law prevents such organisations from receiving either assets or income from foreign sources.2 In Ecuador, President Correa issued a decree in March 2008 authorising the government to dissolve NGOs on broad, discretionary grounds such as ‘compromising (…) the interests of the State.’3 Under the decree, NGOs must also comply with virtually any kind of government requests for information. In Iran, following the disputed 2009 presidential elections, several non-profit organisations have been subject to government harassment, closure and even arrests of staff members.4 In Cambodia, a law to regulate NGOs has been drafted, which threatens to undermine their freedom of association and expression.5 In Egypt, the Coptic churches have raised complaints that the security forces do not protect them against violence by extremists.6 In Egypt, following the fall of President Mubarak in 2011, both international and Egyptian NGO offices have been subjected to raids, closures and the arrest of staff members by security forces as part of a crackdown on independent civil society groups.7 In 2013 guilty verdicts and sentences were

1 International Center for Not-for-Profit Law, ‘Wave of Constraint: Recent Developments in Venezuela, Ecuador, Honduras, Iran, Bahrain, and Cambodia’, Global Trends in NGO Law (2011) 1. 2 Id., at 2. 3 Id., at 4. 4 See also Amnesty International, ‘Iran Urged to Scrap Draft Law Undermining Independent NGOs’ (6 April 2011), available at http://www.amnesty.org/en/news-and-updates/iran-urgedscrap-draft-law-undermining-independent-ngos-2011-04-06. For further examples of NGO restriction, see International Center for Not-for-Profit Law, ‘International Investment Treaty Protection of Not-for-Profit-Organizations’ (2011) 4–6. 5 Democracy Digest, ‘Cambodia’s NGO Law Targets “Unwanted Opposition”’ (1 April 2011), available at http://www.demdigest.net/blog/2011/04/cambodias-ngo-law-targets-unwanted-opposition. 6 See, e.g., Hearing on the Coptic Christian Community in Egypt, Statement to the Tom Lantos Human Rights Commission, United States Congress (7 December 2011), available at http:// www.humanrights.gov/2011/12/07/hearing-on-the-coptic-christian-community-in-egypt. See also, Christian Today, ‘Christians being “targeted” in Egypt’ (11 December 2013), available at http://www.christiantoday.com/article/christians.being.targeted.in.egypt/35017.htm. 7 See, e.g. Freedom House, ‘Timeline of Human Rights Violations in Egypt since the Fall of Mubarak’ (9 August 2013), available at http://www.freedomhouse.org/article/timeline-humanrights-violations-egypt-fall-mubarak.

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handed down by an Egyptian court against 43 national and international NGO representatives.8 In Russia, the State Duma passed a law in 2012 requiring all NGOs engaged in politics and that receive funds from foreign sources to register as ‘Foreign Agent’.

In order to carry out their work, NGOs need to protect their staff and their as- 3 sets. While international Human Rights protections may be available, the enforcement mechanisms for Human Rights in many regions of the world lack teeth. Both proceedings under the Optional Protocol to the UN Covenant on Civil and Political Rights (CCPR) and regional Human Rights agreements, such as the European Convention on Human Rights (ECHR), require the exhaustion of domestic remedies. The ECHR proceedings at least end with a judgment which the respondent State has to comply with (Art. 46 of the ECHR). Under the Optional Protocol to the CCPR. However, the UN Human Rights Committee can only state its ‘views’, not render an enforceable decision.9 While helpful, these protections are not nearly as robust as they should be. International investment treaties may be another avenue for NGO’s to seek re- 4 course.10 Over the last 50 years, a legal framework to protect and promote foreign investment has evolved, principally through the development of a wideranging network of over 2,000 bilateral investment treaties (BITs) which provide important protections for investors abroad and help to mitigate political risk. The treaties protect investors against interference by host State governments with an investment. Most importantly, such treaties provide for direct access to international justice: investors have the right to commence international arbitration before an independent international tribunal directly against the host State to seek

8 See, e.g. Reuters U.S. Edition ‘Egypt sentences 43, including Americans, in NGO case’ (4 June 2013), available at http://www.reuters.com/article/2013/06/04/us-egypt-ngos-idUSBRE9530C420130604. See also U.S. Department of State Press Statement, ‘Egypt NGO Trial Verdicts and Sentences’ (4 June 2013), available at http://www.state.gov/secretary/remarks/ 2013/06/210257.htm. 9 The UN Human Rights Committee relies on a reference to Article 2(3) of the CCPR (right to an effective remedy) ‘as a substitute for the Committee’s inability to order the State party concerned to remedy the violation’ and to lend its views a quasi-enforceable character, see Manfred Nowak, UN Convention on Civil and Political Rights (NP Engel Verlag, 2005) Article 5 First Optional Protocol, para. 36. 10 Although NGOs historically have sought protection through human rights actions (see, e.g., ECtHR, Case of the Moscow Branch of the Salvation Army v. Russia, Application No. 72881/01, Judgment, 5 October 2006), very few NGOs have brought investment treaty arbitrations in their own right as a claimant. See, e.g., Victor Pey Casado and President Allende Foundation v. Republic of Chile, ICSID Case No. ARB/98/2; Amokura Kawharu, ‘Participation of Non-governmental Organizations in Investment Arbitration as Amici Curiae’ in Michael Waibel, Asha Kaushal, Kyo-Hwa Chung and Claire Balchin (eds), The Backlash against Investment Arbitration (Kluwer Law International, 2010) 275–296. NGOs have, of course, participated as amici in investment treaty cases. See, e.g. Methanex Corporation v. USA, UNCITRAL (NAFTA), Decision of the Tribunal on Petitions from Third Persons to Intervene as ‘Amici Curiae’, 15 January 2001.

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redress and obtain compensation. BITs are important safeguards and have contributed to the economic welfare of the member States and their investors. 5 For example, these treaties provide, among other things, for compensation in the event of expropriation and a violation of the NGO’s rights to fair and equitable and non-discriminatory treatment.11 Most importantly, BITs give access to international justice. 6 While some BITs explicitly mention not-for-profit investors, most BITs are silent on the topic. The availability and scope of investment protection for notfor-profit activity is largely untested. NGOs are well advised to assess the level of protection they enjoy and should take precautionary measures to make sure that they will be protected in the event of future actions by the host State. 2. Are NGOs Investors? a) Definition of Investor under BITs

A tribunal constituted pursuant to an international investment treaty is a creature of consent, and may not exceed the jurisdictional scope established within the underlying treaty. Each treaty contains its own definition of what constitutes an ‘investor’. Many treaties define the ‘investor’ as ‘national’ or ‘company’ of the contracting State. 8 Certain BITs expressly include not-for-profit companies in the definition of ‘investor’. In line with the German Model BIT, the Germany-Bulgaria BIT contains a broad definition of ‘investor’ as ‘[a]ny juridical person as well as any commercial or other company or association (…) whether or not it operates for profit.’12 The Germany–Egypt BIT contains a similar definition of ‘investor’ which includes ‘legal entities, including companies, corporations, business associations, partnerships and other organisations with or without legal personality which have their registered office or seat in the territory of that Contracting State, irrespective of whether or not their activities are directed at profit’.13 9 Other BITs, such as the Turkey–Iran BIT are silent as to whether entities that do not make a profit are ‘investors’ entitled to protection. Instead ‘investor’ is defined only as investors in the host State who are: 7

(a) (b)

natural persons who, according to the laws of that Contracting Party, are considered to be its nationals; corporations, firms or business associations incorporated and constituted under the law in force of either of the Contracting Parties and having their headquarters, seat and real economic

11 It is interesting to note the contradiction that there are certain NGOs whose mission is directed at increasing the restriction of investment treaties to protect investments. 12 Article 1(3) of the Treaty concerning the reciprocal encouragement and protection of investments of 12 April 1986 concluded between Germany and Bulgaria (emphasis added). 13 Article 1(2)(b) of the Agreement between the Arab Republic of Egypt and the Federal Republic of Germany concerning the Encouragement and Reciprocal Protection of Investments of 16 June 2005 (emphasis added). The 2012 US Model BIT also expressly defines ‘enterprise’ to include an ‘entity (…) whether or not for profit (…).’

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Where a BIT fails to include expressly not-for-profit activity within the defi- 10 nition of protected ‘investor’, this does not necessarily mean that it will not provide protection. Instead, the NGO will only need to ensure that it meets the criterion of an ‘investor’ under the relevant treaty. For example, with respect to the Turkey–Iran BIT, a company need only be 11 (1) ‘constituted under the laws’ of the host State; (2) ‘have [its] headquarters, seat and real economic activities’ in the host State; and (3) be approved by the ‘competent authorities’ of the host State. The requirement that the company have ‘real economic activities’, a term that 12 is not defined in the BIT, may be the most difficult part of the definition to prove. Nevertheless, assuming the NGO provides either goods or services, this condition should be met. A hospital, by way of example, would therefore be protected under the BIT even if it operates as a not-for-profit organisation because it provides ‘real economic activity’ in the form of services to the community. b) Definition of Investor under Article 25 of the ICSID Convention

Many investment treaties offer a choice of arbitral forum to a claimant, in- 13 cluding an option for arbitration pursuant to the Convention on the Settlement of Investment Disputes (ICSID Convention) or a non-ICSID alternative. If the claim is brought under the ICSID Convention it will have to meet the test of Article 25. Under Article 25(1) of the Convention, the jurisdiction of the Centre extends to any legal dispute arising directly out of an investment between a contracting State and a ‘national’ of another contracting State. Nationals of host States and of non‐contracting States, on the other hand, are not permitted to bring claims before ICSID. The ICSID Convention does not define the term ‘national’, but relies mainly 14 on the national law of the State the national of which the claimant claims to be.15 3. Does an NGO have an Investment? a) Definition of Investment under BITs

In addition to requiring compliance with the definition of ‘investor’ under the 15 BIT, a tribunal will also seek to ensure that it possesses the authority to decide on the subject matter at issue based on whether there has been a covered ‘investment’. Again, this determination will vary depending on the applicable investment treaty.

14 Article 1(2) of the Agreement on Reciprocal Promotion and Protection of Investments between the Government of the Republic of Turkey and the Government of the Republic of Iran of 19 December 1996. 15 Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary (Cambridge University Press, 2009) 265.

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The definition of ‘investment’ typically is quite broad and recognises that investments can take many different forms, including shares, stocks or bonds in a company, moveable and fixed property, loans or claims to money, entitlement to performance under a contract, and intellectual property rights or know-how. Indeed, many BITs define investment as ‘[a]ny kind of asset.’16 By way of example therefore, a hospital or school would certainly be considered as ‘asset’. b) Definition of Investment under Article 25 of the ICSID Convention

If the claim is brought under the ICSID Convention, it will have to meet the test for an ‘investment’ under Article 25. The question of what constitutes an investment under Article 25 has attracted a large and sometimes conflicting body of jurisprudence as well as academic interest. 18 Despite the silence of the ICSID Convention, some tribunals have tried to develop criteria. The most frequently referenced decision, Salini v. Morocco, held that an investment must meet four criteria in order to satisfy the Article 25 requirement: (1) a contribution of money or assets, (2) a sufficient duration, (3) an element of risk, and (4) a contribution to the development of the host State.17 19 However, this has been heavily criticised.18 A number of cases have rejected the criteria suggested by Salini and instead deferred to the definition of investment contained in the BIT in recognition of the fact that the drafters and signatories of the ICSID Convention purposefully declined to include a universal definition of ‘investment.’19 17

16 See, e.g., US Model BIT of 2004, Article 1 (‘investment means every asset’); France Model BIT of 2006, Article 1(1) (‘investment means every kind of assets’ [sic]); Germany Model BIT of 2008, Article 1(1) (‘the term investments comprises every kind of asset’); India Model BIT of 2003, Article 1(b) (‘investment means every kind of asset’). 17 Salini Costruttori S.P.A. and Italstrade S.P.A. v. Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001, para. 52. In the aftermath of this decision some ICSID tribunals have occasionally referred to an additional requirement of ‘regularity of profit and return’; Joy Mining v. Egypt, ICSID Case No. ARB/03/11, Decision on Jurisdiction, 6 August 2004, para. 53; Helnan Hotels A/S v. Egypt, ICSID Case No. ARB/05/19, ILC 130, Decision on Jurisdiction, 17 October 2006, para. 77. This fifth criterion which has been even more criticised than the development criterion would pose the greatest difficulties for a not-for-profit entity which, by its very nature, is not intended to generate a ‘profit’ or ‘return’ unlike forprofit companies. 18 See, e.g., Saba Fakes v. Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010. 19 See, e.g., Abaclat and others v. Argentina, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011, para. 364 (holding that it would be ‘contradictory to the ICSID Convention’s aim’ to require that an ‘investment’ meet the Salini criteria but instead that the Convention was meant to provide the parties with the ‘tools to define what kind of investments they wanted to promote’); Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010, paras. 310–332 (holding that it was inappropriate to apply the Salini test or to apply additional criteria beyond those contained in Article 25 or in the relevant BIT); Biwater Gauff (Tanzania) Ltd. v. Tanzania, ICSID Case No. ARB/ 05/22, Award, 24 July 2008, paras. 310–322 (stating that there is ‘no basis for a rote, or overly strict, application’ of the Salini test given the definition of investment was left ‘intentionally undefined’ in the ICSID Convention). Indeed, Emmanuel Gaillard has emphasised that in analysing what constitutes an ‘investment’, it is important that ICSID tribunals should not overlook the ‘intentional absence’ of the term ‘investment’ by the drafters of the ICSID Con-

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However, even if one were to apply the Salini test, NGOs would often not 20 have a problem meeting it. This, of course, depends on the kind of activities the NGO undertakes. A hospital or school would not have problems meeting even the Salini criteria. It is less clear whether a relief organisation that sends voluntary temporary aid workers to a country but does not have an office or other physical property in the host State will meet the duration test. Interestingly, the fourth and most heavily criticised Salini characteristic, a contribution to the development of the host State, may even be easier to meet for an NGO than for a commercial investor: it generally is the primary objective of NGO work. For claims brought outside of ICSID, the NGO claimant typically only needs 21 to satisfy the investment treaty’s definition of investment.20 4. Substantive Protections Available

Most BITs contain similar substantive protections. Though the nature and 22 specific language of individual treaty protections will vary, there are a certain number of core investment protections that are likely to be of particular relevance to an NGO claimant. a) Fair and Equitable Treatment

Most modern BITs contain a promise by the contracting States to accord ‘fair 23 and equitable treatment’ to investors. This protection imposes an obligation on the host State to provide a stable investment environment in which the investor’s reasonable expectations should not be violated.21 Legislative, judicial and other government acts that negatively impact an investment can amount to unfair and inequitable treatment and serve as a basis for a BIT claim. For instance, the above referenced restriction or prohibition of foreign funding of an NGO by Venezuela conceivably constitutes a violation of the principle of fair and equitable treatment.22

vention. See Emmanuel Gaillard, ‘Identify or Define? Reflections on the Evolution of the Concept of Investment in ICSID Practice’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (Oxford University Press, 2009) 403. 20 One recent case, however, has suggested that the definition of ‘investment’ might be subject to additional scrutiny even outside the ICSID forum. For example, in Romak v. Uzbekistan, a tribunal organised under the UNCITRAL Arbitration Rules held that the term ‘investments’ within the Switzerland–Uzbekistan BIT had an inherent meaning independent of the BIT. It concluded that an investment necessarily must include ‘a contribution that extends over a certain period of time and that involves some risk’ (emphasis in original), Romak S.A. v. Uzbekistan, PCA Case No. AA 280, Award, 26 November 2009, para. 207. 21 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 134. 22 International Center for Not-for-Profit Law, ‘International Investment Treaty Protection of Not-for-Profit-Organizations’ (2011) 22.

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b) Expropriation 24

Under most investment treaties, a host State must pay compensation when it acts in a way that causes a taking of or interference with a foreign investment. Expropriation encompasses both direct and indirect expropriation. These terms can encompass a variety of actions by the State or its agents which either result in an infringement on the investment, a diminution of its value, or an outright taking of the investment. c) Full Protection and Security

A host State must also take reasonable steps to prevent the physical harm to, or destruction of, an investor’s property. When a host State compromises the physical security of an NGO or its staff, a violation of the NGO’s protection of ‘full protection and security’ may be implicated.23 There exists an obvious need for protection of an NGO and its employees from physical harm. Physical harassment of NGO staff by government actors would violate this standard. 26 Indeed, the protection has been interpreted by tribunals to extend beyond ‘physical security’ to encompass legal security as well,24 although the outer limits of its scope remain unresolved. 25

d) National Treatment and Most Favoured Nation Clause

Some BITs contain a promise that an investor is entitled to treatment no less favourable than that afforded to domestic investors or investors from any other country. If a BIT contains a so-called most favoured nation clause, the investor also will be entitled to take advantage of the protections offered by other BITs executed and ratified by the host State. Efforts to deny certain NGOs (but not others) access to foreign funds could be viewed as a violation of their right to national treatment or most favoured nation treatment because the restrictions are not universally applied. 28 Most favoured nation treatment provides some of the most important protection for investors and their investments because they allow an investor to access protections from other BITs. Their content varies widely however. Sometimes they apply to the entire treaty and sometimes only to specific matters.25 Each clause should be carefully examined to determine its scope. 27

23 See Saluka Investments BV v. Czech Republic, Partial Award, UNCITRAL Case No. IIC 210 (2006). 24 See Biwater Gauff (Tanzania) Ltd v. Tanzania, ICSID Case No. ARB/05/22, Award and Concurring and Dissenting Opinion, 24 July 2008; see also Azurix Corp v Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 151; Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007. 25 See, e.g., Emmanuel Gaillard, ‘Establishing Jurisdiction Through a Most-Favored-Nation Clause’, 233 (105) New York Law Journal (2 June 2005).

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5. Investment Structuring for NGOs

An NGO operating abroad should consider structuring its registration and 29 ownership model to bring it within the scope of application of a treaty that spares it possible jurisdictional challenges and affords it additional substantive protections. This can be accomplished by reviewing the investment treaties to which the host State is party, and identifying the treaty or treaties that are most favourable. NGOs may also want to consider whether any bilateral tax treaties apply. 30 These tax treaties are intended to promote investments by providing relief from double taxation by setting off taxes paid in one State against taxes payable in another. As of less than ten years ago, however, only a fraction of the tax treaties expressly contemplate applicability to NGOs.26 The potential applicability of a particular tax treaty should therefore be analysed closely. 6. Concordats

An institution which has for centuries been engaged in international charity 31 work is the Roman Catholic Church.27 It was also one of the first institutions to embrace the idea of treaty protection. Today a network of concordats exists between the Holy See and a multitude of countries. Indeed, particularly newer concordats contain, cum grano salis, BIT-type protections. For example, the 2004 Concordat with Portugal28 provides for full security and protection type rights (Article 7),29 protection of Church property, including against expropriation (Articles 23 and 24),30 as well as dispute resolution (Article 29).31 26 Paul Bater, The Tax Treatment of NGOs: Legal, Fiscal, and Ethical Standards for Promoting NGOs and Their Activities (Kluwer Law International, 2003) 5; see for example Article 21(7) (b) of the German–French taxation treaty (last amended in 2001), Article 4(2)(b) of the US Model Income Tax Treaty. 27 The Sovereign Military Hospitaller Order of Saint John of Jerusalem of Rhodes and of Malta (Knights of Malta) even enjoy the status of a subject of international law sui generis. See, e.g., Anna-Karin Lindblom, Non-governmental Organisations in International Law (Cambridge University Press, 2005) 66. 28 Agreement between the Holy See and the Portuguese Republic (18 May 2004, ratified on 18 December 2004) (authentic version in Italian and Portuguese; unofficial translation of selected sections provided by the author). 29 Article 7: ‘The Republic of Portugal shall assure, within the terms of Portuguese law, all necessary measures to protect places of worship and clerics to exercise their ministry, as well as to avoid the abuse of Catholic practices or resources.’ 30 Article 23: ‘(1) The Republic of Portugal and the Catholic Church declare their commitment to protection, appreciation and enjoyment of both moveable and immovable goods which are the property of the Catholic Church or of recognised legal canonical persons and which are an integral part of the cultural patrimony of Portugal. (2) The Republic of Portugal acknowledges that the true purpose of ecclesiastical property shall be safeguarded by Portuguese law, without in any way detracting from its other purposes as object of cultural value, and respecting the principle of cooperation.’ Article 24: ‘(1) No church, building, subsidiary church, or object assigned for Catholic worship may be demolished, occupied, moved, altered, or designated by the State and other public bodies for any other ends, without the prior agreement of the competent ecclesiastical authority and for urgent reasons of public necessity.

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Some treaties create protections for special projects. For example, Article VI(3) of the Agreement Between the Holy See and the Republic of Côte d’Ivoire concerning the ‘International Foundation, our Lady of peace of Yamoussoukro’ of 20 May 1992 provides: ‘The premises, assets and property of the Foundation and of its establishments may not be subjected to being searched, requisitioned, confiscated or expropriated, nor to seizure or executory measures.’32 Article XIII of the same agreement deals with transfer rights. 33 Interestingly, the Holy See can be more effective in obtaining ratification where others have failed: its 13 November 2008 Concordat with Brazil33 was ratified on 10 December 2009.34 34 Although the Holy See prides itself of having one of the most experienced diplomatic corps, an amicable solution will not always be possible. Under the concordats, dispute resolution would take place between the Holy See and the host State.35 32

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(2) In cases of requisition or expropriation for public use, consultation with the competent ecclesiastical authorities shall always be made, even on the amount of compensation. In any case, no act of appropriation or non-religious use shall be made without the property being divested of its religious character. (3) The competent ecclesiastical authority has the right to prior consultation when restorations are required or when the process of making an inventory or classification as cultural property is initiated.’ Article 29: (1) The Holy See and the Republic of Portugal shall convene to create within the scope of this present Concordat and by way of developing the principle of cooperation, a Joint Committee. (2) The tasks of the Joint Committee noted above shall be: a. to find a mutually agreeable solution in cases of doubt to problems of interpreting this Concordat b. to suggest any other measures for the better execution of this Concordat Article VI(3) of the Agreement Between the Holy See and the Republic of Côte d’Ivoire concerning the ‘International Foundation, our Lady of peace of Yamoussoukro’ (20 May 1992, signed and entered into force) (authentic version in French; unofficial translation provided by the author): ‘Les locaux, les biens et les avoirs de la Fondation et de ses œuvres ne peuvent faire l’objet de perquisition, réquisition, confiscation ou expropriation, de saisie ou mesure d’exécution.’ The Concordat also contains clauses with a similar function to a BIT, e.g. Article 7 which obliges Brazil to ‘take the measures necessary to ensure the protection of places of worship of the Catholic Church, as well as its liturgy, symbols, images and objects of veneration, against all forms of violation, disrespect and illegitimate use’. It also limits the State’s right to expropriate (‘No building, dependency or object related to the Catholic creed can, so as long as the social ends of the property and the [requirements of] the law are met, be demolished, occupied, transported, subject to alteration or consigned by the State and public bodies to different purposes, except due to the needs or utility of the state or because of social needs, in accordance with the Brazilian Constitution.’). See http://visnews-ita.blogspot.com/2009/12/ratificazione-accordo-santa-sede.html. – The treaty is in force as a matter of international law. However, on the national Brazilian level, a constitutional challenge is ongoing before the State’s Supreme Court (ação direta de inconstitucionalidade (ADI 4439)), see http://www.stf.jus.br/portal/processo/verProcessoAndamento.asp?numero=4439&classe=ADI&origem=AP&recurso=0&tipoJulgamento=M. See, e.g., EU Network of Independent Experts on Fundamental Rights, ‘Opinion No. 4-2005: The Right to Conscientious Objection and the Conclusion by EU Members States of Concordats with the Holy See’ (14 December 2005) 5–6; Robert Jennings and Arthur Watts, Oppenheim’s International Law (Oxford University Press, 1992) 328.

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II.C. Protection for Non-Profit Organisations

The protection offered to Roman Catholic charities under a concordat is often 35 not sufficient. With many countries no concordats exist. For Roman Catholic charities BITs can therefore offer additional protection. The Roman Catholic Church is probably the most multi-national institution in existence with ‘subsidiaries’ in nearly every country. Structuring charities to benefit from BIT protections seems fairly unproblematic. Although some concordats contain protections which may be similar to BITs, 36 it is unlikely that they could be regarded as leges speciales. Another question is whether a non-Roman Catholic church or charity could 37 rely on the most favoured nation clause of a BIT in order to take advantages of protections contained in a concordat. Most favoured nation clauses typically refer to treatment afforded to ‘investors of a third State’.36 Whether the notion of ‘State’ would extend to the Holy See (as opposed to the Vatican) is an open question.

36 See for example Article 3(1) of the Treaty between the Federal Republic of Germany and Bosnia and Herzegovina concerning the Encouragement and Reciprocal Protection of Investments of 18 October 2001.

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Katharina Diel-Gligor and Rudolf Hennecke 1. Introduction and Overview of Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Legal Nature of the Compliance Requirement . . . . . . . . . . . . . . . . . . 3. The Procedural Stage for Assessing the Compliance of an Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Methods and Standards for Determining the Compliance of an Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Conclusion and Outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 9 11 16 17 20 29 31

Literature: Christian Borris and Rudolf Hennecke, ‘Das Kriterium der Einhaltung von Vorschriften nationalen Rechts in ICSID-Schiedsverfahren – Anmerkungen zum Schiedsspruch in der Sache Fraport v. Philippines’ (2008) 2 SchiedsVZ 49–58; Andrea Carlevaris, ‘The Conformity of Investments with the Law of the Host State and the Jurisdiction of International Tribunals’ (2008) 9 JWIT 35–49; Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 151–289; Bryan A. Garner (ed), Black’s Law Dictionary (Thomson West, 2004); Robert Hunter, ‘When is an “Investment” an “Investment”? – Formalities of Approval and Limitations on Their Application’ in Miguel Ángel Fernández-Ballersteros and David Arias (eds), Liber Amicorum Bernardo Cremades (La Ley, 2010) 627–644; Christina Knahr, ‘Investments “in accordance with host state law”’ (2007) 5 TDM 1–28; Ursula Kriebaum, ‘Chapter 5: Investment Arbitration – Illegal Investments’ in Christian Klausegger, Peter Klein, Florian Kremslehner, Alexander Petsche, Nikolaus Pitkowitz, Jenny Power, Irene Welser and Gerold Zeiler (eds), Austrian Arbitration Yearbook on International Arbitration 2010 (C.H. Beck, Stämpfli & Manz, 2010) 307–335; Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration – Substantive Principles (Oxford University Press, 2007); Rahim Moloo and Alex Khachaturian, ‘The Compliance with the Law Requirement in International Investment Law’ (2011) 34 Fordham Int’l L. J. 1473–1501; Monique Sasson, Substantive Law in Investment Treaty Arbitration (Kluwer Law International, 2010); Stephan W. Schill, ‘Illegal Investments in International Arbitration’ (2012) 11 LPICT 281–323.

1. Introduction and Overview of Issues 1

Many modern bilateral investment treaties (BITs) contain provisions pursuant to which foreign investments are required to be made ‘in accordance with the laws and regulations of the host State’ in order to benefit from the protections granted by the BIT. The primary purpose of these so-called ‘compliance clauses’ is to ‘prevent the Bilateral Treaty from protecting investments that should not be protected, particularly because they would be illegal.’1 Compliance clauses thus limit an investment treaty’s protective scope to lawful investments.

1 Salini Costruttori S.P.A. and Italstrade S.P.A. v. Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001, para. 46. See also Inceysa Vallisoletana S.L. v. El Salvador, ICSID Case No. ARB/03/26, Award, 2 August 2006, paras. 245–247: ’[T]he inclusion of the clause “in accordance with the law” in the agreements for reciprocal protection of investments follows international public policies designed to sanction illegal acts and their resulting effects.’

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The systematic context of compliance provisions varies from treaty to treaty. 2 In most cases, compliance clauses can be found in BIT stipulations on the definition of the term ‘investment.’ For instance, the Germany–Philippines BIT, Art. 1 [Definition of Terms], reads as follows: For the purpose of the Agreement, the term ‘investment’ shall mean any kind of asset accepted in accordance with the respective laws and regulations of either Contracting State (…).2

However, they can also be contained in other parts of a BIT, including, for 3 example, in provisions on the admission of investments, or in norms dealing with the host State’s obligations regarding the promotion and protection of investments. The Argentina–Netherlands BIT, Art. 2, e.g., states that: [e]ither Contracting Party shall, within the framework of its laws and regulations, promote economic cooperation through the protection in its territory of investment of investors of the other Contracting Party. Subject to its right to exercise powers conferred by its laws or regulations, each Contracting Party shall admit such investments.3

Not only the context, but also the wording of compliance clauses tends to dif- 4 fer significantly. It is important to carefully determine, on a case-by-case basis, whether any such variations in a specific BIT signify a legal concept diverging from concepts found in other BITs. The reference to the host State’s national legal system in an ‘in accordance 5 with the law’ clause has been held not to extend to regulations providing for exclusive domestic jurisdiction for the settlement of investment disputes. The arbitral tribunal concerned with this issue decidedly refused to interpret compliance clauses as a tool to place national law over treaty law. Otherwise, it would have risked to ‘defeat the object and purpose of the Treaty’4 and the arbitration agreement contained therein, namely the supply of ‘an independent and neutral forum for the resolution of investment disputes in accordance with a substantive applicable law specified in the BIT.’5 Compliance clauses are to be distinguished from approval clauses, which can 6 also be found in investment treaties. Compliance clauses are of a prohibitory character and serve as a ‘threshold filter’6 against investments that violate host State law. In contrast, approval clauses require the host State’s specific acceptance of an investment in order for such investment to be admitted and protected 2 Agreement between the Federal Republic of Germany and the Republic of the Philippines for the Promotion and Reciprocal Protection, 18 April 1997 (entry into force 1 February 2000), BGBl. 1998 II Nr. 27 (24 July 1998). 3 Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Argentine Republic, 20 October 1992 (entry into force 1 October 1994). 4 Aguas del Tunari S.A. v. Bolivia, ICSID Case No. ARB/02/3, Decision on Jurisdiction, 21 October 2005, para. 153. See also Christina Knahr, ‘Investments “in accordance with host state law”’ (2007) 5 TDM 1, 26–27. 5 Aguas del Tunari S.A. v. Bolivia (n. 4) para. 153. 6 Robert Hunter, ‘When is an “Investment” an “Investment”? – Formalities of Approval and Limitations on Their Application’ in Miguel Ángel Fernández-Ballersteros and David Arias (eds), Liber Amicorum Bernardo Cremades (La Ley, 2010) 627, 629.

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under the host State’s BIT. By inserting an approval clause, the host State reserves the right to engage in an active and selective screening process in each individual case, notwithstanding the investment’s passive compliance with the host State’s law.7 7 Not all BITs presently in force contain an express ‘in accordance with the law’ requirement. Nevertheless, numerous arbitral tribunals have voiced the opinion that the lack of an explicit compliance provision does not necessarily mean that even unlawful investments fall under the protective scope of an investment treaty. Rather, these tribunals have held that an investment treaty cannot be interpreted without taking into consideration public national and international law and policies.8 Such arbitral tribunals have thus found that even in the absence of an explicit compliance clause, the compliance of the investment with applicable standards of national and international law is to be taken into account.9 8 Because it has been only about a decade that questions relating to the role and handling of compliance requirements have emerged in treaty arbitrations and scholarly debate, only the central aspects of these provisions have been discussed in some depth so far. One of these aspects is the legal nature of the compliance requirement, which will be discussed below (2.). Another controversial discussion concerns the question whether the legality of an investment should be treated as a jurisdictional prerequisite or as a merits issue (3.). Moreover, the ap-

7 Id., at 629. See also Fraport AG Frankfurt Airport Worldwide v. Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007, para. 385, on the word ‘accepted’ in Art. 1(1) of the BIT: ‘The acquisition of shares by a foreign investor in a domestic corporation is a legal transaction that does not, by its nature, require some action by the government involving acceptance or permission, yet it is quite clear from the BIT and the Protocol that accordance with the host state’s law is nonetheless required.’ 8 See e.g. Plama Consortium Ltd v. Bulgaria, ICSID Case No. ARB/03/24 (ECT), Award, 27 August 2008, paras. 138–140; Phoenix Action Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, paras. 78, 100–102; Gustav F. W. Hamester GmbH & Co KG v. Ghana, ICSID Case No. ARB/07/24, Award, 18 June 2010, paras. 123–124. See also the contract-based case World Duty Free Company Ltd. v. Kenya, ICSID Case No. ARB 00/7, Award, 4 October 2006, paras. 138–141 (on the concept of international public policy, see paras. 138–139: ‘The concept of public policy (“ordre public”) is rooted in most, if not all, legal systems. Violation of the enforcing State’s public policy is grounds for refusing recognition or enforcement of foreign judgments and awards. The principle is enshrined in Article V.2 of the New York Convention of 10 June 1958 and Article 36 of the UNCITRAL Model Law (…). In this respect, a number of legislatures and courts have decided that a narrow concept of public policy should apply to foreign awards. This narrow concept is often referred to as “international public policy” (“ordre public international”). Although this name suggests that it is in some way a supra-national principle, it is in fact no more than domestic public policy applied to foreign awards and its content and application remains subjective to each State. The term “international public policy”, however, is sometimes used with another meaning, signifying an international consensus as to universal standards and accepted norms of conduct that must be applied in all fora. It has been proposed to cover that concept in referring to “transnational public policy” or “truly international public policy”’ (footnotes omitted). 9 Rahim Moloo and Alex Khachaturian, ‘The Compliance with the Law Requirement in International Investment Law’ (2011) 34 Fordham Int’l L. J. 1473, 1484.

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proaches used by arbitral tribunals in determining and assessing violations of compliance requirements will be presented (4.). 2. The Legal Nature of the Compliance Requirement

Many arbitral tribunals have found the compliance of an investment with the 9 law of the host State an issue to be assessed under the relevant BIT.10 In several such cases, respondent host States have contended that compliance clauses in BITs constitute part of the definition of the term ‘investment’ and thus function as a limit to this notion. This line of argument would have resulted in the definition of an ‘investment’ being governed by the host State’s domestic law. Any investment not in compliance with such domestic law would then have fallen outside the scope of the respective BIT. Yet, arbitral tribunals in charge of such cases have rejected this argumenta- 10 tion. Following the example of the Salini tribunal,11 they consistently held that compliance clauses refer to the legality of an investment, and not to its definition.12 While the determination of whether an investor’s transaction is legal or illegal can be made by reference to host State law, the definition of an investment is considered to be rooted in public international law.13 Otherwise, it would be possible for the respondent State to unilaterally narrow the protective scope 10 It has been discussed whether the compliance of an investment with the law of the host State is a prerequisite to be assessed under the ICSID Convention or under specific BITs: some arbitral awards appear to suggest that the compliance of an investment is a question of jurisdiction ratione materiae, i.e. a matter related to the notion of ‘investment’, in the sense of Art. 25 of the ICSID Convention; see e.g. Phoenix v. Czech Republic (n. 8) para. 114; Toto Costruzioni Generali S.p.A. v. Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, 11 September 2009, para. 85; most other arbitral tribunals have considered the ICSID Convention neutral on the issue of compliance with host State law, reasoning that host States are free to make protection under their investment treaties contingent upon the investment’s conformity with host State law; see e.g. Saba Fakes v. Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, paras. 112–114, 121. 11 Salini v. Marocco (n. 1) para. 46. 12 Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, para. 84; Consortium Groupement L.E.S.I.–DIPENTA v. Algeria, ICSID Case No. ARB/ 03/8, Award, 10 January 2005, para. 24(iii); Gas Natural SGD, S.A. v. Argentina, ICSID Case No. ARB/03/10, Decision on Jurisdiction, 14 November 2005, paras. 33–34; Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Pakistan, ICSID Case No. ARB/03/29, Decision on Jurisdiction, 14 November 2005, paras. 109–110; LESI, S.p.A. and Astaldi, S.p.A. v. Algeria, ICSID Case No. ARB/05/3, Decision on Jurisdiction, 12 July 2006, para. 83 (iii); Inceysa v. El Salvador (n. 1) paras. 187–188; Saipem S.p.A. v. Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction, 21 March 2007, paras. 120–124. As the host States, in most of these cases, failed to assert a specific violation of domestic law and merely claimed that the operation at hand was not covered by the domestic notion of investment, their arguments were plainly dismissed; see Andrea Carlevaris, ‘The Conformity of Investments with the Law of the Host State and the Jurisdiction of International Tribunals’ (2008) 9 JWIT 35, 38. 13 Two case law examples for this ‘two headed approach’ via domestic and international law are presented by Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration – Substantive Principles (Oxford University Press, 2007) 182–184; Nagel v. Czech Republic, SCC Case 49/2002, Award, 9 September 2003, paras. 297–302; Generation Ukraine Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003, paras. 8.9–8.12.

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of the investment treaty.14 The arbitral decisions on this question share the common objective of emancipating investment protective instruments and investment-related arbitration from confining restrictions of national legal systems, and to thereby maximise investment protection in general.15 3. The Procedural Stage for Assessing the Compliance of an Investment

Whether the investor’s compliance with the host State’s law is a jurisdictional requirement or an issue of the merits of the dispute has been the subject of diverging views. Some tribunals have considered the investor’s compliance with national law a jurisdictional requirement under the relevant BITs, holding that the compliance clause contained in the respective BIT before them constituted a limit to the host State’s consent to arbitration (i.e. a requirement of jurisdiction ratione voluntatis).16 Other arbitral tribunals have rejected the concept of a host State limiting its consent to arbitration by reference to its domestic law, and have examined the investor’s compliance with the host State’s domestic law as a matter of merits.17 12 This distinction is by no means of a merely academic nature. Where an arbitral tribunal considers the investor’s compliance with domestic law a jurisdictional requirement, its options in deciding the question are narrowed down to a digital decision: the tribunal can either assume jurisdiction, or deny it entirely – in the latter case denying the investor any protection under the BIT in a neutral, international forum.18 13 Addressing the issue of compliance as a merits issue, on the other hand, allows the tribunal to apply a more carefully weighted approach: here, the tribunal’s alternatives are not narrowed down to a digital decision that may result in the complete loss of protection under the BIT. Rather, the tribunal is able to 11

14 Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 151, 198–199. 15 Andrea Carlevaris (n. 12) 35, 38–39. 16 Case law considering compliance with the host State’s national law a jurisdictional requirement: Inceysa v. El Salvador (n. 1) paras. 142–161; Fraport AG Frankfurt Airport Worldwide v. Philippines (n. 7) paras. 300, 306–307, 319, 323, 332, 335, 350, 383, 385, 396–398, 401– 404; Alasdair Ross Anderson and others v. Costa Rica, ICSID Case No. ARB(AF)/07/3, Award, 19 May 2010, para. 59; Saba Fakes v. Turkey (n. 10) paras. 112–114. In the case of Phoenix v. Czech Republic (n. 8) para. 104, the arbitral tribunal stated obiter that in cases of manifest violations of host State law, jurisdiction could be denied on grounds of judicial economy: ‘There is no doubt that the requirement of conformity with the law is important in respect of access to the substantive provisions on the protection of the investor under the BIT. This access can be denied through a decision on the merits. However, if it is manifest that the investment has been performed in violation of the law, it is in line with judicial economy not to assert jurisdiction.’ 17 Case law considering compliance with the host State’s national law an issue to be decided on the merits: Plama v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, paras. 127–131, 228–229; Berschader v. Russia, SCC Case No. 080/2004, Award, 21 April 2006, para. 111; Malicorp Ltd. v. Egypt, ICSID Case No. ARB/08/18, Award, 31 January 2011, para. 117 et seq. 18 Christian Borris and Rudolf Hennecke, ‘Das Kriterium der Einhaltung von Vorschriften nationalen Rechts in ICSID-Schiedsverfahren’ (2008) 2 SchiedsVZ 49, 58.

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differentiate any sanctions in reaction to the circumstances and weight of the investor’s failure to comply with the host State’s law. Arbitral decisions considering the issue of compliance with host State law 14 have been rendered both in cases involving BITs that contained an explicit compliance clause, as well as in cases concerning BITs without such an express stipulation. However, the reasoning that compliance with the host State’s law constitutes a limit to jurisdiction ratione voluntatis is mainly found in cases in which the respective BIT contained an express compliance clause.19 This is hardly surprising, since it is considerably more difficult to justify the assumption of a farreaching limitation of the host State’s consent to arbitration where the relevant BIT is silent on this issue. Accordingly, where the relevant BIT did not contain an express compliance clause, arbitral tribunals have generally tended to treat the question of compliance with the host State’s law as a merits issue.20 Whether a host State indeed intended to reserve consent to arbitration to in- 15 vestments made in compliance with its domestic law by including a compliance clause in the relevant BIT is a question to be addressed on the basis of the circumstances in the case at hand. In addition to the wording and systematic context of the relevant compliance provision in the relevant BIT, this may also involve an examination of the drafting history as evidenced in the travaux préparatoires. 4. Methods and Standards for Determining the Compliance of an Investment

The development of methods and standards to be used in determining the le- 16 gality or illegality of an investment is still ongoing in arbitral case law and scholarly writing. a) Method

Some arbitral tribunals have adopted a renvoi method in examining the 17 (non-)compliance of an investment.21 Pursuant to this approach, provisions in the BIT requiring an investment to be made ‘in accordance with host State law’ are considered to refer back to the host State’s domestic law. Thus, the BIT – as instrument of international law – is (only) the starting point of the tribunals’ ana-

19 See, e.g., Fraport AG Frankfurt Airport Worldwide v. Philippines (n. 7) para 300; Alasdair Ross Anderson and others v. Costa Rica (n. 16) para 59; Saba Fakes v. Turkey (n. 10) paras. 112–114. 20 See, e.g., Plama v. Bulgaria (n. 17) paras. 127–131, 228–229; Malicorp Ltd. v. Egypt (n. 17) para. 117 et seq. 21 See, e.g., Saluka Investments BV (The Netherlands) v. Czech Republic, UNCITRAL, Partial Award, 17 March 2006, paras. 204–217 (wherein the tribunal based its ruling on other arbitral decisions as res judicata under domestic law); Fraport v. Philippines (n. 7) para. 394. Scholarly writings on this topic: Christina Knahr (n. 4) 1, 8–9, 18–21, 28; Andrea Carlevaris (n. 12) 35, 45; Monique Sasson, Substantive Law in Investment Treaty Arbitration (Kluwer Law International, 2010), Chapter 2, The Notion of ‘Investment’, 46–49.

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lysis, whereas the host State’s national law forms the benchmark of the legality analysis. To that effect, the arbitral tribunal in Fraport v. Philippines stated that [t]he BIT is, to be sure, an international instrument, but its Articles 1 and 2 and ad Article 2 of the Protocol effect a renvoi to national law, a mechanism which is hardly unusual in treaties and, indeed, occurs in the Washington Convention. A failure to comply with the national law to which a treaty refers will have an international legal effect.22

Nevertheless and despite this focus on the host State’s domestic law, the arbitral tribunal, as an international forum, is not bound by any prior assessments made by national courts under such relevant national law; rather, it is required to make its own legal determinations.23 Moreover, the arbitral tribunal’s analysis does not stop at the level of domestic law: where the applicable national law infringes, undermines or refers back to public international law and its principles and policies, the latter controls.24 19 Other arbitral tribunals – in particular in the absence of an explicit compliance clause – have equally looked at both national and international law in order to determine the legality of an investment.25 18

b) Standards

So far, arbitral case law has not yet developed a comprehensive catalogue of criteria for determining when a breach of host State law and/or public international law warrants a deprivation of investment protection. Still, a number of aspects have been considered in arbitral awards that can provide guidance in this regard. 21 An objective criterion is the ‘seriousness’ of the legal violation, providing for a differentiation between minor26 and major27 irregularities. This differentiation ensures that the primary goal of international investment agreements, i.e. the 20

22 Fraport v. Philippines (n. 7) para. 394. 23 Andrea Carlevaris (n. 12) 35, 45. 24 Inceysa v. El Salvador (n. 1) paras. 220–229; Fraport v. Philippines (n. 7) para. 346. Cf. also Monique Sasson (n. 21) 49. 25 See, e.g., Plama Consortium Ltd. v. Bulgaria (n. 8) paras. 135–140; World Duty Free Company Ltd. v. Kenya (n. 8) para. 137 et seq., 157; Hamester v. Ghana (n. 8) para. 123. 26 Case law granting investment protection in case of insignificant deviations from host State law: Metalpar S.A. and Buen Aire S.A. v. Argentina, ICSID Case No. ARB/03/5, Decision on Jurisdiction, 27 April 2006, para. 84; Mytilineos Holdings SA v. Serbia & Montenegro, UNCITRAL, Partial Award, Jurisdiction, 8 September 2006, para. 151; Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Award, 26 July 2007, para. 97; Inmaris Perestroika Sailing Maritime Services GmbH and ors v Ukraine, ICSID Case No. ARB/08/8, Decision on Jurisdiction, 8 March 2010, para. 145; Alpha Projektholding GMBH v. Ukraine, Award, ICSID Case No. ARB/07/16, 8 November 2010, para. 297. 27 Case law assuming a fundamental violation of host State law (and thus denying investment protection): Inceysa v. El Salvador (n. 1) para. 202 (fraud); World Duty Free v. Kenya (n. 8) para. 157 (corruption); Fraport v. Philippines (n. 7) para. 398 (circumvention of host State law); Plama Consortium Ltd v. Bulgaria, Award (n. 8) paras. 135–137, 143 (fraudulent misrepresentation). For a detailed analysis of the topic of corruption and compliance clauses, see the contribution of Alexander Lorz and Manuel Busch, ‘In Accordance With the Law – Specifically Corruption’, ch. 6.II.E., 577–590.

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promotion and protection of foreign direct investment (FDI), will not be contravened by the loss of treaty protection for insignificant, often only formal contraventions of national law.28 In line with this primary purpose of investment protection treaties, arbitral tribunals have tended to read compliance clauses in a restrictive manner and as comprising a de minimis rule with respect to minor breaches of bureaucratic formalities.29 Inter alia, it has been suggested to limit the scope of compliance clauses to business activities (or assets operated in that business context) that are per se illegal.30 A criterion of subjective nature is the ‘good faith’ of the investor.31 Even if it 22 is difficult to prove whether the investor was aware of the illegality of the investment or not, insufficient knowledge of domestic law through no fault of his own should not have the disproportionate effect of denying BIT protection.32 For example, the tribunal in Fraport v. Philippines referred to this general principle of law by stating that [w]hen the question is whether the investment is in accordance with the law of the host state, considerable arguments may be made in favour of construing jurisdiction ratione materiae in a more liberal way which is generous to the investor. In some circumstances, the law in question of the host state may not be entirely clear and mistakes may be made in good faith.33

According to the arbitral tribunal, such exception was contingent upon the in- 23 vestor’s non-awareness of the illegality – a presumption that would be rebutted by any efforts to conceal the illegality.34 While scholarly writings suggest the additional requirement of a certain due diligence of the investor,35 the tribunals in Fraport v. Philippines and in Desert Line v. Yemen held that a certain ‘leniency’ should be granted to investors when applying the ‘good faith’ standard.36 28 The evaluation of situations in between those extremes will often be difficult. It has been suggested in scholarly writings to use civil or criminal liability under domestic law as a threshold; see Christina Knahr (n. 4) 1, 24. Case law in support of this standard: LESI S.p.A. and ASTALDI S.p.A. v. Algeria, ICSID Case No. ARB/05/3, Decision on Jurisdiction, 12 July 2006, para. 83(iii); Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No ARB/05/16, Award, 29 July 2008, para. 168; Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, para. 104. 29 Stephan W. Schill, ‘Illegal Investments in International Arbitration’ (2012) 11 LPICT 281, 291–295. 30 Case law representative of this restrictive manner of interpretation: Tokios Tokelės v. Ukraine (n. 12) para. 86. The arbitral tribunal in this case held that ‘obligations with respect to “investment” relate not only to the physical property (…), but also to the business operations associated with that physical property’, see paras. 91–92. 31 Case law applying the subjective standard of investor’s ‘good faith’: Inceysa v. El Salvador (n. 1) paras. 230–239; Fraport v. Philippines (n. 7) paras. 355, 387, 396; Desert Line v. Yemen (n. 28) paras. 116–117; Phoenix v. Czech Republic (n. 8) para. 106 et seq. 32 Ursula Kriebaum, ‘Chapter 5: Investment Arbitration – Illegal Investments’ in Christian Klausegger, Peter Klein et al. (eds), Austrian Arbitration Yearbook (C.H. Beck, Stämpfli & Manz, 2010) 307, 324–325; Rahim Moloo and Alex Khachaturian (n. 9) 1496–1497. 33 Fraport v. Philippines (n. 7) para. 396. 34 Fraport v. Philippines (n. 7) para. 387. 35 Ursula Kriebaum (n. 32) 307, 324. See also Alasdair Ross Anderson and others v. Costa Rica (n. 16) paras. 52, 58. 36 Fraport v. Philippines (n. 7) para. 396; Desert Line v. Yemen (n. 28) para. 117.

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A further corrective standard and general principle of law is the concept of estoppel. This preclusive mechanism is triggered, inter alia, in the case of a ‘knowing endorsement’ by the host State of the illegality: if the host State, in bad faith, has tolerated the unlawful behaviour of the investor, and the investor has subsequently relied on the validity of his investment, the host State is barred from invoking the breach of its national law.37 25 By the same token, a host State is estopped from asserting that breaches of its domestic law lead to an exclusion of the investment from treaty protection if the State itself is responsible for the non-compliance: according to the legal maxim nemo auditur propriam turpitudinem allegans,38 illegal conduct of the host State itself cannot be invoked to the detriment of the private investor. Rather, it is solely breaches of domestic law by the investor that can deprive an investment of the protection accorded by the investment treaty.39 26 The assessment of legality may become more difficult where it is neither the investor’s nor the host State’s, but a third party’s behaviour that leads to a violation of host State law. In the case of Alasdair Ross Anderson and others v. Costa Rica, the arbitral tribunal held that 24

[i]n interpreting the phrases ‘owned or controlled’ and ‘in accordance with the (…) laws (…)’, it should first be emphasized that the BIT states this requirement in objective and categorical terms. Each Claimant must meet this requirement, regardless of his or her knowledge of the law or his or her intention to follow the law.40

27

Based on these considerations, the arbitral tribunal concluded that a theoretically legal foreign investment made in good faith in an illegal business run by a domestic third party would be excluded from treaty protection: prudent investment practice requires that any investor exercise due diligence before committing funds to any particular investment proposal. An important element of such due diligence is for investors to assure themselves that their investments comply with the law. Such due diligence obligation is neither overly onerous nor unreasonable. Based on the evidence presented to the Tribunal, it

37 Case law examining the possibility of an estoppel due to the host State’s ‘knowing endorsement’ of the investment: Southern Pacific Properties (Middle East) Limited v. Egypt, ICSID Case No. ARB/84/3, Award, 20 May 1992, para. 81; Swembalt AB, Sweden v. Latvia, UNCITRAL, Award, 23 October 2000, para. 35; Técnicas Medioambientales Tecmed, S.A. v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 149; Tokios Tokelės v. Ukraine (n. 12) para. 86; International Thunderbird Gaming Corporation v. Mexico, UNCITRAL (NAFTA), Award, 26 January 2006, para. 165; World Duty Free v. Kenya (n. 8) paras. 184–185; Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Decision on Jurisdiction, 6 July 2007, paras. 191–194; Fraport v. Philippines (n. 7) paras. 346–347, 387; Desert Line v. Yemen (n. 28) paras. 117–118, 120. See also Andrea Carlevaris (n. 12) 35, 46; Christina Knahr (n. 4) 1, 27; Ursula Kriebaum (n. 32) 307, 325–329; Monique Sasson (n. 21) 48. 38 ‘No one can be heard whose claim is based on his own disgraceful behavior’, see ‘Legal Maxims’ in Bryan A. Garner (ed), Black’s Law Dictionary (Thomson West, 2004) 1735. 39 Case law examining the possibility of an estoppel due to the host State’s illegal conduct in relation to the investment: Southern Pacific Properties (Middle East) Limited v. Egypt, ICSID Case No. ARB/84/3, Award, 20 May 1992, paras. 82–85; Kardassopoulos v. Georgia (n. 37) paras. 183–184; Inmaris v. Ukraine (n. 26) para. 139; Alpha Projektholding v. Ukraine (n. 26) para. 299. 40 Alasdair Ross Anderson and others v. Costa Rica (n. 16) para. 52.

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II.D. Investment in Accordance with the Law is clear that the Claimants did not exercise the kind of due diligence that reasonable investors would have undertaken to assure themselves that their deposits with the [third party] (…) scheme were in accordance with the laws of [the host State] (…).41

However, where the third party’s contraventions against host State law oc- 28 curred without the investor’s knowledge (and without the investor being negligent in this regard), the investor’s good faith may be considered as a mitigating criterion.42 c) Timing

A further criterion used in assessing the (il)legality of an investment is the 29 timing of the breach of the relevant law by the investor.43 The arbitral tribunals in Fraport v. Philippines and Hamester v. Ghana both held that the compliance requirement only applied to the point of time the respective investment was made: only illegality of an investment ab initio will prevent it from falling under the protective scope of the relevant investment treaty.44 Illegality ab initio is to be differentiated from ex post illegality, i.e. non-con- 30 formity with host State law occurring after the investment has been made. Such subsequent non-conformity may be the result of a change of the host State’s law, or a change of the investor’s conduct.45 Arbitral tribunals confronted with such cases have held that the subsequent violation of domestic law should not limit a tribunal’s jurisdiction or the applicability of substantive standards at the merits stage from the outset; rather, ‘it might be a defense for the host State to claim substantive violations of the BIT.’46 5. Conclusion and Outlook

The prerequisite that an investment be ‘in accordance with the law of the host 31 State’ has been a central issue in numerous recent investment arbitrations. Various legal questions have arisen with regard to this compliance requirement. 41 Ibid., para. 58. 42 See the case law cited in (n. 31). See also Andrea Carlevaris (n. 12) 45–46. 43 In order to determine the beginning of an investment’s existence, arbitral tribunals have looked at the entire operation and not merely at single steps of the transaction. This ‘doctrine of “general unity of an investment operation’ was established by Holiday Inns v. Morocco, ICSID Case No. ARB/72/1, Decision on Jurisdiction, 12 May 1974 (unpublished), referred to in Ursula Kriebaum (n. 32) 331. See also PSEG Global, Inc., The North American Coal Corporation, and Konya Ingin Electrik Üretim ve Ticaret Limited Sirketi v. Turkey, ICSID Case No. ARB/02/5, Decision on Jurisdiction, 4 June 2004, paras. 106–124; Joy Mining Machinery Limited v. Egypt, ICSID Case No. ARB/03/11, Award, 6 August 2004, para. 54; Patrick Mitchell v. Congo, ICSID Case No. ARB/99/7, Decision on Annulment, 1 November 2006, para. 38; Saipem S.p.A. v. Bangladesh, paras. 112–114. All cases are referred to in Kriebaum (n. 32) 332. 44 Fraport v. Philippines (n. 7) para. 345; Hamester v. Ghana (n. 8) para. 127. 45 Ursula Kriebaum (n. 32) 329. 46 Fraport v. Philippines (n. 7) para. 345. See also Phoenix v. Czech Republic (n. 8) paras. 102– 104. See also Ursula Kriebaum (n. 32) 329–330, where the author stresses that even various BITs consider the admission of an investment as the relevant point of time for evaluation of its compliance with host State law.

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These questions relate to the legal nature of the compliance requirement, the appropriate procedural stage to deal with (il)legality issues, as well as the criteria and standards to be applied when determining the (non-)compliance of an investment. All these questions – to a greater or lesser degree – concern the interplay between domestic and international investment law,47 and as such are characteristic of investor-State disputes and their hybrid nature. In light of the complexity and importance of the issues raised, it is desirable that future arbitral jurisprudence will contribute to the further clarification of the legality requirement and its many ramifications.

47 Stephan W. Schill (n. 29) 321.

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E. Investment in Accordance with the Law – Specifically Corruption

Ralph Alexander Lorz and Manuel Busch 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Substantive Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Jurisprudence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Analysis: Two Types of BITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) BITs Expressly Limiting Consent to Arbitration to Lawful Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) BITs not Expressly Limiting Consent to Arbitration to Lawful Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) The Common Problem: Accounting for the Host State’s Wrongdoing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 4 13 14 18 24 29

Literature: Mohamed Abdel Raouf, ‘How Should International Arbitrators Tackle Corruption Issues?’ (2009) 24 ICSID Rev.–FILJ 116–136; Doak Bishop, ‘Toward a More Flexible Approach to the International Legal Consequences of Corruption’ (2010) 25 ICSID Rev.– FILJ 63–66; Bernardo Cremades, ‘Corruption and Investment Arbitration’ in Gerald Aksen, Karl-Heinz Böckstiegel, Michael Mustill, Paolo Michele Patocchi and Anne Marie Whitesell (eds), Global Reflections on International Law, Commerce and Dispute Resolution: Liber Amicorum in honour of Robert Briner (ICC Publishing, 2005) 203–220; Florian Haugeneder, ‘Corruption in Investor-State Arbitration’ (2009) 3 JWIT 323–339; Richard Kreindler, ‘Corruption in International Investment Arbitration: Jurisdiction and the Unclean Hands Doctrine’ in Kaj Hobér, Annette Magnusson and Marie Öhrström (eds), Between East and West: Essays in Honour of Ulf Franke (Juris, 2010) 309–327; Richard Kreindler, ‘Die internationale Investitionsschiedsgerichtsbarkeit und die Korruption’ (2010) SchiedsVZ 2–13; Andreas Kulick and Carsten Wendler, ‘A Corrupt Way to Handle Corruption? Thoughts on the Recent ICSID Case Law on Corruption’ (2010) 37 LIEI 61–85; Richard Kreindler, ‘Legal Consequences of Corruption in International Investment Arbitration: An Old Challenge with New Answers’ in Laurent Lévy and Yves Derains (eds), Liber Amicorum en l'honneur de Serge Lazareff (Pedone, 2011) 383–390; Kevin Lim, ‘Upholding Corrupt Investors’ Claims Against Complicit or Compliant Host States – Where Angels Should Not Fear to Tread’ (2011–2012) YB Int’l Inv. L. & Pol’y 601–679; Andrea Menaker, ‘The Determinative Impact of Fraud and Corruption on Investment Arbitrations’ (2010) 25 ICSID Rev.–FILJ 67–75; Tamar Meshel, ‘The Use and Misuse of the Corruption Defence in International Investment Arbitration’ (2013) 30 J. Int’l Arb. 267–281; R. Zachary Torres-Fowler, ‘Undermining ICSID: How the Global Antibribery Regime Impairs Investor-State Arbitration’ (2012) 52 Va. J. Int’l L. 995–1039; Jason Webb Yackee, ‘Investment Treaties and Investor Corruption: An Emergent Defense for Host States?’ (2012) 52 Va. J. Int’l L. 723–745; Stephan Wilske, ‘Sanctions for Unethical and Illegal Behaviour in International Arbitration: A Double-Edged Sword?’ (2010) 3 Contemp. Asia Arb. J. 211–235.

1. Introduction

Corruption and bribery are a particular subcategory of investor behaviour 1 which is not ‘in accordance with the law’ of the host State. It deserves special attention, since it differs from other violations of host State law in various regards, resulting in different legal implications. The first difference is that, while adherence to most kinds of domestic laws is only a national matter, corruption is universally condemned by the international community, which is reflected in the Ralph Alexander Lorz/Manuel Busch

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national laws of the vast majority of States1 as well as in a number of international legal instruments.2 The prohibition of corruption has therefore been described as part of an ‘ordre public international’3 and as a ‘quintessential rule of transnational public policy’.4 This entails an important legal consequence: Lack of knowledge of national regulations, which is sometimes pleaded by investors – and sometimes accepted by arbitral tribunals – as an excuse for non-compliance with those regulations, cannot credibly be pleaded in case of corrupt behaviour; neither can an investor argue that the breach concerned a mere formality.5 The second difference is that corruption does not only involve misconduct by the foreign investor, but necessarily also implies misconduct on behalf of organs – oftentimes by high-ranking officials – of the host State. It will be necessary to take these particularities into account in assessing what inferences an arbitral tribunal should draw from corrupt practices. 2 The term ‘corruption’ in the context of this chapter will be used in the meaning of bribery of foreign officials, more specifically ‘the promise, offering or giving, to a public official, directly or indirectly, of an undue advantage, for the official himself or herself or another person or entity, in order that the official act or refrain from acting in the exercise of his or her official duties’,6 as this kind of corruption is most likely to play a role in international investment arbitration. 3 This chapter deals with the effects of corruption on international investment arbitration proceedings initiated on the basis of a BIT or a multilateral investment treaty, particularly the effects on the applicability of these treaties ratione materiae. The problems that arise if the arbitration is based on the arbitration 1 See, e.g., an overview of the legislation implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, available at http:// www.oecd.org/daf/anti-bribery/countryreportsontheimplementationoftheoecdanti-briberyconvention.htm. The tribunal in World Duty Free Company Ltd. v. Kenya, ICSID Case No. ARB/ 00/7, Award, 4 October 2006, para. 142, emphasises that ‘bribery or influence peddling, as well as both active and passive corruption, are sanctioned by criminal law in most, if not all, countries’. 2 Such as the Inter-American Convention against Corruption, 29 March 1996 (entry into force 6 March 1997), 35 ILM 724 (1996); Convention on the Fight against Corruption involving Officials of the European Communities or Officials of Member States of the European Union, Council Act 97/C 195/01, 26 May 1997; OECD, Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, 21 November 1997 (entry into force 15 February 1999), DAFFE/IME/BR(97)20; Committee of Ministers of the Council of Europe, Criminal Law Convention on Corruption, 27 January 1999 (entry into force 7 January 2002), CETS No. 173, 38 ILM 505 (1999); UN General Assembly, Convention against Corruption, 31 October 2003 (entry into force 14 December 2005), GA Res. 58/4, UN Doc. A/58/422; African Union Convention on Preventing and Combating Corruption, 11 July 2003 (entry into force 5 August 2006), 43 ILM 5 (2004). 3 World Duty Free Company Ltd. v. Kenya (n. 1) para. 188. 4 Carolyn B. Lamm, Hansel T. Pham and Rahim Moloo, ‘Fraud and Corruption in International Arbitration’ in Miguel Ángel Fernández-Ballesteros and David Arias (eds), Liber Amicorum Bernardo Cremades (La Ley, 2010) 699–731, 711–715 with further references to case law and scholarly opinion. 5 On both issues, see contribution of Katharina Diel-Gligor and Rudolf Hennecke, ‘Investment in Accordance with the Law’, ch. 6.II.D., 566–576. 6 Following Art. 15(a) of the UN Convention against Corruption (n. 2).

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clause of an investor-State contract that was concluded because of corruption are similar, but not identical. In a BIT-based arbitration, the validity of the BIT itself is usually undisputed, but a particular investor who has engaged in corrupt behaviour might not be able to invoke its protection. By contrast, in a case where resort to arbitration takes place on the basis of an investment contract, the validity of the contract itself and of the arbitration clause included therein might be affected.7 2. Substantive Issues a) Jurisprudence

Several investment tribunals have already dealt with allegations of corruption. 4 However, in most of these cases they have not based their decision on the alleged corruption. E.g. in Wena Hotels v. Egypt, the tribunal found the burden of proof for alleged illegitimate payments had not been met.8 Other tribunals did not address the respondent’s allegations of corruption at all.9 The investment which was subject of the Siemens v. Argentina award10 had indeed been obtained through bribery; however, this was not addressed in the award, as the corruption allegations had been raised by Argentina too late to be considered during the proceedings. After the award – which granted Siemens USD 217 million in relief – had been rendered, criminal investigations against Siemens in Germany and the US prompted Siemens to eventually waive its claim.11 In fact, there are no decisions precisely addressing the issue to be discussed 5 here, namely whether an arbitral tribunal has jurisdiction over a BIT claim brought by an investor who has engaged in corrupt behaviour related to his investment. However, inferences can be drawn from cases sharing some of the relevant characteristics. The World Duty Free v. Kenya award12 is the only ICSID award that indeed 6 centres on corruption. The evidentiary problems typically coming up in cases of alleged corruption13 were not an issue here, since the investor himself admitted 7 For an in-depth discussion of corruption in the context of investor-State contracts, cf., e.g., Hilmar Raeschke-Kessler and Dorothee Gottwald, ‘Corruption in Foreign Investment – Contracts and Dispute Settlement between Investors, States, and Agents’ (2008) 9 JWIT 5–33. Abdulhay Sayed, Corruption in International Trade and Commercial Arbitration (Kluwer Law International, 2004) also examines the issue of investor-State contracts. 8 Wena Hotels Ltd. v. Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, para. 132. 9 E.g. SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003; TSA Spectrum de Argentina S.A. v. Argentina, ICSID Case No. ARB/05/5, Award, 19 December 2008. 10 Siemens v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007. 11 For a detailed outline of the development of the case, see Jason Webb Yackee, ‘Investment Treaties and Investor Corruption: An Emergent Defense for Host States?’ (2012) 52 Va. J. Int’l L 723–745, 723–725. 12 World Duty Free Company Ltd. v. Kenya (n. 1). 13 The question of the standard of evidence that must be met to prove allegations of corruption cannot be discussed here in detail; for further information, cf., e.g., Carolyn B. Lamm, Hansel T. Pham and Rahim Moloo (n. 4) 700–706; Constantine Partasides, ‘Proving Corruption in In-

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the corrupt behaviour. The claimant had sought to expand its business of selling duty free articles to Kenya. It had been made clear to him that his project could be realised only if he made a ‘personal donation’ of USD 2 million to Kenya’s then President, Daniel arap Moi. After handing over the money, the project had been approved and the business had been operating for several years. The dispute arose from setbacks which culminated in the expropriation of the claimant’s business. 7 The claim in World Duty Free was not based on a BIT; the consent to arbitrate had been given in the investment contract between Kenya and the investor, and the tribunal had to decide the case under English and Kenyan law. The tribunal affirmed its competence to rule on the claim, arguing that Art. 9 of the contract, which contained the consent to arbitration, had not specifically been procured by the bribe.14 Moreover, the tribunal made clear that it considered the ‘donation’, which the claimant tried to justify as a gift in accordance with the Kenyan local custom of Harambee,15 a bribe.16 It further pointed out that bribery violated international public policy17 and referred to the principle ex turpi causa non oritur actio.18 It conceded the ‘highly disturbing feature’ that the recipient of the bribe had not only been a representative of the respondent, but its most senior officer, that the bribe had been solicited by the latter himself and that no attempts had been made to prosecute him or to recover the bribe,19 but stuck to its application of the ex turpi causa principle and denied the claimant relief. 8 Since the consent to arbitration in this case was based on an investor-State contract, the award cannot be readily employed to determine the effects of corruption on jurisdiction derived from a BIT. Nevertheless, the award plays an important role in the context to be considered here because of its remarks on international public policy, the clear position of the tribunal concerning the character of the payment as a bribe regardless of the local customs and the tribunal’s view on the irrelevance of Kenya’s own part in the corruption due to the claimant’s unclean hands.

14 15 16 17 18 19

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ternational Arbitration: A Balanced Standard for the Real World’ (2010) 25 ICSID Rev.–FILJ 47–62; Florian Haugeneder, ‘Corruption in Investor-State Arbitration’ (2009) 3 JWIT 323, 338–339; Florian Haugeneder and Christoph Liebscher, ‘Corruption and Investment Arbitration: Substantive Standards and Proof’ in Christian Klausegger, Peter Klein et al. (eds), Austrian Arbitration Yearbook 2009 (C.H. Beck, Stämpfli & Manz, 2009) 539, 544–558. Richard Kreindler, ‘Applications for “Revision” in Investment Arbitration: Selected Current Issues’ in Miguel Ángel Fernández-Ballesteros and David Arias (eds), Liber Amicorum Bernardo Cremades (La Ley, 2010) 679, 691–696 deals with the matter in the context of ICSID revision proceedings. Ibid., para. 187. Ibid., para. 133. Ibid., para. 136. Ibid., para. 157. Ibid., paras. 161, 179, 181. Freely translated, this principle tells us that ‘from a dishonorable cause an action does not arise’. Ibid., para. 180.

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Parallels can also be drawn to cases based on BITs which deal with other 9 kinds of deliberate illegal investor behaviour. E.g. in Inceysa v. El Salvador,20 the claimant had won a public procurement contract by massive fraud, misleading the respondent inter alia with regard to its financial situation and its professional experience. The arbitral tribunal interpreted the BIT to extend only to investments made ‘in accordance with the law’.21 It found the claimant had violated the principles of good faith, nemo auditur propriam turpitudinem allegans22 and unlawful enrichment as well as international public policy.23 Consequently, the tribunal denied jurisdiction. In Fraport v. Philippines,24 the investor had tried to circumvent the rules on 10 control of certain enterprises by foreign investors by secretly acquiring a greater amount of a company’s shares than permitted by law through subsidiaries. The relevant BIT defined protected investments as assets ‘accepted in accordance with the respective laws and regulations of either Contracting State’. The tribunal consequently found that it lacked jurisdiction ratione materiae.25 Cases such as these show that illegal investor behaviour can lead to a lack of jurisdiction of the arbitral tribunal, provided the relevant treaty contains pertinent provisions. Unlike the constellation of corruption, however, these cases do not deal with misbehaviour on the part of the host State, as the host State here indeed appears to be only a victim. Finally, parallels can be drawn to commercial arbitration cases involving cor- 11 ruption.26 One of the most prominent cases in this regard is the decision rendered by Judge Lagergren in ICC Case No. 1110, which has also been cited in the World Duty Free award.27 The case concerned an agent’s claim to a commission out of a contract that had involved this agent to use some of the received money for bribing Argentinian officials. Judge Lagergren concluded: Such corruption is an international evil; it is contrary to good morals and to an international public policy common to the community of nations. (...) I am convinced that a case such as this, involving such gross violation of good morals and international public policy, can have no countenance in any court either in the Argentine or in France, or, for that matter, in any other civilised country, nor in any arbitral tribunal. Thus, jurisdiction must be declined in this case. It follows from the foregoing, that in concluding that I have no jurisdiction, guidance has been sought from general principles

20 Inceysa Vallisoletana S.L. v. El Salvador, ICSID Case No. ARB/03/26, Award, 2 August 2006. 21 Ibid., para. 207. 22 To be translated as ‘no one can be heard who invokes his own turpitude/guilt’. 23 Ibid., paras. 239, 244, 257 and 252, respectively. 24 Fraport AG Frankfurt Airport Services Worldwide v. Philippines, ICSID Case No. ARB/ 03/25, Award, 16 August 2007; the award has in the meantime been annulled for different reasons, cf. Fraport AG Frankfurt Airport Services Worldwide v. Philippines, ICSID Case No. ARB/03/25, Decision on Annulment, 23 December 2010. 25 Fraport v. Philippines, Award (n. 24) paras. 401, 404. 26 The most comprehensive analysis of cases in this field is provided by Abdulhay Sayed (n. 7). 27 ICC Case No. 1110, Award, 1963, reprinted in J. Gillis Wetter, ‘Issues of Corruption Before International Arbitral Tribunals: The Authentic Text and True Meaning of Judge Gunnar Lagergren’s 1963 Award in ICC Case No. 1110’ (1994) 10 Arb. Int’l 277–294, cited in World Duty Free v. Kenya (n. 1) para. 148.

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12

Judge Lagergren thus apparently found that he had no jurisdiction over the dispute for international public policy reasons.28 His approach has been rejected, though, by subsequent tribunals and scholars for its inconsistency with the principle of separability.29 Nevertheless, Judge Lagergren’s views on the general principles that he saw as preventing him from exercising jurisdiction over the case are interesting also with regard to BIT-based arbitration; on the other hand, the doctrine of separability is not relevant in this kind of proceedings, as the consent to arbitration is given in the BIT. In addition, many cases arising in commercial arbitration are to be distinguished from cases that might evolve in investment treaty arbitration in another important respect: ICC Case No. 1110, as any other ‘corrupt agent’ case, developed from a dispute over a contract whose very subject matter was the agent’s promise of an illegal service, namely, bribing foreign officials on the principal’s behalf. BIT claims, by contrast, do usually not involve claims for remuneration of per se illegal activities; the typical problem there rather stems from a business which is in principle legal, but has been established through unlawful means.30 b) Analysis: Two Types of BITs

13

Determining the jurisdiction of an investment tribunal in case of corrupt behaviour of the claiming investor demands, first of all, a close look at the wording of the BIT in question. Two categories of BITs must be distinguished in this regard: Some BITs expressly restrict the host State’s consent to arbitration to investments made ‘in accordance with the laws of the host State’. But at the same time, many others remain silent as to this issue. (1) BITs Expressly Limiting Consent to Arbitration to Lawful Investments

14

As the State parties to a BIT are free to limit their consent in whichever way they deem necessary, whenever such an express limitation of consent is explicitly included,31 the case seems clear at first sight: if the investment has been made illegally, the arbitral tribunal will in principle have to deny jurisdiction.32 To be 28 It has been suggested that his decision in fact did not reject the claimant’s request for relief on jurisdictional, but on substantive grounds: cf., e.g., J. Gillis Wetter (n. 27) 281; and Alexis Mourre, ‘Arbitration and Criminal Law: Reflections on the Duties of the Arbitrator’ (2006) 22 Arb. Int’l 95, 98. Critical towards this interpretation, as it is hard to reconcile that with the wording of the award: Gary Born, International Commercial Arbitration (Kluwer Law International, 2009) 804. 29 See Gary Born (n. 28) 804 with further references to arbitral awards and national court decisions. 30 Jason Webb Yackee (n. 11) 729. 31 Cf. contribution of Katharina Diel-Gligor and Rudolf Hennecke (n. 5) ch. 6.II.D.1., 566 regarding the formulations of legality requirements typically found in BITs.

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sure, there is a reasoning often encountered in cases of minor or negligent violations of host State laws, namely, that the limitation to lawful investments does not comprise strict adherence to any kind of regulation down to mere formalities.33 However, it is impossible to employ this reasoning in corruption cases because of the severity of the transgressions involved. Attention should nevertheless be paid to the context of an ‘in accordance with 15 the laws’ clause in the BIT, in particular to whether it actually refers to the scope of consent. For instance, in Inceysa v. El Salvador the tribunal convincingly drew upon the relevant BIT’s travaux préparatoires to explain why the formulation found therein, although it only appeared in treaty provisions which were not dealing with the scope of consent to arbitration, still determined the scope of this consent.34 In Saluka v. Czech Republic, a similarly worded treaty was disputably interpreted in the same way, but without comparable references to historical materials and their interpretation.35 Moreover, one specific constellation might necessitate more of an in-depth 16 analysis by the competent investment tribunal: even if a bribe was paid, the tribunal still has to evaluate whether the investment was indeed not made ‘in accordance with the laws’, for the mere existence of corrupt behaviour anywhere in the process might not suffice. For example, if a bribe was paid to an official who thereupon issued a necessary licence, but the conditions for a lawful licence were fulfilled and the administration was bound to grant the licence anyway,36 a 32 Cf. contribution of Katharina Diel-Gligor and Rudolf Hennecke (n. 5) ch. 6.II.D.3., 566, 570. 33 Cf., e.g., Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, in which the respondent alleged that the investment had not been made ‘in accordance with laws and regulations’ because of certain documents not having been signed or notarised and because the enterprise was registered as a ‘subsidiary private enterprise’, whilst Ukrainian law only recognised the form of ‘subsidiary enterprise’ (para. 83); the tribunal responded that ‘to exclude an investment on the basis of such minor errors would be inconsistent with the object and purpose of the Treaty’ (para. 86). The Fraport v. Philippines tribunal (n. 24) conceded: ‘In some circumstances, the law in question of the host state may not be entirely clear and mistakes may be made in good faith’, and therefore found that ‘considerable arguments may be made in favour of construing jurisdiction ratione materiae in a more liberal way which is generous to the investor’, para. 396; for an overview over the case law, cf. Katharina Diel-Gligor and Rudolf Hennecke (n. 5) ch. 6.II.D., 566–576. 34 While the definition of investment in Art. 1 of the El Salvador–Spain BIT (Agreement for the Reciprocal Promotion and Protection of Investments signed between the Republic of El Salvador and the Kingdom of Spain, 14 February 1995 (entry into force 20 February 1996)) does not include the phrase ‘in accordance with the law’, it is included in Art. 2 and Art. 3, which deal with the promotion and admission and the protection of investments, respectively. The tribunal then drew upon the travaux préparatoires of the BIT and came to the conclusion that the parties had intended the consent to arbitration to cover only investments made in accordance with the law of the respective party, cf. Inceysa v. El Salvador (n. 20) paras. 191–207. 35 Saluka Investments BV (The Netherlands) v. Czech Republic, UNCITRAL, Partial Award, 17 March 2006, para. 204; critical of this interpretation e.g. Kenneth Vandevelde, Bilateral Investment Treaties – History, Policy, and Interpretation (Oxford University Press, 2010) 156. 36 Such a situation is particularly conceivable in highly corrupt environments in which officials refuse or delay fulfilment of their duties as provided by law until they successfully extort a bribe from applicants; it should be noted that in such a case, the denial of the administrative services and attempted extortion of the bribe might constitute a violation of BIT provisions, provided that the investment already falls within the scope of protection of the BIT.

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good argument can be put forward in favour of such an investment still being in accordance with the (substantive) laws of the host State. In such a case of an otherwise lawful investment, even though the payment of the bribe of course remains unlawful, the establishment of the investment itself might not be tainted by it and thus still deserve treaty protection.37 The underlying reason would be that under those circumstances, unlike most other cases, the prohibition of bribery does not simultaneously serve the purpose of protecting the host State against potentially harmful and therefore outlawed economical activities. On the contrary, in such a case the economical activity itself remains perfectly legal. 17 Lastly and of course depending on the precise wording of the relevant BIT, jurisdiction might be affirmed despite corrupt behaviour if this behaviour did not occur when the investment was ‘made’, but at a point in time after the investment’s establishment; the corrupt behaviour will then be taken into account at the merits stage of the proceedings.38 (2) BITs not Expressly Limiting Consent to Arbitration to Lawful Investments

If a BIT does not expressly limit the consent to arbitration to investments made ‘in accordance with the laws’ of the host State, a tribunal will have to determine whether such a limitation is implied. Such implied restrictions might exist with regard to any kind of material violation of host State laws;39 in the light of the basically universal condemnation of corruption, though, the case in favour of a related restriction appears especially strong. The requirement thereby read into the BIT would demand that the investment at issue has at least not been established through corruption in order to qualify for BIT protection. However, the question remains which legal consequences should then exactly be drawn from the unlawful behaviour. 19 It has been suggested to interpret the consent to arbitration given in the BIT by the host State, in accordance with the principle of good faith treaty interpretation stated in Art. 31(1) of the Vienna Convention on the Law of Treaties (VCLT), to be under the implied condition of lawful conduct of the investor;40 if then, due to the investor’s corrupt behaviour, this condition is not met, the arbitral tribunal should consequently deny jurisdiction for lack of consent of the respondent host State. Denial of jurisdiction would also be the consequence of a 18

37 E.g., Tokios Tokelės v. Ukraine (n. 33) para. 86 formulated as the relevant question whether the claimant’s investment and business activity were ‘illegal per se’; however, as stated above, this award only dealt with minor violations of the law. 38 Cf., e.g., Fraport v. Philippines (n. 24) para. 345; Gustav F. W. Hamester GmbH & Co KG v. Ghana, ICSID Case No. ARB/07/24, Award, 18 June 2010, paras. 127–128; Florian Haugeneder (n. 13) 330. 39 Cf. Katharina Diel-Gligor and Rudolf Hennecke (n. 5) ch. 6.II.D.1., 566. 40 Richard Kreindler, ‘Corruption in International Investment Arbitration: Jurisdiction and the Unclean Hands Doctrine’ in Kaj Hobér, Annette Magnusson and Marie Öhrström (eds), Between East and West: Essays in Honour of Ulf Franke (Juris, 2010) 309, 315–316; Richard Kreindler, ‘Die internationale Investitionsschiedsgerichtsbarkeit und die Korruption’ (2010) SchiedsVZ 2, 7.

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definition of investment under Art. 25 of the ICSID Convention as it was first postulated by the Phoenix Action v. Czech Republic tribunal, which stated that assets, among other requirements for an investment according to Art. 25 of the ICSID Convention, have to be invested in accordance with the laws of the host State and bona fide.41 Following this interpretation of Art. 25 of the ICSID Convention, at least an ICSID tribunal would not have jurisdiction over a dispute arising from a corruptly established investment.42 Another reasoning may be employed to reach the same result, i.e. denial of 20 jurisdiction: even if no such unwritten condition is read into the BIT or into Art. 25 of the ICSID Convention, the corrupt investor might still be estopped from accepting the offer to submit a conflict to arbitration because of his ‘unclean hands’.43 The principles of estoppel and of unclean hands, which are designated to prevent a claimant from benefiting from his own inconsistent behaviour and wrongdoing, are just particular forms in which the principle of good faith manifests itself.44 Contrary to these approaches aiming at denial of jurisdiction, a different sug- 21 gestion seeks to deny the admissibility of the investor’s claims.45 The tribunal would then declare itself competent to hear the case, but also determine that the claim cannot possibly be maintained for a reason other than its merits.46 Unlike 41 Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, paras. 101, 106, 114; citing Phoenix Action v. Czech Republic and arguing similarly Hamester v. Ghana (n. 38) para. 123. 42 The definition of investment under ICSID Convention Art. 25 is highly disputed; for an overview, cf. the contribution of Jan Asmus Bischoff and Richard Happ, ‘The Notion of Investment’, ch. 6.II.A., 495–544; and Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention (Cambridge University Press, 2009) Art. 25, paras. 113–210 with further references; for further remarks on the Phoenix Action v. Czech Republic approach, see the contribution of Katharina Diel-Gligor and Rudolf Hennecke (n. 5) ch.6. II.D.2., 566, 569. 43 Bernardo Cremades, ‘Corruption and Investment Arbitration’ in Gerald Aksen, Karl-Heinz Böckstiegel, Michael Mustill, Paolo Michele Patocchi and Anne Marie Whitesell (eds), Global Reflections on International Law, Commerce and Dispute Resolution: Liber Amicorum in honour of Robert Briner (ICC Publishing, 2005) 203, 214–215; Richard Kreindler in Hobér, Magnusson and Öhrström (eds) (n. 40) 322; Richard Kreindler, SchiedsVZ (n. 40) 10. 44 Cf., e.g., Markus Kotzur, ‘Good Faith (Bona fide)’ in Rüdiger Wolfrum (ed), The Max Planck Encyclopedia of Public International Law (Oxford University Press, 2008–2012), available at http://www.mpepil.com, in particular para. 24; for an overview of the use of these principles in international legal practice, see Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals (Cambridge University Press, 1987) 141–158; for an overview of the use of estoppel in the reasoning of investment tribunals, see Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International, 2009) 526–528. 45 Richard Kreindler in Hobér, Magnusson and Öhrström (eds) (n. 40) 323–327; Richard Kreindler, SchiedsVZ (n. 40) 10–12. 46 On the concept of admissibility in international investment arbitration, cf. Jan Paulsson, ‘Jurisdiction and Admissibility’ in Gerald Aksen, Karl-Heinz Böckstiegel, Michael Mustill, Paolo Michele Patocchi and Anne Marie Whitesell (eds), Global Reflections on International Law, Commerce and Dispute Resolution: Liber Amicorum in honour of Robert Briner (ICC Publishing, 2005) 601–617; David Williams, ‘Jurisdiction and Admissibility’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International

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a negative decision on jurisdiction, this would enable the tribunal to render a binding award, thereby effectively destroying the possibility to simply raise the claim in front of another tribunal.47 22 The last option would be to deal with the issue of corruption only at the merits stage of the proceedings. This is in any case the only possible way if the relevant facts do not surface before the proceedings have reached the merits stage;48 however, this approach might also be consciously chosen by the tribunal.49 The decisive difference of this approach is that it is the only one which enables the tribunal to take into account other factors than the corrupt behaviour of the claimant. As Bernardo Cremades so aptly put it: If the legality of the Claimant’s conduct is a jurisdictional issue, and the legality of the Respondent’s conduct a merits issue, then the Respondent Host State is placed in a powerful position. In the Biblical phrase, the Tribunal must first examine the speck in the eye of the investor and defer, and maybe never address, a beam in the eye of the Host State. Such an approach does not respect fundamental principles of procedure.50

23

This difference is so important because the chance to consider the other side of the story as well is of particular relevance in the context of corruption, brought about by the very nature of this offence as a two-sided one. c) The Common Problem: Accounting for the Host State’s Wrongdoing

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The problem to be addressed here is independent of the category to which the relevant BIT belongs: unlike other unlawful behaviour such as fraud or non-adherence to regulations, ‘it always takes two to tango’ with regard to corruption: vis-à-vis the bribing investor, there is always a bribable State official and possibly additional State organs or officials participating in or condoning the acts in question; such behaviour may well be attributable to the host State.51 The consequences of this are heavily disputed. The World Duty Free tribunal, for instance,

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48 49 50

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Investment Law (Oxford University Press, 2008) 868, 919–928 with further references; in the context of investor misconduct, cf. Andrew Newcombe, ‘Investor misconduct: Jurisdiction, admissibility or merits?’ in Chester Brown and Kate Miles (eds), Evolution in Investment Treaty Law and Arbitration (Cambridge University Press, 2011); cf. also Surya Subedi, International Investment Law (Hart Publishing, 2008) 184, who proposes an analogy to Arts. 49 and 50 of the Vienna Convention on the Law of Treaties, which provide for a treaty’s invalidity in case of fraud and corruption: ‘By applying this analogy, it would be logical to deny protection under [BITs] for companies engaged in fraudulent and corrupt practices’. Jason Webb Yackee (n. 11) 742–744 suggests de lege ferenda to include a clause in BITs that would deny jurisdiction over claims deriving from investments made or operated unlawfully and at the same time clarify that a substantially similar claim cannot be raised in front of any other tribunal. Cf. Phoenix Action v. Czech Republic (n. 41) para. 102 in the context of unlawful behaviour in general. Ibid., para. 102 (‘whether the tribunal considered it best to be analyzed at the merits stage’), referring to Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, paras. 126–130. Bernardo Cremades, Dissenting Opinion attached to the Fraport v. Philippines award (n. 24), para. 37; in para. 40, Cremades further argues that as a matter of principle, jurisdiction should be affirmed also in cases involving fraud or corruption, not without pointing out, however: ‘In some cases (...) the principles of good faith and public policy may bar a claim’.

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expressed its discomfort with the fact that the bribe had been solicited by President Moi himself, and that even after his resignation from office Kenya had not taken any legal steps against him.52 However, in response to these considerations it cited Holman v. Johnson: (…) the objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, but accidentally, if I may say so. The principle of public policy is this: ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally at fault, potior est conditio defendentis.53

The tribunal also discusses the possibility of a balancing approach which 25 would take into account the respondent’s misconduct, but rejects the idea for want of a legal basis in the English law governing the dispute.54 It is precisely this foundation in English law, though, which prevents the reasoning in World Duty Free to be simply transferred to BIT-based disputes. Unsurprisingly, legal analyses have come to widely differing conclusions on 26 how this constellation should be resolved according to international law. Their conclusions range from approaches that, just like the World Duty Free tribunal in its application of English law, impose the consequences of corruption unilaterally on the investor,55 over a balancing approach weighing the investor’s miscon51 While the attribution of internationally wrongful acts is governed by the rules laid down in the International Law Commission’s Draft Articles on Responsibility of States for Internationally Wrongful Acts (Yearbook of the International Law Commission, 2001, Vol. II, Part 2), cf. the contributions of Stephan Wittich, ‘State Responsibility’, ch. 2.II., 23–45; and of James Crawford and Simon Olleson, ‘The Application of the Rules on State Responsibility’, ch. 5.III., 411–441; the attribution of acts of participation in or condonation of corruption can more convincingly be based on the doctrines of recognition, acquiescence and estoppel, cf. Kevin Lim, ‘Upholding Corrupt Investors’ Claims Against Complicit or Compliant Host States — Where Angels Should Not Fear to Tread’ (2011–2012) YB Int’l Inv. L. & Pol’y 601, 623 et seq., and Aloysius P. Llamzon, ‘State Responsibility for Corruption: The Attribution Asymmetry in International Investment Arbitration’ (2013) 3 TDM 69–74. 52 World Duty Free v. Kenya (n. 1) para. 180. 53 Holman v. Johnson (1775) 1 Cowp. 341, 343, cited in World Duty Free v. Kenya (n. 1) para. 181. 54 World Duty Free v. Kenya (n. 1), paras. 176–178, citing ‘a growing groundswell (...) of judicial and extra-judicial criticism at this strict English rule’, which however did not yet lead to any changes in the law. Other legal systems are less strict in the application of the principle that the court does not lend its aid to a plaintiff who has acted illegally; e.g. in Germany, where this rule is codified in para. 817(2) of the civil code, courts do not always apply it strictly, but instead take other factors into account; cf., e.g., Martin Schwab, ‘§ 817’ in Franz Jürgen Säcker and Roland Rixecker (eds), Münchener Kommentar zum Bürgerlichen Gesetzbuch (C.H. Beck, 2009), paras. 20–29, with an overview of the case law. 55 E.g. Richard Kreindler in Hobér, Magnusson and Öhrström (eds) (n. 40); Andrea Menaker, ‘The Determinative Impact of Fraud and Corruption on Investment Arbitrations’ (2010) 25

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duct against that of the host State56 to those that, at least under certain circumstances, completely oppose the host State’s entitlement to invoke corruption as a defence.57 Commentators from all camps also cite policy reasons, namely combating corruption on a large scale, in favour of their respective opinions.58 27 There is also some case law to this effect. Various tribunals have held the host State to be estopped from invoking violations of the law by the investor – provided these violations have initially been tolerated by the host State – as an argument for denial of jurisdiction.59 To be sure, the cases in question mostly dealt with lesser violations. However, the argument of inconsistent host State behaviour does not seem completely without merit if applied to corruption. Of course, due to the universal condemnation of corruption, the investor will rarely be able to argue that he believed his actions were legal.60 But he might well argue that he believed with good cause that his corrupt activities would not be held against him by the host State in order to completely deprive him of the promised

56

57

58

59 60

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ICSID–Rev. FILJ 67–75; Jason Webb Yackee (n. 11) 742–745, in particular the proposed lex ferenda. E.g. Doak Bishop, ‘Toward a More Flexible Approach to the International Legal Consequences of Corruption’ (2010) 25 ICSID Rev.–FILJ 63–66; Andreas Kulick and Carsten Wendler, ‘A Corrupt Way to Handle Corruption? Thoughts on the Recent ICSID Case Law on Corruption’ (2010) 37 LIEI 61–85; Stephan Wilske, ‘Sanctions for Unethical and Illegal Behaviour in International Arbitration: A Double-Edged Sword?’ (2010) 3 Contemp. Asia Arb. J. 211, 223–224; R. Zachary Torres-Fowler, ‘Undermining ICSID: How the Global Antibribery Regime Impairs Investor-State Arbitration’ (2012) 52 Va. J. Int’l L. 995–1039, 1030– 1034. E.g. Mohamed Abdel Raouf, ‘How Should International Arbitrators Tackle Corruption Issues?’ (2009) 24 ICSID–Rev. FILJ, 116, 135, who states: ‘If a host State takes no action to investigate or prosecute the corrupt acts of its own officials, it should forfeit its right to rely on corruption as a defense’. Stephan Wilske (n. 56) 224 also supports a complete disregard of anti-corruption laws which are not enforced ‘despite (i) the knowledge of the state about the law being “lettre morte” and (ii) the state’s ability to enforce it and which is (iii) openly contradicted by state-tolerated or even state-encouraged corruption’. Kevin Lim (n. 51) 623 et seq. draws upon the doctrines of recognition, acquiescence and estoppel as well as a ‘flexible clean hands doctrine’ to determine whether a host State is precluded from raising investor corruption as a defence. E.g., Andrea Menaker (n. 55) 75 argues: ‘If investors lose the protection of arbitrating in a neutral forum when they engage in corruption, they may become more hesitant to invest in States where corruption is endemic. The decline in investment may then, perhaps, serve as an added incentive for governments to take a harder line on reining in corruption within their own systems.’ On the other hand, Stephan Wilske (n. 56) 220 argues that, if the World Duty Free approach were followed, ‘a cynical advisor of a host state would recommend to make sure that any investor has to make some bribes’, so the host State would evade liability under the BIT; similar Ibironke Odumosu, ‘International Investment Arbitration and Corruption Claims: An Analysis of World Duty Free v. Kenya’ (2011) 4 LDR 87, 122. Daniel Litwin, ‘On the Divide Between Investor-State Arbitration and the Global Fight Against Corruption’ (2013) 3 TDM 1, points out that a one-sided approach neglects the demand-side of corruption, thus failing to take into account international anti-corruption instruments and hampering the fight against corruption. For an overview of the discussion, cf. Tamar Meshel, ‘The Use and Misuse of the Corruption Defence in International Investment Arbitration’ (2013) 30 J. Int’l Arb. 267–281 with further references. Cf. Katharina Diel-Gligor and Rudolf Hennecke (n. 5) ch. 6.II.D.4.b), 566, 572. It should be mentioned, though, that even here borderline cases exist, for instance when dealing with gifts of low value and in accordance with local customs.

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recourse to an international tribunal, considering that the host State generally condones corruption. Indicators for inconsistent host State behaviour of this kind can be the means 28 and efforts of the host State’s fight against corruption in general and the actions taken with regard to the corrupt official in particular.61 The existence of a ‘hostage situation’, which becomes especially relevant if a bribe is requested after the establishment of the investment, might also be a relevant factor.62 Finally, if the host State is a country in which it is practically impossible to do business without engaging in corruption, a complete denial of treaty protection to corrupt investors might actually be against the original purpose of the BIT, namely, to attract foreign investment by granting it a certain measure of protection precisely in the face of a potentially hostile political environment.63 3. Outlook

It is astonishing to note the amount of attention that the effects of corrupt in- 29 vestor behaviour on jurisdiction have already received in legal writing – being aware of the fact that so far no cases have been actually decided on this issue. However, this stocktaking must not produce the light-hearted conclusion that it represents a mainly academic question. It is not only that corruption remains rampant all over the world;64 what may serve as an indicator that this time legal writing is just anticipating an upcoming essential problem is the observation that States more and more frequently raise issues of legality, as recent arbitral proceedings show.65 Therefore, it seems a safe bet to assume that it will only be a matter of time until a tribunal has to directly confront the questions debated here.

61 Cf., e.g., Wena Hotels Ltd. v. Egypt (n. 8) para. 116; by contrast, in World Duty Free Company Ltd. v. Kenya (n. 1) para. 180, the failure to prosecute President Moi was not seen as a hindrance to the corruption defence raised by Kenya. While a duty under international law to prosecute corruption may arise from sources such as the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions or the UN Convention against Corruption (n. 2), such a duty is not required in order for a tribunal to be able to take into account the respective host State behaviour in deciding whether the host State can rely on corruption as a defence, cf., Aloysius P. Llamzon (n. 51) 73–74. 62 Florian Haugeneder (n. 13) 331–332. 63 Mohamed Abdel Raouf (n. 57) 135. 64 Cf. the Corruption Perception Index published annually by Transparency International, available at http://www.transparency.org/policy_research/surveys_indices/cpi. 65 Christina Knahr, ‘Investments “in the territory” of the Host State’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century (Oxford University Press, 2009) 53 observes that host States have become ‘more “creative” in their objections to jurisdiction’, citing the Inceysa v. El Salvador (n. 20) and Fraport v. Philippines (n. 24) awards.

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F. The Territorial Nexus between an Investment and the Host State

Christina Knahr 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Territoriality Requirement in Investment Protection Treaties . . . . . . . 3. Arbitral Practice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Financial Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Activities of the Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 6 7 17 23

Literature: Peter Griffin and Ania Farren, ‘How ICSID can protect sovereign bondholders’ (2005) 24 Int’l Fin. L. Rev. 21–24; Christina Knahr, ‘Investments in the territory of the host state’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law in the 21st Century (Oxford University Press, 2009) 42–53; Michael Waibel, ‘Opening Pandora’s Box: Sovereign Bonds in International Arbitration’ (2007) 101 AJIL 711–759.

1. Introduction

Among the numerous contentions arbitral tribunals can be faced with when having to determine their jurisdiction to hear a claim is also the issue of whether an investment had been made ‘in the territory’ of the host State. Indeed, many bilateral as well as multilateral investment treaties contain in their provisions on the definition of investment a requirement that the investment has to be made ‘in the territory’ of the host State. In principle, investments can occur in various different forms. While in some instances it will be easy to determine whether an investment has been made in the territory of the host State, it will be much more difficult in others. In cases of immovable property it will be hardly controversial to determine where the investment has been made. Much more difficult, however, are investments involving monetary obligations, financial transactions or shareholdings. 2 Although the problem of a territorial nexus between the investment and the host country is certainly not among the most frequently raised in investment arbitration, it has been controversial in a couple of cases brought before tribunals on the basis of BITs or also NAFTA Chapter 11. In Bayview v. Mexico1 in 2007 and Canadian Cattlemen for Fair Trade v. United States2 in 2008 the tribunals for the first time even rejected jurisdiction because they reached the conclusion that claimants had not made an investment in the territory of the respondent State.3 Therefore, this issue seems worth looking at in connection with the jurisdiction of investment tribunals. This contribution will provide an overview of 1

1 Bayview Irrigation District et al. v. Mexico, ICSID Case No. ARB(AF)/05/1, Award, 19 June 2007, available at http://ita.law.uvic.ca/documents/bayview.pdf. 2 Canadian Cattlemen for Fair Trade v. United States, (NAFTA/UNCITRAL), Award on Jurisdiction, 28 January 2008, available at http://ita.law.uvic.ca/documents/CCFT-USAAward.pdf. 3 For more on these cases see e.g. Christina Knahr, ‘Investments in the territory of the host state’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law in the 21st Century (Oxford University Press, 2009) 42–53.

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the arbitral practice thus far and will try to determine what kind/level of linkage between an investment and a host State has to be met in order for the investment to qualify as being made ‘in the territory’ of that State. 2. Territoriality Requirement in Investment Protection Treaties

Many bilateral investment treaties (BITs) and also multilateral treaties like the 3 NAFTA and the Energy Charter Treaty (ECT) refer to the territory of the host State in their provisions on the definition of investments. For example Art. I(1) (a) of the Argentina–US BIT provides that ‘investment’ means every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party (…).4

Similarly, Art. 1101(1)(b) of the NAFTA states that

4

This Chapter applies to measures adopted or maintained by a Party relating to: (…) (b) investments of investors of another Party in the territory of the Party existing at the date of entry into force of this Agreement as well as to investments made or acquired thereafter by such investors (…).5

Relying on such treaty provisions, in some cases respondent States have ob- 5 jected to the tribunals’ jurisdiction arguing that due to a lack of a territorial nexus there had been no investment according to the definitions contained in the applicable BIT, and thus the tribunals were not competent to decide the dispute. The following chapter will look at arguments like these and highlight how tribunals have addressed this issue when it was raised in disputes before them. 3. Arbitral Practice

As indicated above, what is particularly problematic in the context of estab- 6 lishing a link between an investment and a host country are financial transactions. In a number of cases, which will be outlined in the following, as well as in scholarly writing,6 it has been controversially discussed whether sovereign bonds, loans, etc. could be qualified as investments made ‘in the territory’ of the host State. a) Financial Transactions

The issue of a territorial nexus between the investment and the host State has 7 come up already in one of the very early ICSID cases, Fedax v. Venezuela,7 where the respondent made the argument that the claimant had not made an investment within its territory and therefore did not qualify as an investor. The tri4 Emphasis added. 5 Emphasis added. 6 See e.g. Michael Waibel, ‘Opening Pandora’s Box: Sovereign Bonds in International Arbitration’ (2007) 101 AJIL 711–759. 7 Fedax N.V. v. Venezuela, ICSID Case No. ARB/96/3, Decision on Jurisdiction, 11 July 1997, 37 ILM 1378 (1998).

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bunal thus examined the kinds of investments listed in the definition of the applicable BIT and concluded that not all types of investments necessarily will be made within the territory of host States. In particular financial transactions, loans or credits, can qualify as investments without ever being physically transferred into the host country. It stated that [w]hile it is true that in some kinds of investments listed under Article 1(a) of the Agreement, such as the acquisition of interests in immovable property, companies and the like, a transfer of funds or value will be made into the territory of the host country, this does not necessarily happen in a number of other types of investments, particularly those of a financial nature. It is a standard feature of many international financial transactions that the funds involved are not physically transferred to the territory of the beneficiary, but put at its disposal elsewhere. In fact, many loans and credits do not leave the country of origin at all, but are made available to suppliers or other entities. The same is true of many important offshore financial operations relating to exports and other kinds of businesses. And of course, promissory notes are frequently employed in such arrangements. The important question is whether the funds made available are utilized by the beneficiary of the credit, as in the case of the Republic of Venezuela, so as to finance its various governmental needs.8

The tribunal therefore decided that the investment at issue did fulfil the territoriality requirement and it thus refused to decline jurisdiction on this ground. 9 Two years later in CSOB v. Slovakia the respondent contended that CSOB had not made an investment within the territory of the Slovak Republic. Referring to the decision in Fedax v. Venezuela, the tribunal stated that 8

(…) while it is undisputed that CSOB’s loan did not cause any funds to be moved or transferred from CSOB to the Slovak Collection Company in the territory of the Slovak Republic, a transaction can qualify as an investment even in the absence of a physical transfer of funds.9

10

The tribunal examined the loan and found that although it did not involve any spending in the territory of the Slovak Republic, it was closely related to all other transactions and could not be disassociated from them.10 It concluded that CSOB’s activity in the Slovak Republic and its undertaking to ensure a sound banking infrastructure in that country compel the conclusion that CSOB qualifies as the holder of an ‘asset invested or obtained’ in the territory of the Slovak Republic within the meaning of Article 1(1) of the BIT (…).11

Thus, according to the tribunal it was irrelevant whether particular aspects of an investment were not performed within the territory of the host State. Rather it was decisive whether the activities as a whole qualified as an investment within the meaning of the BIT. It reached the conclusion that CSOB’s activities did in fact qualify as an investment and thus did not decline jurisdiction on this ground. 12 Recently, the tribunal’s decision in Abaclat v. Argentina12 received considerable attention in the investment arbitration community.13 Even the tribunal itself 11

8 Fedax v. Venezuela (n. 7) para. 41. 9 Ceskoslovenska Obchodni Banka v. Slovakia, ICSID Case No. ARB/97/4, Decision on Jurisdiction, 24 May 1999, 5 ICSID Rep. 335, para. 78. 10 CSOB v. Slovakia (n. 9) paras. 79, 80. 11 CSOB v. Slovakia (n. 9) para. 89. 12 Abaclat and Others (Case formerly known as Giovanna a Beccara and Others) v. Argentina, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011. 13 See e.g. Karen Halverson Cross, Investment Arbitration Panel upholds jurisdiction to hear mass bondholder claims against Argentina, ASIL Insights Vol. 15 No. 30 (21 November

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II.F. The Territorial Nexus between an Investment and the Host State

could not agree on whether security entitlements held by claimants that were issued by Argentina would qualify as an investment made in Argentina, as the majority concluded, or whether they did not fulfil this requirement, as the dissenting arbitrator found.14 The majority argued that (…) [w]ith regard to investments of a purely financial nature, the relevant criteria should be where and/or for the benefit of whom the funds are ultimately used, and not the place where the funds were paid out or transferred. Thus, the relevant question is where[sic] the invested funds ultimately made available to the Host State and did they support the latter’s economic development? (…)15

The tribunal established that there was no need that an investment of a purely 13 financial nature be linked to a specific economic enterprise or operation taking place in the territory of the host State.16 The decisive criterion in determining whether a financial transaction could be qualified as being made in the territory of the host State was whether it contributed to the State’s economic development. The majority of the tribunal concluded that [t]here is no doubt that the funds generated through the bonds issuance process were ultimately made available to Argentina, and served to finance Argentina’s economic development. Whether the funds were actually used to repay pre-existing debts of Argentina or whether they were used in government spending is irrelevant. In both cases, it was used by Argentina to manage its finances, and as such must be considered to have contributed to Argentina’s economic development and thus to have been made in Argentina.17

Sharply disagreeing with the view of the majority, the dissenting arbitrator, 14 however, held that (…) the financial securities instruments that constitute the alleged investment, i.e. the security entitlements in Argentinean bonds, have been sold in international financial markets, outside Argentina, with choice of law and forum selection clauses subjecting them to laws and fora foreign to Argentina. In fact, they were intentionally situated outside Argentina and out of reach of its laws and tribunals. There is no way then to say (and no legal basis for saying) that they are legally located in Argentina.18

In his view, the dispute in Abaclat was to be distinguished from earlier cases 15 like Fedax, since the situation in the present case was very different. He argued that (…) [t]he security entitlements in question are free-standing, and totally unhinged. They do not form part of an economic project, operation or activity in Argentina. Nor are they issued in support of a public project or a commercial undertaking there. In other words, they have no specific economic anchorage in Argentina, allowing them to be seen and considered as an investment ‘in the territory of Argentina’.19

14 15 16 17 18 19

2011); Luke Peterson, Dissenting Arbitrator argues that Argentine bonds bought on secondary market are not ‘investments’ made in Argentina, IAR Vol. 4 No 16 (3 November 2011). Abaclat v. Argentina (n. 12), Dissenting Opinion of Professor Georges Abi-Saab, 28 October 2011. Abaclat v. Argentina (n. 12) para. 374. Abaclat v. Argentina (n. 12) para. 375. Abaclat v. Argentina (n. 12) para. 378. Abaclat v. Argentina (n. 12) Dissenting Opinion para. 78. Abaclat v. Argentina (n. 12) Dissenting Opinion, para. 108.

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Thus, he concluded that in the dispute before them a territorial link between the investment and the host State was lacking, therefore there was no protected investment and the case had to be dismissed since it fell outside the jurisdiction of the tribunal.20 b) Activities of the Investor

A central question that arises in the context of a territoriality requirement is to what extent activities of an investor in connection with his investment have to be performed within the territory of the host State in order to qualify as a whole as having a sufficient territorial nexus to the host State. In SGS v. Philippines21 and in SGS v. Pakistan22 the investments at issue were pre-shipment inspections which, however, were primarily carried out outside the territory of the Philippines and Pakistan. 18 In SGS v. Pakistan the tribunal only briefly addressed this issue. According to a contractual agreement (the PSI Agreement) between SGS and Pakistan the investor had to make certain expenditures within the territory of the respondent.23 The tribunal examined the claimant’s investment and reached the conclusion that the PSI Agreement fell within the definition of investment contained in the applicable BIT and that the transfer of funds by the investor into the territory of Pakistan was sufficient to meet the territorial requirement. The tribunal found that 17

[t]his non-exhaustive definition [of investment] is, in our view, sufficiently broad to encompass the PSI Agreement because: firstly, the Agreement’s performance, by granting SGS the right to carry out pre-shipment inspection services, gave rise to ‘claims to money;’ secondly, Pakistan effectively granted SGS a public law concession (‘a concession under public law’), since SGS was conferred certain powers that ordinarily would have been exercised by the Pakistani Customs service (the identification and valuation of goods for duty purposes); and thirdly, such rights as SGS exercised pursuant to the PSI Agreement were ‘rights given by law’ and ‘by contract.’ The PSI Agreement defined the commitments of SGS in such a way as to ensure that SGS, if it was to comply with them, had to make certain expenditures in the territory of Pakistan. While the expenditures may be relatively small (Pakistan’s Reply estimates them as amounting to approximately U.S. $ 800,000, while SGS presents the estimate of U.S. $ 1.5 million), they involved the injection of funds into the territory of Pakistan for the carrying out of SGS’s engagements under the PSI Agreement.24

19

In SGS v. Philippines the tribunal addressed the issue more substantially. It emphasised the importance of the territoriality requirement which was contained in the preamble as well as in a number of other provisions of the BIT.25 It established that 20 Abaclat v. Argentina (n. 12) Dissenting Opinion, para. 119. 21 SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision on Jurisdiction, 29 January 2004; 8 ICSID Rep. 518 (2005). 22 SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003, (2003) 42 ILM 1290; (2005) 8 ICSID Rep. 406. 23 SGS v. Pakistan (n. 22) para. 136. 24 SGS v. Pakistan (n. 22) paras. 135, 136 (footnotes omitted). 25 SGS v. Philippines (n. 21) para. 99.

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II.F. The Territorial Nexus between an Investment and the Host State [i]n accordance with normal principles of treaty interpretation, investments made outside the territory of the Respondent State, however beneficial to it, would not be covered by the BIT.26

It then examined whether SGS’s services under the contract were provided 20 within or outside of the Philippines. It rejected, however, to subdivide the activities of the investor and to determine whether each of them individually was carried out inside or outside of the territory of the Philippines. Rather it found that ‘a substantial and non-severable aspect of the overall service was provided in the Philippines.’27 In particular it emphasised that the operations were organised through a Liaison Office in Manila, that this office performed substantial coordination efforts and that it had a considerable number of employees.28 Further it considered the fact that the majority of the costs for providing the service was incurred outside of the Philippines as well as the fact that for tax purposes the services provided by the investor were treated as being performed abroad as not decisive.29 It did find support for its reasoning in the decision rendered in SGS v. Pakistan one year earlier, in which, as indicated above, the tribunal considered it sufficient for the purposes of deciding whether the investment had been made within the territory of the host State that funds were injected into the territory of Pakistan.30 In the end the tribunal reached the conclusion that [t]here was no distinct or separate investment made elsewhere than in the territory of the Philippines but a single integrated process of inspection arranged through the Manila Liaison Office, itself unquestionably an investment ‘in the territory’ of the Philippines.31

In LESI Dipenta v. Algeria32 the tribunal also addressed the question what 21 kinds of activities of an investor had to be performed within the territory of the host State in order to fulfil the territoriality requirement. It stated that [w]ith respect to contributions: there can be no investment unless a portion of the contribution is made in the country concerned and brings with it economic value. This would presumably involve financial commitments, in the first place, but it would be too restrictive an interpretation not to admit other sacrifices. These contributions could, then, consist of loans, materials, works, or services, provided they have an economic value. In other words, the Contractor must have committed outlays, in some way, in order to pursue an economic objective. It is often the case that these investments are made in the country concerned, but that again is not an absolute condition. Nothing prevents investments from being committed, in part at least, from the contractor’s home country, as long as they are allocated to the project to be carried out abroad. (…) Indeed, experience shows that in contracts of this kind the initial expenditures required to prepare the project and the worksite consist of material and intangible contributions that can and must often be made in the home country, but that are nevertheless destined for the country concerned.33

26 SGS v. Philippines (n. 21) para. 99 (footnote omitted). See also SGS v. Paraguay, Decision on Jurisdiction, 12 February 2010, para. 111 et seq. 27 SGS v. Philippines (n. 21) para. 102. 28 SGS v. Philippines (n. 21) para. 101. 29 SGS v. Philippines (n. 21) paras. 106, 107. 30 SGS v. Philippines (n. 21) para. 111. 31 SGS v. Philippines (n. 21) para. 112. 32 L.E.S.I. S.p.A. et ASTALDI S.p.A. v. Algeria, ICSID Case No. ARB/05/3, Award, 10 January 2005. 33 L.E.S.I. v. Algeria (n. 32) para. 14.

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Thus, according to the tribunal it was unproblematic and not uncommon that at least certain parts of an investment were carried out outside of the territory of the host State. As long as the activities at issue could be allocated to the investment and were destined for the host country this would suffice in order to fulfil the territoriality requirement. 4. Conclusion

The cases examined above where the issue of a missing territorial link between the investment and the host State has been brought up do not yield a clear picture as to what kind/level of territorial nexus exactly has to be present in order for the investment to be qualified as being made ‘in the territory’ of the host State. Generally, there does not seem to be a ‘one fits all’ answer to this problem. Rather, tribunals will have to take into consideration the particular form of the investment and the circumstances under which it has been made and establish on a case by case basis if there is a sufficient territorial nexus. What criteria tribunals should apply in making such a determination seems not yet to have been answered conclusively, but is certainly one of the most relevant questions in this regard. 24 Frequently it is not one single act but a number of activities that collectively constitute the investment. Thus it needs to be determined at what point sufficient activity has taken place in the host country in order to be qualified as being made ‘in the territory’ of that State. According to the tribunal in SGS v. Philippines, referring to the CSOB tribunal, the investment in its entirety should be decisive in this regard rather than whether particular aspects of it were performed inside or outside of the territory of the host State. While this seems to be a reasonable solution, in cases where an investment consists of activities partly performed within and outside of the host State it will nonetheless not always be easy to determine when the threshold for sufficient activity in the host State was passed and the investment as a whole can in fact be considered as having a territorial nexus with the host State as required in a BIT. 25 Even more problematic than investments consisting of multiple activities both inside and outside of the host country are undoubtedly financial transactions, sovereign bonds, etc., which by their very nature do not have an easily to establish territorial link to the host country. The diverging opinions and the split decision of the arbitrators in the Abaclat v. Argentina case attest to this difficulty. As earlier decisions in Fedax and in CSOB demonstrate, in principle financial transactions can be considered as investments meeting the territoriality requirement without being physically located in the territory of the host State. Indeed, requiring actual physical presence in the host country does not seem to be necessary for an investment to qualify as being made ‘in the territory’ of the host State.34 23

34 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 67.

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This alone, however, does not completely solve the problem. Could it really be justified to qualify government bonds issued and traded on secondary markets somewhere outside of the host State as investments ‘in the territory’ of that State? Having at least some doubts in this regard seems probably appropriate. Close ties to the territory of the host State certainly look different. It seems to require an extensive interpretation of what constitutes a territorial nexus between an investment and a host State to argue that such forms of investments still qualify as being made ‘in the territory’ of the host State. On the other hand, however, one could argue that this is not the relevant criterion to make such a determination in the first place. Rather, it would be more appropriate to take into consideration whether the money would ultimately be used for the benefit of the host State e.g. to finance various governmental tasks and to financially support the State’s economic development. Looking at the problem from that angle, one might reach the conclusion – as did the majority of the tribunal in the Abaclat case – that such kinds of investments could indeed be qualified as investments ‘in the territory’ of the host State despite their loose territorial nexus to the country. In light of these very different starting points one can assume that having a consistent arbitral practice in this context could be difficult. While investors will favour a more expansive interpretation of the territoriality requirement in order to increase their possibilities to receive protection under the BIT, respondent States aiming at avoiding responsibility under the BIT will argue for requiring stricter and more concrete ties with the host State. Correspondingly, as the decision in Abaclat shows, the perspective arbitrators might take on the issue can diverge considerably. Therefore, one can assume that Abaclat will not be the last case where the issue of a territorial nexus between an investment and a host State will be raised – and probably also not the last one where reaching an agreeable conclusion will be difficult.

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G. Denial of Benefits

Anne K. Hoffmann 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Origins and Purpose of Denial of Benefits Clauses . . . . . . . . . . . . . 3. Denial of Benefits Clauses in Investment Arbitration Case Law . . . a) Case Law Based on BITs and NAFTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Case Law Based on the ECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Issues Arising from the Interpretation of Denial of Benefits Clauses in the Current Case Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exercising the Right to Deny Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Burden of Proof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Invoking the Denial of Benefits Clause as an Issue of Admissibility or Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) The Meaning of ‘Third State’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Substantial Business Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 11 11 17 27 28 32 40 48 51 56

Literature: Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008); Stephen Jagusch and Anthony Sinclair, ‘Denial of advantages under Article 17(1)’ in Graham Coop and Clarisse Ribeiro (eds), Investment Protection and the Energy Charter Treaty (Juris, 2008); Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2007); Loukas A. Mistelis and Crina Mihaela Baltag, ‘Denial of Benefits and Article 17 of the Energy Charter Treaty’ (2009) Penn St. L. Rev. 1301–1321; Jan Paulsson, ‘Jurisdiction and Admissibility’ in Gerald Aksen, Karl-Heinz Böckstiegel, Michael Mustill, Paolo Michele Patocchi and Anne-Marie Whitesell (eds), Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in Honour of Robert Briner (ICC, 2005); Jeswald W. Salacuse, ‘BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign Investment in Developing Countries’ (1990) 24 Int’l Law. 655–676; Herman Walker Jr., ‘Provisions on Companies in United States Commercial Treaties’ (1956) 50 AJIL 373–393.

1. Introduction 1

In addition to the substantive standards of protection and the dispute resolution clause of investment agreements which regularly are of interest to investors and host States, many of those agreements also contain so-called denial of benefits clauses. In summary, these clauses seek to ensure the reciprocity of the concerned treaty by excluding those companies from the scope of protection which are owned or controlled by nationals of a third country and/or which do not undertake substantial business activity in the host State. This chapter looks at the origins and the purpose of such denial of benefits clauses and then considers the arbitration case law in which these clauses are featured. Finally, the author will address some of the issues which arise from the interpretation of denial of benefits clauses in the current case law.

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2. The Origins and Purpose of Denial of Benefits Clauses

Although clauses of similar character can be found already prior to 1945,1 the 2 denial of benefits clause at the heart of this contribution appears to have its origins in the treaties concluded by the United States of America after the Second World War. Thus, for example, the Treaty of Friendship, Commerce and Navigation (hereinafter FCN) between the US and China in 1946 states that: each High Contracting Party reserves the right to deny any of the rights and privileges accorded by this Treaty to any corporation or association created or organized under the laws and regulations of the other High Contracting Party which is directly or indirectly owned or controlled, through majority stock ownership or otherwise, by nationals, corporations or associations of any third country or countries.2

Similarly, the Treaty of Amity and Economic Relations between the United 3 States and Thailand of 1966 stipulates that the advantages of the Treaty can be denied to ‘any company in the ownership or direction of which nationals of any third country or countries have directly or indirectly the controlling interest’,3 however, this denial of benefits clause does not apply to the ‘recognition of juridical status and with respect to access to courts of justice and to administrative tribunals and agencies’.4 Denial of benefits clauses also found their way into nearly all bilateral invest- 4 ment treaties as well as many Free Trade Agreements concluded by the United States. The 1994 US Model BIT contains in Art. XII a denial of benefits clause which reads: [e]ach Party reserves the right to deny to a company of the other Party the benefits of this Treaty if nationals of a third country own or control the company and a) the denying Party does not maintain normal economic relations with the third country; or b) the company has no substantial business activities in the territory of the Party under whose laws it is constituted or organized.5

The 2004 US Model BIT, in Art. 17, contains a more extensive clause which 5 states that 1.

A Party may deny the benefits of this Treaty 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:

1 For example, the Treaty of Friendship, Commerce and Navigation, with Final Protocol between the United States of America and Siam, signed on 13 November 1937, provides in Article 1(8) that ‘neither High Contracting Party shall be required by anything in this paragraph to grant any application for any such right or privilege [exploration and exploitation of mineral resources] if at any time such application is presented the granting of all similar applications shall have been suspended or discontinued.’ 2 Treaty of Friendship, Commerce and Navigation between the United States of America and the Republic of China, signed on 4 November 1946 and entered into force on 30 November 1948, (1949) 43 Am. Int’l L. Supp. 27, 48, Art. XXVI(5). 3 Thailand–US Treaty of Amity and Economic Relations of 29 May 1966, (1966) ILM 876, 884, Art. XII(1)(f). 4 Ibid. 5 See Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2007) App. 5, 386–392.

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2.

does not maintain diplomatic relations with the non-Party; or adopts or maintains measures with respect to the non-Party or a person of the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Treaty were accorded to the enterprise or to its investments. A Party may deny the benefits of this Treaty 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 substantial business activities in the territory of the other Party and persons of a non-Party, or if the denying Party, own or control the enterprise.6

Hence, both US Model BITs deny the benefits of these treaties under certain conditions. 6 Today, denial of benefits clauses are no longer limited to treaties concluded by the US. Other countries have adopted this approach. Thus, the 2004 Canadian Model BIT incorporates in Art. 18a denial of benefits clause similar to the one found in the 2004 US Model BIT.7 This clause permits the contracting parties to deny benefits to companies which have no substantial business activity subject to prior notification and consultation.8 7 Other BITs contain similar provisions. The Jordan–Austria BIT provides, for example, in Art. 10 that a party may deny the benefits of the agreement to investors and investments of the other contracting party if the investor is owned or controlled by investors of a third party and the investor has no substantial business activity in the territory of the denying party.9 8 A prominent example of a denial of benefits clause, the application of which in recent investment treaty case law will be addressed more substantially below, is contained in Art. 17 of the Energy Charter Treaty (hereinafter ECT), i.e. in a multilateral agreement. It reads as follows: Each contracting Party reserves the right to deny the advantages of this Part to: (1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized; or (2) an Investment, if the denying Contracting Party establishes that such Investment is an Investment of an Investor of a third state with or as to which the denying Contracting Party: (a) does not maintain a diplomatic relationship; or (b) adopts or maintains measures that: (i) prohibit transactions with Investors of that state; or (ii) would be violated or circumvented if the benefits of this part were accorded to Investors of that state or to their investments.10

6 Ibid., App. 6, 393–416. 7 See http://italaw.com/documents/Canadian2004-FIPA-model-en.pdf. 8 ‘1. A Party may deny the benefits of this Agreement to an investor of the other Party that is an enterprise of such Party and to investments of such investor if investors of a non-Party own or control the enterprise and the denying Party 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 Agreement were accorded to the enterprises or to its investments. 2. Subject to prior notification and consultation in accordance with Article 19, a Party may deny the benefits of this Agreement to an investor of the other Party that is an enterprise of such Party and to investments of such investors if investors of a non-Party own or control the enterprise and the enterprise has no substantial business activities in the territory of the Party under whose law it is constituted or organized.’ 9 See Agreement between the Hashemite Kingdom of Jordan and the Republic of Austria for the Promotion and Protection of Investments of 2001, available at http://unctad.org/sections/ dite/iia/docs/bits/austria_jordan.pdf.

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Thus, the wording of denial of benefits clauses incorporated in treaties differs. 9 However, their purpose is always similar: they seek to prevent third parties from claiming the benefits of a treaty without assuming the obligations provided for therein. Already in 1956, Walker Jr. explained these provisions as a safeguard against ‘free riders’, i.e. nationals of third countries who would gain rights or interests despite the fact that the contracting States to the treaty did not wish to accord them those benefits.11 In 1990, Salacuse stated that it is a basic task of BITs to determine whether an investor has a sufficient link to one of the contracting States of the treaty.12 Thereby, so Salacuse asserts, allowing the benefits of the BITs to nationals of third countries or to those who are ‘primarily associated’ with those countries and with which the denying country has no relationship, would be ‘to abandon (…) [the] right to negotiate corresponding privileges and obligations from those countries’.13 Hence, the denial of benefits clause is viewed as a mechanism used to safeguard the principle of reciprocity embodied in investment treaties. Moreover, it has been pointed out that the right to deny benefits is a ‘method 10 to counteract nationality planning’, i.e. the structuring of an investment in such a way so as to ensure that it will be covered by the scope of a BIT.14 Accordingly, the denial of benefits clause was described as follows: Under such a clause the state reserves the right to deny the benefits of the treaty to a company that does not have an economic connection to the state on whose nationality it relies. The economic connection would consist in control by nationals of the state of nationality or in substantial business activities in that state.15

3. Denial of Benefits Clauses in Investment Arbitration Case Law a) Case Law Based on BITs and NAFTA

The issue of the denial of benefits under a treaty has been raised in invest- 11 ment arbitrations, however, there is no abundant case law on this point, in particular with regard to denial of benefits clauses contained in BITs. In Generation Ukraine, Inc. v. Ukraine,16 the respondent sought to prevent the 12 claimant, a US corporate vehicle wholly-owned by a US national, from benefiting from the investment protection standards conferred by the USA–Ukraine 10 See http://www.encharter.org/fileadmin/user_upload/document/EN.pdf. Another example of a denial of benefits clause in a multilateral treaty is Art. 1113 of the NAFTA. 11 See Herman Walker Jr., ‘Provisions on Companies in United States Commercial Treaties’, (1956) 50 AJIL 373, 388, who in this context described the denial of benefits clauses contained in the early FCNs signed by the US as ‘a latent protective clause which a party may utilize if it wishes to take the initiative of so doing.’ Ibid. 12 Jeswald W. Salacuse, ‘BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign Investment in Developing Countries’, (1990) 24 Int’l. Law. 655, 665. 13 Ibid. 14 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 55. 15 Ibid. 16 Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9.

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BIT which the parties relied upon. In this case, the BIT contained in Art. I(2) a clause which reads as follows: Each Party reserves the right to deny to any company the advantages of this Treaty if nationals of any third country control such company and, in the case of a company of the other Party, that company has no substantial business activities in the territory of the other Party or is controlled by nationals of a third country with which the denying Party does not maintain normal economic relations.

The tribunal arrived at the conclusion that one or the other of the numbered provisos must be fulfilled in addition to the general requirement that the company in question is owned or controlled by nationals of a third country.17 The arbitral tribunal was also satisfied that ‘third country control’ over Generation Ukraine is a prerequisite for any purported invocation of Article I(2) by the respondent. Furthermore, the burden of proof to establish the factual basis of the ‘third country control’, together with the other conditions, falls upon the State as the party invoking the ‘right to deny’ conferred by Article 1(2). This is not, as the respondent appears to have assumed, a jurisdictional hurdle for the claimant to overcome in the presentation of its case; instead it is a potential filter on the admissibility of claims which can be invoked by the respondent State.18 The tribunal concluded that the respondent had not shown that Generation Ukraine was under third country control and therefore dismissed – without further discussing whether the claimant in fact conducted substantial business activities – the respondent’s objection in this regard.19 14 In the case Tokios Tokelės v. Ukraine,20 the respondent argued that jurisdiction should be denied on the basis that the claimant did not maintain substantial business activity in Lithuania.21 The respondent referred to a number of investment treaties allowing a party to deny the benefits of the treaty to entities of the other party that are controlled by foreign nationals and that do not engage in substantial business activity in the territory of the other party. However, the BIT between Lithuania and Ukraine which the parties relied upon did not contain a denial of benefits clause. The tribunal regarded the absence of such a clause as a deliberate choice of the parties.22 Therefore, while the tribunal confirmed that State parties can exclude entities of the other party controlled by nationals of third countries or by nationals of the host country from the scope of the agreement, it did not consider it appropriate to impose limits on the scope of BITs which are neither found in the text nor are evident from the negotiating history.23 13

17 Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Final Award, 16 September 2003, para. 15.6. 18 Ibid., para. 15.7. 19 Ibid., paras. 15.8–15.9. 20 Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18. 21 Ibid., Decision on Jurisdiction, 29 April 2004, para. 33. 22 Ibid., paras. 34–36. 23 Ibid., para. 36. The arbitral tribunal stated in this regard that ‘[a]n international tribunal of defined jurisdiction should not reach out to exercise a jurisdiction beyond the borders of the definition.’

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In an award rendered only one day later, in the case Waste Management II v. 15 Mexico,24 the tribunal referred to the denial of benefits clause in Art. 1113 of the NAFTA when addressing the issue of whether the claimant was an ‘investor’. In the tribunal’s view the clause provided a condition for commencing arbitration under NAFTA and addressed ‘situations where the investor is simply an intermediary for interests substantially foreign and it allows NAFTA protections to be withdrawn in such cases subject to prior notification and consultation.’25 In their Decisions on Preliminary Objections, the tribunals in Pan American 16 Energy and BP Argentina Exploration v. Argentina and BP America Production Company v. Argentina26 addressed the issue of the denial of benefits under Art. I(2) of the Argentina–US BIT. They rejected its application since Pan American Energy was directly and indirectly controlled by two US companies, i.e. BP Argentina and BP America, which had substantial business activity in the US.27 b) Case Law Based on the ECT

In the matter Petrobart Limited v. Kyrgyzstan,28 the claimant was organised as 17 a Gibraltar non-resident company, i.e. a legal entity incorporated in Gibraltar but owned, managed and controlled by non-residents, which relied implicitly on the United Kingdom’s status as a signatory of the treaty. The respondent Kyrgyzstan sought to rely upon Art. 17(1) of the ECT alleging at a late stage of the proceedings that Petrobart was not an investor who made an investment under the treaty, a position which it appears to have never taken in any of its submissions.29 The arbitral tribunal at the outset of its discussion of this issue determined that Article 17 does not apply automatically but provides for certain defined exceptions to Part III obligations of the Treaty, which must be pleaded by a Contracting Party for breaching its obligations under Part III of the Treaty. As such, the denying Contracting Party must establish (i) that the legal entity to which it wishes to deny the advantages of Part III of the Treaty is a legal entity owned or controlled by citizens or nationals of a third state, and (ii) that the entity in question has no substantial business activities in the Area of the Contracting Party in which such an entity is organised. It is clear that the conjunction ‘and’ makes the test a cumulative one. Both of these conditions must be present for Article 17(1) to apply (...).30

It also found that neither of these two conditions applied to Petrobart and 18 specifically pointed out in this regard that ‘neither before nor after the present proceedings did the Kyrgyz Republic invoke Article 17, expressing the wish to 24 Waste Management, Inc. (US) v. Mexico, ICSID Case No. ARB/03/24. 25 Ibid., Award, 30 April 2004, para. 80. 26 Pan American Energy LLC and BP Argentina Exploration Company v. Argentina, ICSID Case No. ARB/03/13, Decision on Preliminary Objections, 27 July 2006, and BP America Production Company, Pan American Sur SRL, Pan American Fueguina SRL and Pan American Continental SRL v. Argentina, ICSID Case No. ARB/04/8, Decision on Preliminary Objections, 27 July 2006. 27 Ibid., para. 221. 28 Petrobart Limited v. Kyrgyzstan, SCC Arb. No. 126/2003. 29 Petrobart Limited v. Kyrgyzstan, SCC Arb. No. 126/2003, Award, 29 March 2005, p. 59. 30 Ibid., at 58–59.

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deny the advantages of Part III of the Treaty to Petrobart in order to justify the Republic’s breaches of Part III obligations of the Treaty’.31 Moreover, the Tribunal came to the conclusion that the information it received from the claimant contradicted the view that Petrobart is a company owned or controlled by citizens or nationals of a State other than the United Kingdom and that Petrobart has no substantial business in the United Kingdom. The arbitral tribunal therefore considered that the conditions for application of Article 17(1) of the treaty are not present in this case. 19 Although – as seen above – denial of benefit clauses were addressed in investment arbitration decisions prior to that, the case Plama v. Bulgaria32 caused this type of provision to be moved into the centre of attention. The tribunal in this matter addressed the effects of Art. 17(1) of the ECT, as cited above. It held that Art. 17(1) applied exclusively to Part III of the ECT which addresses investment promotion and protection, and not to other parts, including Part V which contains the dispute settlement provisions, including Art. 26 stipulating the settlement of disputes between an investor and a contracting party. The tribunal stated (...) As a matter of language, it would have been simple to exclude a class of investors completely from the scope of the ECT as a whole, as do certain other bilateral investment treaties; but that is self-evidently not the approach taken in the ECT. (...) the object and purpose of the ECT, in the Tribunal’s view, clearly requires Art. 26 to be unaffected by the operation of Article 17(1). (...)33

20

The arbitral tribunal proceeded to discuss further features of the operation of Art. 17(1). The first was whether the right to deny benefits enshrined in the treaty has to be exercised in a specific manner by the contracting party. In this regard, the tribunal stated that: In the Tribunal’s view, the existence of a ‘right’ is distinct from the exercise of that right. For example, a party may have a contractual right to refer a claim to arbitration; but there can be no arbitration unless and until that right is exercised. In the same way, a Contracting Party has a right under Article 17(1) ECT to deny a covered investor the advantages under Part III; but it is not required to exercise that right; and it may never do so. (...) [I]t is not unreasonable or impractical to interpret Article 17(1) as requiring that a Contracting State must exercise its right before applying it to an investor and be seen to have done so. By itself, Article 17(1) ECT is at best only half a notice; without further reasonable notice of its exercise by the host state, its terms tell the investor little; and for all practical purposes, something more is needed. (...) For these reasons, in the Tribunal’s view, the interpretation of Article 17(1) ECT under Article 31(1) of the Vienna Convention requires the right of denial to be exercised by the Contracting State. Accordingly, the Tribunal decides in the present case that the Respondent was required to exercise its right against the Claimant; and that it did so only on 18 February 2003, more than four years after the Claimant made its investment in Nova Plama. The real point at issue, therefore, is whether that exercise had retrospective effect to 1998 or only prospective effect from 2003, on the Claimant’s ‘advantages’ under Part III ECT.34

31 32 33 34

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Ibid., at 59. Plama Consortium Ltd v. Bulgaria, ICSID Case No. ARB/03/24. Ibid., Decision on Jurisdiction, 8 February 2005, para. 148. Ibid., paras. 155–158.

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Accordingly, the arbitral tribunal in its analysis turned to the question of 21 whether the exercise of the right to deny benefits has a retroactive effect. The tribunal denied this. It came to the conclusion that (...) the right’s exercise should not have retrospective effect. A putative investor, properly informed and advised of the potential effect of Article 17(1), could adjust its plans accordingly prior to making its investment. If, however, the right’s exercise had retrospective effect, the consequences for the investor would be serious. The investor could not plan in the ‘long term’ for such an effect (if at all); and indeed such an unexercised right could lure putative investors with legitimate expectations only to have those expectations made retrospectively false at a much later date. (...)35

Finally, the arbitral tribunal pointed out that where the right to deny benefits 22 is exercised, the expression ‘own or control’ in ECT Art. 17(1) includes indirect and beneficial ownership and control. The tribunal phrased it as follows: (...) Also, in the Tribunal’s view, ownership includes indirect and beneficial ownership; and control includes control in fact, including an ability to exercise substantial influence over the legal entity’s management, operation and the selection of members of its board of directors or any other managing body.36

The tribunal in Limited Liability Company AMTO v. Ukraine37 also addressed 23 the denial of benefits clause within the context of the ECT, i.e. Art. 17(1) thereof. In these proceedings, the respondent Ukraine sought to rely upon ECT Art. 17(1) for its request that the arbitration be terminated based on the assertion that the exercise of its rights under Art. 17 was not arbitrable, that the claimant did not prove that it was not owned or controlled by citizens of third States and had substantial business in Latvia and, finally, that the respondent can exercise its right to deny advantages at any time, not only when the investment is made or prior to alleged breaches.38 The tribunal rejected the respondent’s arguments. In doing so, it made interesting observations as regards the burden of proof as well as the question of what constitutes substantial business activity, both of which shall be addressed further below. ECT Art. 17(1) and its application was also subject to analysis in the case 24 Hulley Enterprises v. Russia.39 The tribunal in its decision on jurisdiction, confirmed the findings of the tribunal in Plama v. Bulgaria discussed above. Thus, it held that the denial of benefits provision in ECT Art. 17(1) does not affect the dispute resolution mechanism in the treaty which is not part of Part III and cannot be exercised in order to contest the legitimate expectations of an investor as regards substantive treaty protection under Part III of the ECT. It stated that Art. 17(1) does not constitute an automatic denial of benefits but confers a right that must be exercised: Article 17(1) does not deny simpliciter the advantages of Part III of the ECT – as it easily could have been worded to do – to a legal entity if the citizens or nationals of a third State own or control

35 36 37 38 39

Ibid., para. 162. Ibid., para. 170. Limited Liability Company AMTO v. Ukraine, SCC Case No. 080/2005. Ibid., Award, 26 March 2008, para. 59. Hulley Enterprises Limited v. Russia, PCA Case No. AA 226.

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Chapter 6: The Scope of Application of International Investment Agreements such entity and if that entity has no substantial business in the Contracting Party in which it is organized. It rather ‘reserves the right’ of each Contracting Party to deny the advantages of that Part to such an entity. This imports that, to effect denial, the Contracting Party must exercise the right.40

25

The tribunal further confirmed that exercising the right to deny benefits will only have a prospective effect while a retrospective application of a denial of benefits clause would be inconsistent with the treaty’s objectives of promotion and protection of investments: To treat denial as retrospective would, in the light of ECT’s ‘Purpose’, as set out in Article 2 of the Treaty (‘The Treaty establishes a legal framework in order to promote long-term cooperation in the energy field (...)’) be incompatible ‘with the objectives and principles of the Charter.’ Paramount among those objectives and principles is ‘Promotion, Protection and Treatment of Investments’ as specified by the terms of Article 10 of the Treaty. Retrospective application of a denial of rights would be inconsistent with such promotion and protection and constitute treatment at odds with those terms.41

26

Finally, the tribunal arrived at the conclusion that a ‘third State’ under this provision refers to a non-contracting State and therefore does not include the State hosting the investment. The tribunal held in this regard that ‘[t]he Treaty clearly distinguishes between a Contracting Party (and a signatory), on the one hand, and a third State, which is a non-Contracting Party, on the other.’42 4. Issues Arising from the Interpretation of Denial of Benefits Clauses in the Current Case Law

27

The limited case law existing until now which addresses denial of benefits clauses has put a focus on the issues which arise or may arise in this context. Some of them have been addressed, some of them have not been addressed because the circumstances did not require the arbitrators to do so. Although already touched upon in the previous section, some further remarks on these points will be made here below. a) Exercising the Right to Deny Benefits

As discussed above, several tribunals faced with an objection by the respondent State based on a denial of benefits clause in the treaty decided that a State which seeks to deny benefits to an investor needs to notify the investor accordingly, i.e. the contracting party needs to exercise its right to invoke the denial of benefits provision contained in the treaty. At the same time, this notification does not have retrospective effect. 29 Although no decision has been rendered thus far taking a different position, the arguments raised when criticising this approach cannot be ignored. Thus, it has been pointed out that the rationale upon which these decisions are based 28

40 Ibid., para. 455. 41 Ibid., para. 457. 42 Ibid., para. 543.

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II.G. Denial of Benefits is predicated upon principles of predictability and respect for legitimate expectations [and] remains attractive on many levels. For others, doubts may persist. It is debatable whether an investor that may come within the conditions of Article 17 [of the ECT] may have any legitimate expectation that it will in the future be entitled to enforce the advantages afforded by Part III of the ECT. (...) For some, the rationale in the Plama decision, couched in so-called certainty of investment planning and legitimate expectations, is hollow and contrary to reality. (...) Just as investors may wish to plan their investments in order to attract protection, so too are some States understandably concerned to know the extent of their potential exposure and to manage that exposure where possible. If Article 17(1) is to play any meaningful role in this regard, the Plama decision also appears to engender in States a perverse incentive to publish blanket denials or attempt to screen inward investment, neither of which would seem to be in accord with one of the overall purposes of the ECT to promote foreign investments in the energy sector. Indeed, some may consider that the Plama interpretation renders Article 17(1) practically ineffective and meaningless to States, contrary to established principles of treaty interpretation.43 (emphasis omitted)

And continued:

30

The interpretation given to Article 17(1) by the Plama Tribunal essentially requires that – if Article 17(1) is to have any effect – a Contracting Party should maintain a system of monitoring all investors, big or small, and somehow ascertain at the time of entry of the investment whether or not the conditions exist for Article 17(1) to apply in order to make a determination whether or not to invoke Article 17(1) and so deny the advantages of Part III to such investors.44 (emphasis in original)

As a result, it has been pointed out that the Plama decision might lead States 31 to publish blanket denials or attempt to screen inward investment, neither of which would appear to be in accordance with one of the overall purposes of the ECT, namely to promote foreign investments in the energy sector.45 Worse, one may consider that the interpretation of Art. 17(1) of the Plama tribunal renders this provision ‘practically ineffective and meaningless to States, contrary to the established principles of treaty interpretation’.46 b) Burden of Proof

The issue of burden of proof is generally important in international arbitration 32 and it is of no less importance in relation to denial of benefit clauses. Naturally, how a tribunal decides on this issue can determine whether a State’s attempt to invoke its right to deny benefits is successful or not. The AMTO tribunal observes in this regard There are important differences in drafting between Article 17(1) and 17(2). In particular, Article 17(2) places the burden of proof to establish the facts necessary to exercise this power on the State Party, while Art. 17(1) is expressed in a neutral manner in respect of the burden of proof. (…) However, when a respondent alleges that the claimant is of the class of Investors only entitled to defeasible protection, so that the respondent can exercise its power to deny, then the burden passes to the respondent to prove the factual prerequisites of Article 17 on which it relies. Article 17(2)

43 Stephen Jagusch and Anthony Sinclair, ‘Denial of advantages under Article 17(1)’ in Graham Coop and Clarisse Ribeiro (eds), Investment Protection and the Energy Charter Treaty (Juris, 2008) 17, 39–40. 44 Ibid., at 42. 45 Ibid., at 40. 46 Ibid., at 40 with further considerations on this point.

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Chapter 6: The Scope of Application of International Investment Agreements adopts exactly this approach but, as already mentioned, Article 17(1) is neutral on the question of burden of proof. Burden of proof is an important issue in respect of Article 17(1) as it might be difficult, as the present case demonstrates, for the respondent to determine who owns or controls an Investor when ownership or control might involve a number of entities in different jurisdictions. Similarly, the claimant knows exactly what its business activities are in a particular area, and can easily present the evidence to establish those activities, while this information might not be accessible to the respondent. Nevertheless, the relative accessibility of evidence would not seem to justify any modification to the normal rules regarding the burden of proof. It would support a duty to disclose evidence so that a respondent could request the disclosure of specific documents from the claimant where the documentation is not otherwise accessible. Alternatively, where the agreed procedure, as in this case, provides for Tribunal questions then the Tribunal can request the necessary clarifications. In both cases, negative inferences might be drawn against the claimant for a failure to provide the requested documents or information. Alternatively, as the Respondent sought to do in this case, the respondent might seek to exploit the paucity or ambiguity of the evidence relating to the claimant’s business activities to argue these activities have no substance, thereby effectively compelling the Claimant to supplement this evidence, or defend its limitations.47

Hence, the tribunal acknowledged that the burden of proof rests with the party advancing the claim – here the State relying on its right to deny benefits –, it also acknowledged that relevant information might be more difficult for the State to access. Nevertheless, the tribunal did not shift the burden of proof, but referred the respondent State to procedural means when seeking to overcome the disparity between the parties’ access to information with regard to its right under Art. 17(1) of the ECT. 34 The tribunal in Plama v. Bulgaria drew a distinction between the burden of proof concerning jurisdictional issues and the merits. It commenced by summarising the positions of the parties and observed: 33

The Claimant asserts that the Respondent bears the burden of showing that Article 17(1) applies factually to the present dispute to disqualify its claim on the merits. The Respondent contends that, although it might have borne the burden initially in asserting Article 17(1), the burden subsequently shifted to the Claimant to show that its ownership and control has never been held by a national of a third state, being an approach consistent with ECT Understanding No 3 (relating to Article 1(6) defining ‘Investment’ where there is a ‘doubt’ as to whether an Investor controls an Investment, directly or indirectly). Further, Respondent contended that the burden shifted to the Claimant when it alone could produce the relevant documentation and testimony required to resolve disputed factual issues over its own ownership and control. 167. In the Tribunal’s view, as already indicated above, the burden of proof on the merits is significantly different from the burden applied to a jurisdictional issue. Further, the parties were not agreed on the standard of proof, including the drawing of adverse inferences; and the parties’ submissions may disguise a further difference between the legal and evidential burdens of proof. Given these factors, the Tribunal has experienced difficulties in addressing factual issues disputed between the parties, particularly as regards Article 17(1)’s first limb. It is however convenient to begin with its second limb where no such difficulties arise.48

35

The tribunal reverted on the issue of burden of proof in its decision on the merits and clearly stated that the claimant bears the burden of proof as regards

47 AMTO v. Ukraine (n. 37) paras. 63–65. 48 Plama Consortium Ltd v. Bulgaria (n. 32), Decision on Jurisdiction, paras. 166–167.

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the points of ownership and control within the context of the denial of benefits clause invoked by the respondent.49 The decision in Generation Ukraine also dealt with this point, addressing the 36 ‘third country control’ element of the denial of benefits clause contained in Art. I(2) of the Ukraine–US BIT. The tribunal observed in this regard: [i]n the absence of any competing considerations advanced by the Respondent, the Tribunal is satisfied that ‘third country control’ over Generation Ukraine is a prerequisite for any purported invocation of Article I(2) by the Respondent. Furthermore, the burden of proof to establish the factual basis of the ‘third country control’, together with the other conditions, falls upon the State as the party invoking the ‘right to deny’ conferred by Article 1(2).50

This statement makes it clear that while the tribunal focused on the issue of 37 third-country control, it considered that the burden of proof when invoking the right to deny benefits falls upon the State for all elements which need to be shown in this regard. Other tribunals were less explicit as regards this issue. Thus, the tribunal in 38 Hulley v. Russia – although it addressed ECT Art. 17 in detail – did not address the burden of proof at all in its Decision on Jurisdiction and Admissibility. The tribunal in Petrobart v. Kyrgyzstan did not mention this issue either. Nevertheless, the jurisprudence which exists on the issue of the burden re- 39 veals that there is no uniform view held by tribunals at this point. While the predominant view suggests that since the right to deny benefits is invoked by the respondent State, the latter also bears the burden of proof, others at least put part of this burden on the claimant. c) Invoking the Denial of Benefits Clause as an Issue of Admissibility or Jurisdiction

Another issue which has been raised in the context of the invoking of the de- 40 nial of benefits provision in investment arbitration proceedings is whether the objection is one of jurisdiction or admissibility.51 The difference between the two has been summarised as the distinction between whether the challenge pertains to the forum in which the claim has been brought or to the claim itself which should not be heard at all. In the former case, the issue is one of jurisdiction, in the latter, it is one of admissibility.52 In the context of the ECT and its provision Art. 17, investors argued that if the 41 host State has effectively denied the advantages of the ECT to the investor, then

49 Plama Consortium Ltd v. Bulgaria (n. 32), Award, 27 August 2008, paras. 82, 89. 50 Generation Ukraine, Inc. v. Ukraine (n. 16) para. 15.7. 51 See also on this point: Loukas A. Mistelis and Crina Mihaela Baltag, ‘Denial of Benefits and Article 17 of the Energy Charter Treaty’ (2009) Penn St. L. Rev. 1301, 1316; Stephen Jagusch and Anthony Sinclair (n. 43) 17, 43. 52 Jan Paulsson, ‘Jurisdiction and Admissibility’ in Gerald Aksen, Karl-Heinz Böckstiegel, Michael Mustill, Paolo Michele Patocchi and Anne-Marie Whitesell (eds), Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in Honour of Robert Briner (ICC, 2005) 601, 617.

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there can be no claim under Part III of the ECT since the investor has no relevant ‘advantages’ under Part III legally capable of giving rise to any claim pleaded under Part III. Therefore, Art. 17(1) cannot relate to jurisdiction, but relates to the claims themselves.53 Consequently, the objection made affects the admissibility of the claim. 42 The tribunal in Plama v. Bulgaria explicitly addressed this issue, deciding that Bulgaria’s objection did not relate to jurisdiction. One reason for this view was that if Art. 17(1) went to jurisdiction, this could render the host State ‘the judge in its own cause’ which would be a ‘license for injustice’.54 The tribunal stated further that by operation of Art. 26 of the ECT and Art. 25 of the ICSID Convention, the parties had given their unconditional consent to arbitration. Therefore, Art. 17(1) of the ECT could not constitute a bar to the tribunal’s jurisdiction to hear the claims brought under the ECT and consequently, Bulgaria’s objections to jurisdiction on these grounds were rejected.55 Art. 17(1) was not considered a condition precedent upon the offer to submit disputes to investment arbitration.56 43 In Hulley v. Russia, the arbitral tribunal, while mentioning this point, merely observed that both parties considered the objection raised by the State as an issue of admissibility and hence did not address this point in any more detail.57 44 The decision in Petrobart v. Kyrgyzstan58 did not address this issue explicitly as it found that the prerequisites for the application of ECT Art. 17(1) were not met. However, its reference to Art. 10(2) of the 1999 Rules of the Arbitration Institute of the Stockholm Chamber of Commerce which states that [i]f the Respondent wishes to raise any objection concerning the validity or applicability of the arbitration agreement, such objection shall be made in the Reply [to the Request for Arbitration] together with the grounds therefore

has been interpreted as an indication that the tribunal in this case viewed ECT Art. 17 as a jurisdictional defence.59 If one applied the distinction set out by Paulsson as described above, however, the tribunal’s approach should be considered as treating this issue as one of admissibility since the objection was not directed against the forum, but rather at the claim being heard. 45 Also the AMTO decision is a testament to the confusion which often reigns regarding the classification of issues pertaining to admissibility or jurisdiction. In this case, the award states that ‘[t]he Respondent submits that the claims 53 54 55 56 57 58 59

610

See for example Plama v. Bulgaria (n. 32) Decision on Jurisdiction, para. 146. Ibid., para. 149. Ibid., para. 151. Ibid., para. 150. Hulley Enterprises Ltd. v. Russia (n. 39) para. 442. Petrobart v. Kyrgyzstan (n. 28). See Kaj Hobér who observed: ‘(…) the reference by the tribunal to Article 10(2) of the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, regarding the time when jurisdictional objections should be made, indicates that the tribunal viewed Article 17 as a jurisdictional defence.’ Kaj Hobér, ‘The Energy Charter Treaty – Awards Rendered’ (2007) 1 Disp. Res. Int’l 36, 47.

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II.G. Denial of Benefits

brought by Claimant are inadmissible by operation of Article 17(1) of the ECT and alleges that Article 17(1) ECT requires the termination of this arbitration.’60 Nevertheless, the tribunal found that it ‘has jurisdiction over claims submitted by the Claimant (…)’.61 Whilst the first objection raised by the respondent, namely that of the alleged non-‘arbitrability’ of the respondent’s exercise of its right under Art. 17, might be classified as an issue of jurisdiction rather than admissibility depending upon the interpretation of the term ‘arbitrability’ in this context, the remaining issues decided in relation to ECT Art. 17 related to the admissibility of the claim – however, this was not reflected in the operative section of the award as cited. Finally, in Generation Ukraine, Inc. v. Ukraine,62 when addressing the re- 46 spondent’s objection based on the alleged right to deny the advantages of the treaty, the tribunal observed that ‘[t]his is not, as the Respondent appears to have assumed, a jurisdictional hurdle for the Claimant to overcome in the presentation of its case; instead it is a potential filter on the admissibility of claims which can be invoked by the respondent State.’63 Hence, it indicated which characterisation of this issue it considered to be correct. The above-mentioned case law indicates that while jurisdiction and admissi- 47 bility are used as distinct terms, there appears to be no clear and uniform definition of these terms. Consequently, some decisions make it clear why specific terminology is used, however, this is not always the case. Hence, future case law will need to ensure that it does not contribute to this confusion, but rather clarify the meaning of each term in the context of the denial of benefit clause. d) The Meaning of ‘Third State’

Bilateral or multilateral investment treaties are reciprocal agreements between 48 States. They aim to convey rights and obligations to the contracting parties and investors thereof, however, not to third, non-contracting parties. This is reflected in denial of benefits clauses which seek to ensure that ‘free riders’ who do not assume any obligation under the treaty nevertheless enjoy their benefits. As the tribunal in the AMTO decision summarised with regard to Art. 17(1) of the ECT: Article 17(1) affects only juridical rather than natural persons, and requires the fulfilment of two requirements in order for the host state to exercise its right to deny. First, the investor must be owned or controlled by citizens or nationals of a ‘third state’. ‘Third state’ is not defined in the ЕСТ, but is used in Article 1(7) in contradistinction to ‘Contracting Party’, which suggests that a third state is any state that is not a Contracting Party to the ЕСТ.64

In the matter Hulley v. Russia, the latter sought to argue that for the purposes 49 of ECT Art. 17(1), Russia should be considered a ‘third State’. The arbitral tri60 61 62 63 64

AMTO v. Ukraine (n. 37) para. 59. AMTO v. Ukraine (n. 37) 67. Generation Ukraine, Inc. v. Ukraine (n. 16). Ibid., para. 15.7. AMTO v. Ukraine (n. 37) para. 62; see also Plama v. Bulgaria (n. 32), Decision on Jurisdiction, para. 170.

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bunal rejected this notion, observing, also on the basis of the travaux préparatoires and the Vienna Convention on the Law of Treaties that the term ‘third State’ is merely a substitute for ‘non-Contracting Party’.65 50 Thus, at first sight, the meaning of the ‘third State’ referred to in clauses denying the benefits of a treaty do not appear to pose considerable problems even in the absence of any given definition. It remains to be seen whether this definition will be expanded, for example, to entities or nationals of the host State owning or controlling the investing company as it might be argued that it was never the intention to confer the protection of the treaty to those.66 e) Substantial Business Activity

Another criterion which is used to determine whether a State can invoke its right to deny advantages of a treaty to an investor is whether the investor has ‘substantial business activity’ in the territory in which it is organised, i.e. it denies the protection of the treaty to mere shell companies. The term ‘substantial business activity’ however is not readily defined. 52 Consequently, it is worth to refer to the existing case law for guidance as to the meaning of this term. The tribunal in AMTO v. Ukraine observed that 51

The ЕСТ does not contain a definition of ‘substantial’, nor does the Final Act of the European Energy Charter Conference that would serve as guidance for interpretation. As stated above, the purpose of Article 17(1) is to exclude from ЕСТ protection investors which have adopted a nationality of convenience. Accordingly, ‘substantial’ in this context means ‘of substance, and not merely of form’. It does not mean ‘large’, and the materiality not the magnitude of the business activity is the decisive question. In the present case, the Tribunal is satisfied that the Claimant has substantial business activity in Latvia, on the basis of its investment related activities conducted from premises in Latvia, and involving the employment of a small but permanent staff.67

53 54

Other awards are silent on this issue. The above-cited decision points out correctly that the requirement of substantial business activity seeks to ensure that the business activities undertaken are not merely formal. Based on the aforesaid, it appears safe to assume ‘that merely “some” or “transitory” business activities would not suffice’.68 Rather, it can be concluded that if a company is carrying out business activities in the territory in which it is organized, one would expect that, at a minimum, it will be engaged in buying, selling, and contracting in that territory beyond the normal activities or functions required merely by the fact of its corporate existence (such as corporate registration and administration, including holding requisite board or shareholders’ meetings and the payment of associated taxes and corporate registration fees). One would also expect such a company: (1) to have employees in the territory of the Contracting Party in which it is organized carrying out assignments in the furtherance of the business; (2) to have resident managers involved in a hands-on manner in the actual decision-making of the business; (3) to be party to substantial transactions in the Area of the Contracting Party associated with the furtherance of the busi-

65 66 67 68

612

Hulley v. Russia (n. 39) para. 543. In favour of such an approach, see Stephen Jagusch and Anthony Sinclair (n. 43) 19. AMTO v. Ukraine (n. 37) para. 69. Stephen Jagusch and Anthony Sinclair (n. 43) 20.

Anne K. Hoffmann

II.G. Denial of Benefits ness; (4) to pay taxes to the treasury of that Contracting Party in relation to profits earned from these transactions; and (5) to engage in procurement locally of inputs for the business.69

Consequently, when assessing whether or not a company carries out substan- 55 tial business activity, it should always be borne in mind that the purpose of this criterion is to ensure that the benefits of treaty protection are accorded to those companies who contribute in a meaningful way to the country in which they are incorporated. 5. Conclusions

The denial of benefits clause is used as a means to exclude ‘free riders’ who 56 would gain rights or interests despite the fact that the contracting States to the treaty did not wish to accord them those benefits from the protection granted through those treaties. Although their origins can be traced to the period immediately subsequent to the Second World War, case law involving denial of benefits clauses and their application in concrete circumstances is still scant. The decisions which exist however display that a variety of questions in this context, for example with regard to the need to exercise this right to deny benefits, whether an objection invoked by the State on this basis relates to jurisdiction or admissibility and who bears the burden of proof, and finally the definition of ‘third State’ as well as ‘substantial business activity’ have been touched upon, but still are open to discussion and sometimes doubt. While a few issues appear to remain the subject of some confusion, a certain milestone as regards the application of denial of benefit clauses has been set by the decision in Plama v. Bulgaria, followed by the one in Hulley v. Russia. It will be seen whether the standards set therein will continue to be applied in the same way in future rulings as they have not remained without criticism as regards their impact in practice.

69 Ibid.

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Lucy F. Reed and Jonathan E. Davis* 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Jurisdiction Ratione Personae in ICSID Arbitration: The ‘Double Keyhole’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Natural Persons as Protected Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Scope of Protection of Natural Persons under International Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) The ICSID Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) BITs and MITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Standards for Determining Jurisdiction Ratione Personae for Natural Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Particular Problems That arise with Respect to Jurisdiction Ratione Personae and Natural Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Dual or Multiple Nationality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) The Doctrine of ‘Real and Effective Nationality’ . . . . . . . . . . . . (a) Effective Nationality and the ICSID Convention . . . . . . . . (b) Effective Nationality and BITs/MITs . . . . . . . . . . . . . . . . . . . . . . (c) Conclusions Regarding Effective Nationality. . . . . . . . . . . . 4. At What Points in Time must an Investor satisfy the Relevant Conditions Ratione Personae?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Temporal Requirements Ratione Personae under the ICSID Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Temporal Requirements Ratione Personae under BITs and MITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 7 7 7 10 13 20 21 25 29 36 40 42 43 45 55

Literature: Chittharanjan F. Amerasinghe, ‘The Jurisdiction of the International Centre for the Settlement of Investment Disputes’ (1979) 19 Indian J. Int’l L. 166–227; Roberto Aguirre Luzi and Ben Love, ‘Individual Nationality in Investment Treaty Arbitration: The Tension Between Customary International Law and Lex Specialis’ in Andrea K. Bjorklund, Ian A. Laird, and Sergey Ripinsky, Investment Treaty Law: Current Issues III (BIICL, 2009) 183– 206; Maurice Mendelson, ‘The Runaway Train: The “Continuous Nationality Rule” From the Panevezys-Saldutiskis Railway Case to Loewen’ in Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005) 97–149; Anthony C. Sinclair, ‘ICSID’s Nationality Requirements’ in Todd J. Grierson Weiler (ed), Investment Treaty Arbitration and International Law (JurisNet, 2008) 85–118; Christoph H. Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair, The ICSID Convention: A Commentary (Cambridge University Press, 2009) 71–347.

1. Introduction 1

A fundamental jurisdictional prerequisite of international investment arbitration is that the dispute oppose a host State and an investor of another State. That the investor be foreign under some objective criterion, whether nationality or otherwise, is critical to the architecture of the system of international investment * The views expressed herein are personal to the authors and do not represent the views of Freshfields Bruckhaus Deringer LLP, the US Department of State, or the US Government.

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arbitration: without that criterion, the system would provide an impermissible forum for purely domestic disputes. The test for jurisdiction ratione personae addresses this fundamental prereq- 2 uisite by asking whether the claimant has satisfied the internationalising criteria of the treaty or treaties under which it brings its claim. This question has proven a fertile area for objections to jurisdiction. To give one of the more controversial examples, respondent States frequently allege that a claimant has abused its corporate nationality or improperly used a ‘mailbox company’ or corporate restructuring to establish a ‘nationality of convenience.’ Issues also arise with respect to the ‘foreign’ status of natural persons, albeit less frequently than for juridical persons – typically, such issues involve claimants with dual or multiple nationalities and/or an attempt by one of the parties to apply the ‘effective nationality’ principle to establish or destroy jurisdiction ratione personae. These issues tend to be controversial because jurisdiction ratione personae is bound so closely to the purpose of the international investment regime: to encourage foreign investment in host States. This contribution provides an overview of both the nature of jurisdiction ra- 3 tione personae in ICSID arbitration and the temporal requirements ratione personae, as well as an examination of jurisdiction ratione personae with respect to natural persons. The contribution of M. Perkams that follows examines jurisdiction ratione personae with respect to juridical persons. 2. Jurisdiction Ratione Personae in ICSID Arbitration: The ‘Double Keyhole’

Article 25(1) of the Convention states that the Centre’s jurisdiction ‘shall ex- 4 tend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State.’1 Article 25(2) sets out the conditions ratione personae for both natural persons,2 which are discussed at greater length below, and juridical persons,3 which are addressed in the contribution of M. Perkams. In ICSID arbitrations, a tribunal must satisfy itself that the conditions ratione 5 personae set out in both the Convention and the instrument containing the State’s consent to arbitration – i.e., the BIT or multilateral investment treaty (MIT) at issue – have been met.4 As with the other fundamental jurisdictional 1 2 3 4

ICSID Convention, Art. 25(1) (emphasis added). See ibid., Art. 25(2)(a). See ibid., Art. 25(2)(b). See ‘Are the ICSID Rules Governing Nationality & Investment Working? Panel Discussion’ in Todd J. Grierson Weiler (ed), Investment Treaty Arbitration and International Law (JurisNet, 2008) 119–141, 120–124 (comments of David D. Caron); Víctor Pey Casado and President Allende Foundation v. Chile, ICSID Case No. ARB/98/2, Award, 8 May 2008, paras. 236–418 (separately assessing jurisdiction ratione personae under the Convention and the Spain–Chile BIT); Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Decision on Jurisdic-

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requirements, this is the case regardless of whether the respondent State objects to the tribunal’s jurisdiction ratione personae.5 The conditions ratione personae set out in the Convention determine the scope of the jurisdiction of the Centre and tribunals acting under its auspices, while the conditions ratione personae in international investment treaties set out the scope of the host State’s consent to arbitration and define the investors that enjoy the substantive protections of those treaties.6 6 This ‘double keyhole’ nature of ICSID arbitration has particular implications for jurisdiction ratione personae. As Aron Broches famously noted, Article 25(1) of the Convention sets the ‘outer limits’ of ICSID jurisdiction but otherwise leaves it to the parties to determine the types of disputes that may be submitted to the Centre for resolution.7 Thus, a BIT or MIT cannot expand the Centre’s jurisdiction, but it can narrow it, including through its definition of a protected investor. Alternatively, a BIT or MIT may extend its substantive protections to a broader class of investors than are qualified to bring a claim under the Convention, in which case an investor may nonetheless avail itself of ‘single keyhole’ arbitration under the UNCITRAL or other rules offered in the BIT or MIT. 3. Natural Persons as Protected Investors a) The Scope of Protection of Natural Persons under International Investment Agreements (1) The ICSID Convention 7

Article 25(2)(a) of the Convention defines ‘national of another Contracting State’ to include any natural person who had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered [with the Centre], but does not include any person who on either date also had the nationality of the Contracting State party to the dispute (…). (emphasis added)

8

Article 25(2)(a) sets forth both a ‘positive’ and a ‘negative’ nationality requirement for natural persons: (i) the investor must possess the nationality of an tion, 6 July 2007, paras. 108–112 (separately assessing jurisdiction ratione personae under the Convention, the ECT, and the Greece–Georgia BIT). See also Malincorp Ltd. v. Egypt, ICSID Case No. ARB/08/18, Award, 7 February 2011, para. 107 (referring to the ‘double keyhole’ in the context of determining jurisdiction ratione materiae). 5 See Bernardus Henricus Funnekotter and Others v. Zimbabwe, ICSID Case No. ARB/05/6, Award, 22 April 2009, para. 94; Ioan Micula, Viorel Micula, S.C. European Food S.A., S.C. Starmill S.R.L., and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Decision on Jurisdiction and Admissibility, 24 September 2008, para. 91; Kardassopoulos (n. 4) para. 108. 6 See Malincorp (n. 4) para. 107. 7 Aron Broches, ‘The Convention on the Settlement of Investment Disputes Between States and Nationals of Other States’ (1972) 136 RC 331–410, 360–361.

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ICSID contracting State; and (ii) the investor must not possess the nationality of the contracting State that is a party to the dispute.8 The Convention offers no definition of nationality. This silence was intention- 9 al: the drafters of the Convention sought to grant contracting States maximum flexibility regarding the scope of the protections afforded to foreign investors.9 This silence, however, requires tribunals to give content to the term ‘nationality’ for purposes of determining jurisdiction ratione personae under Article 25(2)(a). In practice, tribunals typically have looked to the definition of ‘investor’ or ‘national’ in the instrument containing the host State’s consent to ICSID arbitration.10 In other cases, they have looked directly to the laws of the State whose nationality is claimed to give meaning to the term ‘nationality’ under the Convention.11 The latter methodology honours the double jurisdictional nature of ICSID arbitration and avoids confusion in cases where a BIT or MIT grants protection to a broader class of ‘investors’ than those with access to ICSID (e.g., permanent residents). (2) BITs and MITs

States are free to define the class of natural persons entitled to protection un- 10 der a BIT or MIT. Most commonly, BITs and MITs protect natural persons who are nationals of a contracting State other than the host State. Such treaties may provide either a single definition of ‘national’ that applies to all contracting States, e.g., by general reference to ‘the applicable law’ of the contracting States,12 or separate definitions of ‘national’ for each contracting party.13 In8 See, e.g., Abaclat and Others v. Argentina, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011, para. 257. The clear requirement of Article 25(1) that an investor be a ‘national of a Contracting State’ excludes stateless persons from ICSID’s jurisdiction. Chittharanjan F. Amerasinghe, ‘The Jurisdiction of the International Centre for the Settlement of Investment Disputes’ (1979) 19 Indian J. Int’l L. 166–227, 200; Anthony C. Sinclair, ‘ICSID’s Nationality Requirements’ in Todd J. Grierson Weiler (ed), Investment Treaty Arbitration and International Law (JurisNet, 2008) 85–118, 87; Christoph H. Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair, The ICSID Convention: A Commentary (Cambridge University Press, 2009), 270. 9 See Anthony Sinclair (n. 8) 88; Christoph Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair (n. 8) 265; Abaclat (n. 8) para. 281. 10 See, e.g., Abaclat (n. 8) paras. 280–287; Hussein Nuaman Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7, Award, 7 July 2004, para. 54, and Decision of the Ad Hoc Committee on the Application for Annulment of Mr Soufraki, 5 June 2007, para. 68 (Freshfields Bruckhaus Deringer LLP represented the claimant in this case); Tza Yap Shum v. Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence, 19 June 2009, paras. 52–53. 11 Pey Casado (n. 4) para. 320; see also Christoph Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair (n. 8) 265. 12 See, e.g., NAFTA, Art. 201; ECT, Art. 1(7). 13 See, e.g., Agreement between the Government of Australia and the Government of the Argentine Republic on the Promotion and Protection of Investments, and Protocol, signed 23 August 1995, entered into force 11 January 1997, Art. 1(c) (defining ‘investor’ to include, with respect to Australia, ‘a natural person who is a citizen or permanent resident of Australia,’ and, with respect to Argentina, ‘a natural person who is a national of [Argentina] in accordance with its laws on nationality’); Agreement between the Government of the People’s Republic of China and the Government of the Hellenic Republic for the Encouragement and Re-

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creasingly, investment treaties also extend protections to natural persons who are permanent residents, or domiciled within the territory, of a contracting State.14 In some cases, BITs require natural persons to demonstrate a combination of nationality plus domicile, permanent residence or another criterion, effectively requiring natural persons to demonstrate a greater link to a State than nationality alone.15 The language of denial of benefits clauses, which allow a State to exclude certain investors from treaty protections even if they meet the treaty’s objective criteria, appears to restrict the application of such clauses to juridical persons.16 11 States cannot consent to ICSID jurisdiction that is greater than that allowed under the Convention; thus, certain investors who are entitled to protection under a BIT or MIT nonetheless may be excluded from bringing an ICSID claim.17 Such investors, including protected permanent residents, dual nationals who possess the nationality of the host State (see below), and even stateless persons,18 may nonetheless pursue direct claims against the host State through a

14

15

16 17 18

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ciprocal Protection of Investments, signed 25 June 1992, entered into force 21 December 1993, Art. 1. See, e.g., NAFTA, Art. 201; ECT, Art. 1(7); Agreement between the Government of Canada and the Government of the Republic of Argentina for the Promotion and Protection of Investments, signed 5 November 1991, entered into force 29 April 1993, Art. 1(b)(i); ASEAN Comprehensive Investment Agreement, signed 26 February 2009, not yet entered into force, Art. 4(g). Compare Agreement between the Government of the Federal Republic of Germany and the Palestine Liberation Organization for the benefit of the Palestinian Authority concerning the Encouragement and Reciprocal Protection of Investments, signed 10 July 2000, not yet entered into force, Art. 1(3)(a) (defining ‘investor’ to include, with respect to the Palestinian Authority, ‘natural persons entitled to vote and having their permanent residence in the territory’ under the self-administration of the Palestinian Authority). See, e.g., Agreement between the Government of Denmark and the Government of the Republic of Indonesia concerning the Encouragement and Reciprocal Protection of Investments, signed 30 January 1968, entered into force 2 July 1968, Art. 1(a) (requiring a natural person to be ‘domiciled in the territory of their nationality’); Agreement between the Government of the Republic of Argentina and the Government of the Republic of Nicaragua for the Promotion and Reciprocal Protection of Investments, signed 10 August 1998, entered into force 1 February 2001, Arts. 1(2)(a) and 1(3) (defining ‘investor’ to include ‘any natural person who is a national of a Party in accordance with its legislation’ but expressly stating that ‘[t]he provisions of the [BIT] shall not apply to the investments of natural persons who are nationals of one Party in the territory of the other party if at the time of the investment such persons had been domiciled in the latter Party for more than two years, unless it is proved that the investment was admitted from abroad’); Treaty between the Federal Republic of Germany and the State of Israel concerning the Encouragement and Reciprocal Protection of Investments, signed 24 June 1976, not yet entered into force, Art. 1(3)(b) (defining ‘nationals’ to mean, with respect to Israel, ‘Israeli nationals who are permanent residents of the State of Israel’). See, e.g., ECT, Art. 17(1); US Model BIT (2004), Art. 17. Engela C. Schlemmer, ‘Investment, Investor, Nationality, and Shareholders’ 49–88, in Peter Muchlinski, Federico Ortino, and Christoph Schreuer, The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 70; Anthony Sinclair (n. 8) 89. See, e.g., Agreement between the Government of the People’s Republic of China and the Government of the Republic of Latvia on the Promotion and Protection of Investments, signed 15 April 2004, entered into force 1 February 2006, Art. 1(2)(a)(i) and Protocol dated 15 April 2004 (protecting ‘a person who, in accordance with the Law on Status of Those Former U.S.S.R. Citizens Who Do Not Have Citizenship of Latvia or That of Any Other State, has a right to a non-citizen passport issued by the Republic of Latvia’).

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single keyhole arbitration under the UNCITRAL or other rules if the BIT or MIT allows them to do so. While the question of whether BITs or MITs protect shareholders is really a 12 question of whether shareholdings constitute an ‘investment’ under the relevant international investment agreement and/or the Convention,19 it is nonetheless worth noting that most BITs regard shareholdings as investments.20 Shareholders therefore can bring claims for injuries suffered qua shareholders, although they cannot bring claims on behalf of the company whose shares are held.21 Moreover, a natural person who makes an investment through a corporate vehicle may bring a claim under a BIT or MIT that affords protection to indirect investments.22 In such cases, the relevant nationality is that of the shareholder, not of the company whose shares are held. b) Standards for Determining Jurisdiction Ratione Personae for Natural Persons

The starting point of any inquiry into the status of an individual claimant as a 13 protected investor is the language of the international investment agreement(s) at issue in a particular case. As noted above, the conditions ratione personae under both the Convention and BITs/MITs ultimately point to the domestic law of the State whose nationality (or permanent residence) is asserted by the claimant.23 This is consistent with the general principle of international law that the domestic laws of States determine nationality.24 The task of a tribunal is to decide 19 See, e.g., Vladimir Berschader and Moïse Berschader v. Russia, SCC Case No. V080/2004, Award, 21 April 2006, paras. 59–61, 80–82, 105–106 (Freshfields Bruckhaus Deringer LLP represented the claimant in this case). See also Jan Asmus Bischoff and Richard Happ, ‘The Notion of Investment’, ch. 6.II. above. 20 See, e.g., Yury Bogdanov v. Moldova, SCC Case No. V114/2009, Award, 30 March 2010, paras. 67–68; CMS Gas Transmission Co. v. Argentina, ICSID Case No. ARB/01/8, Decision of the Tribunal on Objections to Jurisdiction, 17 July 2003, paras. 43–48 (Freshfields Bruckhaus Deringer LLP represented the claimant in this case); Emilio Agustín Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision of the Tribunal on Objections to Jurisdiction, 25 January 2000, paras. 65–70. 21 See Jan Asmus Bischoff and Richard Happ, ‘The Notion of Investment’, ch. 6.II. above. 22 See, e.g., Kardassopoulos (n. 4) paras. 123–124 (an individual shareholder who brought claims under the Greece–Georgia BIT for losses to a Georgian entity held via a Panamanian company was a protected investor); Franz Sedelmayer v. Russia, SCC, Award, 7 July 1998, pp. 26–28 (a German citizen and sole shareholder of a US-incorporated company who brought a claim was a protected investor under the Germany–Russia BIT). 23 Article 42(1) of the Convention – which permits tribunals to apply international law if the parties have not agreed on a different choice of law – is not applicable to the question of whether a claimant satisfies the jurisdictional requirements of Article 25. See Anthony Sinclair (n. 8) 88. 24 Nationality Decrees Issued in Tunis and Morocco (Great Britain v. France), PCIJ Reports, Ser. B, No. 4 (1923) 24 (‘[I]n the present state of international law, questions of nationality are, in the opinion of the Court, in principle within the reserved domain.’); Hague Convention on Certain Questions Relating to the Conflict of Nationality Laws, signed 12 April 1930, Art. 1 (‘It is for each State to determine under its own law who are its nationals. This law shall be recognised by other States in so far as it is consistent with international conventions, international custom, and the principles of law generally recognised with regard to nationality.’); The Nottebohm Case (Liechtenstein v. Guatemala) (Second Phase), Judgment of 6 April 1955,

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whether the claimant possessed the claimed nationality (or permanent residence) in accordance with that State’s laws. Generally, domestic laws provide that one or both of the following general principles cause the involuntary acquisition of nationality by individuals: (i) jus sanguinis, or descent from a national of the State; and (ii) jus soli, or birth within the territory of the State.25 Additionally, most States legislate other means by which individuals may acquire nationality voluntarily, including through marriage, adoption, residence or domicile, and other modes of naturalisation.26 14 Tribunals thus are called upon to construe not only the conditions ratione personae under international investment treaties, but also States’ nationality laws. For example, in Tza Yap Shum v. Peru, an ICSID tribunal considered the question of whether a Chinese national who was a resident of China’s Special Administrative Region of Hong Kong was protected by the China–Peru BIT.27 In that case, Peru objected to jurisdiction on the basis that the claimant was a Hong Kong resident and therefore was not protected by the treaty.28 The tribunal rejected Peru’s argument and held that the claimant was a national of China under the Chinese Nationality Act, further holding that his Hong Kong residency was irrelevant under the BIT because the Nationality Act applies to Hong Kong and there was no evidence that China and Peru intended to exclude Hong Kong residents from the treaty’s scope.29 15 While domestic laws set nationality standards, tribunals have the power to make their own determination of a claimant’s nationality for jurisdictional purposes based on an examination of the facts in light of such laws.30 A tribunal of

25

26 27 28 29

30

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1955 ICJ Rep. 4, p. 20; Waguih Elie George Siag and Clorinda Vecchi v. Egypt, ICSID Case No. ARB/05/15, Decision on Jurisdiction, 11 April 2007, para. 143; Tza Yap Shum (n. 10) para. 54. Ian Brownlie, Principles of Public International Law (Oxford University Press, 2008) 388– 391. An individual may acquire nationality involuntarily through the application of either of these general principles, or through a combination of both. Jus sanguinis, in particular, may take different forms in different States and be based on paternal descent, maternal descent, or some other variation. Ibid. Ibid., at 391–394. Tza Yap Shum (n. 10) paras. 42–77. Ibid., para. 42. Ibid., paras. 52–77. This holding has an interesting consequence: since Hong Kong has concluded BITs independently from China, a Hong Kong resident who is also a Chinese national can take advantage of both Hong Kong and Chinese BITs. See also Norah Gallagher and Wenhua Shan, Chinese Investment Treaties: Policies and Practice (Oxford University Press, 2009) paras. 2.44–2.48. See Soufraki, Award (n. 10) para. 55 (‘It is accepted in international law that nationality is within the domestic jurisdiction of the State, which settles, by its own legislation, the rules relating to the acquisition (and loss) of its nationality. (…) But it is no less accepted that when, in international arbitral or judicial proceedings, the nationality of a person is challenged, the international tribunal is competent to pass upon that challenge. It will accord great weight to the nationality law of the State in question and to the interpretation and application of that law by its authorities. But it will in the end decide for itself whether, on the facts and law before it, the person whose nationality is at issue was or was not a national of the State in question and when, and what follows from that finding. Where, as in the instant case, the jurisdiction of an international tribunal turns on an issue of nationality, the international tribunal

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course does not grant or withdraw nationality when it determines its jurisdiction ratione personae; rather, it decides whether to recognise the claimant’s asserted nationality for the purposes of the arbitration. As explained by the ad hoc annulment committee in Soufraki v. United Arab Emirates, a tribunal decision on nationality is a ‘declaratory act,’ not a ‘constitutive act.’31 This gives rise to two questions: (i) to what extent may a tribunal probe 16 and/or make a ruling contrary to a State’s official declaration that a claimant holds its nationality? and (ii) to what extent, if at all, may a tribunal disregard the result dictated by a State’s nationality laws? The first question is essentially a question of competence and proof. It is well 17 settled that a tribunal has the power to make an independent determination of jurisdiction ratione personae and that, in doing so, the tribunal may inquire independently into whether a claimant meets the requisite criteria for nationality under domestic law.32 The individual claimant in the oft-cited Soufraki case presented to the tribunal five certificates of nationality issued by Italian authorities, copies of Italian passports, and a letter from the Italian Ministry of Foreign Affairs stating that the claimant had ‘the right to have recourse to the said [ICSID/ BIT] forum.’33 Citing both its competence and duty to determine its own jurisdiction ratione personae, the Soufraki tribunal undertook an independent examination of the facts in light of Italian nationality law and found the claimant not to be an Italian national because he had acquired conflicting Canadian nationality, a fact that the claimant had not revealed to Italian authorities when they issued his certificates of nationality and other official documents.34 As Soufraki makes clear, tribunals are constrained neither by a State’s official 18 declaration of an individual claimant’s nationality nor by official indicia of a State’s recognition of an individual’s nationality.35 Official indicia of nationality only constitute prima facie proof of the claimed nationality, subject to rebuttal and to independent examination and verification by the tribunal that the investor holds the claimed nationality in accordance with the State’s domestic laws.36

31 32

33 34 35 36

is empowered, indeed bound, to decide that issue.’); Soufraki, Decision on Annulment (n. 10) paras. 50–78. Soufraki, Decision on Annulment (n. 10) para. 55. See, e.g., The Flegenheimer Case (US v. Italy), Decision No. 182 of the Italian–US Conciliation Commission, 20 September 1958, 14 Recueil des Sentences Arbitrales 327–390, pp. 336– 349; Soufraki, Decision on Annulment (n. 10) paras. 71 (‘Flegenheimer stands for the proposition that it is a generally accepted international law principle that international tribunals, in the course of determining their own jurisdiction, are not only empowered, but duty bound, to make their own findings as to a contested nationality, even in the face of official nationality documents provided by one of the State Parties to the treaty establishing jurisdiction[al] [competence] of the tribunal.’) and 72–74. Soufraki, Award (n. 10) para. 14. Soufraki, Award (n. 10) paras. 47–81. See also Pey Casado (n. 4) paras. 319–320; Micula (n. 5) paras. 91–97. See Christoph Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair (n. 8) 267–269; Soufraki, Award (n. 10) para. 63; Siag, Decision on Jurisdiction (n. 24) paras. 150– 153, 193; Mohammad Ammar Al-Bahloul v. Tajikistan, SCC Case No. V064/2008, Partial Award on Jurisdiction and Liability, 2 September 2009, paras. 129–132; Chittharanjan Am-

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Similarly, a contractual clause in an investment agreement specifying the investor’s nationality constitutes only prima facie proof of the same,37 as does the fact of a host State’s agreement on the claimant’s nationality at the time of its consent to ICSID jurisdiction.38 19 With respect to the second question – whether a tribunal may disregard the nationality result dictated by domestic law – while domestic law determines nationality, the international effect of nationality conferred by domestic law is limited by international law and, in certain circumstances, tribunals may disregard nationality conferred or withdrawn in accordance with domestic law.39 For example, although no published decision has addressed such a case, tribunals have remarked that the involuntary acquisition or withdrawal of nationality in a manner contrary to international law may be ignored.40 Tribunals also have noted their power to disregard nationality acquired in a manner inconsistent with international law, such as by means of fraud or mistake.41 One commentator has even suggested that tribunals may disregard a claimant’s nationality if recognition of

37 38

39 40

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erasinghe (n. 8) 198–199 (stating that during the Convention’s drafting, a proposal for official certification of nationality to be ‘conclusive proof of the facts stated therein’ was met with ‘overwhelming opposition,’ and that experts instead suggested that such a certification should be prima facie evidence only). See also Ambiente Ufficio SpA and others v. Argentina, ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility, 8 February 2013, paras. 318– 319 (‘ICSID tribunals have full discretion in assessing the probative value of any piece of evidence introduced before them. (…) [P]hotocopies of passports or identity documents or certificates of incorporation will suffice to adequately substantiate the (…) nationality requirement for natural and juridical persons (…) as long as there are no relevant counter-indications and as long as the Tribunal is satisfied that the documents are in order.’); Arif v. Moldova, ICSID Case No. ARB/11/23, Award, 8 April 2013, para. 356 (finding a decree granting claimant French nationality ‘strong and convincing evidence that [claimant] acquired nationality in accordance with French law,’ noting further that the claimant presented his French passport and French nationality identity card to the tribunal) (quoting Micula (n. 5) paras. 94– 95). The claimant has the burden of proving that the requisite conditions ratione personae have been satisfied on the relevant dates. A prima facie showing on jurisdiction shifts the burden to the respondent State to prove that jurisdiction does not exist. See Soufraki, Award (n. 10) para. 58; Soufraki, Decision on Annulment (n. 10) para. 109; Waguih Elie George Siag and Clorinda Vecchi v. Egypt, ICSID Case No. ARB/05/15, Award, 1 June 2009, paras. 315– 318; Chevron Corp. & Texaco Petroleum Corp. v. Ecuador (Ad hoc; UNCITRAL), Interim Award, 1 December 2008, para. 112. The burden of proving that the claimed nationality is invalid is high. See Micula (n. 5) para. 87; Tza Yap Shum (n. 10) paras. 63–65. Christoph Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair (n. 8) 269– 270. Chittharanjan Amerasinghe (n. 8) 204 (stating that ‘while it is ultimately for a tribunal or commission to decide on questions of nationality in the exercise of the power to determine its own competence, it will not lightly disregard an agreement or tacit recognition of nationality by the host State’). See Siag, Decision on Jurisdiction (n. 24) paras. 144–145; Anthony Sinclair (n. 8) 88. See, e.g., Iran–US CTR, Case No. A/18, Decision No. DEC 32-A18-FT, 6 April 1984, 5 Iran– US CTR 251, 272–273 (Concurring Opinion of Richard M. Mosk) (noting that ‘Iranian law imposes Iranian nationality on a broad spectrum of people, mak[ing] it very difficult to renounce that nationality and drastically penaliz[ing] persons who succeed in doing so’). See, e.g., Soufraki, Decision on Annulment (n. 10) para. 71; Arif (n. 36) para. 357 (stating that the tribunal ‘would only be inclined to disregard the decision of the French authorities [to grant nationality to the claimant] if “there was convincing and decisive evidence” that [the claimant’s] acquisition of French nationality “was fraudulent or at least resulted from material

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that nationality threatened to undermine ‘the integrity and sustainability of the investment treaty regime.’42 c) Particular Problems That arise with Respect to Jurisdiction Ratione Personae and Natural Persons

Tribunals have addressed the status of natural persons as protected investors 20 less frequently than juridical persons, no doubt due to the facts that foreign investments are typically structured through corporate entities and individual nationality is more difficult to change than corporate nationality.43 Nonetheless, two issues regarding the nationality of natural persons have arisen with some frequency: (i) the jurisdictional consequences of a claimant’s dual or multiple nationalities; and (ii) the role of the ‘effective nationality’ principle in determining jurisdiction ratione personae. (1) Dual or Multiple Nationality

Article 25(2)(a) of the ICSID Convention expressly excludes any individual 21 who possessed the nationality of the respondent contracting State on the critical dates from the Centre’s jurisdiction, even if that person simultaneously held the nationality of another contracting State on those dates.44 The Report of the Executive Directors on the Convention notes that ‘[t]his ineligibility is absolute and cannot be cured even if the State party to the dispute has given its consent.’45 Beyond this negative nationality requirement, Article 25(2)(a) does not pre- 22 vent individuals with multiple nationalities (other than that of the respondent State) from bringing claims before ICSID.46 An ICSID tribunal therefore has jurisdiction over a claim brought by an investor who held the nationality of two or more non-host contracting States on the critical dates, or who held the nationality of a non-host contracting State and one or more non-contracting States.47

42 43 44 45

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error,”’ noting further that it is for the respondent State to make that showing). Chittharanjan Amerasinghe (n. 8) 203. Zachary Douglas, The International Law of Investment Claims (Cambridge University Press, 2009) paras. 539–541. See Anthony Sinclair (n. 8) 89 (stating that, for the most part, Elihu Lauterpacht’s prediction that ‘where natural persons are concerned, few difficulties are likely to arise’ has proven accurate). ICSID Convention, Art. 25(2)(a). Report of the Executive Directors on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965), 1 ICSID Rep. 25, 29. See also Christoph Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair (n. 8) 271– 274; Chittharanjan Amerasinghe (n. 8) 205. Anthony Sinclair (n. 8) 97 (‘It was apparently not the intention of the Contracting States to the Convention to preclude the claims of dual nationals per se, provided that an investor had the nationality of at least one Contracting State and did not have the nationality of the host State.’). Saba Fakes v. Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, para. 62 (‘[T]he Contracting Parties to the ICSID Convention did not exclude claims of dual nationals per se,

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In contrast to the Convention, most BITs and MITs do not prevent dual nationals who possess the nationality of the respondent State from bringing treaty claims.48 As a result, even a dual national who possessed the respondent State’s nationality on the critical dates may bring a claim.49 The tribunal in Pey Casado v. Chile interpreted the silence in the Spain–Chile BIT on this issue to mean that a dual Spanish-Chilean national could claim the protections of the BIT against either Spain or Chile.50 The reasoning of Pey Casado may apply with special force to investment treaties concluded after the Convention. Although this interpretation may create the potential for abuse by host State nationals who obtain dual nationality for the purpose of internationalising what would otherwise be a domestic dispute, the risk that host State nationals will pursue such an expedient is limited by the temporal requirements ratione personae and the ability of States to restrict the grant of dual nationality and/or insert negative nationality requirements in their BITs and MITs. 24 NAFTA Article 201 extends the treaty’s protections to both nationals and permanent residents of contracting States. The claimant in Feldman Karpa v. Mexico was a US citizen and a permanent resident (inmigrado) of Mexico, and Mexico argued that he should be considered a Mexican ‘national’ for purposes of the NAFTA diversity of nationality requirement, thereby destroying jurisdiction.51 The tribunal refused to interpret Article 201 as treating a claimant who is a na23

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in circumstances when such dual nationals (i) hold the nationality of at least one Contracting State and (ii) do not hold the nationality of the host State.’). Cf. Agreement between the Government of Canada and the Government of the Lebanese Republic for the Promotion and Protection of Investments, signed 11 April 1997, entered into force 19 June 1999, Art. 1 (stating in the definition of ‘investor’ that ‘[i]n the case of persons who have both Canadian and Lebanese citizenship, they shall be considered Canadian citizens in Canada and Lebanese citizens in Lebanon’); Convention Establishing the Inter-Arab Investment Guarantee Corporation, entered into force 1 April 1974, Art. 17.3 (stating that ‘[i]n no event shall the investor be a natural person who is a national of the host country’); Colombia Model BIT (2007), Art. 1.2. See also Convention Establishing the Multilateral Investment Guarantee Agency, signed 11 October 1985, entered into force 12 April 1988, Art. 13 (defining covered investors to include any ‘natural person [who] is a national of a member other than the host country’ and setting out a hierarchy for determining the nationality of a claimant with multiple nationalities for purposes of the convention, stating that ‘the nationality of a member shall prevail over the nationality of a non-member, and the nationality of the host country shall prevail over the nationality of any other member’); US Model BIT (2004), Art. 1. See Ibrahim F.I. Shihata and Antonio R. Parra, ‘The Experience of the International Centre for Settlement of Investment Disputes’ (1999) 14 ICSID Rev.–FILJ 299, 308 (‘Many BITs (…) purport to extend the benefits of the treaties to investors who are natural persons with the nationality of the host State so long as they also have the nationality of the other State party to the treaty.’). Cf. Roberto Aguirre Luzi and Ben Love, ‘Individual Nationality in Investment Treaty Arbitration: The Tension Between Customary International Law and Lex Specialis’ in Andrea K. Bjorklund, Ian A. Laird and Sergey Ripinsky, Investment Treaty Law: Current Issues III (BIICL, 2009) 183–206, 197 (stating that ‘there may be arguments that customary international law principles would preclude such claims’ where the BIT or MIT is silent on a negative nationality requirement). Pey Casado (n. 4) para. 415. Marvin Roy Feldman Karpa v. Mexico, ICSID Case No. ARB(AF)/99/1 (NAFTA), Interim Decision on Preliminary Jurisdictional Issues, 6 December 2000, paras. 24–38.

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tional of one contracting State and a permanent resident of another as a dual national for purposes of the NAFTA. The tribunal reasoned that Article 201 is intended to expand jurisdiction, not limit it, and therefore held that ‘permanent residents are treated like nationals in a given State Party only if that State is different from the State in which the investment [was] made.’52 (2) The Doctrine of ‘Real and Effective Nationality’

Although the criteria for determining an investor’s nationality are supplied by 25 the international investment agreements at issue and, in turn, by the law of the State whose nationality is claimed, both claimants and respondent States have invoked the international law doctrine of ‘real and effective nationality’ in attempts either to establish or to destroy jurisdiction ratione personae. It is clear that the effective nationality principle is applicable to determinations of nationality if a treaty expressly incorporates the principle.53 The harder question is whether the effective nationality principle applies if a treaty is silent on the issue and, if so, under what circumstances. Two decisions figure prominently in relation to this question. The first is the 26 seminal ICJ decision in the 1955 Nottebohm case.54 In Nottebohm, the issue was whether Liechtenstein could espouse the claim of Frederic Nottebohm against Guatemala. Nottebohm was a German national who had worked and resided in Guatemala since 1905, and then sought and obtained Liechtenstein nationality in less than a month in 1939, relinquishing his German nationality in the process.55 Guatemala objected that Nottebohm’s expeditiously-acquired nationality was insufficient for Liechtenstein to espouse his claim.56 The ICJ held that Nottebohm’s Liechtenstein nationality was not ‘real and ef- 27 fective’ vis-à-vis Guatemala, describing his connections with Liechtenstein as ‘extremely tenuous’ and ‘lacking in genuineness’ and further noting that his nationality ‘was conferred in exceptional circumstances of speed and accommodation.’57 The ICJ famously described nationality as ‘a legal bond having as its basis a social fact of attachment, a genuine connection of existence, interests and sentiments, together with the existence of reciprocal rights and duties.’58 While a State determines how its nationality may be acquired and lost, the ICJ held that international law nonetheless requires a ‘genuine link’ between an individual

52 53 54 55 56 57

Ibid., para. 34. See, e.g., US Model BIT (2004), Art. 1. Nottebohm (n. 24). Ibid., at 15–16. Ibid., at 9–12. Ibid., at 24–26 (further noting that Nottebohm had substantial connections with Guatemala and noting in contrast that he had ‘[n]o settled abode’ and ‘no prolonged residence’ in Liechtenstein and, furthermore, no intention of settling there). Prior to Nottebohm, the effective nationality principle had been applied only in cases of dual nationality to determine which nationality should be effective for purposes of diplomatic protection. 58 Ibid., at 23.

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and a State in order for such nationality to be given international effect for purposes of diplomatic protection. 28 The second oft-cited precedent on effective nationality is the decision of the Iran–US Claims Tribunal in Case No. A/18.59 In Case No. A/18, the tribunal applied the effective nationality principle when determining its jurisdiction ratione personae over a claim brought by a dual Iranian-US national against Iran under the Algiers Declaration.60 The Algiers Declaration expressly states that the tribunal was established ‘for the purpose of deciding claims of nationals of the United States against Iran and claims of nationals of Iran against the United States.’61 Citing Nottebohm, the tribunal determined to search for the ‘stronger factual ties between the person concerned and one of the States whose nationality is involved’ and held that ‘national’ and ‘nationals’ under the Algiers Declaration ‘must be understood as consistent with that rule unless an exception is clearly stated.’62 The tribunal went on to find that the Algiers Declaration does not contain such a clear exception and thus held that it had jurisdiction over claims brought by dual Iranian-US nationals only ‘when the dominant and effective nationality of the claimant during the relevant period from the date the claim arose until 19 January 1981 was that of the [non-Respondent State],’63 typically the US. (a) Effective Nationality and the ICSID Convention 29

No ICSID tribunal to date has held that the effective nationality principle applies to the Convention, and ICSID awards suggest that there is very little room to do so.64 59 Iran–US CTR, Case No. A/18 (n. 40). Other frequently cited precedents on effective nationality include the Mergé Case (Italian–US Conciliation Commission), Decision No. 55 of 10 June 1955, 14 RIAA 236 (1955), and the Salem Case (Egypt v. USA), Award of 8 June 1932, 2 RIAA 1161 (1932). 60 Ibid., at 259–266. 61 Declaration of the Government of the Democratic and Popular Republic of Algeria Concerning the Settlement of Claims by the Government of the United States of America and the Government of the Islamic Republic of Iran of 19 January 1981 (the ‘Algiers Declaration’), 1 Iran–US CTR 9, Art. II(1). 62 Iran–US CTR, Case No. A/18 (n. 40) 265 (stating that the Tribunal will consider ‘all relevant factors, including habitual residence, center of interests, family ties, participation in public life and other evidence of attachment’). 63 Ibid. (stating that Nottebohm ‘demonstrated the acceptance and the approval by the [ICJ] of the search for the real and effective nationality based on facts of a case, instead of an approach relying on more formalistic criteria’). Cf. ibid., Dissenting Opinion, at 321, 332 (stating that ‘the theory of effective nationality is far from constituting a principle of international law’ and noting that ‘[i]n the long history of the relevant legal precedents, not one single case can be found where an international tribunal resorted to the so-called theory of effective nationality to settle a conflict of nationalities where it involved the nationalities of the two States establishing the international forum’). 64 See Fakes (n. 47) paras. 54–81; Micula (n. 5) paras. 98–106; Pey Casado (n. 4) paras. 236– 323; Siag, Decision on Jurisdiction (n. 24) paras. 195–201; Champion Trading Co., Ameritrade Int’l, Inc., James T. Wahba, John B. Wahba and Timothy T. Wahba v. Egypt, ICSID Case No. ARB/02/9, Decision on Jurisdiction, 21 October 2003, p. 17. See also Rompetrol Group

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Champion Trading v. Egypt was the first ICSID decision to address this issue. 30 In Champion Trading, the claimants, who were dual US–Egyptian nationals, argued that the tribunal should apply the effective nationality principle and disregard their Egyptian nationality, thereby finding that they satisfied the Convention’s negative nationality requirement. The tribunal disagreed and found Nottebohm inapplicable to the case. In doing so, the Champion Trading tribunal distinguished Case No. A/18 on the basis that, unlike the Algiers Declaration, Article 25(2)(a) of the Convention ‘contains a clear and specific rule regarding dual nationals,’ i.e., that an ICSID tribunal lacks jurisdiction ratione personae if a claimant possesses the nationality of the respondent contracting State, even as a dual national.65 Subsequent tribunals have agreed that the negative nationality requirement in 31 Article 25(2)(a) constitutes lex specialis and therefore leaves no room for consideration of a claimant’s effective nationality. The question in Siag v. Egypt, as in Champion Trading, was whether the individual claimants satisfied the Convention’s negative nationality requirement. However, in contrast to Champion Trading, the Siag tribunal considered whether the Nottebohm principle could be used to find that the claimants, who were not dual nationals, nonetheless had the effective nationality of the respondent State (Egypt), thereby destroying diversity of nationality under Article 25(2)(a). In holding that the Nottebohm principle did not apply because the claimants were not dual nationals, the Siag tribunal agreed with Champion Trading ‘that the regime established under Article 25 of the [Convention] does not leave room for a test of dominant or effective nationality.’66 The Siag tribunal further distinguished Nottebohm on the basis that rules regarding diplomatic protection are not automatically transferable to international investment arbitration.67 N.V. v. Romania, ICSID Case No. ARB/06/3, Decision on Jurisdiction and Admissibility, 18 April 2008, paras. 78–93 (rejecting the application of the effective nationality principle under the Convention with respect to corporate claimants and stating that ‘there is nothing in the Nottebohm judgment that would serve to establish a general rule of “real and effective nationality” for the purpose of determining the status of corporations under international law,’ further noting that ‘there is simply no room for an argument that a supposed rule of “real and effective nationality” should override either the permissive terms of Article 25 (…) or the prescriptive definitions incorporated in the BIT’). Cf. Feldman Karpa (n. 51) paras. 31–32 (stating that ‘dual nationality problems, including the search [for] the “dominant and effective nationality,” require the existence of double citizenship,’ and holding that Nottebohm was inapposite in that case because only one nationality was at issue, which was not conferred ‘in exceptional circumstances of speed and accommodation’); Eudoro Armando Olguín v. Paraguay, ICSID Case No. ARB/98/5, Award, 26 July 2001, para. 61 (holding somewhat cryptically that both of the claimant’s nationalities – Peruvian and Paraguayan – were ‘effective’ and that ‘the effectiveness of his Peruvian nationality [was] enough to determine that he cannot be excluded from the provisions for protection under the BIT,’ but not discussing the effective nationality principle). 65 Champion Trading (n. 64) p. 15–16. 66 Siag, Decision on Jurisdiction (n. 24) paras. 195–199. Cf. ibid., Partial Dissenting Opinion of Francisco Orrego Vicuña, 61 et seq. (stating that because the Convention does not define ‘nationality,’ international law governs, including the Nottebohm principle). 67 Siag, Decision on Jurisdiction (n. 24) paras. 197–198.

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More recently, the tribunals in Micula v. Romania and Fakes v. Turkey also held that the effective nationality principle does not apply to the Convention. In Micula, the tribunal found that the claimant had only Swedish nationality but nonetheless considered Romania’s argument that it should disregard that Swedish nationality because the claimant lacked genuine connections with Sweden and had strong links with Romania.68 Agreeing with Siag, the tribunal held that Article 25 left no room for a test of effective nationality, noting that the Convention ‘requires only that a claimant demonstrate that it is a national of a “Contracting State,”’ and that Article 25(2)(a) permits dual nationality so long as the claimant is not a national of the respondent State.69 The Micula tribunal also expressed doubt as to the status of effective nationality as a rule of customary international law and stated that Nottebohm should be confined to its ‘peculiar facts.’70 33 In Fakes, the claimant was a dual Dutch-Jordanian national who brought an ICSID claim against Turkey alleging breaches of the Netherlands–Turkey BIT.71 Turkey objected that the claimant lacked effective Dutch nationality for purposes of qualifying as a protected investor under both the BIT and Article 25(2)(a) of the Convention.72 The Fakes tribunal held that there was no room for effective nationality under the Convention, noting that it provides a ‘clear exception’ to the Nottebohm principle because it ‘contains an express exclusion of claims by dual nationals when one of the nationalities is that of the host State regardless of whether those nationalities are effective.’73 In particular, the Fakes tribunal observed that this ‘explicit exclusion’ was ‘the only jurisdictional bar relating to a natural person’s nationality that was contemplated by the drafters of the Convention’ and found it significant that Article 25 ‘avoided any reference to the effectiveness of an investor’s nationality.’74 The tribunal refused to import a rule of international law ‘that would run counter to [the] clear language’ of Article 25 and ‘that would result in establishing additional limitations to the Centre’s jurisdiction where no such limitations were provided by the Contracting Parties.’75 32

68 Micula (n. 5) paras. 98–99. 69 Ibid., para. 100. See also Arif (n. 36) para. 359 (citing Micula (n. 5) paras. 98–103 and stating: ‘The Tribunal notes that neither Article 25 of the ICSID Convention, nor the BIT require the application of the effective nationality principle. The Tribunal moreover notes that the effective nationality test has little support in ICSID proceedings and that there is a clear reluctance to apply the test where only one nationality is at issue. This is the case here and therefore the Tribunal is not persuaded that an effective nationality test is applicable.’). 70 Ibid., para. 99 (stating that ‘the role of a genuine or effective link with the [S]tate of nationality is disputable in public international law, and is indeed disputed, particularly in the case of a single nationality’) (citing John Dugard, First Report on Diplomatic Protection, U.N. GAOR International Law Commission, 52nd Sess., U.N. Doc. A/CN.4/506/Add.1 (2000) para. 110, and Article 4 of the ILC Draft Articles on Diplomatic Protection). 71 Fakes (n. 47) paras. 54–81. 72 Ibid., para. 51. 73 Ibid., paras. 71–72, 76. 74 Ibid., para. 61. 75 Ibid., para. 76.

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In Pey Casado, the tribunal considered whether it had jurisdiction ratione 34 personae under the Convention in a case brought by a claimant who had been a dual Spanish-Chilean national before formally renouncing his Chilean nationality just prior to filing his ICSID claim under the Spain–Chile BIT. In doing so, the tribunal considered the relevance of effective nationality to Article 25(2)(a)’s negative nationality requirement and held that the principle ‘does not seem to be pertinent “de lege lata.”’76 However, the Pey Casado tribunal also opined that where a dual national possesses the host State’s nationality but that nationality is ‘totally artificial or totally ineffective,’ a question of whether such dual national should be excluded from ICSID jurisdiction could arise,77 thereby suggesting that effective nationality might apply to expand the Centre’s jurisdiction.78 While no ICSID decision has yet applied the effective nationality principle, 35 several tribunals have recognised the possible application to individual investors in exceptional circumstances.79 Most notably, the Champion Trading, Siag, and Fakes tribunals each suggested in dicta that a tribunal might apply the effective nationality principle to disregard either a ‘nationality of convenience’ – acquired, like in Nottebohm, ‘in exceptional circumstances of speed and accommodation’ – or an involuntarily-acquired nationality, such as one passed down by descent over multiple generations.80 (b) Effective Nationality and BITs/MITs

Similarly, tribunals that have considered the relevance of effective nationality 36 to BITs have found that the principle has no role to play.81 In Siag, the tribunal considered the role of effective nationality in determining its jurisdiction ratione 76 77 78 79

Pey Casado (n. 4) para. 241. Ibid., para. 241. Roberto Aguirre Luzi and Ben Love (n. 49) 192. See Fakes (n. 47) para. 77 (‘This is not to say that the effective nationality test never has any bearing in the context of ICSID arbitration.’). 80 Champion Trading (n. 64) 16–17 (‘This Tribunal does not rule out that situations might arise where the exclusion of dual nationals could lead to a result which is manifestly absurd or unreasonable (…). One could envisage where a country continues to apply the jus sanguinis over many generations. It might for instance be questionable if the third or fourth foreign born generation, which has no ties whatsoever with the country of its forefathers, could still be considered to have, for the purpose of the Convention, the nationality of this state.’); Siag, Decision on Jurisdiction (n. 24) paras. 200–201 (seemingly undertaking a limited effective nationality examination to dispose of Egypt’s objection that the claimants’ connections with Italy were ‘slight’ and finding that Egypt failed to demonstrate that the claimants ‘acquired Italian nationality as a mere expedient in order to bring these claims before ICSID’); Fakes (n. 47) paras. 77–78 (referring to the possibility of disregarding a ‘nationality of convenience’ or a nationality that is passed down over several generations). 81 See Fakes (n. 47) paras. 54–81; Micula (n. 5) paras. 98–106; Pey Casado (n. 4) paras. 412– 418; Siag, Decision on Jurisdiction (n. 24) paras. 195–201. See also Soufraki, Award (n. 10) paras. 42–46 (noting that the U.A.E. argued in the alternative that even if the tribunal found the claimant to be an Italian national, such nationality should not be treated as effective for purposes of the Agreement between the Government of the United Arab Emirates and the Government of the Italian Republic for the Promotion and Protection of Investments, but not reaching the question because the claimant had failed to prove his Italian nationality).

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personae under the Italy–Egypt BIT. That BIT defines ‘national’ to include, ‘with respect to either Contracting State, a natural person holding the nationality of that State in accordance with its laws.’82 The Siag tribunal held that the BIT, like Article 25(2)(a) of the Convention, contained ‘a clear definition of who is to be considered a national’ and therefore, unlike the Algiers Declaration at issue in Case No. A/18, that the BIT contained a clear exception to the customary international law rule of ‘real and effective nationality.’83 In other words, the BIT definition of ‘national’ as a natural person holding the nationality of a contracting State ‘in accordance with its laws’ constituted lex specialis and left no room for the application of customary international law.84 37 Subsequent tribunals have adopted this reasoning. In Micula, the tribunal considered whether an effective nationality requirement could be read into the Sweden–Romania BIT and held that ‘the clear definition and the specific regime established by the terms of the BIT should prevail.’85 The Micula tribunal observed that the BIT clearly stated that nationality should be determined pursuant to the contracting States’ domestic laws and contained no further requirements, noting that the contracting States were ‘free to agree whether any additional standards must be applied to the determination of nationality.’86 To require investors to demonstrate links to one of the contracting States beyond nationality ‘would result in an illegitimate revision of the BIT.’87 38 The Pey Casado and Fakes tribunals reached the same conclusion under the Spain–Chile and the Netherlands–Turkey BITs, respectively. In Pey Casado, having found jurisdiction under the first keyhole of the Convention, the tribunal went on to consider whether the claimant could claim protection under the BIT. As discussed above, the tribunal held that since the BIT did not contain a negative nationality requirement like that in the Convention, it protected dual nationals who possessed the nationality of the respondent State, which the claimant had done until shortly before filing the claim. In doing so, the tribunal rejected the argument that the BIT contained an implicit condition excluding a dual national whose ‘dominant and effective’ nationality was that of the respondent host State.88 The tribunal found that it would be inappropriate to impose a condition ratione personae ‘based on a supposed rule of customary international law’ that was not revealed in either ‘the letter or the spirit’ of the BIT.89 39 The Fakes tribunal similarly held that a requirement of effective nationality could not supersede the clear definition of ‘investor’ in the Netherlands–Turkey 82 Siag, Decision on Jurisdiction (n. 24) para. 198 (emphasis added). 83 Ibid. 84 Ibid. (‘Developments in international law concerning the nationality of individuals in the field of diplomatic protection (…), while of interest, must give way to the specific regime under the (…) Convention and the terms of the BIT.’). 85 Micula (n. 5) para. 101. 86 Ibid. 87 Ibid., paras. 101–102. 88 Pey Casado (n. 4) para. 415. 89 Ibid.

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BIT, under which a claimant’s nationality is to be determined in accordance with the ‘applicable law’ of one of the contracting States.90 Mr Fakes was a dual national holding the nationalities of both a BIT contracting State and a non-contracting State. In holding that the BIT did not include an implicit effective nationality requirement, the Fakes tribunal stated that ‘[h]ad the Contracting Parties intended to set additional limitations as regards jurisdiction ratione personae, no doubt they would have expressly stated such limitations in the text of the BIT.’91 (c) Conclusions Regarding Effective Nationality

Except in a case involving exceptional circumstances similar to those in Not- 40 tebohm, there appears to be little scope to apply the effective nationality principle in either single or double keyhole treaty arbitration.92 As described above, there is significant support for the proposition that Article 25(2)(a) constitutes lex specialis regarding ICSID jurisdiction ratione personae and, therefore, is not susceptible to a reading that imports effective nationality.93 There also is significant support for the proposition that, absent a provision 41 explicitly incorporating the effective nationality principle, BITs and MITs require no greater links than nationality (or permanent residence) under a contracting State’s laws.94 This result has particular appeal in a globalised world where individuals – particularly those involved in international business and investment – often spend a large part of their lives outside of their States of nationality. As noted above, States can and do require more substantial links than nationality for an individual to claim the protection of a BIT or MIT.95 As a result, and 90 Fakes (n. 47) paras. 64 (‘[T]he text of the BIT leaves no room as to the question of whether the Contracting Parties intended such effectiveness test to be applied in the context of the BIT.’) and 69. 91 Ibid., para. 70. 92 See Anthony Sinclair (n. 8) 101 (‘[I]t is not possible to state conclusively that an ICSID tribunal may never find the principle applicable since, so far as the published decisions are concerned, no tribunal has yet been faced with a clear nationality of convenience, acquired “in exceptional circumstances of speed and accommodation” for the purpose of bringing a claim.’). 93 Cf. Anthony Sinclair (n. 8) 98–99 (‘One interpretation of its absence may be that the “Nottebohm rule” was firmly rejected. Another interpretation may be that it was considered to be obviously applicable as a principle of general international law relevant to the interpretation of the Convention.’). 94 See mns. 36–40. See also Zachary Douglas (n. 42) paras. 541 (‘Investment treaties do not (…) reveal a fundamental preoccupation with the origin of (…) capital. It would not, therefore, be consistent with the object and purpose of investment treaties for tribunals to develop stringent requirements for the quality of the link of nationality between the claimant investor and the relevant contracting state party.’) and 584; Roberto Aguirre Luzi and Ben Love (n. 49) 197– 198 (‘Without specific treaty text to the contrary, the normative argument that individuals must somehow meet a higher threshold of genuineness than corporations in the links that they hold with a particular State is unpersuasive.’). 95 See mn. 10. See also Roberto Aguirre Luzi and Ben Love (n. 49) 198; US Model BIT (2004), Art. 1. But see Kenneth Vandevelde, ‘A Comparison of the 2004 and 1994 US Model BITs: Rebalancing Investor and Host Country Interests’ (2009) Y.B. Int’l Inv. L. & Pol’y 2008–

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as the Siag, Micula, Pey Casado, and Fakes decisions indicate, tribunals are likely to find a BIT or MIT definition of ‘investor’ or ‘national’ – even one that states only that nationality is to be determined ‘in accordance with national law’ – to be sufficiently clear so as to constitute lex specialis, thereby displacing the effective nationality principle regardless of whether it is considered a rule of customary international law. 4. At What Points in Time must an Investor satisfy the Relevant Conditions Ratione Personae? 42

A related question, and in many ways an earlier question, is this: at what points in time must a claimant satisfy the requisite conditions ratione personae at issue in a particular case? This question raises the issue not only of the critical dates for determining jurisdiction ratione personae, but also of the applicability of the so-called ‘continuous nationality’ rule. a) Temporal Requirements Ratione Personae under the ICSID Convention

Article 25 of the Convention requires a natural person to satisfy its nationality requirements on both the date of consent to arbitration and the date on which the request is registered with ICSID.96 The temporal requirement is less strict for juridical persons, which must satisfy Article 25’s conditions ratione personae only on the date of consent.97 44 The Convention does not require natural persons to maintain continuous nationality from the date of consent through the date of registration, nor does it require them to possess the nationality of the same contracting State on those two 43

2009, 283–315, 294 (stating that the US Model BIT’s clause ‘essentially codifies the rule under customary international law and thus does not represent a departure from the rule that the United States would have expected a tribunal to apply in a case arising under the 1994 model, though now the rule has been made explicit’). 96 ICSID Convention, Art. 25(2)(a). See also Christoph Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair (n. 8) 274–277. But cf. Siag, Decision on Jurisdiction (n. 24) pp. 63–65 (Partial Dissenting Opinion of Professor Francisco Orrego Vicuña) (suggesting that in cases where a State’s advance consent is later perfected by the investor, Article 25(2)(a) should be read to require the claimant to meet the Convention’s negative nationality requirement not only on the date consent was perfected, but also on the date of the State’s advance consent or the date the investment was made). If consent is ad hoc, then the date of consent is the date on which the parties agreed in writing to submit the claim to international arbitration. Otherwise, the date of consent is the date of the agreement in which the parties consented in advance to ICSID arbitration, or, in cases where a State has made an open offer of consent to arbitration (e.g., in a treaty or foreign investment law), the date on which the claimant files its request for arbitration. See Maurice Mendelson, ‘The Runaway Train: The “Continuous Nationality Rule” From the Panevezys-Saldutiskis Railway Case to Loewen’ in Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005) 97–149, 127–128. 97 ICSID Convention, Article 25(2)(b). See also Christoph Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair (n. 8) 294–296. Continuous nationality is irrelevant for juridical persons since Article 25 specifies only one critical date.

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dates.98 Thus, hypothetically, a natural person could possess different nationalities on the date of consent and the date of registration of the request.99 b) Temporal Requirements Ratione Personae under BITs and MITs

In contrast to the Convention, BITs and MITs generally do not set forth the 45 dates on which claimants must satisfy their conditions ratione personae. Theoretically, given the double keyhole nature of ICSID arbitration, ICSID tribunals should determine whether a claimant satisfies the conditions ratione personae of the instrument of consent independently from those under the Convention, including whether such conditions were met on the critical dates under the BIT or MIT. In practice, however, most ICSID tribunals have addressed only the critical 46 dates set out in the Convention. This appears to be because the satisfaction of the temporal requirements ratione personae by the claimant(s) was not in dispute.100 Tribunals in UNCITRAL or other ‘single keyhole’ arbitrations also have shed little light on this issue.101 One exception is the ICSID award in Pey Casado, which held that despite silence in the Peru–Chile BIT, the nationality requirement had to be met on both the date of consent to arbitration and the date of the alleged breach of the treaty.102 Commentary supports the Pey Casado holding that BITs and MITs contain an 47 implicit requirement that conditions ratione personae must be met on the date of the State’s alleged breach of the substantive provisions of the investment agreement at issue.103 This makes sense: if a claimant were not a protected investor at 98 Christoph Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair (n. 8) 276; Maurice Mendelson (n. 96) 128–129; Anthony Sinclair (n. 8) 116; Chittharanjan Amerasinghe (n. 8) 207; Micula (n. 5) para. 85; Siag, Decision on Jurisdiction (n. 24) paras. 203– 206; Siag, Award (n. 36) paras. 497–499. 99 Christoph Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair (n. 8) 276. 100 See, e.g., Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability, 14 January 2010, paras. 49–50 (stating simply that the claimant ‘is, and at all relevant times has been,’ a national of the US, thereby satisfying the conditions ratione personae under the Convention and the US–Ukraine BIT); Tza Yap Shum (n. 10) para. 66 (holding that the claimant demonstrated that he held Chinese nationality on the date of consent and the date of registration, thereby satisfying the requirements ratione personae of both the Convention and the China–Peru BIT); Micula (n. 5) para. 85 (referring only to the critical dates under the Convention); Soufraki, Award (n. 10) paras. 68 and 84 (same), and Decision on Annulment (n. 10) para. 54 (same); Antoine Goetz and Others v. Burundi, ICSID Case No. ARB/95/3, Award, 10 February 1999, paras. 84–85 (same). 101 See, e.g., Al-Bahloul (n. 36) para. 132 (stating that, since the claimant’s naturalization certificate pre-dated his first alleged investment, he ‘would also have qualified as an Investor under the [ECT] at the time of making his alleged investment (whether one considers this to be necessary or not)’); Sedelmayer (n. 22) 26 (simply stating that ‘[t]he Claimant is, and was at the relevant point in time, a natural person domiciled in Germany’ pursuant to the Germany–Russia BIT). 102 Pey Casado (n. 4) para. 414. 103 See, e.g., Zachary Douglas (n. 42) para. 545 (stating that ‘the requirement that the relevant nationality be held at the time of the alleged breach of the obligation forming the basis of [the] claim (…) is implicit in the architecture of [an] investment treaty’); Maurice Mendelson (n. 96) 123 (‘There is substantial support for the rule requiring the claimant State to

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the time of the acts that gave rise to the claim, there would be no breach of the treaty’s substantive protections. Requiring a claimant to satisfy the conditions ratione personae on the date of consent seems similarly uncontroversial. 48 Related to the question of when a claimant must satisfy the requisite conditions ratione personae is the question of how long a claimant must satisfy those jurisdictional conditions – i.e., from what initial date (dies a quo) to what end date (dies ad quem) must a claimant possess continuous nationality, if at all? BITs and MITs are generally silent on this durational question.104 49 This question was addressed in the controversial award in Loewen Group, Inc. v. United States.105 In Loewen, the claimants – a Canadian corporation and a Canadian citizen who was the corporation’s CEO and principal shareholder at the time of the alleged NAFTA violations – brought claims against the US under the ICSID Additional Facility Rules alleging violations of Chapter 11 of the NAFTA.106 During the pendency of the arbitral proceedings – after several rounds of written submissions and a hearing on the merits, but before the tribunal had issued its award – the Loewen Group filed for bankruptcy and, pursuant to a reorganisation plan approved by US and Canadian courts, ceased to exist.107 All of the Loewen Group’s businesses were reorganised as a US corporation.108 Prior to going out of business, the Loewen Group assigned its right, title, and interest in the NAFTA claim to a newly-created Canadian corporation, which apparently had no other assets and the sole business purpose of pursuing the claim.109 50 The US filed an objection to the tribunal’s jurisdiction on the basis that the Loewen Group’s reorganisation as a US corporation destroyed diversity of nationality under the NAFTA. In response, the claimants argued that because the Loewen Group had the requisite nationality both when the claim arose and when it was submitted, the subsequent bankruptcy and reorganisation was irrelevant.110 The Loewen tribunal rejected the claimants’ argument and held that ‘[i]n international law parlance, there must be continuous national identity from the

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have been the State of nationality at the time of injury (though some would like to mitigate its harsher features).’). Another rationale for this requirement is the prevention of forum shopping: without such a rule, investors that are not protected by a BIT or MIT at the time of their injury could restructure their investments after a dispute arises in order to gain the protection of a treaty. See Zachary Douglas, paras. 542, 548–550. Cf. Algiers Declaration (n. 61), Arts. II(1) and VII(1)–(2) (setting forth a limited continuous nationality requirement from the date on which the claim arose to the date the Algiers Declaration entered into force, i.e., 19 January 1981); Lianosoff v. Iran, Award No. 104-183-1, 20 January 1984, 5 Iran–US CTR 90, 92–93; Development & Resources Corp. v. Iran, Award No. 485-60-3, 25 June 1990, 25 Iran–US CTR 20, 28. Loewen Group, Inc. and Raymond L. Loewen v. United States, ICSID Case No. ARB(AF)/ 98/3 (NAFTA), Award, 26 June 2003. Ibid., para. 9. Canada is not a Contracting State to the ICSID Convention. Ibid., para. 220. Ibid. Ibid. Ibid., para. 225.

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date of the events giving rise to the claim, which is known as the dies a quo, through the date of the resolution of the claim, which date is known as the dies ad quem.’111 The Loewen tribunal reasoned that because Articles 1116 and 1117 of the 51 NAFTA only provide for a dies a quo (the date of submission) and are silent regarding a requirement of continuous nationality until some dies ad quem, the silence should be filled by customary international law.112 With no citations and little discussion,113 the Loewen tribunal then found that ‘[t]here is only limited dispute as to the history of continuous nationality to the end of any international proceedings.’114 While Loewen acknowledged that claims brought directly by investors against States differ from those diplomatically espoused by States and also recognised that the strict requirement of continuous nationality for diplomatic protection had been modified by certain investment treaties, it found that ‘such specific provisions in other treaties and agreements only hinder [the claimants’] contentions, since NAFTA has no such specific provision.’115 The Loewen holding on continuous nationality has been criticised extensively 52 by arbitral tribunals and commentators alike.116 There have been two main criticisms. First, Loewen is criticised for applying the continuous nationality principle as customary international law despite its disputed status even in the context of diplomatic protection, in which the principle first arose.117 Under the law of diplomatic protection, a State cannot espouse the claim of a person unless that person possesses its nationality.118 A corollary of this rule holds that for a State to espouse a claim, the injured person must possess the nationality of the espousing State, and not possess the nationality of the State against which the claim is espoused, continuously from the dies a quo – generally accepted to be the date of the events giving rise to the claim – to some dies ad quem. While there appears to be general agreement that continuous nationality must be held at least until the date of the State’s presentation or espousal of the claim, there appears 111 Ibid. 112 Ibid., paras. 226–228. 113 See Matthew S. Duchesne, ‘The Continuous-Nationality-of-Claims Principle: Its Historical Development and Current Relevance to Investor-State Disputes’ (2004) 36 Geo. Wash. Int’l L. Rev. 783–815, 808 (describing Loewen’s analysis of continuous nationality as ‘if not cursory, then at least conclusory’); Campbell McLachlan, Laurence Shore, and Matthew Weiniger, International Investment Arbitration (Oxford University Press, 2007) para. 5.68 (noting the ‘troublingly cursory treatment of customary international law provided by the Loewen Tribunal on the continuous nationality rule’). 114 Loewen (n. 105) para. 229. 115 Ibid. (noting, without any citation, that ‘[m]any of the bilateral investment treaties, the socalled “BITs”, contain specific modifications of the requirement’). 116 See, e.g., Siag, Award (n. 36) para. 497–499; Maurice Mendelson (n. 96) 97, 135–149. 117 See Maurice Mendelson (n. 96) 99–123; Matthew Duchesne (n. 113) 784, 787–802 (stating at p. 799 that ‘with regard to a rule requiring continuous nationality, virtually everyone recognizes that there is no agreement’); Ian Brownlie (n. 25) 478–479; National Grid PLC v. Argentina, UNCITRAL, Decision on Jurisdiction, 20 June 2006, para. 116 (Freshfields Bruckhaus Deringer LLP represented the claimant in this case). 118 Ian Brownlie (n. 25) 477–479.

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to be no agreement on the dies ad quem, much less on the dies ad quem being the date of the judgment or settlement of the claim.119 Second, Loewen is criticised for improperly importing a purported rule of diplomatic protection into investor-State arbitration, which was designed as a distinct alternative to diplomatic protection.120 53 No published decision has followed Loewen in adopting the continuous nationality rule.121 Nonetheless, the question of whether BITs or MITs require continuous nationality and, if so, between what dates, remains unsettled. Some commentators support the application of a ‘limited’ continuous nationality rule that would require an investor to hold the requisite nationality from the date of the events giving rise to the claim through the commencement of arbitral proceedings.122 Others assert that there is no basis for applying a continuous nationality rule unless it is expressly incorporated in a treaty, except perhaps with respect to any requirement that the claimant not possess the nationality of the host State.123

119 Matthew Duchesne (n. 113) 799–802; Ian Brownlie (n. 25) 478–479; Case Concerning the Barcelona Traction, Light & Power Co. (Belgium v. Spain) (Second Phase), Judgment of 5 February 1970 (Separate Opinion of Judge Jessup), 1970 ICJ Rep. 3, 202–203; John R. Dugard, First Report on Diplomatic Protection, U.N. GAOR International Law Commission, 52nd Sess., U.N. Doc. A/CN.4/506/Add.1 (2000), paras. 12–16 (concluding that there is no rule of continuous nationality under customary international law); Maurice Mendelson (n. 96) 118–123, 147–148; Annemarieke Vermeer-Künzli, ‘As If: The Legal Fiction in Diplomatic Protection’ (2007) 18 EJIL 37–68, 63. 120 See Maurice Mendelson (n. 96) 124–126, 141; Campbell McLachlan, Laurence Shore, and Matthew Weiniger (n. 113) para. 5.68; Matthew Duchesne (n. 113) 802–815; Pia Acconci, ‘The Requirement of Continuous Corporation Nationality and Customary International Law Rules on Foreign Investments: The Loewen Case’ (2004) 14 Italian Y.B. Int’l L. 225–236, 228–231. 121 See Hulley Enterprises Ltd. v. Russia, PCA Case No. AA 226, Interim Award on Jurisdiction and Admissibility, 30 November 2009, paras. 550–551 (criticizing Loewen and declining to apply its holding that nationality should be held through the date of the award); Yukos Universal Ltd. v. Russia, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, paras. 551–552 (same); Veteran Petroleum Ltd. v. Russia, PCA Case No. AA 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009, paras. 562–563 (same); EnCana Corp. v. Ecuador, UNCITRAL (Canada–Ecuador BIT), LCIA Case No. UN3481, Award, 3 February 2006, para. 128 (distinguishing Loewen on the basis of ‘NAFTA’s apparent co-mingling of diplomatic protection concepts with investor-State claims,’ which generally are not reflected in BITs, but declining to consider ‘the question whether and how far international law rules in the field of diplomatic protection such as the rule of continuous nationality apply to direct claims by investors under BITs, and if they do, to identify the terminus ad quem for the purposes of that rule’ since the claimant’s nationality had not changed). See also Campbell McLachlan, Laurence Shore, and Matthew Weiniger (n. 113) para. 5.71 (‘The draft articles on Diplomatic Protection, combined with the point on interpretation of NAFTA made in EnCana (…), thus provide a complete answer to – and rejection of – the Loewen Tribunal’s position on continuous nationality.’). 122 See, e.g., Zachary Douglas (n. 42) paras. 542–543; Campbell McLachlan, Laurence Shore, and Matthew Weiniger (n. 113) paras. 5.70 and 5.88. 123 See Maurice Mendelson (n. 96) 126, 132–134. See also Maurice Mendelson, ‘The Requirement for Continuous Nationality’ in Federico Ortino, Lahra Liberti, Audley Sheppard, and Hugo Warner (eds), Investment Treaty Law: Current Issues (Vol. II) (BIICL, 2007) 41–53, 46 (‘Each BIT is individual, but broadly speaking the pattern seems to be that the key is whether the claimant had the nationality of the relevant State at the date of the injury, and if

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The interplay in double keyhole ICSID arbitration of the different temporal 54 requirements that apply to conditions ratione personae under the instrument of consent and under the Convention is an area ripe for potential confusion.124 The guiding decision should be that in Pey Casado v. Chile, where the tribunal held that it had jurisdiction ratione personae in a case brought by a claimant who was a dual Spanish-Chilean national at the time of the alleged breach of the Spain– Chile BIT, but who had renounced his Chilean nationality before filing his claim.125 Because the temporal requirements ratione personae of the Convention and the instrument of consent must be analysed separately, this result should be permissible so long as the BIT does not contain a negative nationality requirement like that of Article 25(2)(a) of the Convention. A pending ICSID case may provide an opportunity to confirm Pey Casado’s holding.126 5. Conclusion

Jurisprudence regarding jurisdiction ratione personae in claims brought by 55 natural persons may have been limited to date, but individual claimants are likely to increase in number given the potential for tribunals to hear mass investorState claims127 and the standing of shareholders to bring claims as protected investors. In such future cases, the temporal requirements for jurisdiction ratione personae of BITs and MITs that are silent both on critical dates and the need for continuous nationality is one area ripe for further clarification by tribunals. Issues involving the interplay of conditions for jurisdiction ratione personae in double keyhole ICSID arbitration is another area likely to receive the attention of arbitrators. And while the door appears to be closed to the application of the effective nationality principle in all but the most exceptional cases, claimants and respondent States are still likely to test the boundaries of its acceptance and argue for its application both to establish and destroy jurisdiction ratione personae, giving tribunals an opportunity to offer additional insight into the role and scope of customary international law in the international investment treaty regime.

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continuous nationality is required (which is not necessarily the case), the terminus ad quem is no later than the institution of international proceedings.’). See Zachary Douglas (n. 42) paras. 545–546; Anthony Sinclair (n. 8) 116. Pey Casado (n. 4) paras. 317, 414–418. See Hortensia Margarita Shortt v. Venezuela, ICSID Case No. ARB/11/30, registered 21 November 2011 (claimant, who was an alleged dual British–Venezuelan national at the time her claim arose, brought an ICSID claim under the UK–Venezuela BIT after renouncing her Venezuelan citizenship). See, e.g., Abaclat (n. 8).

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Markus Perkams 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Term Legal Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Definition of Corporate Nationality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Place of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Seat Criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) The Control Criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) The Criterion of Real Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Nationality Planning and Abuse of Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Concluding Remarks/Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 6 7 13 19 22 24 31

Literature: Pia Acconci, ‘Determining the Internationally Relevant Link between State and Corporate Investor’ (2004) 5 JWIT 139–175; Chittharanjan F. Amerasinghe, ‘Jurisdiction Ratione Personae under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States’ (1974/75) 47 BYIL 227–267; Piero Bernardini, ‘Nationality Requirements under BITs and Related Case Law’ in Federico Ortino, Lahra Liberti, Audley Sheppard and Hugo Warner (eds), Investment Treaty Law Current Issues II (BIICL, 2007) 17– 23; Aron Broches, ‘The Convention on the Settlement of Investment Disputes between States and Nationals of Other States’ (1972-II) 136 RC 331–410; Markus Burgstaller, ‘Nationality of Corporate Investors and International Claims against the Investor’s Own State’ (2006) 7 JWIT 857–881; Norah Gallagher, ‘The Requirement for Substantive Nationality’ in Federico Ortino, Lahra Liberti, Audley Sheppard and Hugo Warner (eds), Investment Treaty Law Current Issues II (BIICL, 2007) 27–39; ILA German Branch/Working Group, The Determination of the Nationality of Investors under Investment Protection Treaties (TELC, 2011); Matthias Pannier, ‘Nationality of Corporations under Domestic Law: A Comparative Perspective’ in Federico Ortino, Lahra Liberti, Audley Sheppard and Hugo Warner (eds), Investment Treaty Law Current Issues II (BIICL, 2007) 11–16; Engela C. Schlemmer, ‘Investment, Investor, Nationality and Shareholders’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 49–88; Anthony Sinclair, ‘The Substance of Nationality Requirements in Investment Treaty Arbitration’ (2005) 20 ICSID Rev.–FILJ 357–388.

1. Introduction 1

Next to natural persons, International Investment Agreements (IIAs) protect also legal persons1 as investors. The definition of legal persons as investors is normally short and straightforward. Art. 1(7) of the Energy Charter Treaty for example provides: ‘“Investor” means (…) a company or other organization organized in accordance with the law applicable in that Contracting Party’. Such definitions of legal persons as investors raise two issues. The first issue is what exactly is meant by the term legal person or its synonyms. The second, more important, issue is how the corporate nationality of legal persons is defined. Here, IIAs use various criteria. The criteria most commonly used, be it as a standalone criterion or in combination, are the place of incorporation or the seat or the 1 The term ‘legal person’ is not universally used in IIAs. Synonyms are ‘juridical person’, ‘company’, ‘corporation’, etc. For the purposes of this chapter, the term legal person encompasses all terms used in IIAs to describe non-natural persons as investors.

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control of a legal person.2 Sometimes treaties require a more substantive link between a legal person and its home State. Legal persons must then be shown to have ‘substantive business activity’ in the home State to be protected by a treaty. Arbitral tribunals have frequently had to deal with the protection of legal per- 2 sons. The case law resulting therefrom is not free from controversy. It addresses issues like whether the place of incorporation can be a stand-alone criterion for determining corporate nationality, what constitutes a ‘seat’ for purposes of IIAs and when one entity may be said to control another. Closely connected with those issues is the practice of nationality planning, i.e. the structuring of investments to maximise IIA protection. Arbitral tribunals have started drawing the line between legitimate corporate structuring on the one hand and structures that constitute an abuse of rights on the other. The present chapter provides an overview of the most important treaty terms 3 and the relevant case law. To this end, it is divided into three parts. The first part looks at the definition of legal persons. The second part focuses on the four criteria outlined above to determine corporate nationality. The third part summarises the case law on nationality planning and abuse of rights. 2. The Term Legal Person

IIAs do not normally define the term ‘legal person’. They use the term or its 4 synonyms either without any further explanation3 or contain exemplary lists of covered legal persons.4 IIAs thereby presuppose the existence of legal persons in

2 The criteria of incorporation and seat are known from national corporate laws and private international law. In those laws, they are used to determine the existence of a legal person, see Matthias Pannier, ‘Nationality of Corporations under Domestic Law: A Comparative Perspective’ in Federico Ortino, Lahra Liberti, Audley Sheppard and Hugo Warner (eds), Investment Treaty Law Current Issues II (BIICL, 2007) 11–16; Marie Louise Seelig, Anke Sessler, Hartmut Paulsen, ‘Impact of MoMiG on “Sitztheorie”/“Gruendungstheorie” – Consequences for German BITs’ in ILA German Branch/Working Group, The Determination of the Nationality of Investors under Investment Protection Treaties (TELC, 2011) 25–36. Consequently, they are also used in customary international law to determine the nationality of legal persons for purposes of diplomatic protection, see International Court of Justice, Case concerning the Barcelona Traction, Light and Power Company, Limited, Judgment of 5 February 1970, para 70. See also International Law Commission, Art. 9 of the Draft Articles on Diplomatic Protection with commentaries (United Nations, 2006). 3 Art. 1(b)(ii) of the Netherlands–Pakistan IIA, Art. 1(b)(ii) of the Netherlands–Albania IIA, Art. 1(b)(ii) of the Netherlands–Belize IIA or Art. 1(2)(b) of the Belgium/Luxembourg–Belize IIA, using the French term ‘personne morale’. 4 Art. 1(4) of the Germany–Hong Kong IIA states that the term investor means in respect of Germany ‘any juridical person as well as any commercial or other company or association with or without legal personality (…) irrespective of whether or not its activities are directed at profit’ and in relation to Hong Kong ‘corporations, partnerships and associations incorporated or constituted and registered where applicable under the law in force in its area’. See also Art. 1(4) of the Germany–Albania IIA; Art. 1(2) of the Italy–Hong Kong IIA or Art. 1(c)(bb) of the UK– Argentina IIA with regard to British legal persons.

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national legal orders.5 Sometimes, IIAs add clarifications with regard to the status of governmentally-owned entities or non-profit organisations.6 5 The existence of a legal person is not normally a matter of dispute in investment arbitrations. The few cases which discussed the matter concerned the question whether claimants had the necessary legal capacity to bring the claims. In Impregilo SpA v. Pakistan, for example, the tribunal denied the claimant’s right to claim ‘for and on behalf of its joint venture’, because the joint venture did not have legal capacity under Swiss law.7 In Renta 4 SVSA and ors v. Russia, the majority of the tribunal decided that three Spanish investment funds did not qualify as ‘corporate bodies’ under the Spain–Russia IIA. The tribunal based its decision on the undisputed fact that Spanish law did not provide them with the capacity to bring claims in relation to their assets.8 Judge Brower dissented and argued that the term in question should not have been interpreted pursuant to Spanish law, but pursuant to public international law. There, Judge Brower opined, it would also have included the entities in question.9 Finally, in Abaclat and ors v. Argentina, the tribunal held that both the Italy–Argentina IIA and the ICSID Convention are not limited to Italian corporate bondholders with full legal capacity. In the tribunal’s view, legal persons with limited legal capacity are also covered, provided they have the ‘capacity to make the investment and the right to litigate in their own name’ under the applicable national law.10 5 See Barcelona Traction case (n. 2) para. 38, where the International Court of Justice recognises legal persons as institutions created within the domestic jurisdiction of States. 6 See Art. 1(4) of the Germany–Hong Kong IIA for non-profit organisations. US treaties often expressly include governmentally-owned enterprises. Art. 1(b) of the Argentina–USA IIA protects for example ‘(…) any kind of corporation, company, association, state enterprise, or other organization, (…) whether or not organized for pecuniary gain, and whether privately or governmentally owned.’ The protection of non-profit organisations and governmentallyowned entities by other IIAs depends on their wording. In Victor Pey Casado et Fondation ‘Présidente Allende’ v. Chile, for example, the Spain–Chile IIA was silent on non-profit organisations. The tribunal nevertheless found that the Fondation ‘Présidente Allende’ was a covered investor under the treaty, see Victor Pey Casado and President Allende Foundation v. Chile, ICSID Case No. ARB/98/2, Award, 22 April 2008, para. 557, fn. 508. For the protection of governmentally-owned entities as long as they are not acting as an agent for their government or in a governmental function, Ceskoslovenska Obchodni Banka AS v. Slovakia, ICSID Case No. ARB/97/4, Decision on Objections to Jurisdiction, 24 May 1999, para. 16 et seq.; Rumeli Telekom AS and Telsim Mobil Telekomikasyon Hizmetleri AS v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 21 July 2008, para. 324 et seq. 7 Impregilo SpA v. Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction, 22 April 2005, para. 131 et seq. The tribunal based its decision on Art. 25 of the ICSID Convention, see also Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary (Cambridge University Press, 2012), Art. 25, paras. 689– 690. The authors refer to the drafting history of the Convention to show that legal personality of a juridical person is a requirement for jurisdiction under the ICSID Convention. 8 Renta 4 SVSA and ors v. Russia, SCC Case No. 24/2007, Award on Preliminary Objections, 20 March 2009, para. 121 et seq., para. 127. 9 Separate Opinion of Charles N. Brower, para. 28. 10 Abaclat and ors v. Argentina, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011, para. 418. The tribunal noted that it was unclear to which extent the ICSID Convention requires full legal capacity, but held that ultimately the provisions of the IIA and the applicable national law must prevail.

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3. The Definition of Corporate Nationality

The second part of the definition of legal persons as investors deals with cor- 6 porate nationality. It is here where disputes have arisen in the past and where some uncertainty still remains. a) The Place of Incorporation

The place of incorporation is the most widespread criterion to determine cor- 7 porate nationality in IIAs: legal persons have to be incorporated or constituted pursuant to the law of the home State to enjoy the protection of an IIA. IIAs use the incorporation criterion both as a stand-alone criterion and together with other criteria, such as, in particular, the seat criterion. An example of the use of the place of incorporation as sole criterion is Art. 1(c)(ii) of the Netherlands–India IIA: ‘“Companies” means (…) in respect of the Netherlands: legal persons constituted under the law of the Netherlands’.11 An example of its use combined with other criteria is Art. 1(b) of the Spain–Albania IIA: ‘[T]he term “company” means juridical persons or any other legal entity constituted or otherwise duly organized under the applicable law of that Party and having its seat in the territory of that same Party (…)’.12 The place of incorporation as a stand-alone criterion has caused an intensive 8 debate about the definition of corporate nationality in IIAs. At the heart of the debate is the question of whether tribunals should only look at the express wording and grant protection to any legal person that has been formally established in a treaty party.13 Critics argue that the mere fact of incorporation cannot suffice to establish corporate nationality and that a more substantive link to a treaty party is required.14 Tribunals should therefore assess additional criteria, like the origin

11 See also Art. 1(b)(ii). of the Netherlands–Bangladesh IIA; Art. 1(b)(ii) of the Netherlands– Georgia IIA; Art. 1(b)(ii) of the Netherlands–Vietnam IIA; Art. 1(1)(d) of the United Kingdom–China IIA; Art. 1(d) of the United Kingdom–United Arab Emirates IIA; Art. 1(d)(ii) of the United Kingdom–Ghana IIA; Art. 1(b) of the USA–Bulgaria IIA; Art. 1(b) of the USA– Mongolia IIA; Art. 1(c) of the USA–Tunisia IIA; Art. 1(a) of the Canada–Armenia IIA. 12 See also Art. 1(2)(b) of the France–Argentina IIA; Art. 1(1)(3). of the France–Costa Rica IIA; Art. 1(2)(ii) of the France–Iran IIA; Art. 1(1)(b) of the Spain–Nigeria IIA; Art. 1(b) of the Spain–Kazakhstan IIA; Art. 1(3)(b) of the Spain–Philippines IIA; Art. 1(3)(b) of the Portugal– Turkey IIA; Art. 1(3)(b) of the Portugal–South Korea IIA; Art. 1(3)(b) of the Portugal– Uruguay IIA; and Art. 1(4) of the Italy–Armenia IIA. 13 See Robert Hunter, ‘Is a corporation’s entitlement to the protection of an investment treaty a question solely of form or is it also a question of substance?’ in ILA German Branch/Working Group, The Determination of the Nationality of Investors under Investment Protection Treaties (TELC, 2011) 37–51; Sabine Konrad, ‘The Nationality of Corporations in International Investment Law’, id., 52–59. 14 Engela C. Schlemmer, ‘Investment, Investor, Nationality and Shareholders’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 49, 79 et seq.; Markus Burgstaller, ‘Nationality of Corporate Investors and International Claims against the Investor’s Own State’ (2006) 7 JWIT 857–881.

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of capital or the control over a legal person, even if those criteria are not expressly mentioned in the IIA. 9 Beginning with the jurisdictional award in Tokios Tokelės v. Ukraine, most arbitral tribunals have stuck to the plain wording of IIAs.15 They have refused arguments to read additional criteria into the treaties and deny jurisdiction only if the invocation of treaty protection amounts to an abuse of rights.16 In Tokios Tokelės, the claimant was an entity incorporated in Lithuania, 99 % of the shares of which were owned by Ukrainian nationals.17 Art. 1(2)(b) of the Lithuania– Ukraine IIA defines Lithuanian investors as ‘any entity established in the territory of the Republic of Lithuania in conformity with its laws and regulations’. The majority of the tribunal, consisting of the two party-appointed arbitrators, undertook a detailed interpretation of the IIA and found nothing that would require a restricted interpretation of Art. 1(2)(b). It also found that it was within the reasonable discretion granted to the parties under Art. 25 of the ICSID Convention to determine corporate nationality solely on the basis of the place of incorporation.18 It therefore held that the claimant was a protected Lithuanian investor both for purposes of the IIA and the ICSID Convention. The majority also considered whether the ‘equitable doctrine of “veil piercing”’19 required it to look beyond Tokios Tokelės’ Lithuanian incorporation. Since it did not find any suspicious circumstances, it declined to do so: [N]one of the Claimant’s conduct with respect to its status as an entity of Lithuania constitutes an abuse of legal personality. The Claimant made no attempt whatever to conceal its national identity from the Respondent. To the contrary, the Claimant’s status as a juridical entity of Lithuania is well established under the laws of both Lithuania and Ukraine and well known by the Respondent. The Claimant manifestly did not create Tokios Tokelės for the purpose of gaining access to ICSID arbitration under the BIT against Ukraine, as the enterprise was founded six years before the BIT between Ukraine and Lithuania entered into force. Indeed, there is no evidence in the record that the Claimant used its formal legal nationality for any improper purpose.20

10

That interpretation of the majority was also adopted by later tribunals. In The Rompetrol Group N.V. v. Romania, the tribunal decided that the claimant, an en-

15 Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction and Dissent, 29 April 2004, para. 27 et seq.; Saluka Investments BV v. Czech Republic, UNCITRAL Arbitration, Partial Award, 17 March 2006, para. 222 et seq.; ADC Affiliate Ltd and ADC & ADMC Management Ltd v. Hungary, ICSID Case No. ARB/03/16, Final award on jurisdiction, merits and damages, 27 September 2006, para. 332 et seq.; The Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Decision on Preliminary Objections, 18 April 2008, para. 75 et seq. 16 See 4. below with regard to the abuse of rights doctrine. 17 Tokios Tokelės v. Ukraine (n. 15) para. 21. 18 Id., para. 27 et seq. With regard to the ICSID Convention the majority stated: ‘Although Art. 25(2)(b) of the ICSID Convention does not set forth a required method for determining corporate nationality, the generally accepted (albeit implicit) rule is that the nationality of a corporation is determined on the basis of its siege social or place of incorporation’, id., para. 42. 19 Id., para. 53 et seq. The tribunal based the doctrine on the judgment in Barcelona Traction (n. 2) and considered it to be part of customary international law. 20 Id., para. 56.

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tity incorporated in the Netherlands, had complied with the only express requirement of the Netherlands–Romania IIA.21 It held that the fact that the claimant was ultimately owned and controlled by Romanian nationals had no relevance for the purposes of the IIA.22 The tribunal in Saluka Investments BV v. Czech Republic expressed sympathy with the view that the sole reliance on the incorporation criterion opened the door for abusive behaviour, but equally held that it was bound by the express terms of the treaty: The Tribunal has some sympathy for the argument that a company which has no real connection with a State party to a BIT, and which is in reality a mere shell company controlled by another company which is not constituted under the laws of that State, should not be entitled to invoke the provisions of that treaty. (…) However that may be, the predominant factor which must guide the Tribunal’s exercise of its functions is the terms in which the parties to the Treaty now in question have agreed to establish the Tribunal’s jurisdiction. (…) That agreed definition required only that the claimant-investor should be constituted under the laws of (in the present case) the Netherlands, and it is not open to the Tribunal to add other requirements which the parties could themselves have added but which they omitted to add.23

While the prevailing case law therefore solely relies on the express wording 11 of IIAs, some sources argue for a consideration of additional criteria in investment arbitrations. The most prominent example is the dissenting opinion by the president of the tribunal in Tokios Tokelės, Prof. Prosper Weil.24 Prof. Weil did not base his dissent on the IIA, but on the object and purpose of the ICSID Convention.25 He characterised object and purpose as follows: [I]t appears that the ICSID arbitration mechanism is meant for international investment disputes, that is to say, for disputes between States and foreign investors. It is because of their international character, and with a view to stimulating private international investment, that these disputes may be settled, if the parties so desire, by an international judicial body. The ICSID mechanism is not meant for investment disputes between States and their own nationals.26

21 Rompetrol v. Romania (n. 15) para. 77 et seq. Art. 1(b)(ii) of the Netherlands–Romania IIA defines legal persons as ‘legal persons constituted under the law of that Contracting Party’. The tribunal also made it clear that it considered it to be perfectly within the margin of appreciation that parties have under the ICSID Convention to determine corporate nationality solely pursuant to the place of incorporation, id., para. 83. 22 The tribunal also rejected Romania’s argument that the Nottebohm and Barcelona Traction judgments of the ICJ would require the establishment of an ‘effective nationality’ of a legal person. The tribunal could find no such statement in Barcelona Traction and pointed out that that case had been decided in the absence of a treaty, id., para. 92. 23 Saluka v. Czech Republic (n. 15) paras. 240, 241. 24 Dissenting Opinion, Prof. Prosper Weil, 29 April 2004. 25 Art. 25 of the ICSID Convention does not define corporate nationality, but leaves it to the reasonable discretion of the parties to determine the criteria for corporate nationality, see n. 18. Art. 25 thereby, in the often quoted words of Aron Broches, sets the ‘outer limits’ of ICSID jurisdiction, see Aron Broches, ‘The Convention on the Settlement of Investment Disputes between States and Nationals of Other States’ (1972-II) 136 RC 331, 361. While it is generally accepted that the discretion granted under Art. 25 is not limitless, it is less clear what these limits are, as is exemplified by the dispute between the majority in Tokios Tokelės (n. 15) on the one hand and Prof. Weil on the other. The issue of what the limits of the ICSID Convention are exists also with regard to the control criterion used in Art. 25(2)(b) second alternative of the ICSID Convention, see below section 3.c). 26 Dissenting Opinion, Prof. Prosper Weil, 29 April 2004, para. 5 (emphasis in the original).

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He concluded that the origin of the capital has to be the decisive factor for the required internationality of the dispute, and not the formal corporate structure.27 If this were different, he warned, domestic investors could bring their essentially domestic disputes before international tribunals, which ‘might jeopardize the future of the institution’.28 He therefore argued to deny jurisdiction to Tokios Tokelės’ claim, since it was not a protected investor under the ICSID Convention. So far, the only noteworthy award to adopt a restricted interpretation of the definition of corporate nationality seems to have been CCL v. Kazhakstan.29 That little noticed case was decided in 2003 and therefore some time before Tokios Tokelės. In CCL, the tribunal denied the US nationality of the claimant, notwithstanding the fact that the claimant had been incorporated in New York as required under the US–Kazakhstan IIA. The tribunal pointed out that the available facts showed that when the arbitration had been commenced, the claimant had no remaining business activities in the US and had been ultimately controlled and financed by non-US investors.30 The nationality of those persons had never been fully disclosed. The tribunal justified its reliance on ultimate control as an additional criterion by reference to its use in other provisions of the IIA. The tribunal quoted the definition of investment, the denial of benefits clause and the investor-State arbitration clause.31 b) The Seat Criterion

13

Next to the place of incorporation the seat is the second criterion frequently used to establish corporate nationality. Its essential content is that a legal person has the nationality of the State in which it is seated. IIAs use the seat criterion as a stand-alone criterion, in connection with other criteria and in varying formulations. An example of the use of the seat as sole criterion is Art. 1 of the German– 27 Id., para. 20: ‘Contrary to what the Decision maintains, when it comes to ascertaining the international character of an investment, the origin of the capital is relevant, and even decisive. True, the Convention does not provide a precise and clear-cut definition of the concept of international investment (…) and it is therefore for each ICSID tribunal to determine whether the specific facts of the case warrant the conclusion that it is before an international investment. Given the indisputable and undisputed Ukrainian character of the investment the Tribunal does not, in my view, give effect to the letter and spirit, as well as the object and purpose, of the ICSID institution.’ 28 Id., para. 1. 29 CCL v. Kazhakstan, SCC Case 122/2001, Jurisdictional Award, 1 January 2003, Stockholm International Arbitration Review (2005) 1 SIAR 123. See also Loewen Group Inc and Loewen v. United States, ICSID Case No. ARB(AF)/98/3, Award, 25 June 2003, para. 220 et seq. In Loewen, the tribunal had to deal with the reorganisation of the previously Canadian claimant into a US entity at the end of the proceedings. The NAFTA claim had been assigned to an SPV incorporated in Canada. As a result of the change of nationality, the tribunal denied jurisdiction. The tribunal did not base its decision on NAFTA, but on the continuous nationality rule in public international law, see id., para. 225. It held that under that rule the claimant must keep its nationality until the resolution of the claim. Since the tribunal regarded the claimant as a US entity, it found that the claimant had not complied with that requirement. 30 CCL v. Kazakhstan (n. 29) 152. 31 Id., pp. 151, 152.

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India IIA, pursuant to which German investors are ‘juridical persons (…) having its seat in (…) Germany (…)’.32 Other IIAs combine the seat criterion with the place of incorporation. Art. 1(3)(a) of the Germany–China IIA states that Chinese investors are ‘economic entities (…) incorporated and constituted under the laws and regulations of and with their seats in the People’s Republic of China (…)’.33 Some IIAs use other terms than seat to locate legal persons. For instance, Art. 1(4) of the Italy–Jordan IIA protects ‘any entity having its headquarter in the territory of one of the Contracting Parties and recognized by it’.34 There is only limited case law with regard to the seat criterion. Two aspects of 14 it are noteworthy. The first aspect is that there is no universally accepted definition of ‘seat’ and terms as ‘corporate seat’ or ‘siège social’ may have different meanings in different contexts. This is exemplified by the seemingly different interpretation of ‘seat’ in Alps Finance and Trade AG v. Slovakia and Tokios Tokelės.35 In Alps Finance, the tribunal interpreted the meaning of ‘seat’ in Art. 1(b) of the Switzerland–Slovakia IIA.36 It first found that the fact that the treaty requires both Swiss incorporation and seat showed that the latter criterion must mean more than a registered address for incorporation.37 It then characterised the requirements for a seat as follows: Proof of a ‘business seat’, in the meaning of an effective center of administration of the business operations, requires (…) proof that: the place where the company board of directors regularly meets or the shareholders’ meetings are held is in Swiss territory; there is a management at the top of the company sitting in Switzerland; the company has a certain number of employees working at the seat; an address with phone and fax numbers are offered to third parties entering in contact with the company; certain general expenses or overhead costs are incurred for the maintenance of the physical location of the seat and related services, which would be a clear indication that a business entity is effectively organized at a given Swiss place.38

That interpretation shows that the Alps Finance tribunal understood the term 15 seat in a material sense. This understanding is somewhat contradicted by the passing reference to the seat criterion in obiter in Tokios Tokelės. The tribunal elaborated: 32 See also Art. 1(3) of the Germany–Afghanistan IIA; Art. 1(4)(a) of the Germany–Cuba IIA with regard to German investors; Art. 1(4)(a) of the Germany–Ghana IIA; Art. 1(2) of the Sweden–Albania IIA; Art. 1(3)(b) of the Sweden–Lithuania IIA; and Art. 1(3)(b) of the Sweden–Oman IIA. 33 See also Art. 1(1)(b) of the Belgium/Luxembourg–Armenia IIA; Art. 1(3) of the Belgium/ Luxembourg–Bulgaria IIA; Art. 1(1)(b) of the Belgium/Luxembourg–Uzbekistan IIA; Art. 1(2)(b) of the France–Czech Republic IIA; Art. 1(3) of the France–Bahrain IIA; Art. 1(2) of the France–Lebanon IIA; Art. 1(b) of the Spain–Uzbekistan IIA; Art. 1(1)(b) of the Spain– Costa Rica IIA; Art. 1(1)(b) of the Spain–Nigeria IIA; or Art. 1(2)(b) of the Italy–Venezuela IIA. 34 Other terms are ‘main office’ (Art. 1(3)(b) of the Portugal–Turkey IIA); ‘place of effective management’ (Art. I(2) of the 1987 ASEAN Agreement); or ‘registered seat, central management or main place of business’ (Art. 1(2)(b)(ii) of the Sweden–Bosnia and Herzegovina IIA with regard to Bosnian investors). 35 With regard to the term seat, see also Barcelona Traction (n. 2) para. 70. 36 Alps Finance and Trade AG v. Slovakia, UNCITRAL, Award, 5 March 2011, para. 213 et seq. 37 Id., para. 216. 38 Id., para. 217.

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Chapter 6: The Scope of Application of International Investment Agreements [T]he Claimant is an ‘investor’ of Lithuania under Article 1(2)(b) of the Ukraine-Lithuania BIT based on its state-of-incorporation. Although not required by the text of the Treaty, an assessment of the siège social of the Claimant leads to the same conclusion. Among the relevant evidence of siège social, the Claimant’s registration certificate (…), its statute of incorporation, and each of the Claimant’s ‘Information Notices of Payment of Foreign Investment’ (…), all record the Claimant’s address as Vilnius, Lithuania. (…) [A] nationality test of siège social leads to the same result as one based on state of incorporation.39

Hence, in contrast to Alps Finance, the tribunal in Tokios Tokelės relied on formal factors that are unlikely to have evidenced from where the claimant’s business was effectively conducted.40 It remains open for debate whether that difference resulted from the discrepancy between the wording of the IIAs, or from other factors, such as the different importance of the seat for the outcome of the case. For purposes of the present overview, it suffices to point out that the quotes indicate some uncertainty as to the interpretation of seat in modern investment arbitration. 17 The second noteworthy aspect is the interpretation of Art. I(2) of the 1987 Association of South East Asian Nations (ASEAN) Agreement in Yaung Chi Oo v. Myanmar.41 That provision protects legal persons that are ‘incorporated or constituted under the laws in force in the territory of any Contracting Party wherein the place of effective management is situated’. The tribunal described the reason behind the ‘place of effective management’ criterion as follows: 16

It appears that the requirement of effective management of the investing company in the place of incorporation was primarily included in the 1987 ASEAN Agreement to avoid what has been referred to as ‘protection shopping’; i.e., the adoption of a local corporate form without any real economic connection in order to bring a foreign entity or investment within the scope of treaty protection.42

18

The tribunal also held that the place of incorporation and the place of effective management were two distinct requirements that required separate interpretation. The tribunal’s actual decision was then based on the particularities of the case. The investor was a small, family-owned company whose key personnel had moved from its home State Singapore to Myanmar in order to realise the investment. The tribunal found that there was a presumption that the place of effective management would not move after the investment had been made. It held that the managerial activities that were still carried out in Singapore sufficed to establish effective management, notwithstanding the fact that those activities were the minimum requirements under the Singaporean corporate law.43 39 Tokios Tokelės (n. 15) para. 43. 40 It has to be noted however that the tribunal also indicated that Tokios Tokelės had substantial business activities in Lithuania, so that the material aspects of the seat criterion may have been less important for the tribunal, see id., para. 37. 41 Yaung Chi Oo Trading Pte Ltd v. Myanmar, ASEAN Case No. ARB/01/1, Award, 31 March 2003, para. 46 et seq. 42 Id., para. 52. In line with the Alps Finance award, the tribunal also held that the place of incorporation and the place of effective management were two distinct requirements that must be interpreted separately. 43 Id., para. 52.

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c) The Control Criterion

The control of a legal person is the third criterion frequently used to deter- 19 mine corporate nationality in IIAs. The control criterion is mostly used to extend the scope of IIAs.44 It allows the inclusion of legal persons that are incorporated outside the home State but which are controlled by natural or legal persons from the home State. An example of the control criterion is Art. 1(b)(iii) of the Netherlands–Costa Rica IIA: ‘[N]ationals shall comprise (…) legal persons constituted under the law of the other Contracting Party but controlled, directly or indirectly, by natural persons as defined in (i) or by legal persons as defined in (ii) above’.45 Other treaties also cover legal persons incorporated in third States. For instance, Art. 1(2)(b) and (c) of the Sweden–Kyrgyz Republic IIA reads: ‘[I]nvestor (…) shall mean (…) any legal person not organized under the law of that Contracting Party but controlled by an investor as defined under (a) or (b).’46 While these treaties leave the meaning of control open, other treaties are more precise. Art. 1(1)(c) of the Switzerland–India IIA provides: ‘The term investor means (…) companies not established under the law of that Contracting Party in which at least 51 per cent of the equity interest is owned by persons of that Contracting Party, or in which persons of that Contracting Party control at least 51 per cent of the voting rights in respect of shares owned by them’.47 Lastly, the control criterion also plays an important role in Art. 25 of the ICSID Convention. Art. 25(2)(b) second alternative opens the ICSID Convention to entities that ‘had the nationality of the Contracting State party to the dispute (…) and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State.’48 Arbitral tribunals have frequently dealt with the control criterion in both IIAs 20 and the ICSID Convention.49 The case law resulting therefrom is not free from 44 It can also be used to limit the scope of IIAs, see with regard to the requirement of a ‘substantial interest’ of nationals in a legal person, n. 58 below. 45 See also Art. 1(1)(3)(c) of the Netherlands–Mexico IIA; Art. 1(b)(iii) of the Netherlands–Pakistan IIA; and Art. 1(b)(iii) of the Netherlands–Philippines IIA. 46 See also Art. 1(3) of the France–Azerbaijan IIA; Art. 1(3) of the France–Laos IIA; Art. 1(3) of the France–Namibia IIA; Art. 1(1)(c) of the Netherlands–Belarus IIA; Art. 1(b)(iii) of the Netherlands–Burkina Faso IIA; Art. 1(b)(iii) of the Netherlands–Georgia IIA; a ‘predominant interest’ by nationals in legal persons incorporated in a third state require Art. 1(1)(c)(iii) of the Sweden–Bulgaria IIA; Art. 1(3)(b) of the Sweden–Vietnam IIA or Art. 1(2)(b) of the Sweden–Macedonia IIA. 47 Some treaties contain clarifications in a protocol. See for example the protocol to the Netherlands–Bulgaria IIA. 48 With regard to the relationship between IIAs and the ICSID Convention, see above n. 25. 49 See Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Decision on Objections to Jurisdiction, 11 May 2005, para. 38 et seq.; Aguas del Tunari SA v. Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21 October 2005, para. 214 et seq.; African Holding Company of America Inc (AHL) and the African Society of Construction in Congo (SARL) v. Congo, ICSID Case No. ARB/05/21, Decision on Jurisdiction and Admissibility, 23 July 2008, para. 85 et seq. TSA Spectrum de Argentina SA v. Argentina, ICSID Case No. ARB/05/5, Award, 19 December 2008, para. 133 et seq.; Mobil Corporation Venezuela Holdings BV and ors v. Venezuela, ICSID Case No. ARB/07/27, Decision

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controversy. Among the most important disputed questions is whether control can exist at various levels of a corporate structure at the same time or whether only ultimate control is decisive. A question closely related is whether investors have to demonstrate actual control or whether the possibility to exercise control suffices. Finally, contradictory awards have been reached on the meaning of control for purposes of Art. 25(2)(b) second alternative of the ICSID Convention. 21 The different approaches with regard to those issues can be exemplified by a comparison of the awards in the ICSID arbitrations Aguas del Tunari SA v. Bolivia on the one hand and TSA Spectrum de Argentina SA v. Argentina on the other. In both cases, the relevant phrase in the IIAs was ‘controlled, directly or indirectly’ and Art. 25(2)(b) second alternative of the ICSID Convention applied.50 The tribunal in Aguas del Tunari SA v. Bolivia51 undertook a detailed interpretation of the text of the IIA. It found that control could exist at various levels at the same time and that the possibility to exercise control sufficed.52 The tribunal also found that this interpretation of the IIA was within the reasonable discretion of the parties under Art. 25(2)(b) of the ICSID Convention.53 It therefore held that the claimant, a company incorporated in Bolivia, was a national of the Netherlands for purposes of the IIA, because it was indirectly majorityowned by two Dutch holding companies. The fact that the Dutch holding companies were in turn controlled by investors from the US and Italy was not decisive.54 In contrast, the tribunal in TSA Spectrum de Argentina SA v. Argentina

50

51 52 53

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on Jurisdiction, 10 June 2010, para. 150 et seq.; Perenco Ecuador Ltd v. Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador), ICSID Case No. ARB/08/6, Decision on Jurisdiction, 30 June 2011, para. 69 et seq.; Caratube International Oil Company LLP v. Kazakhstan, ICSID Case No. ARB/08/12, Award, 30 May 2012, para. 326 et seq.; Swisslion DOO Skopje v. Macedonia, ICSID Case No. ARB/09/16, Award, 6 July 2012, para. 127 et seq. Aguas del Tunari was based on the Netherlands–Bolivia IIA. Art 1(b)(iii) provides: ‘[T]he term “nationals” shall comprise (…) legal persons controlled directly or indirectly, by nationals of that Contracting Party, but constituted in accordance with the law of the other Contracting Party’. The award in TSA was based on the Netherlands–Argentina IIA. Art. 1(b)(iii) of that treaty provides: ‘[T]he term investor shall comprise (…) legal persons, wherever located, controlled, directly or indirectly, by nationals of that Contracting Party.’ In addition, a protocol to the Netherlands–Argentina IIA clarified the meaning of control: ‘With reference to Article 1, paragraph b) (iii) the Contracting Party in the territory of which the investments are undertaken may require proof of the control invoked by the investors of the other Contracting Party. The following facts, inter alia, shall be accepted as evidence of the control: i. being an affiliate of a legal person of the other Contracting Party; ii. having a direct or indirect participation in the capital of a company higher than 49 % or the direct or indirect possession of the necessary votes to obtain a predominant position in assemblies or company organs.’ The applicable Netherlands–Bolivia IIA protected ‘legal persons controlled directly or indirectly, by nationals of that Contracting Party, but constituted in accordance with the law of the other Contracting Party’. Aguas del Tunari (n. 49) para. 237, 264. Arbitrator Alberro-Semerena dissented and argued that a grammatical interpretation speaks in favour of a need to prove actual control, see Declaration of José Luis Alberro-Semerena, 11 October 2005, para. 26. Id., para. 285. This is supported by a number of other tribunals, see also Mobil v. Venezuela (n. 49) para. 157 and Swisslion v. Macedonia (n. 49) para. 127 et seq.

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did not focus on the IIA, but on Art. 25(2)(b) second alternative of the ICSID Convention. The tribunal agreed with previous tribunals that Art. 25 set only the ‘outer limits’ of ICSID jurisdiction within which State parties were free to determine corporate nationality, but stressed that these limits must be determined objectively.55 It emphasised that control was a material criterion and therefore found that the examination of control must identify the real source of control.56 The tribunal denied jurisdiction under the ICSID Convention, because the claimant, a company incorporated in Argentina, was not controlled by the intermediary holding company incorporated in the Netherlands, but by its ultimate owner, a German-Argentine businessman.57 d) The Criterion of Real Economic Activity

The final criterion sometimes used in IIAs is that legal persons must have ‘re- 22 al economic activity’ in their home State. This is normally an additional criterion to the place of incorporation and/or seat. It thereby limits the scope of IIAs by requiring a substantive link between the legal person and the home State. An example of the real economic activity criterion is Art. 1(1)(b) of the Switzerland–Croatia IIA: ‘The term investor refers to (…) legal entities (…) which are constituted or otherwise duly organised under the law of that Contracting Party and have their seat, together with real economic activities, in the territory of the same Contracting Party.’58 The real economic activity criterion was addressed in the aforementioned 23 Alps Finance case.59 The tribunal first pointed out that it is an ‘uncommon’ criterion and that the State parties’ intention must have been to exclude shell companies.60 It then tried to define ‘real’: ‘[T]he good faith ordinary meaning of the 54 Id., paras. 283, 285. 55 See n. 25 above with regard to the relationship between IIAs and the ICSID Convention. 56 Id., paras. 140, 147. See also Caratube v. Kazakhstan (n. 49) para. 407, where the tribunal also requires proof of actual control for purposes of Art. 25 of the ICSID Convention. However, with reference to the award in Aguas del Tunari the tribunal also accepts that ‘the term “foreign control” is flexible (...) and is meant to accomodate a wide range of agréments between the parties as to [its] meaning’, id., para. 336. 57 Id., para. 155 et seq. 58 See Art. 1(1)(b) of the Switzerland–Belarus IIA; Art. 1(1)(b) of the Switzerland–Chile IIA; Art. 1(1)(b) of the Switzerland–Kyrgyzstan IIA; Art. 1(2)(a)(ii) of the Greece–Bosnia and Herzegovina IIA; Art. 1(3)(b) of the Greece–India IIA; Art. 1(3)(b) of the Greece–Syria IIA. Some treaties use a different wording and require that natural persons of the home State have a ‘substantial interest’ in a legal person for the latter to qualify as a protected investor, see Art. 1(1)(b) of the USA–Egypt IIA. That provision was interpreted in Champion Trading Company and ors v. Egypt, ICSID Case No. ARB/02/9, Decision on Jurisdiction, 21 October 2003. The two claimant companies were incorporated in Delaware and owned by five natural persons that had the dual nationality of Egypt and the US. The tribunal first rejected the claims brought by three of the five individuals since Art. 25(2)(a) of the ICSID Convention excludes claims by dual nationals against one of their home States. The tribunal granted, however, the claims of the companies, since it found that ‘neither the Treaty nor the Convention contain any exclusion of dual nationals as shareholders of companies of the other Contracting State’, id., para. 70. 59 Alps Finance v. Slovakia (n. 36) para. 219 et seq.

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word “real” cannot but be “actual”, or “effective”, or “genuine”, or “verifiable”, or “visible”, or “tangible”, or “objective”’.61 Since the claimant was unable to establish‘ (…) number and type of its clients, type of its operations, kind of contracts it enters into, quantity and type of personnel, nature and composition of its managing bodies’,62 the tribunal had no difficulty in finding that the claimant lacked real economic activity in Switzerland as required by the IIA. 4. Nationality Planning and Abuse of Rights

The case law discussed so far has shown that arbitral tribunals normally stick ‘to the letter’ of IIAs. They do not go beyond the criteria expressly contained in treaties to determine corporate nationality. Arbitral tribunals thereby accept nationality planning to maximise the available protection. Beginning with Tokios Tokelės, however, arbitral tribunals have also held that entities principally covered by an IIA cannot rely on treaty protection if doing so amounts to an abuse of rights.63 Thus, while several tribunals have characterised nationality planning as ‘perfectly legitimate’,64 they have distinguished this from cases where nationality was chosen in an abusive manner. Where that line runs depends on the circumstances of the case. The present case law indicates that crucial factors are the economic nature of the investment and in particular the timing of the dispute. 25 In Phoenix Action, Ltd. v. Czech Republic, the claimant was an entity incorporated and seated in Israel.65 It was ultimately owned by a Czech businessman. The respondent did not dispute that the claimant had complied with the Israel– Czech Republic IIA.66 It argued that the structure was abusive.67 The respondent pointed out that the investment, the shareholding in two Czech companies, had only been acquired by the claimant after the dispute had arisen. It was also undisputed that the companies had formerly been owned by the businessman’s 24

60 Id., para. 224 and para. 226. 61 Id., para. 226. 62 Id., para. 219. The only evidence the claimant produced was a seemingly rather obscure affidavit from its sole director, which stated that the claimant carried out economic activities in Switzerland, but which gave no further indication of the nature of those activities. 63 Tokios Tokelės v. Ukraine (n. 15) para. 56; Aguas del Tunari v. Bolivia (n. 49) para. 330; Phoenix Action Ltd v. Czech Republic, ICSID Case No. ARB/06/5, Award, 9 April 2009, para. 74 et seq.; Mobil v. Venezuela (n. 49) para. 169 et seq.; Pac Rim Cayman LLC v. El Salvador, ICSID Case No. ARB/09/12, Decision on the respondent’s jurisdictional objections, 1 June 2012, para. 2.41 et seq.; Caratube v. Kazakhstan (n. 49) para. 458 et seq.; Tidewater Inc. et al. v. Venezuela, ICSID Case No. ARB/10/5, Decision on Jurisdiction, 8 February 2013, para. 145 et seq. The abuse of rights doctrine invoked by the tribunals is neither expressly contained in IIAs nor in the ICSID Convention. Some tribunals have suggested that the doctrine is an overarching legal principle and thus is applicable to the interpretation of IIAs, see only Mobil v. Venezuela (n. 49) para. 169 et seq. for a review of national and international legal orders. 64 Mobil v. Venezuela (n. 49) para. 204. 65 Phoenix Action Ltd. v. Czech Republic (n. 63) para. 22 et seq. 66 Id., para. 65. 67 The award does not discuss the abuse of rights doctrine in the context of jurisdiction ratione personae, but in the context of jurisdiction ratione materiae. However, the considerations of the tribunal can equally be applied to the question of whether the claimant is an investor, as is shown by subsequent tribunals which relied on the Phoenix award in that context.

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family and that the purchase price had not been commercial. The tribunal accepted that investors may structure their investment in ways to enhance the protection. The tribunal also made it clear, however, that this must occur before a dispute arises: International investors can of course structure upstream their investments (…) in a manner that best fits their need for international protection, in choosing freely the vehicle through which they perform their investment. (…) But on the other side, an international investor cannot modify downstream the protection granted to its investment by the host State, once the acts which the investor considers are causing damages to its investment have already been committed.68

The tribunal found that the case at hand fell into the latter category, as the on- 26 ly purpose of the acquisition had been to get access to ICSID jurisdiction: The evidence indeed shows that the Claimant made an ‘investment’ not for the purpose of engaging in economic activity, but for the sole purpose of bringing international litigation against the Czech Republic. (…) This kind of transaction is not a bona fide transaction and cannot be a protected investment under the ICSID system.69

The tribunal in Mobil Corporation Venezuela Holding BV and ors v. 27 Venezuela agreed with the considerations in Phoenix.70 Following certain difficulties with regard to the relevant investments in Venezuela, Mobil had restructured its investments to bring it within the scope of the Netherlands–Venezuela IIA. Sometime after this restructuring had been completed, Venezuela expropriated the investments.71 The tribunal first confirmed Mobil’s right to restructure its investment.72 It then considered the timing of the investments made by Mobil. It found that the fact that only limited financial investments had been made after the restructuring did not speak against protecting the investment.73 The tribunal pointed out that this had been in line with the original project plan. Finally, it considered the timing of the dispute. It differentiated between existing and future disputes: [T]he aim of the restructuring (…) was to protect those investments against breaches of (…) the BIT. The Tribunal considers that this was a perfectly legitimate goal as far as it concerned future disputes. With respect to pre-existing disputes, the situation is different and the Tribunal considers that to restructure investments only in order to gain jurisdiction under a BIT for such disputes would constitute, to take the words of the Phoenix Tribunal, ‘an abusive manipulation of the system of international investment protection under the ICSID Convention and the BITs’.74

On this basis, the tribunal decided that it had jurisdiction over the disputes 28 that occurred after the restructuring. In Pac Rim Cayman LLC v. El Salvador, finally, the claimant company had 29 originally been incorporated in the Cayman Islands. It had been relocated to Nevada in December 2007. By then, it had been in a dispute with El Salvador 68 69 70 71 72 73 74

Id., paras. 94, 95. Id., para. 143. Mobil v. Venezuela (n. 49) para. 169 et seq. Id., para. 145 et seq. Id., para. 192. Id., para. 198. Id., paras. 204, 205.

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about the delay in the issuing of mining permits.75 The tribunal found that the main purpose of the relocation had been to bring the company within the scope of the DR–CAFTA. The tribunal endorsed the previous case law from Tokios Tokelės to Mobil.76 It defined the dividing line between legitimate planning and an abuse of rights to be as follows: In the Tribunal’s view, the dividing-line occurs when the relevant party can see an actual dispute or can foresee a specific future dispute as a very high probability and not merely as a possible controversy. In the Tribunal’s view, before that dividing-line is reached, there will be ordinarily no abuse of process; but after that dividing-line is passed, there ordinarily will be. (…) (T)he Tribunal (…) recognises that, as a matter of practical reality, this dividing-line will rarely be a thin red line, but will include a significant grey area.77

30

The tribunal then undertook a detailed analysis of when the dispute had occurred. Based on the circumstances of the case, it rejected the abuse of rights defence, since it found the dispute had only occurred after the restructuring. 5. Concluding Remarks/Outlook

The overview has shown that the nationality of a legal person cannot be defined in the abstract but instead always depends on the specific wording of the BIT in question. Criteria commonly used to determine nationality include the place of incorporation, seat or, less frequently, control. 32 Tribunals tend to adhere to those criteria expressly set out in an IIA and appear to be willing to take additional criteria into account in certain limited circumstances only. 33 While tribunals therefore consider nationality planning to be legitimate, provided this is in line with the wording of the IIA in question, they draw a line where a certain structure appears to constitute an abuse of rights. Whether this is the case or not depends on the circumstances of the case and in particular on the question of whether a dispute had already arisen or was foreseeable when the relevant nationality was adopted. 31

75 Pac Rim v. El Salvador (n. 63) at para. 2.41. 76 Id., para. 2.42 et seq. 77 Id., para. 2.99.

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Chapter 7: The Liberalisation of the International Movement of Capital and of International Investments I. WTO Rules and Obligations Related to Investment

Michael Hahn A. Investment as a Non-Issue in GATT Law – Or So They thought … . . . . B. Investment-Related Rights and Obligations in Existing WTO Law (Other than GATT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Agreement on Trade-Related Investment Measures (TRIMs) . . . . . . a) Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Dispute Settlement Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. General Agreement on Trade in Services (GATS) . . . . . . . . . . . . . . . . . . . a) Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Relevant Disciplines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Investment-Related GATS Disciplines Regarding State Measures Affecting Trade in Services Pursuant to Mode 3 and Mode 4, in Particular Market Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Dispute Settlement Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Agreement on Subsidies and Countervailing Measures . . . . . . . . . . . . . 4. The Agreement on Trade-Related Aspects of Intellectual Property 5. The Plurilateral Agreement on Government Procurement (GPA) . . 6. The Dispute Settlement Understanding (DSU). . . . . . . . . . . . . . . . . . . . . . . C. Further Efforts to include Investment into the WTO Portfolio and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 6 7 7 13 14 17 21 25 36 37 40 42 44 45

Literature: Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008); Martín Molinuevo, Protecting Investment in Services, Investor–State Arbitration versus WTO Dispute Settlement (Kluwer, 2012); Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008); Nellie Munin, Legal Guide to GATS (Kluwer, 2010); Andrew Paul Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Wolters Kluwer Law & Business, 2009).

A. Investment as a Non-Issue in GATT Law – Or So They thought …

Whereas the Havana Charter of the International Trade Organization (ITO) of 1 March 19481 contained separate provisions on trade and investment, no such provision found its way into the General Agreement on Tariffs and Trade (GATT). In fact, many believe that Art. 12 of the Havana Charter2 – the core 1 See United Nations Conference on Trade and Employment, Final Act and Related Documents (1948), reprinted, e.g., at http://www.wto.org/english/docs_e/legal_e/havana_e.pdf. 2 Cf. Art. 12 of the Havana Charter on International Investment for Economic Development and Reconstruction: ‘1. The Members recognize that: (a) international investment, both public and private, can be of great value in promoting economic development and reconstruction, and consequent social progress;

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provision dealing with investment – contributed significantly to the US Congress turning its back to the comprehensive post-World War II system of global economic governance that had been devised under American leadership since 1942, culminating in the Bretton Woods Conference. As congressional non-acceptance of the charter became a realistic possibility, the Truman administration decided to go ahead with those parts of the Havana Charter for which the US executive branch had received blanket authorisation under the Trade Agreements Act of 1934; this statute allowed the executive branch to conclude ‘foreign trade agreements’. The business of investment protection was left to bilateral investment treaties (BITs) that started their remarkable career as one of the most successful types of international agreements in 1959 with the Germany–Pakistan BIT. Slightly ahead of the curve, a 1955 Resolution on International Investment for Economic Development by the GATT contracting parties recognises that an increase in investment capital flows, particularly into developing countries, would help attain the objectives of the GATT and recommends (b) the international flow of capital will be stimulated to the extent that Members afford nationals of other countries opportunities for investment and security for existing and future investments; (c) without prejudice to existing international agreements to which Members are parties, a Member has the right: (i) to take any appropriate safeguards necessary to ensure that foreign investment is not used as a basis for interference in its internal affairs or national policies; (ii) to determine whether and, to what extent and upon what terms it will allow future foreign investment; (iii) to prescribe and give effect on just terms to requirements as to the ownership of existing and future investments; (iv) to prescribe and give effect to other reasonable requirements with respect to existing and future investments; (d) the interests of Members whose nationals are in a position to provide capital for international investment and of Members who desire to obtain the use of such capital to promote their economic development or reconstruction may be promoted if such Members enter into bilateral or multilateral agreements relating to the opportunities and security for investment which the Members are prepared to offer and any limitations which they are prepared to accept of the rights referred to in sub-paragraph (c). 2. Members therefore undertake: (a) subject to the provisions of paragraph 1(c) and to any agreements entered into under paragraph 1(d), (i) to provide reasonable opportunities for investments acceptable to them and adequate security for existing and future investments, and (ii) to give due regard to the desirability of avoiding discrimination as between foreign investments; (b) upon the request of any Member and without prejudice to existing international agreements to which Members are parties, to enter into consultation or to participate in negotiations directed to the conclusion, if mutually acceptable, of an agreement of the kind referred to in paragraph 1(d). 3. Members shall promote co-operation between national and foreign enterprises or investors for the purpose of fostering economic development or reconstruction in came where such co-operation appears to the Members concerned to be appropriate.’ See on the Havana Charter C. Wilcox, A Charter for World Trade (Macmillan, 1949); William Adams Brown, The United States and the Restoration of World Trade (Brookings Institution, 1950); Georg Schwarzenberger, The Principles and Standards of International Economic Law, (1966) 117 RC 1–98.

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that parties enter into negotiations towards the conclusion of bilateral and multilateral agreements on, inter alia, the security of foreign investment and the transfer of earnings derived from investment. However, a proposal by Germany to insert rules on establishment in the GATT was not accepted.3 Thus, apart from this rather modest support, the GATT was not the place to turn to for finding legal rules concerning investment protection and regulation. Or so one thought. Then came the 1984 Report Canada – Administration of the Foreign Invest- 2 ment Review Act (FIRA).4 There, the panel had to address the US complaint that certain types of undertakings required from foreign investors as a condition for the approval of investment by Canadian authorities were in violation of the General Agreement on Tariffs and Trade. Canada had requested, as a condition for welcoming foreign direct investment (FDI), the purchase of certain products from domestic sources (‘local content requirements’) and required a percentage of the output to be exported (‘export performance requirements’). In its report, the panel took the view that the former measures (the local content requirements) were inconsistent with GATT Article III:4; this provision reads: [P]roducts (…) imported into the territory of any (…) contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. (…)

As foreign products having legally obtained access to the Canadian market 3 did not receive similar beneficial treatment (no one ever heard of the requirement for investors to use a minimum percentage of imported goods), the panel rightly assumed a violation of GATT Art. III:4. In contrast, the export performance requirements were not viewed as being inconsistent with GATT obligations, notably GATT Art. XI.5 The panel emphasised that while the GATT did not as such purport to regulate Canada’s foreign investment policy, it still constituted a benchmark for any trade-affecting measures by a GATT contracting party, even if it had been taken with the sole purpose to enact foreign investment legislation (and thus not with a view to regulate trade). The FIRA jurisprudence has been taken up and developed by WTO panels 4 and the Appellate Body: In China – Auto Parts,6 the Appellate Body upheld the panel’s findings that China’s imposing an 25 % additional charge on imported 3 World Trade Organization, GATT Basic Instruments and Selected Documents, 3rd suppl. (1955) 48–50; see also GATT Doc. W.9/198, at 9. Cf. Mark Koulen, ‘Foreign Investment in the WTO’ in Eva Nieuwenhuys and Marcel Brus (eds), Multilateral Regulations of Investment (Kluwer, 2001) 181–203, 183. 4 World Trade Organization, GATT Basic Instruments and Selected Documents, 30th suppl. (in the following: BISD 30S/)(1984), 140. 5 Art. XI:1 (General Elimination of Quantitative Restrictions) reads: ‘No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.’ 6 China – Measures Affecting Imports of Automobile Parts, DS339, 340, 342.

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auto parts violated GATT Article III:2 because that charge was not imposed on like domestic auto parts. It further found GATT Art. III:4 to be violated, as China accorded imported parts less favourable treatment than like domestic auto parts, in particular due to subjecting only imported parts to certain particularly burdensome administrative procedures. In India – Autos,7 the panel had to examine whether India’s local content requirement and its ‘trade balancing requirement’, pursuant to which imports value had to be less or equal to exports values, were compatible with India’s obligations under the GATT. In the panel’s view, the measure violated GATT Art. III:4 as the local content affected the conditions of competition in the Indian market to the detriment of imported car parts and components. With regard to India’s trade balancing requirement, the panel was of the view that it limited the amount of imports in relation to an export commitment; this was rightly viewed as a restriction on importation within the meaning of GATT Art. XI:1. As the measures in question burdened the purchasers of imported components on the Indian market with an additional obligation to export cars or components, the panel was of the opinion that the measure created a ‘disincentive’ to the purchase of imported products. This, of course, is treatment less favourable to imported products than to like domestic products, and hence incompatible with GATT Art. III:4. 5 In a nutshell, the FIRA Report and its jurisprudential progeny highlight the relevance of WTO rules for investors. Indeed, the nexus between trade and investment had become clear at the time: the new round of multilateral trade negotiations was about to be kicked off in Punta del Este, and the US, supported by many others, not only put forward proposals for improved protection of intellectual property at the multilateral level (which resulted in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)) but also put forward a proposal for a comprehensive agreement on investment in the GATT.8 As is well known, this proposal was not taken up. However, it is fair to say that the many agreements that were to become the result of the Uruguay Round contain a number of highly relevant provisions dealing with investment-related legal parameters. In the following, this contribution will attempt to give an overview of those provisions of WTO law that have the most significant impact on the decision of investors to get their capital to work in a given WTO member.

7 India – Measures Affecting the Automotive Sector, WT/DS146, 175; this is the last of a series of disputes concerning TRIMs with regard to the car industry; see in particular, Indonesia – Certain Measures Affecting the Automotive Industry, WT/DS54, 55, 59, 64. 8 GATT Doc No. PREP.COM (86)/W/35 (11 June 1986); according to the US ‘[i]t was submitted in precisely the same spirit as the proposal on services: if the GATT were to reflect and be responsive to the world trade system of the future, the new round must address the issues raised for trade by investment problems’, GATT Doc. PREP.COM(86)SR/8, 2. Cf. also Terence Stewart, The GATT Uruguay Round: A Negotiating History, vol. II (Kluwer, 1993) 2061 et seq.

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B. Investment-Related Rights and Obligations in Existing WTO Law (Other than GATT)

All ‘Marrakesh Agreements’, i.e. the negotiating results of the Uruguay 6 Round of Trade negotiations are an integral part of the WTO Agreement (Art.II: 2 of the WTO Agreement, WTOA), which is, as such, setting up the infrastructure of the organisation. The substantive provisions are to be found in the annexed agreements; for present purposes, the most important ones are the Agreement on Trade-Related Investment Measures (TRIMs), the GATT itself (dealt with supra), the GATS, the Agreement on Subsidies and Countervailing Measures (ASCM), the TRIPS and the Agreement on Government Procurement (AGP): the latter is the only plurilateral WTO agreement, i.e. not binding for all WTO members but only for those specifically adhering to it.9 1. Agreement on Trade-Related Investment Measures (TRIMs) a) Overview

As a reaction to ‘trade restrictive and distorting effects of investment mea- 7 sures’ highlighted in the FIRA case, the TRIMs aims ‘to promote the expansion and progressive liberalisation of world trade and to facilitate investment across international frontiers so as to increase the economic growth of all trading partners, particularly developing country Members, while ensuring free competition’. It restates in an unequivocal fashion that discriminatory treatment of imported and exported products related to local production is as illegal as the establishment of local content requirements and limitations on the use of imported parts and materials. Due to the failure of the Multilateral Agreement on Investment (MAI), TRIMs may be described as the first, albeit modest, and so far only, multilateral agreement to discipline government-imposed investment restrictions. However, the usual bouquet of investment incentives, such as tax breaks – de- 8 spite their effect on market access strategies (by possibly offering a commercially more interesting way to acquire market share than exporting goods into the host country) – is not as such the subject of TRIMs which may be characterised as a restatement of previously established GATT ground rules. TRIMs’ investment impact is largely restricted to the explicit recognition that certain investment measures distort trade and that these distortions are not consistent with GATT principles, as they may not only affect the volume of trade but, in addition, the composition of trade: local content requirements, held to have ‘trade restrictive and distorting effects of investment measures’ by the FIRA Panel, are a protectionist advantage for domestically produced ‘like products’, and thus a vi9 Armenia, Canada, the EU, Hong Kong (China), Iceland, Israël, Japan, Korea, Liechtenstein, the Netherlands with respect to Aruba, Norway, Singapore, Switzerland, Chinese Taipei, United States, according to http://www.wto.org/english/tratop_e/gproc_e/memobs_e.htm#parties (last visited 13 April 2012).

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olation of the national treatment obligation. In much the same fashion, capitalimporting States’ measures linking the quantity of permissible merchandise imports to export performance seem not compatible with GATT’s obligations: TRIMs, albeit being an integral part of the WTO Agreement10 applies only to investment measures related to trade in goods (TRIMs Art. 1),11 hence trade covered by GATT disciplines. Whereas therefore many investment incentives and performance requirements are not covered by the TRIMs, they may be subject to rules established by other Uruguay Round agreements such as GATS, the ASCM or TRIPS. 9 The Agreement on Trade-Related Investment Measures’ central provision reads: Article 2: National Treatment and Quantitative Restrictions 1. 2.

10

Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994. An illustrative list of TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 and the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 is contained in the Annex to this Agreement.

In the annexed list attached to TRIMs, WTO members single out five categories of investment measures as being TRIMs incompatible: TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include (…) (a)

(b)

the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production; or that an enterprise’s purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports.

TRIMs that are inconsistent with the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 include

10 It is attached to the WTO Agreement in Annex 1A. 11 Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54, 55, 59 and 64/R, 2 July 1998, Abbreviation: Indonesia – Autos, Panel Report, paras. 14.58–14.92, 14.73: ‘We note that the use of the broad term “investment measures” indicates that the TRIMs Agreement is not limited to measures taken specifically in regard to foreign investment. (…) [N]othing in the TRIMs Agreement suggests that the nationality of the ownership of enterprises subject to a particular measure is an element in deciding whether that measure is covered by the Agreement. We therefore find without textual support in the TRIMs Agreement the argument that since the TRIMs Agreement is basically designed to govern and provide a level playing field for foreign investment, measures relating to internal taxes or subsidies cannot be construed to be a trade-related investment measure. We recall in this context that internal tax advantages or subsidies are only one of many types of advantages which may be tied to a local content requirement which is a principal focus of the TRIMs Agreement. The TRIMs Agreement is not concerned with subsidies and internal taxes as such but rather with local content requirements, compliance with which may be encouraged through providing any type of advantage. Nor, in any case, do we see why an internal measure would necessarily not govern the treatment of foreign investment.’

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(c)

the importation by an enterprise of products used in or related to its local production, generally or to an amount related to the volume or value of local production that it exports; the importation by an enterprise of products used in or related to its local production by restricting its access to foreign exchange to an amount related to the foreign exchange inflows attributable to the enterprise; or the exportation or sale for export by an enterprise of products, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.

Importantly, the annex does not only prohibit direct commands as mandatory 11 measures but also measures ‘compliance with which is necessary to obtain an advantage’. Clearly, this illustrative list of investment-impeding State measures contains a number of important hurdles for investors that they would happily do without. Despite the concerns of capital exporters, reflected in the preamble, that per- 12 formance requirements imposed by host countries in order to advance their development agenda would have detrimental effects on international trade, it is important to note that apart from the last constellation identified in the illustrative list, the results of the FIRA panel remain largely unchanged: as indicated above, the panel had rejected the argument that the Canadian export performance requirements were in violation of Canada’s GATT obligation, in particular Article XI, stating that nothing in the GATT ‘forbids requirements to sell goods in foreign markets in preference to the domestic market’.12 b) Dispute Settlement Practice

As of spring 2012, the TRIMs has been invoked 28 times in requests for con- 13 sultation.13 Apart from the Indonesia – Auto panel cited above (WT/DS54, 55, 59, 64) that clarified aspects of TRIMs Art. 1 and 2, the following panels discussed questions related to TRIMs: EC – Bananas III (WT/DS27), Canada – Autos (WT/DS139, 142), India – Autos (DS146, WT/DS175), Canada – Wheat Exports and Grain Imports (WT/DS276). In several reports, the panels, never corrected by the Appellate Body, chose to exercise judicial economy, having found other WTO violations, in particular related to GATT Art. III.14 2. General Agreement on Trade in Services (GATS)

Like the TRIMs, the GATS explicitly addresses foreign investment. However, 14 it does so only in one provision,15 GATS Article XVI(2)(f) and without specifying what the term investment covers in that context:

12 World Trade Organization (n. 4) BISD 30 S/140, 164. 13 Available at http://www.wto.org/english/tratop_e/dispu_e/dispu_agreements_index_e.htm?id= A25#selected_agreement, last visit on 14 April 2012. 14 Overview at the WTO homepage at trade topics > dispute settlement > the disputes > disputes by agreement. 15 The term investment is also used in the Annex on Financial Services, to describe certain (investment-related) financial services.

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2.

With respect to market access through the modes of supply identified in Article I, each Member shall accord services and service suppliers of any other Member treatment no less favourable than that provided for under the terms, limitations and conditions agreed and specified in its Schedule. In sectors where market-access commitments are undertaken, the measures which a Member shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire territory, unless otherwise specified in its Schedule, are defined as: (…) (f) limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment.

The purpose of GATS is to lay down ground rules for trade in services, not for service-related investments: however, GATS’ wording reveals that the implications of trade rules for investments in service sectors were not absent from the negotiators’ minds. As GATS law stands, it codifies multilateral rules for certain, albeit limited, aspects of FDI in services and, maybe even more importantly, constitutes a framework for multilateral liberalisation of FDI, in particular with regard to financial services.16 However, this legal regime is substantially less developed than the comprehensive sets of rules to be found these days in free trade agreements (FTAs); it is also less intrusive for WTO members, whose rights ‘to regulate, and to introduce new regulations, on the supply of services within their territories in order to meet national policy objectives’ is explicitly recognised, both in the preamble and in operative provisions.17 Given the often underdeveloped state of services regulations in many countries, this is a highly relevant statement, both for political and legal purposes. 16 As the quoted provision (GATS Art. XVI) is a specific commitment, it is not a provision that applies to all WTO members, but rather only to those which have entered into specific commitment with regard to services or rather, very carefully circumscribed service sectors. Thus, before this chapter turns to Art. XVI and other investment-related provisions of GATS, it shall describe how the GATS operates. 15

a) Coverage

Services have been subject to multilateral international disciplines only since the successful conclusion of the Uruguay Round in 1994. GATS is thus still a teenager, and the somewhat limited body of panel and Appellate Body jurisprudence on GATS is a testimony to this (relative) youth. 18 GATS does not define service, but rather trade in services, which is recognised, pursuant to GATS Article I:2, in the form of four modes of supply: the supply of a service from one member country to another member (mode 1, only the service travels – by phone, mail or electronically), within one member country to service consumers of any other member (mode 2, the recipient travels, e.g. 17

16 Cf. Annex and Second Annex on Financial Services; cf. also the Understanding on Commitments in Financial Services. 17 Preamble, para. 4; see also Annex on Financial Services, para. 2.

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the British aristocrat to the Swiss ski resort), in another member country through ‘commercial presence’ (mode 3, the service provider travels, e.g. the Chinese Bank goes onshore and sets up a subsidiary in Manila), and in another member country through the ‘presence of natural persons’ (mode 4, natural persons travel to provide services, e.g. the Chinese bank sends the management team from Shanghai to Manila, or the Chinese chef sets up a shop in the building of the Chinese bank in Manila). The last two modes seem to particularly affect investors as these forms of market access will regularly build on FDI, while this is not the case under modes 1 and 2. GATS covers ‘all services except those supplied in the exercise of govern- 19 mental authority’.18 However, when searching for provisions relating to investment in the GATS, one ought to not lose sight of the fact that the GATS’ comprehensive coverage came at the price of rather limited regulatory density: basic liberal trade concepts such as national treatment and market access are only due when specific (additional) bindings have been accepted by members, in what is a stark difference to how things are played out in GATT. Even the general obligation to extend most favoured nation (MFN) treatment to trade in services is subject to a very open-ended exemption in GATS Art. II:2 that allows members to ‘maintain a measure inconsistent with [GATS’ MFN obligation] provided that such a measure is listed in, and meets the conditions of, the Annex on Article II Exemptions.’ Hence, the ‘GATS regime on services’ (that is the basis for any investment-related right a member may have),19 is really a regime applicable only to the extent that a service sector has been inscribed in the schedule of a member. Even if a sector is scheduled, though, legislation and administrative practices not in line with in principle applicable GATS standards (for example, specific commitments and MFN) may very well be kept operational, provided the member concerned has gotten its paperwork right and has listed them either under the list of Art. II exemptions, or has made pertinent reservations in its schedule. Even then, many disciplines do not apply, as GATS Art. XX allows any mem- 20 ber to specify in its schedule ‘(a) terms, limitations and conditions on market access; (b) conditions and qualifications on national treatment’. With regard to market access such limitations and conditions may, pursuant to GATS Art. XVI: 2, encompass far-reaching exceptions. Thus, the three step examination – (1) Is the sector covered?, (2) What are the terms, limitations and conditions on market access and national treatment (NT)?, (3) Has MFN been excluded pursuant to GATS Art. II:2? – may reveal that GATS rules do not apply after all. If there is coverage, though, a number of disciplines may have an effect on investment. 18 US – Gambling, WT/DS285, Appellate Body Report, para. 180. 19 To the knowledge of the author, no member grants, as a general rule, direct effect to the provisions of the WTO Agreements in domestic courts; in the WTO dispute settlement mechanism, only rights of the sovereign members are being dealt with; private investors may, however, not only benefit indirectly from pertinent WTO rights but also be instrumental in bringing the case.

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b) Relevant Disciplines

The most important pertinent disciplines are the most favoured nation obligation (GATS Art. II), the national treatment obligation pursuant to GATS Article XVII,20 and, lastly, market access pursuant to GATS Art. XVI. Market access and national treatment obligations apply, it is to be repeated, only where specific commitments have been undertaken. 22 Art. II of the GATS’ obligation to accord treatment no less favourable includes, as in other areas of WTO law de facto as well as de jure discrimination.21 Hence, State measures (such as, e.g., investment incentives or restrictions) that are applied equally to all foreign sources of inward service industry-related investments are not affected, whereas providing more favourable treatment to investors from a particular member (or a sub-group) of one or more countries is GATS-incompatible. 23 National treatment is a specific commitment applicable only to service sectors liberalised (and ‘scheduled’) as a consequence of what are supposed to be mutually beneficial negotiation results. It is to be accorded in respect of all State measures affecting the supply of services within the regulating members’ territory; this may include – with regard to mode 3 and mode 4 service providers – investment-related measures such as the screening of FDI proposals, economic benefit tests or the condition for investors to acquire at least 25 % of equity:22 panels have so far given a wide interpretation to the term ‘affecting’.23 Such measures are, however, compatible with the national treatment obligation, provided domestic investors are submitted to the same procedures. 24 Only ‘service suppliers’ of another member may benefit from these standards; in the case of a juridical person this requires ownership or control by nationals of another WTO member pursuant to GATS Art. XXVIII. As a consequence, a foreign investor using an investment vehicle which she does not control or own would not benefit from any of the GATS-based advantages.24 21

20 Art. XVII reads: ‘1. In the sectors inscribed in its Schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers. 2. A Member may meet the requirement of paragraph 1 by according to services and service suppliers of any other Member, either formally identical treatment or formally different treatment to that it accords to its own like services and service suppliers.’ 21 Appellate Body Report, EC – Bananas III, WT/DS27, para. 233 et seq. 22 Panagiotis Delimatsis and Martin Molinuevo, ‘Art. XVI GATS’ in Rüdiger Wolfrum, PeterTobias Stoll and Clemens Feinäugle (eds), WTO – Trade in Services, vol. 6 (Brill, 2008) 367, 388 (fn. 100); Nellie Munin, Legal Guide to GATS (Kluwer, 2010) 152 et seq. 23 See e.g. China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/R, para. 7.942. 24 Panagiotis Delimatsis and Martin Molinuevo (n. 22) 367, 389.

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c) Investment-Related GATS Disciplines Regarding State Measures Affecting Trade in Services Pursuant to Mode 3 and Mode 4, in Particular Market Access

Mode 3 and 4 describe forms of trade in services that entail the movement of 25 persons and/or assets across borders: the former (mode 3, GATS Art. I:2(c)) describes commercial presence as integral part of the process of supplying a service, the latter (mode 4, GATS Art. I:2(d)) requires presence of natural persons (who supply services to the recipient(s) of a member) in the territory of any other member. The mode of supply against which the largest number of restrictions seems to 26 have been undertaken is that relating to commercial presence,25 which is defined by GATS as any type of business or professional establishment, including through (i) (ii)

the constitution, acquisition or maintenance of a juridical person, or the creation or maintenance of a branch or a representative office, within the territory of a Member for the purpose of supplying a service[.]26

Due to this definition, GATS establishes – nota bene subject to the ‘terms, 27 limitations and conditions agreed and specified in its Schedule’ – for scheduled service sectors a right of establishment27 which would not only provide for a national treatment obligation (pursuant to GATS Art. XVII) in scheduled sectors with regard to both the establishment of the commercial presence and the postestablishment phase. This is particularly significant, given the prevalence of post-establishment restrictions by host States.28 Footnote 8 to the GATS clarifies a point of importance to investors: ‘[i]f a Member undertakes a market-access commitment in relation to the supply of a service through the mode of supply referred to in subparagraph 2(c) of Article I, it is thereby committed to allow related transfers of capital into its territory.’ It is noteworthy that whilst the influx of capital, and thus the effective use of the right to establishment, is ensured, the GATS remains silent on the opposite direction capital flows may want to take. This, of course, is in stark contrast to the explicit coverage of payments for services supplied: disallowed measures affecting trade in services include ‘measures in respect of the purchase, payment or use of a service’.29 GATS Art. XI:1 establishes an overlapping obligation by requiring members to not apply restrictions on international transfers and payments for current transactions relating to 25 Americo Zampetti and Pierre Sauvé, ‘International Investment’ in Andrew Guzman and Alan Sykes (eds), Research Handbook in International Economic Law (Edward Elgar, 2007) 211– 271, 255. 26 GATS Art. XXVIII(d). 27 See Ignacio Gómez-Palacio and Peter Muchlinski, ‘Establishment’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 227–258, 245 et seq. 28 UNCTAD, Preserving Flexibility in IIAs: The Use of Reservations (United Nations, 2006) 44 et seq. 29 GATS Art. XXVIII(c)(i).

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service sectors that it scheduled for market access or national treatment; GATS Art. XI:2 specifies the relationship between scheduled capital transactions and the obligations of members pursuant to the Articles of Agreement of the IMF.30 28 GATS Article XVI does not define what constitutes market access for service providers. However, the list of prohibited (unless explicitly reserved) measures in GATS Art. XVI:2 is an authoritative illustration of what market access is supposed to mean. With regard to commercial presence, the provisions of Art. XVI: 2(e) and (f) are particularly relevant. 29 According to GATS Art. XVI:2(e), ‘measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service’ are incompatible with the commitment to allow trade in a defined service sector, unless otherwise specified in the schedule. Thus, the provision addresses two distinct legal measures, and prohibits them as a matter of general policy: unless otherwise determined in the schedule, it is incompatible with GATS Art. XVI:2(e) to require foreign service providers to not take advantage of the full range of legal franchises available. For example, many members allow the provision of legal services only by entities which do not benefit from limited liability, whereas, on the contrary, financial services may often only be offered by limited liability entities. States that wish to allow trade in those services sector and want to adhere to the status quo above have to inscribe this in the relevant modes 1–3. While this would include non-discriminatory measures,31 the Scheduling Guidelines32 give the following example for pertinent requirements that would require, in case of pertinent commitments, inclusion into the schedule, in order to not be in violation of GATS Art. XVI: (e)

Restrictions or requirements regarding type of legal entity or joint venture: • Commercial presence excludes representative offices. • Foreign companies required to establish subsidiaries. • In sector x, commercial presence must take the form of a partnership.

In addition to preventing the State from reducing the options as to the type of legal entities available for market access, GATS Art. XVI:2 also aims at preventing a forced choice for service providers that seek commercial presence and thus intend to invest: whereas the formation of a joint venture may well be a very appropriate business decision in order to ‘conquer’ a foreign market with the help of local intelligence and know-how, Art. XVI:2 lit. e) puts the requirement to proceed with ‘local content’ only on the black list of those measures that will only survive scrutiny, if specifically provided for in the schedules. 31 According to GATS Art. XVI:2(f), ‘limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the to30

30 Benedict Christ and Marion Panizzon, ‘Art. XI GATS’ in Rüdiger Wolfrum, Peter-Tobias Stoll and Clemens Feinäugle (eds) (n. 22) 245, 248. 31 Panagiotis Delimatsis and Martin Molinuevo (n. 22) 367, 386–387. 32 World Trade Organization, Guidelines for the Scheduling of Specific Commitments under the General Agreement on Trade in Services (GATS), WTO Doc, S/L/92, 28 March 2001.

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tal value of individual or aggregate foreign investment’ are also black-listed, i.e. will only be compatible with GATS law, if the schedule is drafted so as to reduce a priori the pertinent commitment to liberalise trade in the service sector in question. The example given by the Scheduling Guidelines reads: (f)

Limitations on the participation of foreign capital: • Foreign equity ceiling of x percent for a particular form of commercial presence.33

Limitation of the scope of the participation is, of course, something else than 32 minimum requirements; these (not infrequent measures) would be compatible with GATS law, unless they would be discriminatory (which they are frequently). Hence, it can be said that GATS Art. XI:2(f) establishes the freedom to invest for the purposes of obtaining commercial presence in a service sector; however, this freedom comes under the condition that 1) the sector is covered, i.e. the member in question has bound itself explicitly with regard to that sector in its schedule and 2) that there has been no pertinent reduction of the standard parameters in the schedule pursuant to GATS Art. XVI:1. While it is thus not wrong to describe Art. XVI:2 as a prohibition of certain investment restricting practices, such a statement seems a tad too optimistic given the massive possibilities to allow those black-listed State measures by simply making sure that the schedules are drafted accordingly; these possibilities are frequently used. GATS grants considerable flexibility to the host State, rendering it somewhat 33 less helpful to investors in the process: it only covers the cross-border movement of the capital necessary to effectively supply a service to foreign customers. The amount needed for establishment can only be determined on a case-by-case basis: the right to establish commercial presence seems somewhat less comprehensive than the asset-based approach commonly found in international investment agreements (IIAs).34 A number of other GATS provisions provide for what one may call good gov- 34 ernance and thus contribute to favourable general conditions for FDIs. In Art. VI (Domestic Regulation), members undertake to administer in a reasonable, objective and impartial manner all measures of general application affecting trade in services; sudden hikes in visa fees in response to the rise of protectionist tendencies in the political process of a member may be in violation of that standard. In addition, members will provide for judicial, arbitral or administrative tribunals or procedures providing, at the request of an affected service supplier, the prompt, objective and impartial review of administrative decisions affecting trade in services. This includes the explicit obligation to provide for appropriate remedies. While this falls short of a protection against expropriation, it represents a legal impediment for a number of discriminatory measures with expro33 Cf. China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/R, para. 7.1367. 34 Friedl Weiss, ‘Trade and Investment’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 182–223, 194.

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priatory effects. In addition to that obligation, members undertake, pursuant to GATS Art. VIII, the obligation to ensure that their monopoly suppliers of services will not discriminate between foreign partners and do not act in a manner inconsistent with their obligations under GATS Art. II and their specific commitments. 35 All investment-related provisions in GATS are subject to the agreement’s many exceptions, most notably the balance of payments exception (GATS Art. XII) and the general exception (GATS Art. XIV). They are also to extend only as far as the liberalisation of trade in services is granted, which means that (due to the GATS’ ‘positive listing’ approach) only those sectors that are specifically included by a member in its schedules of liberalised sectors will benefit from GATS’ protections for investors. d) Dispute Settlement Practice 36

Of the very limited number of GATS cases only one dealt with certain aspects of mode 3 trade in services. In Mexico – Measures Affecting Telecommunications Services the panel examined whether Mexico had a commitment in effect to allow commercial agencies to supply the services at issue through commercial presence, and answered in the affirmative.35 3. Agreement on Subsidies and Countervailing Measures

Investment incentives more often than not fit the definition of a subsidy, i.e. ‘there is a financial contribution by a government (...) and a benefit is thereby conferred.’ It is this benefit that is supposed to attract FDI to member A (and hence not to X, Y, and Z). This is certainly true for both direct financial incentives, but also for fiscal incentives (tax breaks) and subsidised services: tax breaks are caught by Art. 1 of the SCM Agreement, as it defines a financial contribution as a ‘government revenue that is otherwise due [which] is foregone or not collected (e.g. fiscal incentives such as tax credits)’. Subsidised services and goods fall under the SCM Agreement pursuant to its provision that government provisions of ‘goods or services other than general infrastructure’ and the purchase of goods are subsidies provided they confer a benefit. Only incentive measures that may improve the status of an investment by granting it preferential regulatory treatment and insulation from further market entrants would escape the definition of a subsidy. However, such measures might very well collide with the standards developed with regard to GATT’s national treatment clause.36 38 Of course, any of these support measures are only outlawed or rendered countervailable, if they are specific pursuant to ASCM Art. 2: the purpose of the ASCM is not to second-guess the overall degree of State involvement in a mem37

35 Mexico – Measures Affecting Telecommunications Services, WT/DS204, Panel Report, para. 7.353 et seq. 36 Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54, Report of the Panel, para. 14.58 et seq.

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ber’s economy or society, but rather to curtail targeted measures aiming to improve the competitive position of the provider of competing products. Hence, providing first-class public educational services or the best transport infrastructure in the world is not a subsidy despite it benefitting massively industries dependant on highly qualified labour and excellent logistics. Rather, only support measures that target an enterprise, an industry or a region will be caught in the ASCM’s dragnet. Investment incentives through subsidies contingent upon export performance 39 of goods produced by the receiver of the subsidy are per se prohibited pursuant to ASCM Art. 3.37 But also lesser sins are attackable, provided they harm the interests of other members and inflict detrimental effects on the industries of other members that compete with like products that have benefitted from subsidisation (ASCM Art. 6, 15). A note of caution is, however, appropriate: the bread-andbutter-‘yellow-light’ subsidy is only WTO-incompatible to the extent that it affects trade flows and thereby inflicts harm on producers of like goods in other members. WTO decisions are prospective only: a priori, therefore, not much can be gained by another member by attacking such subsidising incentives through a complaint.38 The only remedy that could provide some form of relief would be a countervailable duty offsetting the benefit conferred.39 Of course, that would affect, although only in a somewhat reduced way, the value of the initial incentive. 4. The Agreement on Trade-Related Aspects of Intellectual Property

The importance of the Agreement on Trade-Related Aspects of Intellectual 40 Property Rights (TRIPS Agreement) for this overview stems from two interconnected aspects: firstly, in today’s world, the assets of corporations consist increasingly of intangible assets; thus a member’s intellectual property (IP) regime affects its attractiveness for inbound FDI. Secondly, and as a consequence of the first point, BITs regularly (and, in more recent years, always) contain provisions aimed at securing and enforcing the protection of intellectual property rights (IPRs). In sum, there is little doubt, that a host country’s system of IPR protection influences investment decisions both in general and with regard to the technology employed.

37 Cf. recently the Appellate Body Report in European Communities and Certain Member States – Measures Affecting Trade in Large Civil Aircraft,WT/DS316, para. 1047: ‘Where the evidence shows, all other things being equal, that the granting of the subsidy provides an incentive to skew anticipated sales towards exports, in comparison with the historical performance of the recipient or the hypothetical performance of a profit-maximizing firm in the absence of the subsidy, this would be an indication that the granting of the subsidy is in fact tied to anticipated exportation within the meaning of Article 3.1(a) and footnote 4 of the SCM Agreement.’ 38 This is a recurring theme in the literature; see, e.g. Mark Koulen (n. 3) 181, 191. 39 Americo Zampetti and Pierre Sauvé (n. 25) 211, 260; of course, both avenues are open for an aggrieved member: cf. Art. 10, fn. 35 of the Agreement on Subsidies and Countervailing Measures.

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The TRIPS Agreement does not directly address investment protection. It acknowledges that heterogeneous legal and enforcement standards with regard to IPRs have had a detrimental effect on international trade. The very (maybe: too) high standards of the TRIPS Agreement have shaped the legal environment for FDI worldwide, arguably creating a more favourable environment for investors. TRIPS parameters are of great interest to corporations that engage in FDI, and in the production and marketing of goods and services dependent on proprietary IPRs. However, the direct effect of the agreement depends very much on the enforcement of IP standards by host countries which, to say the least, is heterogeneous. However, maybe counter-intuitively, deficits in enforcement may also create an incentive to invest, as a company seeking market access may rely on FDI to ensure control over proprietary information.40 5. The Plurilateral Agreement on Government Procurement (GPA)

42

Due to pertinent carve-out clauses in GATT and GATS, government procurement is largely excluded from benefitting from the general national treatment obligations. The Agreement on Government Procurement is an à-la-carte option open to those members who want to liberalise the area of government procurement. Remarkably, the GPA now goes beyond extending the national treatment clause in GATT Art. III to government procurements. GPA Art. IV:2 explicitly commands: With respect to any measure regarding covered procurement, a Party, including its procuring entities, shall not: (a) (b)

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treat a locally established supplier less favourably than another locally established supplier on the basis of the degree of foreign affiliation or ownership; or discriminate against a locally established supplier on the basis that the goods or services offered by that supplier for a particular procurement are goods or services of any other Party.41

Pursuant to GPA Art. IV:6, parties, and in particular their procuring entities ‘shall not seek, take account of, impose or enforce any offset (…) [w]ith regard to covered procurement’; according to GPA Art. I, offset means any condition or undertaking that encourages local development or improves a party’s balance of payments accounts, such as the use of domestic content, the licensing of technology, investment, countertrade and similar action or requirement. However, GPA Art. V exempts domestic contents (DCs) from most of these disciplines, which – it is to be repeated – they are not obliged to sign on anyway, as the GPA is the only existing WTO agreement that is not integrated into the single undertaking approach that all WTO agreements constitute as inherent parts of the WTOA. 40 Friedl Weiss (n. 34) 199. 41 Emphasis added. The text of the modified GPA is reproduced in WTO Doc. GPA/113 (2 April 2012): ‘Adoption of the Results of the Negotiations Under Article XXIV:7 of the Agreement on Government Procurement, Following Their Verification and Review, as Required by the Ministerial Decision of 15 December 2011 (GPA/112), PARAGRAPH 5 – Action Taken By the Parties to the WTO Agreement on Government Procurement at a Formal Meeting of the Committee, at the Level of Geneva Heads of Delegations, on 30 March 2012.’

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6. The Dispute Settlement Understanding (DSU)

The DSU is the basic law for the world’s most successful and important inter- 44 national dispute settlement mechanism outside certain mechanisms in charge for human rights and regional integration organisations. However, it contains no provisions allowing for private party (e.g. investor-State) recourse to multilateral dispute settlement. Nevertheless, many, if not a majority of WTO cases are brought in constellations where the most direct interest lies with important private economic interests. Indeed, in many cases, even the considerable cost associated with the use of the WTO’s inter-State dispute settlement mechanism is carried by those private interests. Thus the existence of a strong dispute settlement mechanism in the WTO not only contributes to a legal environment of greater stability and predictability overall, but rather may be used directly – albeit indirectly in form – to project legal interest into this inter-State dispute settlement forum. C. Further Efforts to include Investment into the WTO Portfolio and Outlook

Even after the public demise of the MAI project,42 the trade and investment 45 debate continued for some time. Following an initial discussion in the Singapore Ministerial Conference (1996), WTO Members agreed at the Doha Ministerial Conference (November 2001) to undertake negotiations on trade and investment beginning in 2003.43 The WTO, it was hoped, could do a better job than the Organisation for Economic Co-operation and Development (OECD) in addressing the societal issues implicit in investment. Moving the discussion from Paris to Geneva certainly appeased, to some extent, the developing countries who had been instrumental to bring down an OECD-based MAI. However, not in the least due to typically scarce negotiating resources, developing countries were not prepared to make the negotiation on trade and investment a priority, in light of the very high opportunity cost associated with such a choice. Their priorities were focused more on special and differential treatment, agriculture, and textiles. The life of the WTO negotiating group on trade and investment was therefore 46 short: At the Cancún meeting of October 2004, which had been intended to become the Doha Mid-Term Review, members took the drastic decision to stop the negotiation on trade and investment.44 The Doha work programme, following a decision adopted by the WTO General Council on 1 August 2004, states: 42 Cf. Peter Muchlinski, ‘The Rise and Fall of the Multilateral Agreement on Investment: Lessons for the Regulation of International Business’ in Ian Fletcher, Loukas Mistelis and Marise Cremona (eds), Foundations and Perspectives of International Trade Law (Sweet and Maxwell, 2001) 114 et seq., 129–131. 43 See WTO Doc WT/MIN(01)/DEC/1 of 20 November 2001, para. 20. 44 See Joel Trachtman, ‘Trade and… Problems, Cost-Benefit Analysis and Subsidiarity’ (1998) 9 EJIL 32–85; on the issue of linkage between trade and investment; Pierre Sauvé and Christopher Wilkie, ‘Investment Liberalization in GATS’ in Pierre Sauvé and Robert M. Stern (eds),

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This state of play however, does not mean that developing countries (or, any other countries for that matter) are not interested in providing an environment attractive to foreign investors. Empirical research suggests a policy change on FDI which is being liberalised quite fast. According to the latest UNCTAD World Investment Report 201446 developing countries and countries in transition attract more than half of global FDI flows. Sauvé and Subramanian47 estimate that cross-border FDI activity has increased in the nineties by almost 60 per cent. As per 2014, it has reached again pre-global financial crisis levels. While all this has happened despite the absence of a multilateral umbrella, the policy discourse re-intensifies in a world where more than 3200 BITs have created an ultra-complex and difficult to manage environment:48 the need for a multilateral WTO agreement on investment measures remains. It would have to find an appropriate balance between the interests of capital exporters (amongst them by now China, Brazil and India) and the wish of many States (including, in reaction to unprecedented inbound investment increases by countries like Russia and other actors rich in energy and cash, many OECD countries) to allow forms of control and restriction, for political security and, of course, developmental reasons.

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GATS 2000: New Directions in Services Trade Liberalization (Brookings, 2000) 331–363 on the negotiation in the WTO. WTO Doc WT/L/579 of 2 August 2004, at 3. UNCTAD (ed), World Investment Report 2014 (United Nations, 2014). Pierre Sauvé and Arving Subramanian, ‘Dark Clouds over Geneva? The Troubled Prospects of the Multilateral Trading System’ in Robert Porter, Pierre Sauvé, Arvind Subramanian and Americo Beviglia Zampetti (eds), Efficiency, Equity, Legitimacy: The Multilateral Trading System at the Millennium (Brookings, 2001) 16–33. Many voices were heard arguing for a trimmed down version of the ambitious MAI as a last hope for a multilateral agreement; cf. Bernard Hoekman and Michel Kostecki, The Political Economy of the World Trading System (Oxford University Press, 2001) 418 et seq.

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Michael Hahn A. The EU Legal Order and Investment: an Introduction . . . . . . . . . . . . . . . . . . .

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B. The Internal Market: Reason (or, Rather: Destination) for Investment in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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C. The Free Movement of Capital (and the Other Fundamental Freedoms) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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D. The New Union Competence to conclude Investment Agreements: The Continuing Role of Member States’ BITs and First Steps . . . . . . . . . . 1. A Look Back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Continuing Role of Member States’ BITs . . . . . . . . . . . . . . . . . . . . . . . 3. Future EU Investment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Jan Ceyssens, ‘Towards a Common Foreign Investment Policy? Foreign Investment in the European Constitution’ (2005) 32 LIEI 259–291; Frank Hoffmeister and Günes Ünüvar, ‘From BITs and Pieces towards European Investment Agreements’ in Marc Bungenberg, August Reinisch and Christian Tietje (eds), EU and Investment Agreements – Open Questions and Remaining Challenges (Nomos, 2013) 57–85; Niklas Maydell, ‘The European Community’s Minimum Platform on Investment or the Trojan Horse of Investment Competence’ in August Reinisch and Christina Knahr (eds), International Investment Law in Context (Eleven, 2008) 73–93; Jukka Snell, ‘Free Movement of Capital: Evolution as a Non-linear Process’ in Paul Craig and Gráinne de Búrca (eds), The Evolution of EU Law (Oxford University Press, 2011) 547–574.

A. The EU Legal Order and Investment: an Introduction

The European Union and its member States are the most important source and 1 destination for foreign direct investment (FDI).1 In line with the interests that follow from this factual situation, EU member States have been the first worldwide to recognise the importance of international investment protection. Starting in 1959 with the conclusion of the first pertinent agreement between Pakistan and Germany, the majority of all bilateral investment treaties (BITs) worldwide have been concluded by EU member States. In doing so, they have shaped, through trial and error, what is today called international investment law, i.e. the body of several thousand BITs2 and their application in what sometimes seems to be a haphazard patchwork of arbitration decisions. These BITs and their application by courts and tribunals are discussed elsewhere in this volume. The EU is an international organisation, created by international treaties con- 2 cluded between its member States. In what is an important distinction from most other international organisations, it has been endowed by its members with the

1 Towards a comprehensive European international investment policy, Commission Communication of 7.7.2010, COM(2010) 343 final, 2. 2 Cf. the Annex to the Commission Communication of 7.7.2010, COM(2010) 343 final; see also the statistical material in the annual UNCTAD World Investment Report, available e.g. at http:// unctad.org/en/Pages/DIAE/World%20Investment%20Report/WIR2012_WebFlyer.aspx.

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capacity to create (secondary) law that is capable of not just binding the contracting parties, but rather pierces the veil of their respective domestic legal orders: Art. 288 of the Treaty on the Functioning of the European Union (TFEU) explicitly attributes to ordinary EU laws (regulations) the full power of law in all member States; additionally, it is by now well established that both EU primary law3 (Treaty on European Union (TEU) and TFEU) and certain framework laws (directives) may have direct effect and enjoy supremacy over conflicting domestic laws.4 However, the member States are, through their representatives in the Council, one of the two EU legislators – the other one being the European Parliament – and thus are not confronted with ‘foreign’ law in the creation of which they would not partake. 3 Until recently, only member States (and not the Union) concluded BITs. This was a function of one of the most fundamental principles governing the relationship between members and the Union: the principle of conferral, now enshrined in Article 5(2) of the TFEU, according to which ‘the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein.’ Competences not conferred upon the Union remain with the member States, and for a considerable time, therefore, there was no room for the Union to engage in treaty action in the field of investment law: the founding treaties certainly did not contain the term ‘investment’ and did not attribute an explicit competence to conclude investment protection agreements to the Union. Such explicit competence found its way into the law of the constituting treaties only in the latest modification of the original Treaty of Rome, the so-called Treaty of Lisbon. However, the Union – this term being used for the Union and its predecessors, i.e. EEC and EC – has been competent (since 1957) for the ‘common commercial policy’ (CCP), today enshrined in Art. 207 of the TFEU. Whereas this competence was initially limited to the conclusion of agreements on tariffs and trade, the European Court of Justice (ECJ) had early on interpreted that provision as being a flexible interface between an ever developing (and hence changing) multilateral trade regime and the EU internal market.5 It was on the basis of those precedents that the Commission tried to convince the Court of Justice that it was within the Union’s powers to conclude the WTO Agreement on its own, without the ‘company’ of the member States. 4 The Court of Justice rejected this view, and in particular emphasised that the member States had not conferred the power of concluding the GATS to the Union, i.e. the agreement in which in mode 3 aspects of investment are regulated.6 For this reason, the WTO Agreement had to be concluded as a ‘mixed 3 Cf. ECJ, 5.2.1963, Case 26/62, van Gend & Loos v. Netherlands Inland Revenue Administration, ECR 1; ECJ, 15.7.1964, Case 6/64, Costa v. ENEL, ECR 1251. 4 With regard to the latter, this ‘direct effect’ is strictly limited to the relationship between the economic operator and the State; cf. ECJ, 4.12.1974, Case 41/74, Yvonne van Duyn v. Home Office, ECR 1337; ECJ, 5.4.1979, Case 148/78, Tullio Ratti, ECR 1629. 5 ECJ, 11.11.1975, Opinion 1/75, ECR 1355.

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agreement’ i.e. both by the EU (being exclusively competent for a large portion of the WTO Agreements, such as all agreements on trade in goods), and its member States (being competent for the not insignificant portions for which the TFEU had not (yet) attributed competences to the Union. In the same manner, the court refused to recognise the right of the EU to sign the OECD National Treatment Instrument without having the member States as co-signers.7 As the Uruguay Round negotiations, the WTO Agreements and the failed ne- 5 gotiations on an MIA had highlighted the close connection between trade and investment, the Union started in the mid-nineties to include more and more investment chapters in its trade agreements. As those were without exception (and for political reasons) concluded as mixed agreements, the discussions on who of the (as per 2014) 29 European contracting parties of an EU FTA was competent for the investment part could largely be avoided. Whereas the members clearly thought they were, the Commission seems to have worked on the hypothesis that the Union had acquired over time an exclusive implied competence on the basis of the ERTA jurisprudence of the Court of Justice,8 according to which the Union has the exclusive competence for external aspects of shared competences that have been used in a way to pre-empt the member States from pertinent legislative activity. Some of the ground rules have changed considerably with the Treaty of Lisbon; in particular, all chapters dealing with foreign direct investment (FDI) now fall under the exclusive competence of the Union pursuant to Art. 207 of the TFEU. B. The Internal Market: Reason (or, Rather: Destination) for Investment in Europe

The purpose of the Treaty of Rome was not the creation of an investment 6 regime for investors for third parties. Whereas the purpose was to expel armed hostilities once and for all from Europe, the primary operational goal was to create a common market, i.e. ‘an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties’.9 In many ways, however, it was clear that if the 6 ECJ, 15.11.1994, Opinion 1/94, ECR I-5267, paras. 41–47. 7 ECJ, 24.3.1995, Opinion 2/92, ECR I-521. 8 ECJ, 31.3.1971, Case 22/70, Commission v. Council (European Agreement on Road Transport), ECR 263; cf. now TFEU Art. 216(1), 2nd half sentence: ‘1. The Union may conclude an agreement with one or more third countries or international organisations where the Treaties so provide or where the conclusion of an agreement is necessary in order to achieve, within the framework of the Union’s policies, one of the objectives referred to in the Treaties, or is provided for in a legally binding Union act or is likely to affect common rules or alter their scope.’ Remarkably, the Union enjoys exclusive competence in those cases, as the external power is supposed to be complemeting the internal: the internal competence may be shared, but if it is used, it preempts the member States’ competence. Art. 3(2) is a reflection of this: ‘The Union shall also have exclusive competence for the conclusion of an international agreement when its conclusion (…) is necessary to enable the Union to exercise its internal competence, or in so far as its conclusion may affect common rules or alter their scope.’

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ambitious project to create an ever closer union between the archenemies of the last centuries would, against all odds, turn out to be a success, the common market would become a premier investment destination. A success, it did become, and the rest, as they say, is history: whereas the EU is undergoing a potentially catastrophic crisis due to the ambition of the member States to create a monetary union between sovereign States with different levels of economic development and very limited economic coordination, its non-monetary strand is alive and well, and has created an economic area with free movement for all factors of production. Regulatory differences between the member States have remained significant, however, resulting in not insignificant restrictions for the fundamental economic freedoms, in particular with regard to the free movement of juridical and natural persons. As a consequence, the different fundamental freedoms (free movement of goods, free movement of persons, freedom to provide services and free movement of capital) have not developed in perfect synchronisation: the free movement of goods remains the most advanced freedom; however, both the EU legislator and, even more pronouncedly, the Court of Justice, have constantly reduced the impediments to a truly single European market erected time and again (and often for legitimate public purposes) by the member States to the full enjoyment of all fundamental freedoms. 7 Such high degree of economic integration has proven to be of the highest value for third-country investors: producers of goods and provider of services have been lured to establish beachheads in a market with more than 400 million middle-class consumers, knowing that once they have established themselves in one of the 28 member States, they can take full advantage of the opportunities the EU internal market offers. 8 While this aspect is crucial for any decision on whether to invest or not in an EU member State, the actual investment still takes place in a member State, pursuant to the rules and regulations of that particular host State. While EU law forms an integral part of any member State’s legal order,10 the domestic legal order remains the fundament for all economic and other activities in the host State. Advantages and downsides of the 28 host States’ legal regimes – including the BITs in force between the host State and the State of origin – and their administrative practice thus remain of utmost significance for every third-country investor who will of course engage in pertinent forum shopping. These parameters will have to remain unexplored in this chapter, which will rather focus on the EU ‘constitutional law’ regulating incoming investment and its beginning BIT practice. Having said this, the sum of the EU’s economic law determines the attractiveness for investors’ decisions – from the measures determining value

9 TFEU Art. 26(2). 10 This was established in the seminal decision of the ECJ in van Gend & Loos (n. 3).

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added tax (VAT) rates to, say, consumer protection, health11 and employment law to antitrust regulations. With regard to investment, the Union has been attributed with a number of internal competences such as in the field of capital movement, establishment of economic operators within the Union and other investment-related areas. The more the Union exercised its competences – it is fair to say that EU secondary legislation has by now harmonised a significant number of subject-matter areas relevant for third-country investors and, in the process, also harmonised the treatment to be afforded to third-country economic operators12 – the more it benefitted, pursuant to the ERTA doctrine and now Art. 3:2 and 216 in fine of the TFEU, from an implied external competence to (at least) co-manage the EU investment relations with its trading partners.13 Secondly, the internal market, set up as a counterpart to the gigantic US (and now: North American) market, is in itself a major attraction for international investors. C. The Free Movement of Capital (and the Other Fundamental Freedoms)

Whereas, ratione personae, the EU’s economic fundamental freedoms (such 9 as the free movement of goods, services and workers, freedom of establishment for individuals and corporations) would typically empower only natural or juridical persons established in the Union or holding citizenship of a member State, the fundamental freedom of Article 63 of the TFEU expands the scope of economic freedoms granted by the EU legal order to non-EU (third-country) investors. Thus, free movement of capital is the only fundamental freedom that empowers third-country investors irrespective of them having established themselves in the European Union: 1.

Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.

11 Regulation (EC) No 1907/2006 of the European Parliament and of the Council of 18 December 2006 concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), establishing a European Chemicals Agency, amending Directive 1999/45/EC and repealing Council Regulation (EEC) No 793/93 and Commission Regulation (EC) No 1488/94 as well as Council Directive 76/769/EEC and Commission Directives 91/155/EEC, 93/67/ EEC, 93/105/EC and 2000/21/EC, OJ L 396, 30.12.2006, 1–849. 12 See, e.g., Regulation 1060/2009/EC on credit rating agencies, Article 5, OJ 2009 L 302/1. 13 See, e.g. the Energy Charter Treaty, in which the Union committed specifically to investment protection; cf. Council and Commission Decision of 23 September 1997 on the conclusion, by the European Communities, of the Energy Charter Treaty and the Energy Charter Protocol on energy efficiency and related environmental aspects, OJ 1998 L 69/1–116; cf. in particular Statement by the European Communities to the Secretariat of the Energy Charter pursuant to Article 26(3)(b)(ii) ECT, OJ 1998 L 69/115. See also Art. 21(2)(b) of the EU–Chile Association Agreement (OJ EU 2002 L 352), according to which the contracting parties (the EU and its member States, on the one hand, Chile on the other hand) shall develop a legal framework that favours investment by concluding, where appropriate, bilateral agreements between the member States and Chile to promote and protect investment and avoid dual taxation.

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Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.

The Court of Justice has held that Article 63 of the TFEU means what it says:14 hence, EU constitutional law grants a right to foreign investors which massively reduces what would, under general international law, be a domaine réservé for any State. Absent specific bindings to the contrary, States have no obligation to allow investments and, accordingly, even more the right to regulate and to limit incoming investment. 11 It should be recalled that until the Treaty of Maastricht the free movement of capital had somewhat taken the role as an ugly sister of the other fundamental freedoms: while the latter had been recognised as granting invocable rights against member States, but also Union organs and individuals, the former did not benefit from the same status but rather constituted an objective obligation, if at all, for the Union organs to undertake efforts to achieve free movement of capital.15 12 To be fair, the EU legislator had already liberalised internal capital movements in the decade preceding the Maastricht Treaty.16 Upon the Delors Commission’s two-step roadmap for liberalising capital movements,17 the Council adopted, in 1986, Directive 86/566/EEC amending the First Directive of 11 May 1960 for the implementation of Article 67 of the EEC Treaty.18 Full liberalisation for capital movements within the Union was to be achieved by 1990 pursuant to Council Directive 88/361/EEC;19 it stated in Article 7: 10

1.

In their treatment of transfers in respect of movements of capital to or from third countries, the Member States shall endeavour to attain the same degree of liberalization as that which applies to operations with residents of other Member States, subject to the other provisions of this Directive. The provisions of the preceding subparagraph shall not prejudice the application to third countries of domestic rules or Community law, particularly any reciprocal conditions, concerning operations involving establishment, the provisions of financial services and the admission of securities to capital markets.

14 ECJ, 14.12.1995, Joined cases C-163/94, C-165/94 and C-250/94, Sanz de Lere and others, ECR I-4821, para. 19, and ECJ, 23.2.2006, Case C-513/03, van Hilten-van der Heijden v. Inspecteur van de Belastingdienst, ECR I-1957, para. 37. 15 ECJ, 11.11.1981, Case 203/80, Casati, ECR 2595, paras. 8–13; Jukka Snell, ‘Free Movement of Capital: Evolution as a Non-linear Process’ in Paul Craig and Gráinne de Búrca, The Evolution of EU Law (Oxford University Press, 2011) 547–574, 548. 16 See, in particular, the Resolution of the Council and of the Representatives of the Governments of the Member States of 22 March 1971 on the attainment by stages of economic and monetary union in the Community, OJ 1971 No C 28, 27.3.1971, 1; before that the Council’s First Directive for the implementation of Article 67 of the Treaty, OJ 1960 No 43, 12.7.1960, 921– 932; Second Council 63/21/EEC Directive of 18 December 1962 adding to and amending the First Directive for the implementation of Article 67 of the Treaty, OJ 1963 No 9, 22.1.1963, 62–74 are of interest. 17 Communication from the Commission to the Council: Programme for the Liberalization of Capital Movements in the Community, COM(86)292 Final. 18 By OJ 1986 No L 332, 26.11.1986, 22. 19 Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty, OJ 1988, No L 178, 8.7.1988, 5–18.

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Where large-scale short-term capital movements to or from third countries seriously disturb the domestic or external monetary or financial situation of the Member States, or of a number of them, or cause serious strains in exchange relations within the Community or between the Community and third countries, Member States shall consult with one another on any measure to be taken to counteract such difficulties (…).20

In addition, Art. 9 repealed the only prior piece of secondary legislation addressing (in a restrictive manner, it should be said) the movement of capital to and from the Union.21 Those liberalisation steps were already influenced by the then somewhat farfetched ideas circulating in the Delors Commission about a possible European Monetary and Economic Union. With the fall of the Berlin Wall the relevance of these concepts changed from being ‘interesting ideas’ to becoming ‘realistic projects’. Germany was supposed to give up its monetary hegemony as the price for the French, British and EU blessings for the Wiedervereinigung. Through the Treaty of Maastricht, what had been (secondary) EU law was elevated to constitutional status. Whereas the freedom to make and receive payments is important for investors in order to ensure that investments can operate efficiently, the following pages will focus on the free movement of capital pursuant to Article 63:1 of the TFEU. Suffice to say that with regard to the promise of Art. 63:2 of the TFEU (free movement of payment) the court has lived up to the reputation to interpret fundamental freedoms with a view to render the freedom meaningful. What does ‘movement of capital’ mean? The treaty does not give a definition of that term, and interestingly the court has so far shied away from giving a textbook definition. Rather, it has developed a rich case law for which the nomenclatura set up by Council Directive 88/361/EEC has served as fundament even after the entry into force of the Maastricht Treaty and thus the withering away of the legal basis of that directive.22 The directive addresses in great detail the following 12 categories: i) direct investments, ii) investments in real estate, iii) operations in securities normally dealt in on the capital market, iv) operations in units of collective investment undertakings, v) operations in securities and other instruments normally dealt in on the money market, vi) operations in current and deposit accounts with financial institutions, vii) credits related to commercial transactions or to the provision of services in which a resident is participating, viii) financial loans and credits, ix) sureties, other guarantees and rights of 20 Emphasis added. 21 Council Directive 72/156/EEC of 21 March 1972 on regulating international capital flows and neutralizing their undesirable effects on domestic liquidity, OJ L 091, 18.4.1972, 13 (English special edition: Series I Chapter 1972(I)) 296. 22 See, e.g., ECJ, 27.1.2009, Case C-318/07, Persche v. Finanzamt Lüdenscheid, ECR I-359, para. 24; ECJ, 3.10.2006, Case 452/04, Fidium Finanz AG v. Bundesanstalt für Finanzdienstleistungsaufsicht, ECR I-9521, para. 41. See Georg Ress and Jörg Ukrow in Eberhard Grabitz, Meinhard Hilf, Martin Nettesheim (eds), Das Recht der Europäischen Union: EUV/AEUV (Beck, 2013), vol. I, Art. 63 AEUV, para. 29; Wolfgang Kiemel in Hans von der Groeben and Jürgen Schwarze (eds), EUV/EGV, vol. 1, Art. 56 TEC, mn. 41.

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pledge, x) transfers in performance of insurance contracts, xi) personal capital movements and xii) physical import and export of financial assets. 17 With regard to direct investment, the decisive criterion is the ‘possibility of participating effectively in the management of a company or in its control’, which the court defines on a case-by-case basis. However, the court has regularly used a 10 % participation as an indication that the investor had that ‘possibility of participating effectively in the management of a company or in its control.’23 18 However, the nomenclatura reveals that ‘portfolio investments’ are not less included in the notion of capital movements protected by Art. 63 of the TFEU than ‘direct investments’. In line with the court’s expansive jurisprudence with regard to all fundamental liberties, the fundamental freedom to move capital freely is interpreted as a general prohibition of measures which render capital movements less attractive, thus clearly transcending the elimination of unequal treatment on grounds of nationality.24 With regard to non-EU investors, the court has held that reciprocity and maintaining member States’ negotiating leverage vis-à-vis third countries is no ground for restrictions.25 The right of free movement of capital, however, does not restrict the right of member States to request reporting of cross-border transactions (e.g. for electronic payments, cash and securities movements above certain thresholds) for the purpose of external sector statistics. 23 See e.g. ECJ, 10.2.2011, Case C-436, 437/08, Haribo v. Finanzamt Linz, ECR I-305, para. 137: ‘It has already been held that holdings in a company which are not acquired with a view to the establishment or maintenance of lasting and direct economic links between the shareholder and that company and do not allow the shareholder to participate effectively in the management of that company or in its control cannot be regarded as direct investments (Test Claimants in the FII Group Litigation, paragraph 196). Since the legislation under examination in the context of the present question concerns only holdings of less than 10% of the share capital of the company making the distribution, it must be held not to fall within the scope ratione materiae of Article 64(1) TFEU.’ See also ECJ, 4.6.2002, Case C-367/98, Commission v. Portugal, ECR I-4731, paras. 37–39: ‘Although the Treaty does not define the terms movements of capital and payments, it is settled case-law that Directive 88/361, together with the nomenclature annexed to it, may be used for the purposes of defining what constitutes a capital movement (Case C-222/97 Trummer and Mayer [1999] ECR I-1661, paragraphs 20 and 21). Points I and III in the nomenclature set out in Annex I to Directive 88/361, and the explanatory notes appearing in that annex, indicate that direct investment in the form of participation in an undertaking by means of a shareholding or the acquisition of securities on the capital market constitute capital movements within the meaning of Article 73 b of the Treaty. The explanatory notes state that direct investment is characterised, in particular, by the possibility of participating effectively in the management of a company or in its control. In the light of those considerations, it is necessary to consider whether the legislation in issue, which (a) prohibits the acquisition by investors from other Member States of more than a given number of shares in certain Portuguese undertakings and (b) requires the grant by the Portuguese Republic of prior authorisation for the acquisition of a holding in certain Portuguese undertakings in excess of a specified level, constitute a restriction on the movement of capital between Member States.’ 24 See ECJ, 4.6.2002, Case C-367/98, Commission v. Portugal, ECR I-4731, para. 44. 25 ECJ, 18.12.2007, Case C-101/05, Skatteverket v. A., ECR I-11531.

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However, this is not where things end. Firstly, Articles 64–66 of the TFEU 19 establish what one could call a regime of multiple exceptions that is commensurate with the vast field of application of the freedom protected by Art. 63.26 This includes the right to ‘grandfather’ national restrictions in place at the time of the new freedom entering into force. As a consequence, investors will still want to look at the regime of capital controls in place in the potential host country. Secondly, and perhaps more importantly, the Court of Justice’s generous in- 20 terpretation of the free movement of capital is less beneficial to third-State investors than anticipated at first glance due to the following: investment-affecting 26 ‘Article 64: 1. The provisions of Article 63 shall be without prejudice to the application to third countries of any restrictions which exist on 31 December 1993 under national or Union law adopted in respect of the movement of capital to or from third countries involving direct investment – including in real estate – establishment, the provision of financial services or the admission of securities to capital markets. In respect of restrictions existing under national law in Bulgaria, Estonia and Hungary, the relevant date shall be 31 December 1999. 2. Whilst endeavouring to achieve the objective of free movement of capital between Member States and third countries to the greatest extent possible and without prejudice to the other Chapters of the Treaties, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall adopt the measures on the movement of capital to or from third countries involving direct investment – including investment in real estate – establishment, the provision of financial services or the admission of securities to capital markets. 3. Notwithstanding paragraph 2, only the Council, acting in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament, adopt measures which constitute a step backwards in Union law as regards the liberalisation of the movement of capital to or from third countries. Article 65: 1. The provisions of Article 63 shall be without prejudice to the right of Member States: (a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested; (b) to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security. 2. The provisions of this Chapter shall be without prejudice to the applicability of restrictions on the right of establishment which are compatible with the Treaties. 3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63. 4. In the absence of measures pursuant to Article 64(3), the Commission or, in the absence of a Commission decision within three months from the request of the Member State concerned, the Council, may adopt a decision stating that restrictive tax measures adopted by a Member State concerning one or more third countries are to be considered compatible with the Treaties in so far as they are justified by one of the objectives of the Union and compatible with the proper functioning of the internal market. The Council shall act unanimously on application by a Member State. Article 66: Where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union, the Council, on a proposal from the Commission and after consulting the European Central Bank, may take safeguard measures with regard to third countries for a period not exceeding six months if such measures are strictly necessary.’

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measures more often than not affect – and are targeted at – economic activities that are also covered by other fundamental freedoms which, however, do not benefit third country nationals. To give an example: investing in an EU member State by, e.g. building a factory or buying one, would seem to be covered by both the freedom of movement of capital and the freedom of establishment: these days, member State measures impeding such investments are typically not targeting the investment as such but rather the establishment conditions, beginning with requirements of corporate governance structure and not ending with, e.g. the parameters that are to be observed when starting the production process. 21 Whereas it would have been feasible to extend the protection of all affected fundamental freedoms to such a constellation, the court has ruled that the proper standard will normally be exclusively defined by the fundamental freedom that matches the government interest that motivates the measure (‘centre of gravity’).27 If this is not the regulation of capital movements pursuant to Art. 63,28 it is a fundamental freedom that third-country investors do not enjoy. It is noteworthy that in some such cases, where due to the conflict of fundamental freedom the rights of the third country investor are threatened to be reduced to zero despite the original promise in Art. 63 of the TFEU to grant them the full protection of the EU legal order, the court has refused to change its legal analysis for the benefit of third-country investors.29 In fairness, however, it should be emphasised that when examining what fundamental freedom is applicable to the acquisition of corporate shares, the court only applies the freedom of establishment, if and where the investor could actually exercise control.30 If no such actual control is exercised, the proper standard applied by the court is the free movement of capital, which protects third-country investors. 22 Whether or not control is to be assumed is assessed on a case-by-case basis and largely fact-driven. In a nutshell, beyond a shareholding of over 35 % actual control is a foregone conclusion; at the lower end, the court has (exceptionally) accepted effective control in cases of a 5 % holding in a company.31

27 ECJ, 12.9.2006, Case C-196/04, Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v. Commissioners of Inland Revenue, ECR I-7995, paras. 31–34; ECJ, 13.3.2007, Case C-524/04, Test Claimants in the Thin Cap Group Litigation v. Commissioners of Inland Revenue, ECR I-2107, para. 34; ECJ, 10.5.2007, Case C-492/04, Lasertec Gesellschaft für Stanzformen mbH v. Finanzamt Emmendingen, ECR I-03775, para. 24 et seq. 28 E.g. ECJ, 23.11.1978, Case 7/78, Thompson, ECR 2247, para. 19 et seq. 29 ECJ, 13.3.2007, Case C-524/04, Test Claimants in the Thin Cap Group Litigation v. Commissioners of Inland Revenue, ECR I-2107, para. 104. 30 It is submitted that this is a different standard from the one distinguishing portfolio and direct investment. 31 ECJ, 26.3.2009, Case C-326/07, Commission v. Italy, ECR I-2291, para. 38; on the other hand a participation of 10 % was not as such considered to be grounds for accepting full control and thus the exclusive application of the freedom of establishment: ECJ, 12.12.2006, Case C-446/04, Test Claimants in the FII Group Litigation v. Commissioners of Inland Revenue, ECR I-11753, para. 33 et seq.

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D. The New Union Competence to conclude Investment Agreements: The Continuing Role of Member States’ BITs and First Steps 1. A Look Back

The explicit inclusion of FDI into the common commercial policy in Art. 207 23 is the (provisional) end to a development that started in the 1990s, with the conclusion of the Uruguay Round and the failed attempt to achieve with the MIA a multilateral investment regime: despite a lack of explicit competence, the Union started to address investment-related provisions and chapters in its trade agreements, which, it has already been mentioned, are in practice always concluded as mixed agreements, a practice not yet fully tested by the Court of Justice. The best known pertinent first steps were, apart from the investment-related 24 provisions in the WTO Agreement,32 the Energy Charter Treaty (ECT) and, even prior to the drafting of the Constitutional Treaty (which already included a provision similar to today’s Art. 207) the investment chapter in the Free Trade Agreement (FTA) with Chile, which had predecessors in several investment clauses in agreements with European neighbours.33 In the former, the Union and its member States tried to expand certain well-established GATT/WTO principles to the field of energy, with a particular view to its Russian energy provider:34 the Union committed, as all contracting parties did, specifically to the protection of foreign investments.35 In the latter, the EU and its member States undertook first steps to develop a legal framework promoting investment by concluding, where appropriate, bilateral agreements between the member States and Chile.36 Important investment chapters are addressed in the newer generation of pre- 25 Lisbon treaties, such as the EU–CARIFORUM Economic Partnership, the EU– Korea Free Trade Agreement, the Deep and Comprehensive Free Trade Agreement (DCFTA) with the Ukraine and the FTAs with Peru and Colombia. All of these agreements go beyond the state of play under WTO law. They address market access through commercial presence (mode 3),37 national treatment and 32 See contribution by Andreas Ziegler, ‘Investment Law in Conflict with WTO Law?’, ch. 13.X., 1786–1803 and the preceding remarks by the author. 33 Jan Ceyssens, ‘Towards a Common Foreign Investment Policy? Foreign Investment in the European Constitution’ (2005) 32 LIEI 259, 265 et seq. with an overview over the precise investment related provisions in those agreements. 34 See Council and Commission Decision of 23 September 1997 on the conclusion, by the European Communities, of the Energy Charter Treaty and the Energy Charter Protocol on energy efficiency and related environmental aspects, OJ 1998 L 69/1-116; cf. in particular statement by the European Communities to the Secretariat of the Energy Charter pursuant to Article 26(3)(b)(ii) ECT, OJ 1998 L 69/115. 35 Cf. Part III (‘Investment Promotion and Protection’), Art. 10-17, to be found at http:// www.encharter.org/fileadmin/user_upload/document/EN.pdf. 36 See Art. 21(2)(b) of the EU–Chile Association Agreement, OJ EU 2002 L 352. 37 E.g. Art. 7.11(2) of the EU–Korea FTA (Free Trade Agreement between the European Union and its Member States, of the one part, and the Republic of Korea, on the other part, OJ 2011 L 127, 14 May 2011, 6 which excludes some of the most usual practices used to impede the

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MFN.38 In addition, they address aspects of good governance39 – including the rights of the contracting parties to define their own environmental, social and other standards,40 and the protection of human rights41 – and of investors’ best practice: an example for the latter would be found in Art. 72 of the EU–CARIFORUM FTA, which addresses ‘behaviour of investors’, obliging the contracting parties to address through relevant legislation the thorny topic of corruption and further ensure compliance with the International Labour Organization’s (ILO) core labour standards that proved so contentious in the WTO context. Moving on, the treaty emphasises that foreign direct investment should not be encouraged by lowering domestic environmental, labour or occupational health and safety legislation and standards or by relaxing labour standards or laws aimed at protecting and promoting cultural diversity.42

The agreements also contain commitments on the cross border supply of services43 and the crucial issue of mode 4 trade in services service (temporary presence of natural persons for business purposes). 27 Whereas FTAs are always concluded as mixed agreements – i.e. the Union and its 28 member States on one side, the third State on the other side – the Union organs started to claim, at the latest after 1 December 2009, that the pertinent chapters fell under Union jurisdiction: whereas it seems a difficult proposition to argue a maiore ad minus that the explicit right (since 2009) to conclude agreements on FDI would also include portfolio investments,44 it is a very tenable proposition that already at the beginning of this century the Union enjoyed implicit exclusive external competence pursuant to the ERTA jurisprudence of the Court of Justice, now enshrined in Art. 216(2) of the TFEU; it should, however, be recalled, that these overall modest EU efforts to ‘get involved’ into the 26

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commercial presence of juridical or natural persons of the other party; see also Art. 67 of the Economic Partnership Agreement between the CARIFORUM States, of the one part, and the European Community and its Member States, of the other part, OJ 2008 L 289/I, 30.8.2008, 3. Ibid., Articles 68 et seq. Cf. Article 7.23(2) of the EU–Korea FTA, in which the contracting parties commit to providing system of administrative review, including judicial review; similar provisions exist in some WTO agreements. See e.g. Art. 7.1(4) of the EU–Korea FTA, pursuant to which ‘each Party retains the right to regulate and to introduce new regulations to meet legitimate policy objectives’; Art. 13.3 of the EU–Korea FTA affirms the right of contracting parties to their ‘own levels of environmental and labour protection and to adopt or modify accordingly its relevant laws and policies’: however, Art. 13.4.3 and Art. 13.5.2 limit that right by referring to the pertinent agreements to which they are parties. As the EU–Korea FTA Agreement ‘shall be an integral part of the overall bilateral relations as governed by the Framework Agreement’ (Art. 15.4), respect for democratic principles and human rights as defined in the Universal Declaration on Human Rights constitutes an essential element of the EU–Korea FTA. Art. 73 of the EU–CARIFORUM FTA. Art. 75 et seq. of the EU–CARIFORUM FTA. See in this sense, however, the excellent article by Frank Hoffmeister and Günes Ünüvar, ‘From BITs and Pieces towards European Investment Agreements’ in Marc Bungenberg, August Reinisch and Christian Tietje (eds), EU and Investment Agreements (Nomos, 2013) 57, 66 et seq.

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area of investment protection were accompanied by a massive expansion of the member States’ networks of hundreds of BITs. 2. The Continuing Role of Member States’ BITs

Since early 2013, a regulation dealing with the status of the member States’ 28 BITs45 confirms the validity of existing bilateral investment treaties until their replacement by treaties concluded by the Union.46 Extra-EU BITs signed after the entry into force of the Treaty of Lisbon will undergo a review by the Commission in order to ensure their compatibility with Union law. Future BITs by member States are not excluded, provided they have been green-lighted by the Commission, which may also require the member States to include relevant provisions in the treaty under negotiation in order to ensure compliance with EU law. Whereas in upholding the principle of pacta sunt servanda, also enshrined in 29 Art. 352 of the TFEU, the regulation endorses the continuing validity of existing BITs, it also establishes the obligation to ‘enter into consultations’ if provisions of the pertinent BIT constitute ‘serious obstacle(s)’ to the Union’s negotiation of a future treaty. However, even if such consultations would entail the termination or renegotiation of the treaty in question, the usual sunset clauses would ensure continuing protection for third-country investors pursuant to the terminated treaty for the determined duration, i.e. normally for another decade or so. 3. Future EU Investment Agreements

In its Communication on ‘Global Europe’, the Commission announced in 30 2010 that future EU FTAs would aim at comprehensive liberalisation, notably in the areas of services and investment.47 This was an operationalisation of the 2009 ‘Minimum Platform for EU FTAs’48 which laid down a policy according to which the EU was to seek WTO plus market access commitments with regard to modes 1, 3 and 4 (cross-border service, commercial presence, temporary entry of the service provider) in service sectors of interest for the EU. In the past, the EU activities with regard to investment protection had been largely limited to non-discrimination provisions aiming at ensuring no less favourable treatment 45 Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member states and third countries. 46 Article 3, Maintenance in force, ‘Without prejudice to other obligations of the Member States under Union law, bilateral investment agreements notified pursuant to Article 2 of this Regulation may be maintained in force, or enter into force, in accordance with the TFEU and this Regulation, until a bilateral investment agreement between the Union and the same third country enters into force’. 47 Communication of 4.10.2006, COM(2006) 567 final, 11. 48 Council Doc. 7242/09, 6.3.2009; a first version had been presented in Council Doc. 15375/06 (27.11.2006); see Niklas Maydell, ‘The European Community’s Minimum Platform on Investment or the Trojan Horse of Investment Competence’ in August Reinisch and Christina Knahr (eds), International Investment Law in Context (Eleven, 2008) 73–92.

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with regard to other trading partners and with regard to the nationals of the host country. The following excerpt from the Communication ‘Towards a comprehensive European international investment policy’ still are a description of the state of affairs: Currently in investment negotiations, the Union relies mostly on the principle of non-discrimination, which is the cornerstone of the global trading system. Non-discrimination is usually implemented through two basic standards, ‘most-favoured-nation treatment’ and ‘national treatment’, which are both relative standards, because they involve making a comparison between the treatment provided based on origin, rather than defining an absolute standard of treatment. (…) While non-discrimination should continue to be a key ingredient of EU investment negotiations, BITs employ other standards as well, such as ‘fair and equitable treatment’ after admission and ‘full security and protection’ treatment. These standards do not imply a comparison to the manner in which comparable investments are treated. Moreover, a number of Member State BITs provide for the protection of contractual rights granted by a host government to an investor (‘umbrella clause’). They have been traditionally used in Member States BITs and are an important element among others that should inspire the negotiation of investment agreements at the EU level.49

Clearly, the Commission intends to start using its new competences in the field of FDI and investment overall. It will be interesting to watch whether the noticeable activism is driven more by the motivation to push the member States from the driving seat in investment matters, as some observers report, or whether the Commission can indeed deliver agreements that are equivalent to the best practice of the most active member States (inter alia, Germany, the UK, the Netherlands, France, Italy). 32 Investment chapters will be included in all future FTA negotiations, in particular in those with Canada, India, Japan, Singapore and the United States. Recently, the Council empowered the Commission to start negotiations for an investment agreement with China;50 exploratory talks are on-going and will soon lead to negotiations. The Council has suggested that a BIT with Myanmar should be explored.51 31

49 Towards a comprehensive European international investment policy, Communication of 7.7.2010, COM(2010) 343 final, 8. 50 European Commission Press Release, IP/13/458, Brussels, 23 May 2013; see also European Parliament resolution of 9 October 2013 on the EU–China negotiations for a bilateral investment agreement, P7_TA(2013)0411, available at http://www.europarl.europa.eu/oeil/popups/ ficheprocedure.do?lang=en&reference=2013/2674(RSP). 51 Council conclusions, 3236th Foreign Affairs Council Meeting, 22 April 2013, Conclusion 3 (5th indent).

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Armand de Mestral A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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B. Substantive Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. How are Pre-Entry Obligations formulated? . . . . . . . . . . . . . . . . . . . . . . . . . 2. Illustrations of International Practice Respecting Pre-Entry Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) NAFTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Japan and Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Customs Unions and Regional Trade Agreements . . . . . . . . . . . . . . . . d) Multilateral Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Private Initiatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 5 12 12 14 15 24 28 29

C. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Rudolf Dolzer and Christoph Schreuer, Principles of international investment law (Oxford University Press, 2008); Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford handbook of international investment law (Oxford University Press, 2008); Andrew Paul Newcombe and Lluís Paradell, Law and practice of investment treaties: standards of treatment (Wolters Kluwer, 2009); OECD, OECD Guidelines for Multinational Enterprises (OECD Publishing, 2011); Giorgio Sacerdoti, ‘The Admission and Treatment of Foreign Investment under Recent Bilateral and Regional Treaties’ (2000) 1 JWI 105–126; Giorgio Sacerdoti, ‘Bilateral Treaties and Multilateral Instruments on Investment Protection’ (1997) 269 RC 321–331; Karl P. Sauvant, ‘The regulatory framework for investment: where are we headed?’ in Ramamurti Ravi and Nashai Niron (eds), Research in Global Strategic Management: The Future of Foreign Direct Investment and the Multinational Enterprise (Bradford: Emerald, 2011) 407–433; Ibrahim Shihata, ‘Recent Trends Relating to Entry of Foreign Direct Investment’ (1994) 9 ICSID Rev. 47–70; UNCTAD, Admission and Establishment, UNCTAD Series on Issues in International Investment Agreements (United Nations, 1999); UNCTAD, World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development (United Nations, 2006); UNCTAD, World Investment Report 2010: Investing in a Low Carbon Economy (United Nations, 2010).

A. Introduction

The general principle of sovereignty over national territory implies that each 1 State is able to determine which foreign investments will be allowed in and which it may refuse. Neither international trade law nor international investment law, which deal directly or indirectly with investment issues, require that a State allow the entry of a foreign investment into its territory against its will. Doctrinal writers have long been of this opinion.1 Mirroring this fact is legislation, in some form or another,2 which exists in virtually every country governing both

1 Giorgio Sacerdoti, ‘The Admission and Treatment of Foreign Investment under Recent Bilateral and Regional Treaties’ (2000) 1 JWI 105–126; Ignacio Gomez-Palacio and Peter Muchlinski, ‘Admission and Establishment’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook in International Investment Law (Oxford University Press, 2008) 227.

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the admission and regulation of foreign investment once admitted. Even jurisdictions such as the United States which are very open to foreign investment have maintained restrictions on the admission limited categories of foreign investment which they deem potentially threaten national security3 or they restrict foreign investment in specific areas such as port ownership, news and television companies or airlines.4 2 During the decades following the Second World War, certain countries and institutions have taken strong positions in favour of the liberalisation of the conditions of entry of foreign investment. Thus the OECD and its members have sought to promote the liberalisation of the entry of foreign investment5 among themselves and in their dealings with all other States. The World Bank has also been prominent in seeking to liberalise the conditions of entry of foreign investment throughout the world.6 Codes of Conduct on the treatment of multinational enterprises (MNEs) adopted under the aegis of the United Nations7 also contain limited pre-entry provisions. But it must be said that most countries continue to maintain extensive controls on the entry of foreign investment. They justify their practice by the need to pursue various goals such as national security, public morality, economic policies, public health and safety, etc.,8 even when they are willing to offer very liberal standards of treatment to those foreign investments that they choose to admit. 3 Certain international non-governmental organisations (NGOs) such as the International Institute for Sustainable Development (IISD) have also adopted model rules9 on foreign investment which cover pre-entry issues as well as post admission standards of treatment. 2 Investment Canada Act, R.S.C. 1985, c 28 (1st Supp) (Investment Canada Act); the United States do not have one single regulation or agency to administer foreign direct investment. There is, however, a government open-door policy for foreign direct investment subject to restrictions in various legislations. See Dennis Campbell (ed), International Protection of Foreign Investment, vol. 2 (Yorkhill Law Publishing, 2008) 519. 3 Foreign Investment and National Security Act of 2007, Pub L No 110-49, 121 Stat. 246 (codified as amended in scattered sections of 5 U.S.C., 31 U.S.C & 50 U.S.C). 4 For deepwater port ownership, see 33 U.S.C.§ 1503; For telecommunication licence ownership restrictions, see 47 U.S.C. § 310 (b); For certificate requirements of air carriers, see 49 U.S.C.A. § 41102. 5 OECD, OECD Code of Liberalisation of Capital Movements (OECD, 2012) at Arts. 1 and 2 (OECD Code of Liberalisation). 6 The World Bank Group, Legal Framework for the Treatment of Foreign Investment, Vol. I, Survey of Existing Instruments, Progress Reports and Background Studies (The World Bank Group, 1992) 24. 7 UNCTC, The United Nations Code Of Conduct On Transnational Corporations, UNCTC Current Studies. Ser. A. No. 4, U.N. Doc. ST/CTC/SER.A/4, U.N. Sales No. E.86.II.A.15 (United Nations, 1986) p. 18 (UN Code of Conduct on Transnational Corporations). 8 UNCTAD, Admission and Establishment, UNCTAD Series on Issues in International Investment Agreements, U.N. Doc. [TD/]UNCTAD/ITE/IIT/10(Vol. II), U.N. Sales No. E.99.II.D.10 (United Nations, 1999) p. 11. 9 Howard Mann, Konrad von Moltke, Luke Eric Petersen and Aaron Cosbey, IISD Model International Agreement on Investment for Sustainable Development, (IISD, 2005), available at http://www.iisd.org/pdf/2005/investment_model_int_agreement.pdf (IISD Model International Agreement).

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The maintenance of barriers to the entry of foreign investment, at least in 4 principle, is in sharp contrast to the many international treaties adopted by States to guarantee the standards of treatment of foreign investment once admitted. Of the major capital importing and exporting countries, only the United States, Canada and Japan10 regularly accept commitments with respect to the pre-entry phase of foreign investment. This is in sharp contrast with the majority of States, including those of the EU, which normally do not include pre-entry commitments in their international agreements.11 If a movement towards change in this situation can be discerned in contemporary international practice, it is to be found in customs unions and an increasing number of regional trade agreements, which frequently involve commitments on the admission and treatment of foreign investment. Of particular interest in this regard are the European Union (EU), the Mercado Común del Sur (MERCOSUR), the Andean Community, the Association of Southeast Asian Nations (ASEAN), the Common Market for Eastern and Southern Africa (COMESA) and the North American Free Trade Agreement (NAFTA). There is also a tendency in recent years for those major bilateral free trade agreements (FTAs) which contain investment provisions to include some limited pre-entry commitments. This includes FTAs such as the China–New Zealand FTA12 and a few south–south BITs13 between developing countries. It should be noted that the Energy Charter Treaty14 also deals with some pre-entry issues. B. Substantive Issues 1. How are Pre-Entry Obligations formulated?

Pre-entry obligations in a BIT or trade agreement cannot be presumed; they 5 must be specifically formulated. The most explicit are set out in the US Model BIT15 or the Canadian Model FIPA.16 The current US Model BIT consistently

10 Now followed in certain agreements by Singapore and China. 11 For a contrary view arguing that German BITs and those of several other EU States can be interpreted as implying a right of entry of investments from BIT partner States see Otto Sandrock, ‘The Right of Foreign Investors to Access German Markets: The Meaning of Article 2(1) of the German Model Treaty for the Promotion and Protection of Foreign Investments’ (2010) 25 ICSID Rev. 268–311. 12 Free Trade Agreement between the Government of New Zealand and the Government of the People’s Republic of China of 7 April 2008 (entered into force 1 October 2008), available at http://www.chinafta.govt.nz. 13 Australia–Thailand Free Trade Agreement of 5 July 2004, [2005] ATS 2 (entered into force 1 January 2005). 14 Energy Charter Treaty, 17 December 1994, 2080 UNTS 95 (entered into force 16 April 1998) (ECT). 15 US Department of State, 2004 U.S. Model Bilateral Investment Treaty (2004), available at http://www.state.gov (US Model BIT). 16 Canada’s Foreign Investment Promotion and Protection Agreements Model, at s. 3 and s. 4, available at http://www.international.gc.ca (Canada’s FIPA).

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refers to ‘establishment’ in its list of covered rights in various contexts. Thus Article 3 on national treatment (NT) states: Article 3: National Treatment 1. Each Party shall accord to investors of the other Party treatment no less favorable 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.

‘Admission’ of foreign investments can cover a wider range of issues than the expression ‘establishment.’ The latter suggests a degree of permanency not necessarily implied by the expressions ‘admission’ or ‘entry.’17 Establishment is used in EU law18 to denote a right of entry and permanent presence in EU member States of professional persons and corporations. As such, it constitutes one of the essential economic freedoms which exist within the EU. It is therefore important in interpreting rights of entry to distinguish the extent and the purpose of the right as it is set out in different texts. 7 A further general consideration of great importance relates to the use in a treaty of the qualification of rights of entry as ‘subject to domestic law’ or subject to ‘laws in force.’ These words in a BIT or other form of treaty generally suggest that all rights of entry are contingent upon prior approval by the authorities of the host State and thus suggest that no guaranteed right of entry is contemplated. If a right of entry or any specific standards of treatment of the request to enter are guaranteed by existing law, the use of the expression may well have legal significance, but use of such expressions is generally a signal that no preentry obligations are assumed by the host State. 8 A further general consideration of great importance with respect to pre-entry obligations is the potential impact of most favoured nation (MFN) and NT commitments in BITs and regional trade treaties. The commitment to national treatment of foreign investors with respect to the right to make investments will normally be a strong indication that all phases of investment are covered. A commitment to MFN treatment may be very significant in particular cases, but is contingent upon pre-entry rights granted to other States in other treaties by the host State. 9 The grant of pre-entry rights is seldom absolute. The most extensive is the freedom of establishment granted to all citizens and companies operating in the EU.19 In all treaties some exceptions to the right are envisaged. Exceptions can be dealt with by a negative list or can be implicitly covered by a positive list of covered investments. The negative list approach, adopted in NAFTA, allows for the broadest grant of pre-entry rights, as all rights are potentially covered, unless specifically excepted. The positive list indicating only those rights which are 6

17 Peter Muchlinski, Federico Ortino and Christoph Schreuer (n. 1) 229. 18 Consolidated versions of the Treaty on the Functioning of the European Union, (2010) OJ, L 83/02, at Arts. 49–53 (TFEU). 19 TFEU Arts. 49–53.

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covered, which is used under the WTO GATS Agreement, is by its nature narrower in scope, as it allows States to make very limited offers of pre-entry coverage. The prohibition of ‘performance requirements’ can constitute a limitation on 10 the right of a host State to condition entry of investments upon the subsequent performance of certain conditions by the foreign investor. This limitation is set out in the WTO TRIMS Agreement as well as being implicit in the GATT NT right,20 and it is also found in a number of BITs and regional agreements such as NAFTA, which carry the obligation further than the WTO with respect to preentry obligations.21 Finally, it is important to note that the manner in which ‘investments’ and ‘in- 11 vestors’ are defined may well clarify whether pre-entry rights are covered or not. Thus in the US Model BIT the definition of ‘investor of a Party’ states that this ‘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 (…)’ (emphasis added). However, a claim to be an investor does not necessarily turn on the denial of pre-investment rights. 2. Illustrations of International Practice Respecting Pre-Entry Obligations a) NAFTA

NAFTA 1993 like its precursor the Canada–United States Free Trade Agree- 12 ment (CUFTA) 1988, contains a very explicit grant of pre-investment rights to investors and to investments. These obligations are set out in three articles: 1102. 1. Each Party shall accord to investors of another Party treatment no less favorable 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. (…) 1103. 1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to investors of any other Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. (…) 1106. 1. No Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or of a non-Party in its territory (…).

Similar obligations are set out in Canadian and American model investment 13 agreements and in BITS/FIPAS negotiated with a number of other countries in recent years.22 BITs negotiated by Japan in recent years have followed a similar 20 Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, Multilateral Agreement on Trade in Goods: General Agreement on Tariffs and Trade 1994, 15 April 1994, 1867 UNTS (entered into force 1 January 1995) at Art. III (GATT 1994); Canada – Administration of the Foreign Investment Review Act (Complaint by the United States), (1984) GATT Doc L/5504, BISD 30S/140, para 6.1., available at http://docsonline.wto.org (FIRA Report). 21 North American Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, 17 December 1992, Can TS 1994, no. 2, 32 ILM 289 (entered into force 1 January 1994) (NAFTA) Art. 301. 22 Canada’s FIPA; US Model BITs.

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approach.23 In Canada the legal effect of these provisions is that, except in fields covered by the general exceptions set out in article 1101.424 and the listed exception in favour of the Investment Canada Act,25 foreign investors are free to make investments as they see fit without the need to obtain prior governmental authorisation. In the United States the same freedom to invest prevails for Canadian and Mexican investors, subject to even narrower legislative restrictions.26 Mexico maintains significant restrictions on foreign investment in a number of sectors – in particular the hydrocarbon extraction sector.27 b) Japan and Singapore 14

A number of Japanese agreements explicitly create pre-entry obligations. Thus the Japan–Mexico FTA Article 58 covers: ‘the establishment, acquisition, expansion, management, conduct, operation, maintenance, use, enjoyment and sale or other disposition of investments (…).’28 This agreement is quite explicit. Less explicit but potentially aplicable to pre-entry issues is the language used in several agreements which refers generally to ‘investment activities (…).’29 In some cases pre-entry issues may be implicitly covered by the provisions in the services chapter dealing with market access commitments.30 Thus, while the 23 Agreement between Japan and the Kingdom of Cambodia for the Liberalization, Promotion and Protection of Investment of 14 June 2007 (entered into force 31 July 2008), Arts. 2 and 3, available at http://www.mofa.go.jp; Agreement between Japan and the Lao People’s Democratic Republic for the Liberalization, Promotion and Protection of Investment, of 16 January 2008 (entered into force 3 August 2009), Arts. 2 and 3, available at http://www.mofa.go.jp; Agreement Between Japan and the Republic of Uzbekistan for the Liberalization, Promotion and Protection of Investment of 15 August 2008 (entered into force 29 September 2009), Art 2, available at http://www.mofa.go.jp. 24 NAFTA Art. 1104.1: ‘Nothing in this Chapter shall be construed to prevent a Party from providing a service or performing a function such as law enforcement, correctional services, income security or insurance, social security or insurance, social welfare, public education, public training, health, and child care, in a manner that is not inconsistent with this Chapter.’ 25 NAFTA, Annex I – Schedule of Canada. 26 See NAFTA, Annex I – Schedule of United States for list of sectors subject to legislative restrictions. 27 NAFTA, Annex I – Schedule for Mexico; NAFTA, Annex II – Schedule of Mexico; NAFTA, Annex III – Schedule of Mexico. 28 Agreement between Japan and the United Mexican States for the Strengthening of the economic partnership of 17 September 2004 (entered into force 1 April 2005), Art. 58, available at http://www.mofa.go.jp; see also Agreement between Japan and the Kingdom of Thailand for Economic Partnership (entered into force 1 November 2007), Art. 75, available at http:// www.mofa.go.jp; see also Agreement between Japan and the Republic of Singapore for a new-age economic partnership of 13 January 2002 (entered into force 30 November 2002), Art. 73, available at http://www.mofa.go.jp. 29 Agreement on Free Trade and Economic Partnership between Japan and the Swiss Confederation of 29 September 2008 (entered into force 1 September 2009), Art. 87, available at http:// www.mofa.go.jp; see also Agreement between Japan and Brunei Darussalam for an Economic Partnership of 18 June 2007 (entered into force 31 July 2008), Art. 57, available at http:// www.mofa.go.jp. 30 See inter alia Agreement between Japan and the Socialist Republic of Viet Nam for an Economic Partnership of 24 December 2008 (entered in force 1 October 2009), Art. 59, available at http://www.mofa.go.jp.

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framing is more varied, Japan has moved to assume pre-entry obligations. Singapore has adopted an approach similar to Japan and some of its BITs explicitly assume pre-entry obligations.31 It would appear that China has begun to follow this course of action with respect to MFN treatment.32 c) Customs Unions and Regional Trade Agreements

Many of the regional trade agreements concluded in recent years include 15 guarantees of the right of nationals of State parties to these agreements to make investments in the territory of other member States. This reflects the broadening of such agreements to include investment promotion and other ‘non-trade’ policies. It also reflects a willingness of member States to extend investment protections to pre-entry commitments as one of the advantages of participation in the agreement. The EU treaties provide by far the most extensive guarantee of the freedom of 16 investment between members States. This is accomplished by the joint application of several freedoms of movement of citizens, services, capital and payments, as well as the freedom of establishment.33 In 2009, the Treaty of Lisbon expanded the Common Commercial Policy (CCP)34 to include ‘foreign direct investment.’ Since the CCP is an exclusive competence of the EU, some observers have suggested that this implies exclusive legislative competence over all aspects of foreign investment except portfolio investment, and that this includes the capacity to regulate not only the conditions of admission but also the standards of treatment in the internal market. Two comments are in order. The full extent of this new competence, especially whether it covers the same ground as that covered by the standard terms of BITs between EU member States, is the object of some controversy in academic circles35 and among arbitrators.36 It is not yet certain that this competence extends to setting the standards of treatment in the internal market. The Court of Justice of the European Union (CJEU) has yet to be seized of the question. Secondly it is curious that the undoubted capacity of the EU to regulate the conditions of access of foreign investment to EU markets under the CCP is the one area where EU member States have traditionally refrained from accepting binding commitments in their BITs in respect of 31 Agreement between the EFTA States and Singapore of 26 June 2002 (entered into force 1 January 2003), Art. 40, available at http://www.efta.int. 32 Free Trade Agreement between the Government of the People’s Republic of China and the Government of the Republic of Peru (entered in force 28 April 2009), Art. 131, available at http://www.unctadxi.org: ‘establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory (…).’ 33 TFEU Arts. 45–66. 34 TFEU Arts. 206, 207. 35 Armand de Mestral, ‘The Lisbon Treaty and the Expansion of EU Competence over Foreign Direct Investment and the Implications for Investor-State Arbitration’ (2009–2010) YB Int’l Inv. L. & Pol’y 365–395; Joachim Karl, ‘The competence for foreign direct investment – new powers for the European Union?’ (2004) 5 JWIT 413–448. 36 Eastern Sugar B.V. v. The Czech Republic, SCC No. 008/2004, March 2007.

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the pre-entry phase. It is not yet clear what position the EU will adopt in its negotiations with third States.37 17 The Protocolo de Colonia para la Promoción y Protección Recíproca de Inversiones en el Mercosur (hereinafter Colonia Protocol), adopted in 1994 by the member States of the MERCOSUR38 Article 2 states: 1- Each Contracting Party will promote investment of investors from other Contracting Parties and will admit them in their territory on a not less favorable basis than investments from their own nationals or of investors from Third States, without prejudice to the right of each party to maintain transitionally limited exceptions that correspond to the sectors that appear in the Annex to this Protocol. 2- When a Contracting Party has admitted an investment in its territory, it will grant the necessary authorizations for its best development, including the execution of contracts under license, commercial or administrative assistance and the admission of key personnel. (author’s translation)

The object of this and similar agreements is to provide national treatment to investors from member States of MERCOSUR thus encouraging the expansion of intra-regional investments and hence greater economic activity within the region. By their nature they constitute a promise of entry into MERCOSUR countries to investors from the other countries. Implicitly this promise is designed to promote the free movement of capital within the region. 19 Article 5 of the ASEAN Comprehensive Investment Agreement 2009 goes even further and is even more explicit than MERCOSUR: 18

Article 5: National Treatment Each Member State shall accord to investors of any other Member State treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the admission, establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. Each Member State shall accord to investments of investors of any other Member State treatment no less favourable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the admission, establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments.39

20

The references to ‘admission, establishment, acquisition, expansion (…)’ suggest the clear intention to promote a unified area in which investment is encouraged to flow from one ASEAN member State to another. This should be seen as an important element of the very ambitious plan to adopt a full-fledged ASEAN customs and monetary union by 2020.40 The 2009 agreement is reinforced with a commitment to investor-State arbitration available to investors of the ASEAN area. By virtue of Article 6, ASEAN members agree to grant MFN treatment to investors of another member State with respect to the same matters as Article 5. 37 Negotiations have been authorised with Canada, India and Singapore. 38 Protocolo de Colonia para la Promoción y Protección Reciproca de Inversiones en el MERCOSUR of 17 January 1994, Dec N. 11/93 (not entered into force yet), Art. 2, available at http://www.mercosur.int. 39 ASEAN Comprehensive Investment Agreement, 26 February 2009 (not entered into force), available at http://www.aseansec.org. 40 Association of Southeast Asian Nations, Press Release, ‘Press Release of the ASEAN Liberalizes Investment Rules’ (Jakarta, 31 January 2003), available at http://www.aseansec.org.

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The ANDEAN Community41 purports to be a customs union with a strong 21 mandate to coordinate industrial and commercial policies of its members. Pursuant to this mandate the Commission of the Cartagena Agreement has adopted Decision 29142 with a view to harmonising policies on foreign investment. While the decision succeeds in harmonising policies on foreign and subregional investment with a view to encouraging the presence of such investment in Andean Community countries, access to individual country markets remains subject to ‘national legislation.’ The CARICOM43 Agreement (Caribbean Community and Common Market), 22 particularly now that it has been reinforced by the CARIFORUM44 Agreement (Forum of the Caribbean Group of African, Caribbean and Pacific States) with the EU has been very successful in promoting advantageous conditions for foreign investment within the Caribbean region. Like the Andean Community the CARICOM is governed by various supranational institutions, but it seems to have succeeded in creating conditions where the powers of these institutions have had considerable impact on economic regulation including the admission of investments from within the region. Pursuant to the objective of ‘the establishment of an integrated capital market in the Community,’45 Article 32 prohibits the creation of new restrictions on the right of establishment, to be enjoyed by citizens and companies established in member States, and commits member State to the elimination of barriers to the right of establishment and the free movement of capital within the CARICOM Community.46 Supranational Community institutions are empowered to act within the territory of member States to promote the free movement of capital.47 Measures are to be taken to harmonise investment incentives in each country48 and to promote investment and the right of establishment between member States.49 Disputes arising under the treaty, including investment disputes, can be resolved variously by conciliation, or before arbitral tribunals or the Caribbean Court of Justice, which has jurisdiction to rule on inter-State complaints, referrals from national courts and, in 41 Andean Subregional Integration Agreement (Cartagena Agreement) of 16 May 1969 (entered into force 16 October 1969) (later renamed the Cartagena Agreement and codified by Andean Community Commission Decision 563), available at http://www.comunidadandina.org/ endex.htm. 42 Andean Group: Commission Decision 291 – Common Code for the Treatment of Foreign Capital and on Trademarks, Patents, Licenses and Royalties (1991) 30 ILM 1288, Preamble. 43 Revised Treaty of Chaguaramas establishing the Caribbean Community including the CARICOM Single Market and Economy, 5 July 2001, 2259 UNTS 293 (entered into force 4 February 2002) (CARICOM). 44 Economic Partnership Agreement between the CARIFORUM States, of the one part, and the European Community and its Member States, of the other part, 15 October 2008, (2008) OJ L289, p. 1 (not entered into force yet), available at http://ec.europa.eu/world/agreements/ default.home.do. 45 CARICOM Art. 44(1)(d). 46 CARICOM Arts. 33, 34, 38–42. 47 CARICOM Art. 45. 48 CARICOM Art. 69. 49 CARICOM Arts. 147, 149.

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a number of cases, applications by private persons.50 Such claims could include denial of admission of investments by a member State. 23 The Economic Community of West African States (ECOWAS) is a most ambitious treaty, among its goals is the creation of a full economic and monetary union. Under Article 53 the Capital Issues Committee is given a mandate to ‘ensure the unimpeded flow of capital within the Community (…).’51 A right of establishment of Community citizens is to be progressively established.52 A Court of Justice is empowered to hear complaints of violation of rights under the treaty.53 The Southern Africa Development Community has as one of many goals to ‘develop policies aimed at the progressive elimination of obstacles to the free movement of capital and labour, goods and services (…).54 Similar provisions are to be found in a number of other regional economic associations.55 Many of these associations, like the Southern African Development Community (SADC), are still in the process of developing policies to promote intra-community investments. d) Multilateral Approaches 24

Several international treaties speak to pre-entry commitments respecting international investments. Under Article 10(1) of the Energy Charter Treaty ‘[e]ach Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area.’ Under Article 10(2) and (3), each party grants national treatment to investors of other contracting parties respecting ‘the Making of Investments in its Area (…).’56 Conditions governing this right are to be set out in a Supplementary Treaty,57 but it is clear that Article 10 speaks to pre-entry issues.58 The WTO TRIMs Agreement59 prohibits WTO members from imposing a variety of performance requirements on the trade in goods. This prohibition is not drafted specifically in 50 CARICOM Arts. 211, 222. 51 Revised Treaty of the Economic Community of West African States (ECOWAS), 24 July 1993, 2373 UNTS 233, 35 ILM 660 (entered into force 23 August 1995) (ECOWAS). 52 ECOWAS, Protocol Relating to Free Movement of Persons, Residence and Establishment, signed on 29 May 1979, A/P.1/5/79, available at http://www.comm.ecowas.int/ecowas1/ home.php?lang=en. 53 The Community Court of Justice was created pursuant to Articles 6 and 15 of ECOWAS (n. 51). 54 Treaty of the Southern African Development Community, 17 August 1992, 32 ILM 120, Art. 5(2)(d). 55 Treaty establishing the Common Market for Eastern and Southern Africa, 5 November 1993, 2314 UNTS 265 (entered into force 8 December 1994) (COMESA), Art. 4(6)(e); General Treaty on Central American Economic Integration between Guatemala, El Salvador, Honduras and Nicaragua, 13 December 1960, 455 UNTS 68 (entered into force 3 June 1961), Art. 1. 56 ECT Art. 10(3). 57 ECT Art. 10(4). 58 Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 171 (Plama Consortium).

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function of pre-entry negotiations for permission to invest but implicitly it speaks to precisely this situation. Thus WTO members are not permitted to require investors who intend to produce goods in their territory to commit to performance requirements with respect to the production and subsequent trade in these goods. Under the GATS,60 WTO members can make commitments concerning cross border services that can imply a right of entry into their territory of the covered services. It is quite possible that investments necessary to offer such services may be covered. In the event of a dispute over such services the matter would be covered by WTO law and could go before the WTO dispute settlement body (DSB). It cannot be excluded that a BIT drafted along US/Canada/Japan lines might provide a parallel arbitral recourse. The Multilateral Agreement on Investments61 which was negotiated within the OECD and abandoned in 1998 would have dealt with pre-entry obligations in a very broad manner. This aspect of the text was but one of a number which led to the abandonment of the negotiations. The OECD has taken other steps to promote the non-discriminatory treatment 25 of international investments. Under the 1967 Code of Liberalisation of Capital Movements, States are encouraged to: ‘progressively abolish between one another (…) restrictions on movements of capital (…).’62 The definition of direct investment in Annex A to the Code makes it plain that the Code speaks to preinvestment matters. Implicitly the OECD Guidelines on Multinational Enterprises63 speak to the regulation of international investments by MNEs, but their general thrust is towards ensuring respect and sensitivity of MNEs for host States’ policies and the guidelines do not speak directly to pre-entry obligations to be assumed by those countries. The same is true of the UN Code of Conduct on Transnational Corporations.64 Perhaps the most directly applicable set of international rules are the Guide- 26 lines on the Treatment of Foreign Direct Investment65 adopted by the World Bank in (1992). Under these guidelines member States of the World Bank Group are encouraged to ‘facilitate the admission and establishment of investments by nationals of other States (…)’ and to ‘avoid making unduly cumbersome or

59 Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, Multilateral Agreement on Trade in Goods: Agreement on Trade-Related Investment Measures, 15 April 1994, 1868 UNTS (entered into force 1 January 1995) (TRIMs Agreement). 60 Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, General Agreement on Trade in Services, 15 April 1994, 1869 UNTS 183, 33 ILM 1167 (entered into force 1 January 1995) (GATS). 61 OECD, The Multilateral Agreement Investment Draft Consolidated Text, Doc No. DAFFE/ MAI(98)7/REV1 (1998). 62 OECD Code of Liberalisation (n. 5) Art. 2. 63 OECD, OECD Guidelines for Multinational Enterprises (OECD Publishing, 2011). 64 UN Code of Conduct on Transnational Corporations (n. 7). 65 The World Bank Group, ‘Guidelines on the Treatment of Foreign Direct Investment’ (World Bank Group, 1992) in Ibrahim F.I. Shihata, Legal Treatment of Foreign Investment: ‘The World Bank Guidelines’ (Kluwer Academic Publishers, 1993) 155.

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complicated procedural regulations for (…) the admission of such investments.’66 27 The guidelines do recognise the right of States to maintain regulations governing the admission of investments for public policy purposes, but discourage unduly restrictive regulations and performance requirements.67 These guidelines were adopted to further the Washington Consensus on the benefits of liberalising the conditions of foreign investments. They were influential in promoting the adoption of more liberal conditions in BITs negotiated at that time, but the specific injunctions concerning admission were not followed by many BITs. Another approach is taken in The Principles for Responsible Agricultural Investment, promulgated by the UNCTAD, FAO, IAD and the World Bank, which leave host States a wide measure of discretion as to the admission of foreign investments in the agricultural sector.68 e) Private Initiatives 28

Private persons and organisations have contributed to the debate over pre-entry obligations. One of the first major contributions to modern international investment law, the Abs–Shawcross Draft Convention on International Investments issued in 1959 by two leading lawyers, did propose the grant of pre-entry rights.69 The Model International Agreement on Investment for Sustainable Development, first proposed in 2005 by the International Institute for Sustainable Development, excludes any grant of a right of establishment, as potentially limiting the right of a State to determine its own policies of sustainable development.70 The Equator Principles, adopted in 2006 by an international group of private investment banks as guidelines for socially and economically responsible investment in developing countries clearly leave it to host States to determine the conditions of entry of foreign investment in the agricultural sector.71 f) Disputes

29

Given that relatively few BITs contain explicit pre-entry commitments, it is not surprising that there are few investor-State arbitrations dealing with these matters. Even those agreements such as NAFTA which do contain pre-entry commitments have not given rise to pre-admission claims. The ADF arbitra-

66 Art. II.2. 67 Arts. II.3 and 4. 68 FAO, IFAD, UNCTAD and World Bank Group, Principles for Responsible Investment that Respect Rights, Livelihoods and Resources, (World Bank Group, 2010), available at http:// www.worldbank.org/reference. 69 Hermann Abs and Hartley Shawcross, ‘The proposed convention to protect private foreign investment: a round table: comment on the draft convention by its authors’ (1960) 9 J. Pub. L. 115, Art. I. 70 IISD Model International Agreement (n. 9) Art. 3.E. 71 The Equator Principles Association, The Equator Principles (The Equator Principles Association, 2006), available at http://www.equator-principles.com.

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tion72 arguably contained pre-entry elements in so far as the Canadian complainant wished to undertake new investments and expand existing investments in the United States. But the case was not pleaded in these terms and the issue did not arise. NAFTA cases turning on the plea to be a foreign investor73 arose out of the denial by governments of access to markets but the issue here is essentially one of jurisdiction over persons claiming, unsuccessfully, to be foreign investors. The closest investor-State arbitrations appear to have come to date to dealing 30 with pre-entry claims arisen under the Energy Charter Treaty. The Plama case74 could in some respects be characterised as resulting from a denial of access to the Bulgarian market in that Bulgaria frustrated efforts to take over a refinery. But the case was argued and decided on pleas of unfair and discriminatory treatment rather than on pleas of denial of access. The Mohammad Al-Bahloul75 claim before the Stockholm Chamber of Commerce which resulted from the denial of licences to explore and exploit hydrocarbons by Tajikistan, is perhaps the closest to a true pre-entry claim; it was decided essentially on the finding that the would-be investor could never have raised the money to pursue his intentions. The various cases launched by the Uzan family, as a result of their unsuccessful efforts to take full control of the privatised CEAS utility company in Turkey,76 might also be characterised as pre-entry cases but they were argued on different grounds, and on the facts it appears that the claimants had made very considerable investments in Turkey before they were frustrated in their efforts to effect a complete takeover.77 In the Aguas del Tunari decision on jurisdiction the tribunal interpreted the 31 duty to ‘admit’ foreign investment from the BIT partner as being limited by the right to exercise the powers set out in Bolivia’s laws and regulations.78 In Generation Ukraine Inc. v. Ukraine, the complainant maintained that the government of Ukraine had made it very difficult to invest in a proposed office block development. But the tribunal noted that to make a claim relating to conduct before 72 ADF Group Inc. v. USA, ICSID Case No. ARB(AF)/00/1 (NAFTA), Award, 9 January 2003. 73 Canadian Cattlemen for Fair Trade v. USA, UNCITRAL (NAFTA), Award on Jurisdiction, 28 January 2008; Bayview Irrigation District et al. v. Mexico, ICSID Case No. ARB(AF)/05/1 (NAFTA), Award, 19 June 2007. 74 Plama Consortium v. Bulgaria (n. 58). 75 Mohammad Ammar Ah-Bahloul v. Tajikistan, SCC Case No. Arb. V064/2008, June 2010. 76 Cementownia ‘Nowa Huta’ S.A. v. Turkey, ICSID Case No. ARB(AF)/06/2, Award, 17 September 2009; Limited Liability Amto (Latvia) v. Ukraine, SCC Case No. Arb. V080/2005, March 2005 (Amto); Europe Cement Investment & Trade S.A. v. Turkey, ICSID Case No. ARB(AF)/07/2, Award, 13 August 2008. 77 Interestingly in the Amto case at para. 28 the respondent Turkey argued with respect to Article 10(1) of the Energy Charter Treaty that: ‘The ЕСТ does not confer substantive protection to the pre-investment period, and so events occurring prior to the making of the Investment should be disregarded by the Arbitral Tribunal as not subject to its jurisdiction in this case.’ Para. 14(c). However this point was not subsequently argued and there is no ruling by the tribunal on the matter. 78 Aguas del Tunari, S.A., v. Bolivia, ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, 21 October 2005, paras. 143–147.

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the investment was made required ‘pre-investment protections’ which did not exist in the relevant treaty.79 The tribunal in the case of Jan de Nul N.V. and Dredging International N.V. v. Egypt, reached a similar conclusion on similar language.80 Técnicas Medioambientales Tecmed, S.A. v. Mexico involved the denial of the renewal of a permit to operate a waste disposal facility in which the claimant had invested. It might have been cast as a denial of the right to invest but was not argued in these terms.81 32 The most explicit pre-entry cases have arisen under the GATT/WTO, either under the original GATT 1947,82 the WTO TRIMs Agreement83 and the WTO GATS Agreement.84 These decisions turn either on the denial of national treatment with respect to the purchase of goods, thus making it impossible to pursue normal business for a trade or investor or the explicit denial of preformance requirements found in the TRIMs Agreement.85 To the extent that they employ language which is close to the denial of performance requirements in BITs these decisions are highly relevant to investor-State law and should be invoked in any future litigation concerning performance requirements which have the effect of making it impossible to pursue an investment. It is also arguable that the GATT DISC case86 and the WTO Foreign Sales Corporation decision87 would be relevant as they involve domestic measures designed to penalise certain forms of investment. Since these cases arise under the WTO they are not reviewed exhaustively here.

79 Generation Ukraine Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003, para. 8.6. 80 Jan de Nul N.V. and Dredging International N.V. v. Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008, paras. 274–276. 81 Técnicas Medioambientales Tecmed, S.A. v. Mexico, ICSID Case No. ARB (AF)/00/2, Award, 29 May 2003, para. 182. 82 FIRA Report (n. 20). 83 China – Measures Affecting Imports of Automobile Parts (complaint by the European Communities) (2008) WTO Doc WT/DS339/R, (Panel Report), available at http://docsonline.wto.org; China – Measures Affecting Imports of Automobile Parts (complaint by the United States) (2008) WTO Doc WT/DS340/R, (Panel Report), available at http://docsonline.wto.org; China – Measures Affecting Imports of Automobile Parts (complaint by Canada) (2008) WTO Doc WT/DS342/R (Panel Report), available at http://docsonline.wto.org. 84 China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products (complaint by the United States) (2009) WTO Doc DS363/R (Panel Report) available at http://docsonline.wto.org. 85 TRIMs Agreement Arts. 2, 2.1; TRIMS Agreement Annex. 86 United States – Income Tax Legislation (DISC) (complaint by the European Communities) (1976) GATT Doc. L/4422, BISD 23S/98, available at http://docsonline.wto.org. 87 United States – Tax Treatment for ‘Foreign Sales Corporations’ (Complaint by the European Communities) (2005) WTO Doc WT/DS108/RW2 (Panel Report), available at http://docsonline.wto.org; United States – Tax Treatment for ‘Foreign Sales Corporations’ (Complaint by the European Communities) (2006) WTO Doc WT/DS108/AB/RW2 (Appellate Body Report) available at http://docsonline.wto.org.

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C. Conclusion

The adoption and spread of pre-entry obligations in BITs and regional trade 33 agreements is clearly a work in progress. At this point there is not a great deal to report, but there does appear to be a tendency to expand these obligations in the context of regional trade agreements. Repeated efforts by the OECD to expand the adoption of pre-entry obligations have been resisted, even by most OECD countries. It is not yet clear whether the EU will decide to include such commitments in its future trade and investment agreements, Should it do so this will be a very significant development. The potential for interesting synergy between the law of the WTO and foreign investment law must also be closely monitored as the impact of WTO law on foreign investment expands in future years.

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Chapter 8: Standards of Protection I. Fair and Equitable Treatment: Content, Practice, Method1

Marc Jacob and Stephan W. Schill A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Conventional Formulations of Fair and Equitable Treatment, Relation to Custom and Comparative Law Methodology . . . . . . . . . . . . . . . . . . . . . . . . . .

5

C. Conceptualising Fair and Equitable Treatment as an Emanation of the Rule of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Overcoming Difficulties in Defining Fair and Equitable Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Principles of Fair and Equitable Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Legality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Administrative Due Process and Denial of Justice . . . . . . . . . . . . . . . c) Protection of Legitimate Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Stability, Predictability, Consistency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e) Non-Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f) Transparency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . g) Proportionality and Reasonableness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Contextualising Fair and Equitable Treatment in an Archetypal Separation of Powers Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Fair and Equitable Treatment and Domestic Administrative Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Administrative Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Exercise of Administrative Discretion. . . . . . . . . . . . . . . . . . . . . . . . . b) Fair and Equitable Treatment and Domestic Judicial Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Fair and Equitable Treatment and Domestic Legislation . . . . . . . . 4. Methodological Implications of the Rule of Law Approach . . . . . . . . a) Comparative Analysis of Domestic Legal Systems. . . . . . . . . . . . . . . . b) Comparative Analysis of Inter- and Supranational Legal Regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27 27 38 42 48 54 66 73 80 87 110 111 112 116 118 121 126 130 138

D. A Normative Justification of the Rule of Law Approach . . . . . . . . . . . . . . . . 141 1. The Teleology of International Investment Treaties . . . . . . . . . . . . . . . . . 143 2. Institutional Economics and the Role of the Rule of Law . . . . . . . . . . . 146 E. Relation to Other Standards of Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 F. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

Literature: Christopher Campbell, ‘House of Cards: The Relevance of Legitimate Expectations under Fair and Equitable Treatment Provisions in Investment Treaty Law’ (2013) 30 J. Int’l Arb. 361–379; Barnali Choudhury, ‘Evolution or Devolution? – Defining Fair and Equitable Treatment in International Investment Law’ (2005) 6 JWIT 297–320; Alexandra Diehl, The Core Standard of International Investment Protection (Wolters Kluwer, 2012); Rudolf

1 The present chapter partly draws on Stephan W. Schill, ‘Fair and Equitable Treatment, the Rule of Law and Comparative Public Law’ in Stephan W. Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010) 151–182. Literature and arbitral jurisprudence are up to date as of December 2013. We would like to thank Anna Lechermann and Fabian Ast for their valuable assistance.

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I. Fair and Equitable Treatment: Content, Practice, Method Dolzer, ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’ (2005) 39 Int’l Law. 87–106; Patrick Dumberry, The Fair and Equitable Treatment Standard: A Guide to NAFTA Case Law on Article 1105 (Kluwer Law International, 2013); Hussein Haeri, ‘A Tale of Two Standards: “Fair and Equitable Treatment” and the Minimum Standard in International Law’ (2011) 27 J. Int’l Arb. 27–46; Jason Haynes, ‘The Evolving Nature of the Fair and Equitable Treatment (FET) Standard: Challenging Its Increasing Pervasiveness in Light of Developing Countries’ Concerns – The Case for Regulatory Rebalancing’ (2013) 14 JWIT 114–146; Moshe Hirsch, ‘Between Fair and Equitable Treatment and Stabilization Clause: Stable Legal Environment and Regulatory Change in International Investment Law’ (2011) 12 JWIT 783–806; Jean Kalicki and Suzana Medeiros, ‘Fair, Equitable and Ambiguous: What Is Fair and Equitable Treatment in International Investment Law?’ (2007) 22 ICSID Rev.–FILJ 24–54; Mark Kantor, ‘Fair and Equitable Treatment: Echoes of FDR’s Court-Packing Plan in the International Law Approach Towards Regulatory Expropriation’ (2006) 5 LPICT 231– 256; Roland Kläger, ‘Fair and Equitable Treatment’ in International Investment Law (Cambridge University Press, 2011); Marcela Klein Bronfman, ‘Fair and Equitable Treatment: An Evolving Standard’ (2006) 10 Max Planck UN YB 609–680; Graham Mayeda, ‘Playing Fair: The Meaning of Fair and Equitable Treatment in Bilateral Investment Treaties’ (2007) 41 JWT 273–291; Santiago Montt, State Liability in Investment Treaty Arbitration – Global Constitutional and Administrative Law in the BIT Generation (Hart, 2009); Peter Muchlinski, ‘“Caveat Investor”? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard’ (2006) 55 ICLQ 527–557; Alexander Orakhelashvili, ‘The Normative Basis of “Fair and Equitable Treatment”’ (2008) 46 AVR 74–105; Abhijit P.G. Pandya and Andy Mood, ‘Legitimate Expectations in Investment Treaty Arbitration: An Unclear Future’ (2010/2011) 15 Tilburg L. Rev. 93–119; Martins Paparinskis, The International Minimum Standard and Fair and Equitable Treatment (Oxford University Press, 2013); Jan Paulsson, Denial of Justice in International Law (Cambridge University Press, 2005); Srilal M. Perera, ‘Equity-Based Decision-Making and the Fair and Equitable Treatment Standard: Lessons From the Argentine Investment Disputes – Part I’ (2012) 13 JWIT 210–255; Srilal M. Perera, ‘Equity-Based Decision-Making and the Fair and Equitable Treatment Standard: Lessons From the Argentine Investment Disputes – Part II’ (2012) 13 JWIT 442–485; J. Roman Picherack, ‘The Expanding Scope of the Fair and Equitable Treatment Standard: Have Recent Tribunals Gone Too Far?’ (2008) 9 JWIT 255–291; Michele Potestà, ‘Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept’ (2013) 28 ICSID Rev.–FILJ 88–122; Andrea Schernbeck, Der Fair and Equitable Treatment Standard in internationalen Investitionsschutzabkommen (Nomos, 2013); Stephan W. Schill, ‘Fair and Equitable Treatment, the Rule of Law and Comparative Public Law’ in Stephan W. Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010) 151–182; Christoph Schreuer, ‘Fair and Equitable Treatment in Arbitral Practice’ (2005) 6 JWIT 357–386; Elizabeth Snodgrass, ‘Protecting Investors’ Legitimate Expectations – Recognizing and Delimiting a General Principle’ (2006) 21 ICSID Rev.–FILJ 1–58; Jacob Stone, ‘Arbitrariness, the Fair and Equitable Treatment Standard, and the International Law of Investment’ (2012) 25 Leiden J. Int’l L. 77–107; Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (Oxford University Press, 2008); UNCTAD, Fair and Equitable Treatment (United Nations, 1999); UNCTAD, Fair and Equitable Treatment: A Sequel (United Nations, 2012); Kenneth Vandevelde, ‘A Unified Theory of Fair and Equitable Treatment’ (2010) 43 NYU JILP 43– 106; Stephen Vasciannie, ‘The Fair and Equitable Treatment Standard in International Investment Law and Practice’ (1999) 70 BYIL 99–164; Thomas J. Westcott, ‘Recent Practice on Fair and Equitable Treatment’ (2007) 8 JWIT 409–430; Trevor J. Zeyl, ‘Charting the Wrong Course: The Doctrine of Legitimate Expectations in Investment Treaty Law’ (2011) 49 Alberta L. Rev. 203–235.

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A. Introduction 1

Fair and equitable treatment (FET) has emerged as the core substantive concept of international investment law. It generally assures non-relational (i.e. absolute) minimum treatment, which makes it the bedrock of the modern protection of investors operating abroad. Albeit in different guises, it appears prominently in nearly all of the more than 2,800 bilateral investment treaties (BITs),2 as well as in regional and multilateral treaties, including Article 1105(1) of the North American Free Trade Agreement (NAFTA) and Article 10(1) of the Energy Charter Treaty (ECT).3 Omissions largely concern older treaties, e.g. the original 1959 Germany–Pakistan BIT;4 more recent exceptions include agreements signed by Singapore, to name but one example.5 But even when left out, the standard might come into play via a most favoured nation (MFN) clause.6 Overall, FET is profusely invoked and applied in investor-State dispute settlement, in particular as a fallback after a failed expropriation submission, and has seen considerable success in this respect.7 The standard is attested to have ‘the potential to reach further into the traditional domaine réservé of the host state than any one of the other rules of the treaties.’8 Not surprisingly, FET is dealt with extensively in the literature on international investment law.9 2 Figures as at the end of 2012. See UNCTAD, World Investment Report (United Nations, 2013) 101. 3 It can be traced to the failed Havana Charter of 1948 and also figured in various post-World War II Friendship, Commerce and Navigation (FCN) treaties concluded by the US, amongst others. FET also featured in prominent private initiatives such as the Abs–Shawcross Draft Convention of 1960 (Draft Convention on Investments Abroad (1960) 9 J. Pub. L. 116). It further played a role in all multilateral projects relating to the protection of foreign investment, including the OECD Draft Convention on the Protection of Foreign Property (1968) 7 ILM 117. See Stephen Vasciannie, ‘The Fair and Equitable Treatment Standard in International Investment Law and Practice’ (1999) 70 BYIL 99–164; Catherine Yannaca-Small, ‘Fair and Equitable Treatment Standard in International Investment Law’ (2004) 3 OECD Working Papers on International Investment 3 et seq. 4 Unless specified otherwise, BITs are available at the Investment Instruments Online database maintained by UNCTAD, available at http://www.unctadxi.org/templates/DocSearch____779.as px. As to multilateral agreements see North American Free Trade Agreement of 17 December 1992, in force since 1 January 1994 (1993) 32 ILM 289, (1993) 32 ILM 605; Energy Charter Treaty of 17 December 1994, in force since 16 April 1998, 2080 UNTS 95, (1995) 34 ILM 360. 5 See e.g. the Treaty between the Federal Republic of Germany and the Republic of Singapore concerning the Promotion and Reciprocal Protection of Investments of 3 October 1973 (Germany–Singapore BIT). Other examples that break the mould include the Agreement between the Government of the Republic of Croatia and the Government of Ukraine for the Promotion and Reciprocal Protection of Investments of 15 December 1997 (Croatia–Ukraine BIT) and chapter 9 of the Thailand–New Zealand Closer Economic Partnership Agreement of 19 April 2005, in force since 1 July 2005, available at http://www.mfat.govt.nz/downloads/trade-agreement/thailand/thainzcep-december2004.pdf. 6 One such instance was ATA Construction, Industrial and Trading Company v. Jordan, ICSID Case No. ARB/08/2, Award, 18 May 2010, para. 125. Another alternative would be an argument to the effect that FET is part of customary international law and that the relevant dispute resolution clause is wide enough to cover this. See infra note 39. 7 UNCTAD, Fair and Equitable Treatment: A Sequel (United Nations, 2012) 1. 8 Rudolf Dolzer, ‘The Impact of International Investment Treaties on Domestic Administrative Law’ (2005) 37 NYU JILP 953, 964.

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The frequency with which FET is promised, its importance in investment 2 treaty arbitration and the amount of academic writing contrast, however, with a lack of clarity concerning FET’s normative content. As one commentator pithily put it, the standard is ‘maddeningly vague, frustratingly general, and treacherously elastic.’10 Accordingly, the way arbitral tribunals develop the interpretation of the standard has given rise to criticism such as that of Pedro Nikken in his separate opinion in the Suez cases in relation to how the tribunal’s majority linked FET to the protection of legitimate expectations. In his view the development of the doctrine of legitimate expectations is the result of the interaction of the claims of investors and their acceptance by arbitral tribunals, buttressed by the presumed moral authority of the decided cases. I believe that the standard of fair and equitable treatment has been interpreted so broadly that it results in arbitral tribunals imposing upon the Parties obligations that do not arise in any way from the terms that the Parties themselves used to define their commitments. Indeed, more attention has been paid to what the claimants have considered the scope of their rights than what the Parties defined as the extent of their obligations. Unfortunately, I have not had the intelligence or the ability to convince my colleagues in this Tribunal (…) about the irrationality and the weakness of this jurisprudence, of which I am convinced.11

As this recent cri de coeur exemplifies, FET has become a lightning rod for 3 much of the substantive protection of foreign investment, any sophisticated application and analysis of which cannot avoid difficult contextual and methodological questions. But for all of this, FET is considered a legal standard, rather than an empowerment of tribunals to render decisions ex aequo et bono (i.e. based on what might be considered just).12 Nevertheless, a uniform and doctri9 For a non-exhaustive list of writings on FET see the bibliography at the beginning of this chapter. 10 Jeswald Salacuse, The Law of Investment Treaties (Oxford University Press, 2010) 221. 11 Suez, Sociedad General de Aguas de Barcelona, S.A.and Vivendi Universal, S.A. v. Argentina, ICSID Case No. ARB/03/19 and AWG Group v. Argentina (joint cases), Decision on Liability, 30 July 2010, Separate Opinion of Arbitrator Pedro Nikken, para. 27; Suez, Sociedad General de Aguas de Barcelona S.A., and InterAguas Servicios Integrales del Agua S.A. v. Argentina, ICSID Case No. ARB/03/17, Decision on Liability, 30 July 2010, Separate Opinion of Arbitrator Pedro Nikken, para. 27. For critical analyses see also J. Roman Picherack, ‘The Expanding Scope of the Fair and Equitable Treatment Standard: Have Recent Tribunals Gone Too Far?’ (2008) 9 JWIT 255–291; Graham Mayeda ‘Playing Fair: The Meaning of Fair and Equitable Treatment in Bilateral Investment. Treaties’ (2007) 41 JWT 273–291; Trevor J. Zeyl, ‘Charting the Wrong Course: The Doctrine of Legitimate Expectations in Investment Treaty Law’ (2011) 49 Alberta L. Rev. 203–235; Jason Haynes, ‘The Evolving Nature of the Fair and Equitable Treatment (FET) Standard: Challenging Its Increasing Pervasiveness in Light of Developing Countries’ Concerns – The Case for Regulatory Rebalancing’ (2013) 14 JWIT 114–146; Christopher Campbell, ‘House of Cards: The Relevance of Legitimate Expectations under Fair and Equitable Treatment Provisions in Investment Treaty Law’ (2013) 30 J. Int’l Arb. 361–379. 12 See Catherine Yannaca-Small (n. 3) 40; Christoph Schreuer, ‘Fair and Equitable Treatment in Arbitral Practice’ (2005) 6 JWIT 357, 365; Saluka Investments BV v. Czech Republic, UNCITRAL, Partial Award, 17 March 2006, para. 284; MCI Power Group LC and New Turbine Inc v. Ecuador, ICSID Case No. ARB/03/6, Award, 31 July 2007, para. 370; see also Oil Platforms (Iran v. USA), Judgment, 12 December 1996, ICJ Rep. 1996, 803, Separate Opinion of Judge Higgins, para. 39. But see Srilal M. Perera, ‘Equity-Based Decision-Making and the Fair and Equitable Treatment Standard: Lessons From the Argentine Investment Disputes – Part I’ (2012) 13 JWIT 210–255; Srilal M. Perera, ‘Equity-Based Decision-Making and the

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nally clear vision of what limitations the standard precisely entails for State measures affecting foreign investors remains elusive. The present chapter seeks to address this through a conceptual and principle-based approach that employs a comparative methodology. 4 The point of departure is that treaty text is necessary but rarely sufficient. Instead, what is needed is a conceptual approach that elucidates the normative content of FET as a legal standard and helps States, investors and arbitral tribunals to concretise that standard in a predictable and well-balanced fashion. In our view, the most convincing method for achieving this aim is to make use of comparative public law in order to develop the normative content of FET in parallel with related standards in domestic systems of administrative and constitutional law.13 B. Conventional Formulations of Fair and Equitable Treatment, Relation to Custom and Comparative Law Methodology 5

Although many are simply without further specification, the formulation of FET provisions in investment treaties is not unvarying.14 FET can be found in preambular language,15 in self-standing provisions,16 in conjunction with other investment assurances.17 As noted above, besides the near ubiquitous appearance in BITs, it also features in multilateral conventions and is found in other

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Fair and Equitable Treatment Standard: Lessons From the Argentine Investment Disputes – Part II’ (2012) 13 JWIT 442–485. On viewing international investment law as a public law discipline and making use of comparative public law in order to understand and further concretise the standards of treatment contained in international investment treaties see the contributions in Stephan W. Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010). For recognition of this approach in arbitral practice see Toto Costruzioni Generali S.p.A. v. Lebanon, ICSID Case No. ARB/07/12, Award, 7 June 2012, para. 193; Total SA v. Argentina, ICSID Case No. ARB/04/1, Decision on Liability, 27 December 2010, paras. 111 et seq. and 126 et seq. For different ways of phrasing FET clauses, see Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (Oxford University Press, 2008) 15–52; Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer Law International, 2009) 257–261; Roland Kläger, ‘Fair and Equitable Treatment’ in International Investment Law (Cambridge University Press, 2011) 9–21; UNCTAD (n. 7) 17–37. See e.g. Treaty between United States of America and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investment of 14 November 1991 (US–Argentina BIT) Preamble. See e.g. Agreement between the Swiss Federal Council and the Government of the People’s Republic of China on the Promotion and Reciprocal Protection of Investments of 27 January 2009 (Switzerland–China BIT) Art. 4(1). See e.g. Agreement between the Federal Republic of Germany and the Hashemite Kingdom of Jordan concerning the Encouragement and Reciprocal Protection of Investments of 13 November 2007 (Germany–Jordan BIT) Art. 2 (nestled in the ‘Promotion and Admission’ provision); Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of Bangladesh for the Promotion and Protection of Investments of 19 June 1980 (Bangladesh-UK BIT) Art. 2(2) (in the same sentence as full protection and security).

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investment-related instruments.18 This eclectic treaty practice warrants care when generalising and provides potential support for narrowly crafted arguments that stress textual specificity and systemic relation. In addition, the provisions on FET in more recent investment treaties are often more refined in light of arbitral interpretations and try to rebalance more clearly investor rights and public interests, thus adding further variance in treaty texts.19 Yet, leaving aside additional wording that accompanies the grant of FET,20 6 arbitral tribunals have largely refrained from attributing excessive weight to finer textual variations. Instead, comparable provisions, for example clauses requiring ‘equitable and reasonable’ rather than ‘fair and equitable’ treatment, are interpreted by arbitral tribunals rather indiscriminately21 and, in any event, with a strong orientation towards precedent as part of a treaty-overarching concept of FET.22 The red thread of what follows is that the precise treaty formulation is an integral starting point, but hardly the end of a sophisticated analysis and application of FET in arbitral practice. The main textual fault line separates eponymous or synonymous FET pre- 7 scription from a combination of the treaty standard with an explicit reference to (customary) international law. The latter can further be drafted or construed as a floor (‘no less favourable than’) or a ceiling (‘not (…) beyond that which is required by’) to demanded treatment.23 Such a supplementary ‘outside’ link could 18 For the latter see e.g. Draft Convention on Investments Abroad (also known as the Abs– Shawcross Convention) (1959) Art. 1 (1969) 9 J. Pub. L. 116. 19 Broad interpretations of FET by arbitral tribunals have led several States to introduce more restrictive wording of the respective standard in their more recent investment treaty practice. Art. 10.5(2)(a) of the Dominican Republic–Central America–United States Free Trade Agreement of 5 August 2004, available at http://tinyurl.com/3dr9zln, for instance, stipulates – in departing from the broader treaty language in earlier treaties – that ‘“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 (…).’ More generally on the recalibration of investment treaties see Peter Muchlinski, ‘Trends in International Investment Agreements’ (2008–2009) 1 YB Int’l Inv. L. & Pol’y 35, 36–50; Peter Muchlinski, ‘Trends in International Investment Agreements, 2008/2009: Review of the Model Bilateral Investment Treaties of Norway, South Africa and the United States’ (2009–2010) 2 YB Int’l Inv. L. & Pol’y 41–86; José E. Alvarez, ‘Why Are We “Re-calibrating” Our Investment Treaties?’ (2010) 4 WAMR 143–161. 20 These can range from fairly clear instructions (e.g. that a violation of another treaty provision or separate convention does not amount to a breach of the FET clause) to similarly nebulous terms (e.g. the prohibition of arbitrary behaviour). See UNCTAD (n. 7) 29–34 (with concrete treaty examples). 21 See Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, para. 277 (noting that ‘[t]he standard of “fair and equitable treatment” has been interpreted broadly by Tribunals and, as a result, a difference of interpretation between the terms “fair” and “reasonable” is insignificant’ (emphasis in original)). 22 See Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 164 (stating that ‘[t]he Arbitral Tribunal will (…) attempt to provide a relevant definition of the standards, taking into account practice under the ECT and the practice of tribunals under other investment treaties’). 23 See Rudolf Dolzer, ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’ (2005) 39 Int’l Law. 87, 90; see also UNCTAD, Fair and Equitable Treatment (United Nations, 1999) 10; UNCTAD (n. 7) 23–28.

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arguably either add to, or detract from, the autonomous demands placed on the host State, inversely strengthening or weakening investment protection, depending on one’s take on the external comparator. Incidentally, this empowers arbitral tribunals and has the potential to disconcert treaty parties, who might resent this indirect relinquishing of sovereign treaty-making authority.24 8 Quite how autonomous FET as assured in treaties is, has been a matter of uncertainty and controversy. The debate is at its most liveliest in arbitral practice and scholarship when it comes to the relationship between FET and the customary international law minimum standard for the treatment of aliens.25 It has flared up notably in the context of NAFTA. Pursuant to a binding interpretation by NAFTA’s Free Trade Commission, FET in Article 1105(1) of NAFTA has to be equated with the international minimum standard.26 9 This was a response to what was considered excessively interventionist arbitral jurisprudence. In one such instance, in S. D. Myers, a tribunal had previously found the customary minimum standard to be ‘a floor below which treatment’ should not drop.27 Even more so, the decision in Pope & Talbot was considered a warning shot across the bows of NAFTA-participating host States, with the tribunal entertaining the view that Article 1105(1) demanded not only international law minimum standards, but also additional ‘fairness elements.’28 Accordingly, in an attempt to reclaim the meaning of FET under NAFTA and hem in its scope, an upper ceiling was urged when the Free Trade Commission ‘clarified and reaffirmed’ in 2001 that FET under NAFTA did not require anything beyond the customary international minimum standard. This note of interpretation made

24 For an example of a more demanding standard (i.e. more investor-friendly ‘floor’) see Azurix Corp v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006, para. 361. But even then techniques exist to play down potential differences, as will be illustrated infra notes 38– 43 and accompanying text. For a less onerous equation of the standard see CMS Gas Transmission Co v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para. 284. 25 See e.g. Alexander Orakhelashvili, ‘The Normative Basis of “Fair and Equitable Treatment”’ (2008) 46 AVR 74–105; Andrew Newcombe and Lluís Paradell (n. 14) 264–275; Hussein Haeri, ‘A Tale of Two Standards: “Fair and Equitable Treatment” and the Minimum Standard in International Law’ (2011) 27 J. Int’l Arb. 27–46. See in detail also Martins Paparinskis, The International Minimum Standard and Fair and Equitable Treatment (Oxford University Press, 2013); Andrea Schernbeck, Der Fair and Equitable Treatment Standard in internationalen Investitionsschutzabkommen (Nomos, 2013) 24–47, 145–146. 26 NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions (31 July 2001), available at http://www.state.gov/documents/organization/38790.pdf. 27 S.D. Myers Inc. v. Canada, UNCITRAL (NAFTA), First Partial Award, 13 November 2000, para. 259. 28 Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award on the Merits of Phase 2, 10 April 2001, para. 110.

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its way into subsequent investment agreements29 and has led some tribunals to apply a more reserved approach to FET.30 But even this limitation is not set in stone. Leaving aside arguments that the 10 upper limit approach is impermissible or specific to NAFTA for more technical reasons,31 the content of the customary international minimum standard is itself an unruly horse. It is often considered to have been expressed in the (in)famous Neer case, in which the United States–Mexican General Claims Commission in 1926 stated that: The treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.32

While this imposes a high threshold, the standard is widely thought to have 11 evolved over the course of time.33 Arguably, such a dynamic view fits with broader developments since the heyday of traditional international law, including the rise of respect for individuals and the shrinking of the etatist mindset according to which ‘the King can do no wrong.’

29 Compare e.g. Agreement between the Government of Canada and the Government of the Czech and Slovak Federal Republic for the Promotion and Protection of Investment of 15 November 1990 (Canada–Czech and Slovak Federal Republic BIT) Art. III(1) (‘treatment in accordance with principles of international law’) with Agreement between Canada and the Czech Republic for the Promotion and Protection of Investments of 6 May 2009 (Canada– Czech Republic BIT) Art. III(1)(b) (‘do not require treatment in addition to or beyond that which is required by the customary international law minimum standard’). Examples of what would fall short of the minimum standard are sometimes added, see e.g. Treaty between the Government of the United States of America and the Government of the Republic of Rwanda concerning the Encouragement and Reciprocal Protection of Investment of 19 February 2008 (Rwanda–United States BIT) Art. 5(2)(a). Note that some of the more recent ‘ceiling’ agreements do not involve a NAFTA participant, e.g. China–Peru FTA of 28 April 2009, Art. 132; Malaysia–New Zealand FTA of 26 October 2009, Art. 10.10; India–Korea Comprehensive Economic Partnership Agreement of 7 August 2009 (CEPA) Art. 10.4. 30 See e.g. Glamis Gold Ltd v. USA, UNCITRAL (NAFTA), Award, 8 June 2009, paras. 549 and 627. 31 See Christoph Schreuer (n. 12) 359, 363–364 (concerning the special features of Art. 1105 of NAFTA). 32 L.F.H. Neer and Pauline E. Neer (USA) v. Mexico, Opinion, 15 October 1926, 4 UNRIAA 61– 62. 33 See Pope & Talbot v. Canada (n. 28) paras. 58 et seq.; Mondev International Ltd. v. USA, ICSID Case No. ARB(AF)/99/2 (NAFTA), Award, 11 October 2002, para. 125; ADF Group Inc v. USA, ICSID Case No. ARB(AF)/00/1 (NAFTA), Final Award, 9 January 2003, para. 179; Chemtura Corporation v. Canada, UNCITRAL (NAFTA), Award, 2 August 2010, para. 122; Railroad Development Corporation (RDC) v. Guatemala, ICSID Case No. ARB/07/23, Award, 29 June 2012, para. 218; SAUR International S.A. v. Argentina, ICSID Case No. ARB/ 04/4, Décision sur la Compétence et sur la Responsabilité, 6 June 2012, para. 494; see also Ian Laird, ‘Betrayal, Shock and Outrage – Recent Developments in NAFTA Article 1105’ (2003) Asper Rev. Int’l Bus. & Tr. L. 185, 202–214; Barnali Choudhury, ‘Evolution or Devolution? – Defining Fair and Equitable Treatment in International Investment Law’ (2005) 6 JWIT 297– 320; Marcela Klein Bronfman, ‘Fair and Equitable Treatment: An Evolving Standard’ (2006) 10 Max Planck UN YB 609–680.

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The upshot of this rejection of the ‘frozen in time’ or ‘encased in amber’ view of the customary minimum standard is that, in arbitral practice, the external linkage has hardly led to differing interpretations and applications of FET, irrespective of which governing standard is ultimately assumed,34 with the decision in Glamis Gold v. United States perhaps being the main exception.35 The customary take on what an investor can demand will then likely mirror any interpretation of a more recent autonomous treaty. 13 Indeed, numerous tribunals commenting on whether the assurance is an autonomous treaty standard or equivalent to customary international law observe that ‘it appears that the difference between the Treaty standard [of FET] and the customary minimum standard, when applied to the specific facts of a case, may well be more apparent than real.’36 Quite how context- and tribunal-dependent FET can be is demonstrated by the NAFTA decision in Merrill & Ring Forestry, which, while aware of Glamis Gold, again considered customary international law on this point to be broader and to have evolved in a more investment-friendly direction since the days of Neer, robustly opining that ‘in the end, the name assigned to the standard does not matter.’37 14 Several factors besides the possible evolution of custom further erode supposed differences between treaty law and the international law minimum level of protection. First, there is nothing per se to assume that one standard (i.e. the customary minimum) necessarily takes a narrow and dim view to the protection of foreign investment while the other standard (i.e. conventional FET) is inescapably over-generous to investors or a wide open invitation for arbitral deci12

34 See Franck Charles Arif v. Moldova, ICSID Case No. ARB/11/23, Award, 8 April 2013, para. 529 (considering the debate to be ‘increasingly of historic significance’); Deutsche Bank AG v. Sri Lanka, ICSID Case No. ARB/09/02, Award, 31 October 2012, para. 419; Grand River Enterprises Six Nations Ltd. v. USA, UNCITRAL (NAFTA), Award, 12 January 2011, para. 214–215. Cf. Nicolas Angelet, ‘Fair and Equitable Treatment’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law, vol. III (Oxford University Press, 2012) 1097. 35 Glamis Gold v. USA (n. 30) paras. 598–616. The tribunal insisted on a difference between an autonomous interpretation of FET and the customary international minimum standard. It deduced from that difference that the customary basis of FET in Art. 1105(1) of NAFTA required a claimant to show State practice supported by opinio juris in order to impose concrete restrictions on certain State conduct that went beyond what the standard required in the 1920s. For a critique of that approach, see Stephan W. Schill, ‘Case Note – Glamis Gold, Ltd. and United States of America’ (2010) 104 AJIL 253–259; Margaret Ryan, ‘Glamis Gold, Ltd v. The United States and the Fair and Equitable Treatment Standard’ (2011) 56 McGill L. J. 919, 947–955 (detecting a ‘major deviation’ in that the investor now had to do the heavy, and perhaps impossible, lifting as concerns proving customary international law). 36 Saluka v. Czech Republic (n. 12) para. 291. Similarly also Azurix Corp. v. Argentina (n. 24) para. 361; Biwater Gauff (Tanzania) Ltd. v. Tanzania, ICSID Case No. ARB/05/22, Award, 24 July 2008, para. 592; Rumeli Telekom AS and Telsim Mobil Telekomikasyon Hizmetleri AS v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, para. 611. 37 Merrill & Ring Forestry LP v. Canada, UNCITRAL (NAFTA), Award, 31 March 2010, paras. 205–213; cf. also RDC v. Guatemala (n. 33) para. 218.

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sionism.38 The brevity and bareness of most FET formulations found in investment treaties certainly allows for a wide range of arguments either way. Second, while this is again contested, some tribunals consider that the inclusion of FET in the vast web of investment treaties has transformed the standard itself into customary international law.39 Third, adopting a historical perspective, it is arguable that through the conclusion of investment treaties, capital-exporting countries deliberately sought to resist challenges mounted during the New International Economic Order (NIEO) of the 1970s, a project largely propagated through the General Assembly of the United Nations. Investment agreements in general are thus vehicles to affirm in treaty form the continuing validity of the standards of investment protection capital-exporting countries defended under customary international law, including the Hull formula of ‘prompt, adequate and effective’ compensation for expropriation, but also the international minimum standard of treatment.40 Last but by no means least, quite what the minimum standard is under customary international law is itself perennially controversial and difficult to ascertain without more.41 In order to concretise such a standard, arbitral tribunals regularly refer to decisions of other dispute settlement bodies without distinguishing whether those findings were actually based on the customary variant or an autonomous treaty standard.42 This copious use of precedent by arbitral tribunals might again suggest that there is no categorical difference between the content of the customary international law minimum standard and an autonomously worded FET treaty standard. Instead, both variants converge into a general principle of international investment law concerning the treatment of foreign investors by host States.43 This is in line with the more general observation that international investment law has developed into a quasi-multilateral system of international law and dispute resolution even though it is based on bilateral treaties and implemented by one-off arbitral tribunals.44 This does not, however, mean that certain treaty

38 See Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2007) 203. 39 See e.g. Pope & Talbot v. Canada (n. 28) para. 62; similarly Mondev v. USA (n. 33) para. 125; see also Steffen Hindelang, ‘Bilateral Investment Treaties, Custom and a Healthy Investment Climate – The Question of Whether BITs Influence Customary International Law Revisited’ (2004) 5 JWIT 789. 40 See Santiago Montt, State Liability in Investment Treaty Arbitration (Hart, 2009) 62–74; José Alvarez, ‘A Bit on Custom’ (2009) 42 NYU JILP 17, 33 and 41. 41 See UNCTAD (n. 7) 28–29; see also RDC v. Guatemala (n. 33) paras. 216–217; SAUR International v. Argentina (n. 33) para. 493. 42 Cf. Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 302 (observing that ‘[o]n many occasions, the issue will not even be whether the fair and equitable treatment standard is different or more demanding than the customary standard, but only whether it is more specific, less generic and spelled out in a contemporary fashion so that its application is more appropriate to the case under consideration’). Again, the tribunal in Glamis Gold v. USA (n. 30) adopted a divergent approach. 43 See also Santiago Montt (n. 40) 298–310.

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regimes, such as NAFTA, do not show tendencies to develop increasingly into an independent sub-system of international law and dispute resolution.45 Nonetheless, it would seem that fair and equitable treatment remains a global standard of international investment law that is nonetheless capable of exhibiting certain nuances depending on the text, context and circumstances of each treaty in which it is contained. 19 The corollary is that something other than supposed textual truisms or the cunning of history is needed to render FET satisfactorily operable in everyday practice.46 This chapter hence develops a conceptual and normative understanding of FET. It does so against the background of understanding international investment law as a public law framework, rather than a purely transactional form of inter-State private law.47 Instead of exhaustively recounting the minutiae of decided cases,48 it focuses on framing the elements arbitral tribunals attribute to FET in a more conceptual way and attempts to provide a general and principlebased framework of analysis for the standard’s application and interpretation. 20 Against that background, the present chapter shows that recurrent elements appearing in arbitral jurisprudence can be understood as and united under the concept of the rule of law.49 The underlying assumption is that FET has an independent and genuinely normative content. It has a quasi-constitutional function that can serve as a yardstick for the exercise of the host State’s administrative, judicial and legislative activity vis-à-vis foreign investors. This allows for deductive application. Viewed from this perspective, existing arbitral jurisprudence can be reconstructed as part of an emerging global regime governing foreign investments, which inter alia limits the conduct of host States relating to it. 21 Turning from content to method, conceptualising FET as an embodiment of the rule of law mainly draws on a comparative public law approach that takes a

44 See generally Stephan W. Schill, The Multilateralization of International Investment Law (Cambridge University Press, 2009). See also Stephan W. Schill, ‘Multilateralization: An Ordering Paradigm in International Investment Law’, in this volume. 45 See Jacob Stone, ‘Arbitrariness, the Fair and Equitable Treatment Standard, and the International Law of Investment’ (2012) 25 Leiden J. Int’l L. 77, 103‑105; cf. also the approach in Patrick Dumberry, The Fair and Equitable Treatment Standard: A Guide to NAFTA Case Law on Article 1105 (Kluwer Law International, 2013). 46 Cf. Roland Kläger (n. 14) 88. 47 See Stephan W. Schill, ‘International Investment Law and Comparative Public Law – an Introduction’ in Stephan W. Schill (n. 13) 3, 10 et seq. 48 For commentary summing up the jurisprudence in more detail, see Andrew Newcombe and Lluís Paradell (n. 14) 279–296; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2012) 145–160; Campbell McLachlan, Laurence Shore and Matthew Weiniger (n. 38) 226–247. 49 This roughly, but in a non-domestic context sometimes inadequately, accords to the concept of Rechtsstaat or état de droit. Note that Kenneth Vandevelde, ‘A Unified Theory of Fair and Equitable Treatment’ (2010) 43 NYU JILP 43, 49–53 has put forward a similar claim, akin to the argument developed earlier in Stephan W. Schill, ‘Fair and Equitable Treatment under Investment Treaties as an Embodiment of the Rule of Law’ (2006) 6 IILJ Working Paper (Global Administrative Law Series), available at http://www.iilj.org/publications/documents/ 2006-6-GAL-Schill-web.pdf.

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bird’s eye view of the restrictions of governmental activity in different legal systems. Hence, concretising FET as suggested here is a comparative law exercise that looks to general principles of public law in domestic and international legal regimes that embrace an institutional design prescribing certain standards for the exercise of public power in administrative and judicial proceedings as well as via legislation.50 The comparative law take is certainly not a value-free or neutral exercise. 22 But, done properly, it is quite different from simply recounting or rejecting past arbitral pronouncements. All the same, the present approach could also be used to voice possible tensions between FET as a legal value and competing public interests. This underscores that the former cannot be understood as an absolute guarantee but rather as a principle that allows for interaction between investment protection and other concerns.51 The ultimate aim is to find ways to promote predictability and uniformity in the standard’s interpretation and application while avoiding a simplistic one-size-fits-all approach that is blind to particular circumstances. This understanding of FET can not only be used to reconstruct and predict 23 patterns in arbitral jurisprudence, but can also be linked to the normative agenda of investment treaties themselves, that is the treaties’ object and purpose, and an analysis of the political economy of international investment treaties that points to benefits the adoption of the concept of the rule of law can have. Such an approach suggests drawing, in a comparative perspective, on the functions of public law to limit, but also to legitimise, State action vis-à-vis private actors. This can help to clarify the meaning of FET and its subelements as applied in 24 arbitral practice.52 Yet, its ultimate purpose is to develop general principles of law in the sense of Article 38(1)(c) of the Statute of the International Court of Justice (ICJ) which would inform the interpretation and application of the FET standard.53 This coincides with an attempt to link fair and equitable treatment to standards of good governance, as suggested by Pedro Nikken in his separate 50 On the interrelation between investment law and comparative public law see Stephan W. Schill (n. 47) 26–29. More in depth on the methodology to be used to develop general principles of law and their impact on the application and interpretation of investment treaties see Stephan W. Schill, ‘General Principles of Law and International Investment Law’ in Tarcisio Gazzini and Eric De Brabandere (eds), International Investment Law – The Sources of Rights and Obligations (Brill, 2012) 133–181. For more on the proper methodology see also Jaye Ellis, ‘General Principles and Comparative Law’ (2011) 22 EJIL 949–971. 51 See Rainer Hofmann and Christian J. Tams (eds), International Investment Law and its Others (Nomos, 2012). 52 See most recently Toto Costruzioni v. Lebanon (n. 13) para. 193 (‘Furthermore, fair and equitable treatment has to be interpreted with international and comparative standards of domestic public law as a benchmark.’). 53 Notably, such a comparative law approach already explicitly forms part of the 2004 and 2012 United States Model BITs that define fair and equitable treatment as ‘includ[ing] 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.’ U.S. Model BIT (2004) and (2012) Art. 5(2)(a); the latter is reprinted in Rudolf Dolzer and Christoph Schreuer (n. 48) 377.

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opinions in the Suez cases.54 It also reflects the close interaction of general principles of law and investment treaty law as sources of international investment law and in fact the function of general principles of law to clarify the normative concept underlying fair and equitable treatment. 25 This interaction was also noted by the NAFTA tribunal in Merrill & Ring v. Canada, which stated in the context of interpreting the fair and equitable treatment standard in Article 1105(1) of NAFTA: The Tribunal must note that general principles of law also have a role to play in this discussion. 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 a part of international law. Each question will have to be addressed on its own merits, as some might be closely related to such principles while other issues are not. Good faith and the prohibition of arbitrariness are no doubt an expression of such general principles and no tribunal today could be asked to ignore these basic obligations of international law. The availability of a secure legal environment has a close connection too to such principles and transparency, while more recent, appears to be fast approaching that standard.55

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General principles of law developed on the basis of comparative analysis may become relevant both for the interpretation of standards of treaties in international investment treaties, but also in respect of customary international law. After all, even historically the breach of the international minimum standard required, as expressed in Neer, ‘an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.’56 This, by definition, involves recourse to comparative law in order to determine the relevant international standard.57 In 54 See supra n. 11, para. 20 (stating that ‘[i]t is unreasonable to assume that the States would have been willing to commit themselves beyond what the canons of good governance would require. With the propriety of the government “of a reasonably well-organized modern State.” On the contrary, it is illogical to understand that the intention of the Parties was to extend the protection of fair and equitable treatment that they undertook to give to the investments (not investors) of the other Party, above what is implied in good governance, just as it would be if treatment below what is expected from good governance were offered.’ (quoting Asian Agricultural Products Ltd. v. Sri Lanka, ICSID Case No. ARB/87/3, Final Award on Merits and Damages, 27 June 1990, para. 170) – emphasis in the original; internal footnote omitted). 55 Merrill & Ring v. Canada (n. 37) para. 187. 56 L.F.H. Neer v. Mexico (n. 32) 61–62. 57 See Edwin Borchard, ‘The “Minimum Standard” of the Treatment of Aliens’ (1940) 38 Mich. L. Rev. 448–449 (explaining that the customary international law minimum standard ‘[i]s also composed of the uniform practices of the civilized states of the western world who gave birth and nourishment to international law. Long before article 38 of the Statute of the Permanent Court of International Justice made the “general principles of law recognized by civilized states” a source of common international law, foreign offices and arbitral tribunals had relied on such general principles to work out a loose minimum which they applied constantly in interstate practice.’). See also Restatement (Second) of Foreign Relations Law of the United States (1965), § 165(2) (providing that ‘[t] he international standard of justice (…) is the standard required for the treatment of aliens by: (a) the applicable principles of international law as established by international custom, judicial and arbitral decisions, and other recognized sources or, in the absence of such applicable principles; (b) analogous principles of justice generally recognized by states that have reasonably developed legal systems.’).

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sum, it therefore seems likely that comparative analysis and the quest for general principles will become an increasingly relevant source in international investment law and investor-State arbitration, not least in order to understand the normative content of FET and to further concretise it. C. Conceptualising Fair and Equitable Treatment as an Emanation of the Rule of Law 1. Overcoming Difficulties in Defining Fair and Equitable Treatment

When arbitral tribunals first started to apply FET provisions in investment 27 treaty arbitrations, they regularly criticised the fact that the standard was not further defined and generally offered little guidance for its application to concrete circumstances.58 Accordingly, earlier arbitral jurisprudence has not managed to develop a uniform methodology for the standard’s application.59 The core reason for this is that the basic ideas of fairness and equitableness are inherently vague.60 The traditional interpretative toolbox of international lawyers, i.e. Articles 31 and 32 of the Vienna Convention on the Law of Treaties (VCLT) of 1969,61 is not able to undo this. The standard does not have a consolidated and conventional core meaning that one can easily apply; it also is not concretised by State practice, nor elucidated by travaux préparatoires. It is against this backdrop that the practice of not obsessing about specific but 28 largely synonymous formulations of FET is defensible once one recalls that legal text does not equal or exhaust its meaning. Of course it is possible to replace the terms ‘fair and equitable’ with similarly vague and malleable phrases such as ‘just’, ‘even-handed’, ‘un-biased’, or ‘legitimate’,62 but that does not succeed in clarifying its normative content.63 Fairness and equitableness are further ambiguous in that they could refer to notions of equality and substantive justice, or to less grand notions of procedural due process. 58 See Alex Genin, Eastern Credit Ltd., Inc. and AS Baltoil v. Estonia, ICSID Case No. ARB/ 99/2, Award, 25 June 2001, para. 367; Consortium RFCC v. Maroc, ICSID Case No. ARB/ 00/6, Sentence Arbitrale, 22 December 2003, para. 51; Ronald S. Lauder v. Czech Republic, UNCITRAL, Final Award, 2 September 2001, para. 292; CMS v. Argentina (n. 24) para. 273. Cf. UNCTAD (n. 7) 2, 11–12, 103. 59 Cf. e.g. Mark Kantor, ‘Fair and Equitable Treatment: Echoes of FDR’s Court-Packing Plan in the International Law Approach Towards Regulatory Expropriation’ (2006) 5 LPICT 231– 256. 60 On vagueness and legal and linguistic indeterminacy see Timothy Endicott, Vagueness in Law (Oxford University Press, 2000) 1, 9–12. 61 1155 UNTS 331. The rules of interpretation under the VCLT further constitute customary international law. See e.g. Case Concerning the Dispute Regarding Navigational and Related Rights (Costa Rica v. Nicaragua), Judgment, 13 July 2009, ICJ Rep. 2009, 213, para. 47. 62 Cf. MTD Equity Sdn Bhd and MTD Chile SA v. Chile, ICSID Case No. ARB/01/7, Award, 25 May 2004, para. 113; Siemens AG v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 290; Azurix Corp. v. Argentina (n. 24) para. 360; National Grid plc v. Argentina, UNCITRAL, Award, 3 November 2008, para. 168. 63 Cf. Saluka v. Czech Republic (n. 12) para. 297.

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Likewise, a teleological interpretation hardly provides more specific meaning. Even though the purpose of current investment treaties suggests a liberal economic approach geared towards the protection and promotion of foreign investment, it does not enable tribunals directly to translate the broad language of FET into specific ‘safety zones’ for foreign investors. Moreover, it is difficult to predict whether a specific interpretation will actually encourage investment flows or, on the contrary, will have the effect of chilling the investment climate due to host States admitting less foreign investment. 30 At the same time, this vagueness does not of course absolve tribunals from their duty to give reasoned decisions.64 Nor is it satisfactory from a substantive point of view. Currently, many investment tribunals do not follow a particularly lucid (let alone uniform) methodology.65 Some extensively describe the facts of a case and simply characterise them as a violation of FET.66 Besides the hint of brute decisionism, the problem with this approach is that it does not elucidate the normative content of FET and obscures the reasoning underlying the decision, making subsequent contestation and refinement difficult. Other tribunals simply posit an abstract standard as part of FET and subsequently subsume the facts of the case under this standard.67 But the normative vanishing point remains unclear. 31 Finally, most tribunals, given the increasing number of arbitral awards that are publicly available, apply FET with a strong reference to arbitral precedent.68 This approach has the benefit of allowing tribunals to approach the interpretation of FET in a case-sensitive manner; it allows gradations based on specific distinctions and thus incremental evolution. At the same time, legal decisionmakers can take account of the fact that arbitral jurisprudence, including that on FET, is a source of expectations for investors and States regarding the future application of the standard principles of international investment law, even if arbitral precedent is not said to be formally binding.69 Nevertheless, this last approach, while perhaps a (deliberate) route to ensure consistency and predictabili29

64 See e.g. ICSID Rules of Procedure for Arbitration Proceedings (2006) Rule 47(1)(i); UNCITRAL Arbitration Rules (2010) Art. 34(3). 65 Cf. Rudolf Dolzer (n. 23) 93 et seq. 66 From the early arbitral jurisprudence, see e.g. Mondev v. USA (n. 33) para. 118; similarly Eastern Sugar BV v. Czech Republic, SCC Case No. 88/2004, Partial Award, 27 March 2007, paras. 222–343. 67 From the early arbitral jurisprudence, see e.g. S.D. Myers v. Canada (n. 27) para. 134. 68 For an earlier example, see e.g. Waste Management Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3 (NAFTA), Award, 30 April 2004, para. 89 et seq. Meanwhile virtually all tribunals define and apply FET in relation to the statements contained in earlier arbitral jurisprudence, see only Total v. Argentina (n. 13) para. 106 et seq. 69 On the importance of precedent in the development of arbitral jurisprudence, see Gabrielle Kaufmann-Kohler, ‘Arbitral Precedent: Dream, Necessity or Excuse?’ (2007) 23 Arb. Int. 357–378; Stephan W. Schill (n. 44) 321–357. For empirical analyses of the impact of precedent, see Jeffery Commission, ‘Precedent in Investment Treaty Arbitration – A Citation Analysis of a Developing Jurisprudence’ (2007) 24 J. Int’l Arb. 129–158; Ole K. Fauchald, ‘The Legal Reasoning of ICSID Tribunals – An Empirical Analysis’ (2008) 19 EJIL 301–364. On precedent as a general and omnipresent concept that simultaneously enables and constrains in-

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ty,70 remains problematic for at least two related reasons. First, there is the very real possibility that prior methodologically suspect findings are transplanted. Second, precedent methodology in this field is itself woefully underdeveloped. By failing to put forward a clear normative, i.e. prescriptive, content of FET, 32 arbitral tribunals run the risk of facing the reproach that they handle the standard as a flexible tool of ex post facto control of host States’ measures based on the arbitrators’ ideological inclinations or gut feelings as to what might be considered fair and equitable. The assumption that personal convictions, instead of prescriptive legal standards, play a major role in applying FET is nourished by the frequent but unhelpfully anthropomorphic reference to treatment that ‘shocks, or at least surprises, a sense of juridical propriety’71 as a yardstick for the standard’s application.72 In addition, some tribunals rather openly opine that [t]he concept of ‘fair and equitable treatment’ is not precisely defined in the BIT, but appears to give each arbitral tribunal much latitude (...) The BIT therefore leaves the precise scope of the ‘fair and equitable treatment’ standard to the determination of the Arbitral Tribunal.73

This view of judges or arbitrators as interstitial or delegated law-makers is 33 neither new nor uncommon,74 but constantly in danger of surrendering legal normativity to the sheer happenstance of who the ultimate arbiter is.75 How then to cut this Gordian knot? There is much to be said for expounding 34 more clearly a normative core of FET, not necessarily in order to condone current arbitral practice, but rather to provide firmer ground for future legal decision-making and policy responses.76 Keeping one foot planted in the present context, this means treating FET as an emanation of recurrent public law characteristics, be they administrative or constitutional, as found in most domestic legal systems adhering to forms of democratic constitutionalism77 and in non-domestic legal regimes purveying comparable variants based on the rule of law.78

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ternational adjudication see Marc Jacob, ‘Precedents: Lawmaking Through International Adjudication’ (2011) 12 German L. J. 1005–1032. Cf. Charles H. Brower II, ‘Investor–State Disputes under NAFTA: The Empire Strikes Back’ (2003) 40 Colum. J. Transnat’l L. 43, 56 (suggesting that FET constitutes ‘an intentionally vague term, designed to give adjudicators a quasi-legislative authority to articulate a variety of rules necessary to achieve the treaty’s object and purpose in particular disputes’). Similarly Susan D. Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions’ (2005) 73 Fordham L. Rev. 1521, 1589; Kenneth J. Vandevelde, United States Investment Treaties: Policy and Practice (Aspen, 1992) 76; Rudolf Dolzer (n. 23) 89. See e.g. Técnicas Medioambientales Tecmed SA v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 154 (quoting the decision of the International Court of Justice in Elettronica Sicula SpA (ELSI) (USA v. Italy), Judgment, 20 July 1989, ICJ Rep. 1989, 15, para. 128). See UNCTAD (n. 7) 98 (fn. 77); Catherine Yannaca-Small (n. 3) 2 et seq. Biwater Gauff v. Tanzania (n. 36) paras. 593–595 (emphasis in the original); similarly Rumeli v. Kazakhstan (n. 36) para. 610. For a recent intimation see ITLOS, Case No. 16, Dispute Concerning Delimitation of the Maritime Boundary Between Bangladesh and Myanmar in the Bay of Bengal (Bangladesh/Myanmar), Declaration of Judge Wolfrum of 14 March 2012 (pp. 2–3). This consideration is also at the origin of criticism of FET by Pedro Nikken, see supra n. 11. For suggestions as to the latter see UNCTAD (n. 7) 103–116.

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Proceeding from a common starting point,79 the main thrust of these rule of law-centric approaches is the aspiration to subject State power to legal control,80 to effectuate individual rights81 and to make sovereign action more foreseeable.82 The rule of law here refers to the procedural quality of law as providing guidance for human affairs and comprises the institutional aspiration that government has to use law as a means of exercising power.83 For one, this translates into mandatory requirements for the deployment of legal processes84 and requires that individuals whose interests are affected by the decisions of (...) officials have certain rights (...) includ[ing] the right to a hearing before a decision is made, the right to have the decision made in an unbiased and impartial fashion, the right to know the basis of the decision so that it can be contested, the right to reasons for the official’s decision, and the right to a decision that is reasonably justified by all relevant legal and factual considerations.85

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In short, the rule of law requires that the affected individual is recognised as a subject with certain rights, which cannot simply be ignored in the decision-making process of public authorities.86 This is also the cradle of the idea of propor-

77 For present purposes, little ultimately turns on a strict delineation between constitutional and administrative principles. See Peter Cane, Administrative Law (Oxford University Press, 2004) 1–2, 7–8; Helmuth Schulze-Fielitz, ‘Article 20’ in Horst Dreier (ed), Grundgesetz – Kommentar (Mohr Siebeck, 2006), vol. II, paras. 1–33 (describing the development of the concept of the rule of law as a central principle of constitutionalism). See also the contributions in Rainer Hofmann, Joseph Marko, Franz Merli and Ewald Wiederin (eds), Rechtsstaatlichkeit in Europa (Müller, 1996); Armin von Bogdandy, Pedro Cruz Villalón and Peter Michael Huber (eds), Ius Publicum Europaeum (Müller, 2007), vol. I; Mortimer Sellers and Tadeusz Tomaszewski (eds), The Rule of Law in Comparative Perspective (Springer, 2010). 78 A good example hereof is the European Union (EU). The founding treaties expressly mention the rule of law, e.g. in the Preamble and Articles 2 and 21 of the Treaty on European Union (TEU), [2010] OJ C83/13. Indeed, the EU famously considers itself a ‘community of law.’ See e.g. Opinion of Advocate General Kokott in Case C-362/05 P, 15 February 2007, Jacques Wunenburger v. Commission, ECR I-4333, para. 42. See further Armin von Bogdandy and Jürgen Bast (eds), Principles of European Constitutional Law (Hart, 2010) 28–29. 79 On the development of the rule of law and its politico-philosophical background, see Brian Tamanaha, On the Rule of Law – History, Politics, Theory (Cambridge University Press, 2004). For the thesis that the rule of law is a concept common to civil and common law see Danilo Zolo, ‘The Rule of Law: A Critical Appraisal’ in Pietro Costa and Danilo Zolo (eds), The Rule of Law (Springer, 2007) 3. 80 Danilo Zolo (n. 79) 21–22. 81 David Dyzenhaus, ‘The Rule of (Administrative) Law in International Law’ (2005) 68 Law & Contemp. Probs. 127, 130; similarly Jeremy Waldron, ‘Is the Rule of Law an Essentially Contested Concept (in Florida)?’ (2002) 21 Law & Phil. 137, 158; Konrad Hesse, ‘Der Rechtsstaat im Verfassungssystem des Grundgesetzes’ in Ernst Forsthoff (ed), Rechtsstaatlichkeit und Sozialstaatlichkeit (Wissenschaftliche Buchgesellschaft Darmstadt, 1968) 557, 560 et seq.; Danilo Zolo (n. 79) 24–25. 82 Cf. Danilo Zolo (n. 79) 24–25. 83 See Richard Fallon, ‘“The Rule of Law” as a Concept in Constitutional Discourse’ (1997) 97 Colum. L. Rev. 1, 14 et seq., on the ‘formalist’ ideal in the rule of law. 84 Ibid., at 18 et seq. (on the legal process ideal understanding of the rule of law). 85 David Dyzenhaus (n. 81) 129. 86 For the avoidance of doubt, this public law angle does not necessarily go as far as to connote any human rights dimensions. The latter’s specific focus on individual autonomy and integrity

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tionality, which demands a proper means-ends relationship as concerns public action.87 Moreover, the rule of law has implications for the institutional design of government. It mandates a basic separation of powers (or a system of checks and balances) and the possibility to seek review of public acts by independent adjudication.88 Such a primarily procedural understanding of the rule of law prevails in many legal traditions.89 While this approach might at first blush perhaps not seem much more con- 37 crete, given the different historic developments and varying notions which the rule of law is traditionally associated with in different legal systems,90 it constitutes a significant step in providing normative content to FET that goes beyond searching for an (often imaginary) meeting of treaty party minds. Furthermore, it opens up a well-stocked toolbox to argue FET points either pro investor or pro State, namely comparative public law methodology involving analysis of how domestic legal systems understand and apply the concept of the rule of law. Such an analysis can come up with certain common ideas and standards that can be used to put flesh on otherwise skeletal international agreements and help to identify features of FET in international investment law. 2. Principles of Fair and Equitable Treatment

Although divergent decisions necessarily crop up when a multiplicity of legal 38 minds makes a large number of decisions over the course of time, let alone ad hoc arbitral tribunals lacking a tiered adjudicatory hierarchy that might encourage consistency, more recent arbitral jurisprudence tends to converge in its application of FET. This is so mainly because many tribunals interpret and apply standards of treatment in investment treaties with a strong focus and emphasis on precedents, coupled with the idea that they should follow a well-established line of cases (jurisprudence constante), all other things being equal.91

87 88 89 90 91

and grounding in human dignity is a different issue. Nonetheless, there are arguably areas of overlap and common roots of human rights and a substantive concept of the rule of law. See infra notes 211–254 and accompanying text. David Dyzenhaus (n. 81) 130 et seq. See e.g. Helmuth Schulze-Fielitz (n. 77) Article 20, paras. 13 et seq., with respect to the German tradition; see also Mark Kantor (n. 59) with respect to the development of the understanding of due process in US Supreme Court jurisprudence. See only Jeremy Waldron (n. 81). Saipem S.p.A. v. Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction and Provisional Measures, 21 March 2007, para. 67 (pointing out that ‘[t]he 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.’). Similarly, International Thunderbird Gaming Corporation v. Mexico, UNCITRAL (NAFTA), Arbitral Award, 26 January 2006, Separate Opinion of Thomas Wälde, para. 16 (stating that ‘[w]hile individual arbitral awards by themselves do not as yet constitute a binding precedent, a consistent line of reasoning developing a

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Arbitrators are known to visibly summarise the disparate cases into manageable abstractions, thereby producing lists of elements or indicators of what the standard entails.92 They thereby use the standard to supervise the exercise of sovereign powers by host States, essentially interpreting FET as a public (international) law concept.93 This concept is independent from other international law standards, so that a breach of another international obligation of the host State does not automatically result in a breach of FET.94 FET is also not used as a concept to judge the adequateness of contractual arrangements between foreign investors and host States or conduct of States as an ordinary contracting party.95 Nor do tribunals substitute their own views on the comparative worth of a decision for those of the national decision-makers. Instead, in relying on recurring patterns in arbitral jurisprudence, arbitrators fan out several related facets in a non-exhaustive fashion that give substance to the public dimension of investment law.96 Such typologies fill in the blanks left by more abstract discussions on the relation of treaty law to customary standards or by (often futile) textual

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principle and a particular interpretation of specific treaty obligations should be respected; if an authoritative jurisprudence evolves, it will acquire the character of customary international law and must be respected. A deviation from well and firmly established jurisprudence requires an extensively reasoned justification.’). See e.g. Biwater Gauff v. Tanzania (n. 36) paras. 593–603. Cf. Consortium RFCC v. Maroc (n. 58) para. 51 (‘Pour que la violation alléguée du contrat constitue un traitement injuste ou inéquitable au sens de l’Accord bilatéral, il faut qu’elle résulte d’un comportement exorbitant de celui qu’un contractant ordinaire pourrait adopter. Seul l’Etat, en tant que puissance publique, et non comme contractant, a assumé des obligations au titre de l’Accord bilatéral.’); see also Bayindir Insaat Turizm Ticaret Ve Sanayi AS v. Pakistan, ICSID Case No. ARB/03/29, Award, 27 August 2009, para. 180 (with further references). On the difference between treaty claims and contract claims, see Stephan W. Schill, ‘Enabling Private Ordering: Function, Scope and Effect of Umbrella Clauses in International Investment Treaties’ (2009) 18 Minn. J. Int’l L. 1, 27–31 (with further references). The question of whether breach by the host State of another international legal obligation translates directly into a breach of FET has played a certain role with respect to measures that breach WTO law and have effect on trading relations of foreign investors. Similar situations can also arise with respect to other treaties, for example environmental treaties. On the WTO law-related discussion see Gaetan Verhoosel, ‘The Use of Investor–State Arbitration under Bilateral Investment Treaties to Seek Relief for Breaches of WTO Law’ (2003) J. Int’l Econ. L. 493–506; Charles O. Verrill, ‘Are WTO Violations also Contrary to the Fair and Equitable Treatment Obligations in Investor Protection Agreements?’ (2005) ILSA J. Int’l & Comp. L. 287–295. In our view, breach of other international legal instruments does not per se translate into a breach of FET. It is possible, however, that other international legal instruments create legitimate expectations the breach of which would be contrary to FET. Cf. infra notes 125– 160 and accompanying text. See Bureau Veritas, Inspection, Valuation, Assessmant and Control, BIVAC BV v. Paraguay, ICSID Case No. ARB/07/9, Further Decision on Objections to Jurisdiction, 9 October 2012, paras. 211–213, 241. Differently, Nordzucker AG v. Poland, UNCITRAL, Second Partial Award, 28 January 2009, para. 14. In any event, States remain entitled to act as contractual counterparties and to insist upon the observance of such commitments. See Swisslion DOO Skopje v. Macedonia, ICSID Case No. ARB/09/16, Award, 6 July 2012, para. 286. Commercial breaches of contractual commitments may however fall into the ambit of umbrella clauses. See Stephan W. Schill (n. 93) 37–47. Notwithstanding the difference between contract claims and treaty claims, interferences with investor–State contracts by sovereign conduct are judged against the FET standard. See Bayindir v. Pakistan (n. 93) para. 180 (with further references).

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exegesis. At the same time, they retain a degree of generality in order to permit meaningful application in the near infinite scenarios imaginable. The present chapter offers seven non-exclusive elements of the rule of law 40 that can render the standard operable in practice. They are not discrete causes of action, but pointers that assist in arguing and justifying FET points either way. These are (a) the principle of legality; (b) administrative due process and the denial of justice; (c) the protection of legitimate expectations; (d) the requirement of stability, predictability and consistency regarding the legal framework; (e) non-discrimination; (f) transparency; and (g) the principles of reasonableness and proportionality. These principles feature prominently as elements or expressions of the broad- 41 er concept of the rule of law in many legal systems. They can overlap and can also be traced throughout arbitral jurisprudence. For the avoidance of doubt, the exact formulation of FET in a given treaty can of course condition their application, although it will rarely be exhaustive in this respect, as noted above. a) Legality

At its most basic, FET can be interpreted as giving effect to the principle of 42 legality. Legality is an essential component of the rule of law. According to this principle, host State action must ordinarily conform to any of its legal obligations, including those contained in domestic law as well as international treaties (negative legality).97 It demands that public power is exercised along the lines of pre-established procedural and substantive rules, but also that it derives its authority from a legal basis (positive legality).98 So while international law generally does not compel State participation in particular spheres of activity, whenever States do commit to certain international obligations, they are required to fulfil them and will be held responsible otherwise.99

96 See e.g. Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011, para. 253 (referring to Rumeli v. Kazakhstan (n. 36) para. 583); Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/ 05/20, Award, 11 December 2013, paras. 518–520; UNCTAD (n. 7) 61–83. 97 Note that wording to the contrary can seek to rule out a breach of FET when a treaty assurance is flouted, see e.g. Mexico–Singapore BIT, Art. 4(3) (quoted in UNCTAD (n. 7) 33). 98 In the German constitutional tradition this element of the rule of law is designated as ‘Gesetzmäßigkeit der Verwaltung’ and ‘Vorrang des Gesetzes’. See Helmuth Schulze-Fielitz (n. 77) Article 20, paras. 92 et seq. The same concept can be found, inter alia, in English, French, Italian, Polish, Spanish and EU law; see Thomas von Danwitz, Europäisches Verwaltungsrecht (Springer, 2008) 32 et seq., 48 et seq., 70 et seq., 86 et seq., 104 et seq., 346 et seq., 503 et seq. For example, while substantially elaborated over the course of time, the classical position of English law is expressed in Council for Civil Service Unions v. Minister for the Civil Service [1985] AC 374, 410 (‘the decision-maker must understand correctly the law that regulates his decision-making power and must give effect to it’). 99 See Robert Jennings and Arthur Watts (eds), Oppenheim’s International Law (Oxford University Press, 2011) 82. Cf. VCLT Art. 27. On the legality principle in EU law see CJEU, 23 April 1986, Case C-294/83, Parti écologiste ‘Les Verts’ v. Parliament [1986] ECR 1339, para.

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In a similar vein, in several cases arbitral tribunals have based their assessment of FET on whether domestic actors breached national legal provisions. Although tribunals diverge on the question as to what extent the correct application of domestic law is subject to arbitral review, their jurisprudence is consistent in holding that at least a qualified violation of domestic law can constitute a violation of FET. In other words, not every infringement of national law necessarily translates into a breach of the standard.100 44 Conversely domestic legality is not per se exculpatory. Violations may therefore also take place when the host State purports to abide by domestic law but acts in bad faith vis-à-vis foreign investors by misusing its governmental powers, perhaps in order to inflict harm on an investor, to coerce an investor in negotiations, or to induce an investor to abandon its investment.101 In Pope & Talbot, the tribunal took into account that a domestic agency failed to produce a legal basis under domestic law for the administrative proceedings it initiated against a foreign investor in a situation where the relations with the investor ‘were more like combat than cooperative regulation.’102 From the perspective of much of domestic administrative law, that is hardly extraordinary: improper motives and bad faith, e.g. the pursuit of vindictiveness or extraneous political objectives, are typical indicators of illegal public decision-making.103 45 FET can inversely also be interpreted to include an obligation to apply domestic law. In GAMI Investments, the tribunal deduced from FET an obligation not only to abide by, but also to enforce, provisions of national law.104 Similarly, in Tecmed the tribunal emphasised that host States have to make use of ‘the legal 43

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23. See further Karol P. E. Lasok, Timothy Millett and Anneli Howard, Judicial Control in the EU (Richmond Law & Tax, 2004) 317; Armin von Bogdandy and Jürgen Bast (n. 78) 33–34. Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, 28 March 2011, para. 43 (stressing ‘blatant disregard’ of applicable rules that distorted fair competition); Franck Charles Arif v. Moldova (n. 34) para. 539; TECO Guatemala Holdings, LLC v. Guatemala, ICSID Case No. ARB/10/23, Award, 19 December 2013, paras. 458, 664–711 (considering that the ‘willful disregard of the fundamental principles upon which the [domestic] regulatory framework is based’ results in a breach of FET – quote at para. 458). See Azurix Corp. v. Argentina (n. 24) paras. 376–377; Rumeli v. Kazakhstan (n. 36) para. 653; Bayindir v. Pakistan (n. 93) paras. 223–258; MCI Power Group v. Ecuador (n. 12) para. 369; Jan Oostergetel and Theodora Laurentius v. Slovakia, UNCITRAL, Final Award, 23 April 2012, para. 300 et seq. This may require assessing the totality of the host State’s conduct vis-à-vis the foreign investor rather than focusing on each act individually; see The Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award, 6 May 2013, para. 271. Note, however, that bad faith is not required to find a breach of FET, see e.g. National Grid v. Argentina (n. 62) para. 185. On coercion as a breach of FET see Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, paras. 193–194. Note however, that economic duress must go beyond ordinary economic pressure and amount to improper compulsion, ibid., para. 151. Pope & Talbot v. Canada (n. 28) para. 174 et seq. (quotation at para. 181). See only the English House of Lords’ decisions in Wheeler v. Leicester City Council [1985] AC 1054; Porter v. Magill [2002] 2 AC 357. GAMI Investments Inc v. Mexico, UNCITRAL (NAFTA), Final Award, 15 November 2004, para. 91.

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instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments.’105 However, the connection between FET and the principle of legality runs both 46 ways. It not only becomes apparent when domestic decision-makers violate municipal laws; on the contrary, the observance of domestic legal rules is often relied upon by tribunals in the course of declining a violation of FET. In Noble Ventures, for instance, the tribunal observed that certain bankruptcy proceedings ‘were initiated and conducted according to the law and not against it’106 and thus declined a breach of the standard. Likewise, the conduct of the investor and its legality under domestic law play a significant role in determining whether the host State has acted in accordance with FET.107 In sum, various legal systems and arbitral decisions consider the principle of 47 legality a facet of FET. This principle should not, however, detract from the point that FET does not simply echo the need to apply domestic law or provide a claim for the foreign investor against the host State for failing to do so correctly. International investment tribunals are not domestic (appeal) courts, and the international responsibility of a State is not determined by local law. Rather, FET remains an independent standard of international law against which the domestic legal order is measured. Hence only qualified breaches of domestic law will normally constitute a breach of the FET standard. b) Administrative Due Process and Denial of Justice

The responsible exercise of sovereign power is tied to procedural duties. Al- 48 beit appearing under different names (‘due process’, ‘good procedures’, ‘absence of procedural impropriety’, ‘sound administration’, ‘natural justice’, etc.), the essential idea of basic procedural guarantees linking public authority to the rule of law has long since played a prominent role in many legal orders, including European Union (EU) law and domestic law.108 Moreover, several investment tribunals have interpreted FET as enshrining the concept of due process. It

105 Tecmed v. Mexico (n. 71) para. 154. 106 Noble Ventures Inc v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 178. Similarly, Lauder v. Czech Republic (n. 58) para. 297; Bosh International, Inc. and B&P Ltd Foreign Investments Enterprise v. Ukraine, ICSID Case No. ARB/98/11, Award, 25 October 2012, para. 213. 107 See Peter Muchlinski, ‘“Caveat Investor”? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard’ (2006) 55 ICLQ 527–557. 108 For EU law see only CJEU, 16 November 2011, Case C-548/09 P, Bank Melli Iran v. Council [2011] ECR I-11381, para. 47 (on effective judicial protection and the need to communicate reasons for a decision); Karol Lasok, Timothy Millett and Anneli Howard (n. 99) 322– 328, 368–369. As to process rights in English law, see Council for Civil Service Unions v. Minister for the Civil Service (n. 98) 410; R. v. Secretary of State for the Home Department ex parte Doody [1994] 1 AC 351, 560. See also Paul Craig, ‘Perspectives on Process: Common Law, Statutory and Political’ (2010) P.L. 275–296. In the common law tradition, due process is traceable back to clause XLV of the Magna Charta of 1215, see Francis Bowen, Documents of the Constitution of England and America (Rothman, 1993 reprint) 11.

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mainly comes in two forms in this context: administrative and judicial due process.109 49 Perhaps the main thrust of the due process requirement in investment treaty arbitration is to establish procedural rights for investors in administrative proceedings. This was emphasised by the tribunal in International Thunderbird Gaming, which held that the proceedings of a government agency ‘should be tested against the standards of due process and procedural fairness applicable to administrative officials.’110 What is demanded is that administrative bodies conform to generally accepted practices and remain within the four corners of their duly afforded discretion.111 Notice and disclosure feature here, as do the availability of hearings and redress. Serious administrative negligence, inconsistency or idiosyncrasy can all amount to a violation.112 50 Evidently, there is flexibility built into this assessment. But that need not turn the exercise into a simplistic imposition of personal preference. Instead, a range of indicia exist to further pin down the egregiousness of the impropriety and thus concretise FET, including but not limited to the ease of remedying the procedural shortcomings, the effect on the investor, an element of discrimination or the degree of entrenchment of the defied administrative practice. 51 FET is equally relevant for the discharge of judicial proceedings.113 Here it demands the proper administration of administrative, civil and criminal justice by the domestic courts.114 This is also reflected in recent treaty practice. Article 10.5(2)(a) of the Dominican Republic–Central America–United States Free Trade Agreement, for instance, stipulates that ‘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.’115 Investment tribunals have often interpreted FET in such a way. The tribunal in Waste Management, for instance, defined a violation of the standard as 109 See Campbell McLachlan, Laurence Shore and Matthew Weiniger (n. 38) 227. 110 International Thunderbird Gaming Corp v. Mexico, UNCITRAL (NAFTA), Arbitral Award, 26 January 2006, para. 200. 111 Cf. Alex Genin v. Estonia (n. 58) paras. 353–364. 112 See Frontier Petroleum Services (FPS) v. Czech Republic, UNCITRAL, Final Award, 12 November 2010, para. 292 (with further references); cf. also Bosh International v. Ukraine (n. 106) para. 214. 113 See Compañía de Aguas del Aconquija SA & Compagnie Générale des Eaux v. Argentina, ICSID Case No. ARB/97/3, Award, 21 November 2000, para. 80; Waste Management v. Mexico (n. 68) para. 132; Rumeli v. Kazakhstan (n. 36) para. 651; Victor Pey Casado and President Allende Foundation v. Chile, ICSID Case No. ARB/98/2, Award, 8 May 2008, paras. 653–657; Glamis Gold v. USA (n. 30) para. 616; Oostergetel et al. v. Slovakia (n. 101) paras. 271 et seq.; Marion Unglaube and Reinhard Unglaube v. Costa Rica, ICSID Case No. ARB/08/1 and ARB/09/20, Award, 16 May 2012, paras. 268 et seq.; Iberdrola Energía S.A. v. Guatemala, ICSID Case No. ARB/09/5, Laudo (Award), 17 August 2012, para. 423 et seq. 114 See comprehensively on the related concept of denial of justice, Jan Paulsson, Denial of Justice in International Law (Cambridge University Press, 2005). 115 See supra note 19.

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Besides refusing to entertain a claim at all, significant delay of proceedings is 52 a typical example, since it can occasion even more uncertainty and impairment than an outright refusal.117 Clear and malicious misapplication of the law is another paradigm instance of a denial of justice.118 In addition, means must exist to reasonably enforce a legitimate right.119 Some tribunals have even been prepared to find an FET violation whenever a 53 judgment is substantively unfair, but this comes close to an ex aequo et bono decision.120 In this difficult grey area, any assessment will have to include factors such as the behaviour of the relevant actors, the complexity of the case and the height of the stakes involved.121 At the end of the day, an investment tribunal is again not an appellate body. The simple rejection of an investor’s submissions is insufficient to constitute a violation of FET, provided they were at least considered.122 Nor is a plain judicial error a violation.123 In short, the judicial impropriety must be manifest; an immaterial act or a decision within the rightful margin of appreciation, i.e. one that does not ‘shock or surprise’ since it remains within conceivable limits, will not infringe FET.124 c) Protection of Legitimate Expectations

Whereas legality and due process are relatively basic aspects of FET, the con- 54 cept of legitimate expectations gives the standard more distinct contours. Rather than from express treaty language, it springs from another tenet of the rule of law, namely that justified hopes, i.e. legitimate expectations, should not be unreasonably disappointed. In fact, considerations relating to legal certainty re116 Waste Management v. Mexico (n. 68) para. 98 (emphasis added). While the reference to ‘judicial propriety’ is unfortunate if it suggests an overly impressionistic approach, the basic concept is widely appreciated, see e.g. S.D. Myers v. Canada (n. 27) para. 134; Rumeli v. Kazakhstan (n. 36) paras. 609 and 617; Jan de Nul NV and Dredging International NV v. Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008, para. 187; Glamis Gold v. USA (n. 30) para. 616; Bayindir v. Pakistan (n. 93) paras. 178 and 344; Oostergetel et al. v. Slovakia (n. 113) para. 277 et seq. 117 See Victor Pey Casado v. Chile (n. 113) para. 659; Oostergetel et al. v. Slovakia (n. 101) paras. 288‑290; Iberdrola v. Guatemala (n. 113) para. 432. 118 See Robert Azinian and others v. Mexico, ICSID Case No. ARB(AF)/97/2 (NAFTA), Award, 1 November 1999, para. 103; Iberdrola v. Guatemala (n. 113) para. 432. 119 See by analogy Chevron Corporation and Texaco Petroleum Company v. Ecuador, UNCITRAL/PCA Case No. 34877, Partial Award on the Merits, 30 March 2010, para. 250. 120 See Aguas del Aconquija v. Argentina (n. 113) para. 80. 121 See e.g. Chevron v. Ecuador (n. 119) para. 250; Oostergetel et al. v. Slovakia (n. 101) para. 291 et seq. 122 See GEA Group Aktiengesellschaft v. Ukraine, ICSID Case No. ARB/08/16, Award, 31 March 2011, para. 318. 123 See Grand River Enterprises v. USA (n. 34) para. 223; Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Award, 7 December 2011, para. 315. 124 Cf. Mondev v. USA (n. 33) para. 133; Loewen Group Inc and Raymond L Loewen v. USA, ICSID Case No. ARB(AF)/98/3 (NAFTA), Award, 26 June 2003, paras. 134–136.

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quire that sovereign authority does not renege on a prior commitment. While the principle of legality revolves around the idea that branches of government have to obey the law, legal rules are only able to have a stabilising function for social relationships and hence create the basis of an environment conducive to longterm investment when they are applied in a way in which a reasonable person would expect them to be applied. In short, the ordering function of law implies that the perceptions of the law’s subjects and their expectations vis-à-vis governmental activity be respected. 55 An overview of arbitral awards elicits that the concept of legitimate expectations has emerged as probably the most prominent, but also most polarising, facet of FET. 125 The tribunal in Saluka even referred to the concept of legitimate expectations as ‘the dominant element of that standard.’126 Another tribunal called it ‘central’ to FET.127 Its existence can be traced as an element of the rule of law in many domestic legal systems,128 EU law,129 and as a concept of general international law.130

125 See e.g. Tecmed v. Mexico (n. 71) para. 154; Waguih Elie George Siag and Clorinda Vecchi v. Egypt, ICSID Case No. ARB/05/15, Award, 1 June 2009, para. 450; Walter Bau AG (In Liquidation) v. Thailand, UNCITRAL, Award, 1 July 2009, paras. 11.5 et seq. (with further references), 12.1, 12.31; Mohammad Ammar Al-Bahloul v. Tajikistan, SCC Case No. V (064/2008), Partial Award on Jurisdiction and Liability, 2 September 2009, para. 200 et seq.; Frontier Petroleum v. Czech Republic (n. 112) paras. 285–288; Impregilo SpA v. Argentina, ICSID Case No. ARB/07/17, Final Award, 21 June 2011, paras. 285, 290–291; Paushok v. Mongolia (n. 96) para. 253; SAUR International v. Argentina (n. 33) paras. 495 et seq.; Unglaube and Unglaube v. Costa Rica (n. 113) para. 249. See also Andrew Newcombe and Lluís Paradell (n. 14) 279; Roland Kläger (n. 14) 165–187; UNCTAD (n. 7) 9, 11, 63–64; Elizabeth Snodgrass, ‘Protecting Investors’ Legitimate Expectations – Recognizing and Delimiting a General Principle’ (2006) 21 ICSID Rev.‑FILJ 1–58; Trevor Zeyl (n. 11); Abhijit P.G. Pandya and Andy Mood, ‘Legitimate Expectations in Investment Treaty Arbitration: An Unclear Future’ (2010) 15 Tilburg L. Rev. 93–119; Michele Potestà, ‘Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept’ (2013) 28 ICSID Rev.–FILJ 88–122. 126 Saluka v. Czech Republic (n. 12) 301. 127 El Paso Energy International Company v. Argentina, ICSID Case No. ARB/03/15, Award, 31 October 2011, para. 348. 128 For the principle in English law see only R. (on the application of Bibi) v. Newham London Borough Council (No. 1), [2002] 1 WLR 237, paras. 17–19. More generally, see David Dyzenhaus (n. 81) 133 et seq.; Helmuth Schulze-Fielitz (n. 77) Article 20, para. 146 et seq.; Søren Schønberg, Legitimate Expectations in Administrative Law (Oxford University Press, 2000); see also Jean-Marie Woehrling, ‘Le Principe de Confiance Légitime dans la Jurisprudence des Tribunaux’ in John W. Bridge (ed), Comparative Law Facing the 21st Century (UKNCCL/BIICL, 2001) 815 et seq. 129 The protection of legitimate expectations is a well-established general principle of EU law. See e.g. CJEU, 28 June 2005, Joined Cases C-189/02 P, C-202/02 P, C-205/02 P to C-208/02 P and C-213/02, Dansk Rørindustri A/S and others v. Commission, [2005] ECR I-5425, para. 211. See also Karol Lasok, Timothy Millett and Anneli Howard (n. 99) 353–364. 130 Cf. Total v. Argentina (n. 13) para. 128 et seq. (linking the protection of legitimate expectations to the general principle of good faith under international law). See also Jörg P. Müller, Vertrauensschutz im Völkerrecht (Heymanns, 1971). See more specifically in the context of the law of expropriation of aliens, Rudolf Dolzer, ‘New Foundations of the Law of Expropriation of Alien Property’ (1981) 75 AJIL 553, 579 et seq.

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Once in a while it is doubted whether one can derive from the ordinary mean- 56 ing of FET an obligation not to frustrate an investor’s legitimate expectation.131 Taken as a fundamental rejection, such a critique, however, is mistaken for two reasons. First, the meaning of a treaty provision is not exhausted by the ‘plain meaning’ (whatever that may be) of its text. Second, as shown above, the concept of legitimate expectations is hardly an outlandish idea known only to particularly investor-friendly arbitration tribunals. But viewed as a more judicious suggestion that the protection of legitimate expectations cannot imply a complete standstill of the domestic legal system, the point has real weight. The delicate issue thus becomes when the protection afforded is ‘adequate’.132 This implies an assessment of whether the investor’s expectation was legitimate, rather than simply whether there was an expectation at all. In other words, the test is not solely subjective.133 As to the requirements, what is averred is that the investor actually held an 57 expectation at the material time, that he or she relied on it to his or her detriment and that it was legitimate to do so.134 The main thrust of an investor’s argument here relates to the protection against unpardonable disorder created by administrative and legislative conduct. In this sense, the tribunal in Tecmed held in slightly elliptical fashion that FET requires ‘provid[ing] to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investors to make the investment.’135 More intelligibly, the tribunal in International Thunderbird Gaming explained that the concept of ‘legitimate expectations’ relates (…) to a situation where a Contracting Party’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the [state] to honour those expectations could cause the investor (or investment) to suffer damages.136

131 See e.g. Suez v. Argentina, Separate Opinion of Pedro Nikken (n. 11) para. 2 et seq. 132 Impregilo v. Argentina (n. 125) paras. 285, 290. 133 See e.g. El Paso Energy v. Argentina (n. 127) para. 356; Ulysseas Inc. v. Ecuador, UNCITRAL, Final Award, 12 June 2012, para. 249; Franck Charles Arif v. Moldova (n. 34) para. 532 (‘these expectations have an objective basis, and are not fanciful or the result of misplaced optimism’). 134 A multitude of arbitral pronouncements can be read to that effect. See e.g. Parkerings-Compagniet v. Lithuania (n. 21) para. 329 et seq.; Enron Corp. and Ponderosa Assets LP v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007, para. 262; BG Group plc v. Argentina, UNCITRAL, Final Award, 24 December 2007, paras. 295 et seq., 310; Metalpar SA and Buen Aire SA v. Argentina, ICSID Case No. ARB/03/5, Award on the Merits, 6 June 2008, paras. 182–185; Biwater Gauff v. Tanzania (n. 36) para. 602; Rumeli v. Kazakhstan (n. 36) para. 609; Duke Energy Electroquil Partners & Electroquil SA v. Ecuador, ICSID Case No. ARB/04/19, Award, 18 August 2008, para. 347; National Grid v. Argentina (n. 62) paras. 173–175; Jan de Nul v. Egypt (n. 116) para. 186; Glamis Gold v. USA (n. 30) para. 766; Bayindir v. Pakistan (n. 93) para. 179; Al-Bahloul v. Tajikistan (n. 125) para. 200. 135 Tecmed v. Mexico (n. 71) para. 154. This idea of avoiding confusion is closely related to more general considerations of good faith, stability and foreseeability and reverberates in various arbitral pronouncements, see e.g. MTD Equity Sdn Bhd & MTD Chile SA v. Chile, ICSID Case No. ARB/01/7, Decision on Annulment, 21 March 2007, para. 69; CMS v. Argentina (n. 24) para. 279; Eureko BV v. Poland, Partial Award, 19 August 2005, para. 235. 136 International Thunderbird Gaming v. Mexico (n. 110) para. 147 (internal citation omitted).

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Turning to the conduct giving rise to the expectation, this can result from a variety of actions that are attributable to the host State.137 As a preliminary point and adopting the traditional stance of international law, the precise intra-State organisation or nomenclature are not determinative; the host State cannot hide behind unilateral or artificial arrangements alone. Provided the conduct is properly attributable, States can be responsible irrespective of whether the organ acting or omitting to act is, from an internal perspective, independent or subordinate.138 The same goes for practices or standards applied to the host State’s own nationals.139 A violation will in the first place become arguable if the host State acts ‘in breach of representations made by [it] which were reasonably relied on by the [investor].’140 This can result, for example, from express opinions and statements released by administrative agencies about the application of domestic law.141 But legitimate expectations need not be based solely on an explicit representation; they can be engendered more generally by the ‘common level of legal comfort’ one could reasonably have anticipated in a given business sector, most likely because of past practices.142 59 There is some uncertainty as to whether there must be any inducement or at least a considerable degree of specificity in the conduct upon which the investor relied. In Plama, the tribunal held that FET was not breached because a change in law was not aimed directly at the claimant and since the host State had not made any specific representations to the investor about freezing its legislation.143 Similarly, the tribunal in Glamis Gold set a relatively high threshold based on the unsettling of reasonable, investment-backed expectations and demanded the existence of ‘at least a quasi-contractual relationship between the State and the investor, whereby the State has purposely and specifically induced the investment.’144 60 What is clear is that the mere possibility or a pure intention regarding a particular outcome is insufficient.145 Simply encouraging remarks by the host State will also normally not suffice.146 Moreover, given the patent difference between 58

137 Cf. ADF Group v. USA (n. 33) para. 189. 138 See Robert Jennings and Arthur Watts (n. 99) 540. 139 See CME Czech Republic BV v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001, para. 611. 140 Waste Management v. Mexico (n. 68) para. 98. Similarly Jan de Nul v. Egypt (n. 116) para. 263; Duke Energy v. Ecuador (n. 134) paras. 351–352 (‘clear assurances’); Paushok v. Mongolia (n. 96) paras. 302, 595 (‘misled’); El Paso Energy v. Argentina (n. 127) paras. 375– 378. See further Hector Mairal, ‘Legitimate Expectations and Informal Administrative Representations’ in Stephan W. Schill (n. 13) 413, 426 et seq. 141 See International Thunderbird Gaming v. Mexico (n. 110) para. 147. See also Metalclad Corp v. Mexico, ICSID Case No. ARB(AF)/97/1 (NAFTA), Award, 30 August 2000, paras. 85 et seq. 142 Lemire v. Ukraine (n. 100) para. 70. 143 Plama v. Bulgaria (n. 22) para. 218. 144 Glamis Gold v. USA (n. 30) para. 766. 145 See MCI Power Group v. Ecuador (n. 12) paras. 279, 325. 146 See White Industries Australia Limited v. India, UNCITRAL, Final Award, 30 November 2011, para. 10.3.7.

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umbrella and FET clauses, the existence of a contract alone does not create legitimate expectations protected at the international level.147 Nor can legitimate expectations override actual arrangements made between the parties.148 Inversely, specifically addressed representations, and even more so an outright inducement, very strongly suggest certain expectations. It is, however, probably too narrow an understanding to necessarily ask for a 61 direct inducement by conduct that was specifically directed towards a foreign investor. After all, legitimate expectations can originate from the provisions of the general regulatory framework that a host State has put into place,149 as long as the confidence the framework generated can be established convincingly. The logical corollary is that the concept of legitimate expectations as an element of the rule of law may even restrict the domestic legislator in making changes to the regulatory framework in place. This was the case in several of the Argentine disputes, where the regulatory framework the foreign investor had relied on was permanently and fundamentally altered after investments were made.150 FET in the guise of legitimate expectations does not however degenerate into 62 a facile comparison of an earlier and a later situation, with a violation being established purely on account of a divergence. For one, it is of course essential that the investor did not know or should not have known that a certain unfavourable outcome was likely.151 Crucially, as the tribunal in Duke Energy opined, the assessment of the legitimacy or the reasonableness of an investor’s expectations must take into account the political, socio-economic, cultural, and historical conditions of the host State.152 Overall, legitimate expectations remain a powerful and controversial tool. 63 There is a patent danger that domestic legal orders and the actions of host States are exclusively measured against the hopes of foreign investors.153 Although the legitimacy of expectations already limits the scope of the concept,154 it should in 147 See Gustav F. W. Hamester GmbH & Co KG v. Ghana, ICSID Case No. ARB/07/24, Award, 10 June 2010, paras. 333 et seq.; Franck Charles Arif v. Moldova (n. 34) para. 539. But that does not conversely mean that a breach of contract cannot ever also amount to a breach of FET, see SGS Société Générale de Surveillance SA v. Paraguay, ICSID Case No. ARB/ 07/29, Award, 10 February 2012, para. 146, fn. 134. 148 See Walter Bau v. Thailand (n. 125) para. 12.31. 149 See GAMI v. Mexico (n. 104) para. 100; Paushok v. Mongolia (n. 96) paras. 301–302; LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 133. Total v. Argentina (n. 13) para. 129 (stating however that ‘only exceptionally the concept of LE has been the basis of redress when the legislative action of a state was at stake’); El Paso Energy v. Argentina (n. 127) para. 364; Impregilo v. Argentina (n. 125) paras. 290–291, 299; Paushok v. Mongolia (n. 96) para. 298. 150 See infra notes 276–277 and accompanying text. 151 See only White Industries v. India (n. 146) paras. 10.3.11, 10.3.14. Paushok v. Mongolia (n. 96) paras. 301–302 and 305. 152 Duke Energy v. Ecuador (n. 134) para. 340; similarly El Paso Energy v. Argentina (n. 127) para. 359 et seq. 153 Similarly, MTD v. Chile (n. 135) para. 67. 154 See Saluka v. Czech Republic (n. 12) para. 304.

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general not be handled as an inflexible and absolute yardstick. The wording of FET clauses certainly permits a balanced understanding. 64 Tribunals should hence allow for a certain flexibility for host States to react, for instance, to emergency situations. In line with this, the tribunal in Eureko suggested that the breach of basic expectations was not a violation of FET if good reasons existed why the expectations of the investor could not be met.155 Likewise, the panel in Saluka warned of the danger of taking the investor’s expectation to be the sole determinant since this would ‘impose upon host States’ [sic] obligations which would be inappropriate and unrealistic.’156 Instead, the tribunal set out to balance the ‘[investor’s] legitimate and reasonable expectations on the one hand and the [host State’s] legitimate regulatory interests on the other.’157 An investor could only: (...) expect that the [host state] implements its policies bona fide by conduct that is, as far as it affects the investors’ investment, reasonably justifiable by public policies and that such conduct does not manifestly violate the requirements of consistency, transparency, even-handedness and non-discrimination. In particular, any differential treatment of a foreign investor must not be based on unreasonable distinctions and demands, and must be justified by showing that it bears a reasonable relationship to rational policies not motivated by a preference for other investments over the foreignowned investment.158

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In sum, the concept of legitimate expectations offers sufficient flexibility to accommodate both interests of foreign investors and of host States.159 Here it is again useful to turn to comparative legal analysis to substantiate precise allegations of FET infringements, not least since this provides valuable pointers as to what could have reasonably been expected. The tribunal in Total took a step in this direction by drawing on comparative law in the context of determining the restrictions FET could impose on a State’s regulatory powers outside of specific promises.160 d) Stability, Predictability, Consistency

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Investment treaties evidently seek to cushion political risk and enhance the reliability of the respective investment climates.161 Accordingly, it appears warranted to consider the stability, predictability, and consistency of the host State’s legal order a component of FET. The underlying idea is closely related to the protection of legitimate expectations;162 it differs in that it does not revolve as 155 156 157 158 159 160 161

See Eureko v. Poland (n. 135) para. 232 et seq. Saluka v. Czech Republic (n. 12) para. 304. Ibid., para. 306. Ibid., para. 305 et seq. Cf. El Paso Energy v. Argentina (n. 127) paras. 348, 365–368; UNCTAD (n. 7) 77. See Total v. Argentina (n. 13) paras. 111, 128 et seq. See only Noah Rubins and Stephan Kinsella, International Investment, Political Risk and Dispute Resolution (Oxford University Press, 2005) 1 et seq. That does not of course mean they are the sole – or even the main – determinant for decisions on an investment’s assurance, see Detlev Vagts, William Sumner Dodge and Harold Hongju Koh, Transnational Business Problems (Foundation Press, 2003) 458. 162 See Frontier Petroleum v. Czech Republic (n. 112) para. 285.

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closely around a particular investor’s perspective, but instead subjects the relevant regulatory framework to a broader assessment. It goes beyond due process baselines by demanding a certain overall degree of substantive tranquillity and coherence. The essence is again traceable to rule of law ruminations that are familiar to 67 most legal systems, often expressed as legal certainty and legal security (Rechtssicherheit, sécurité juridique).163 This reflects a core aspect of the normativity of law: individuals adapt their behaviour to the requirements of the legal order and, on that basis, not only form stable social relationships but also accept responsibility for their own fortunes, financial or otherwise. In a business context, stability is a critical component. This applies all the more to long-term investments. Legal security requires a certain constancy of the legal framework, legal certainty in turn calls for predictable and understandable rules and their consistent application. Reading these into FET clauses gels with the object and purpose of investment treaties.164 Turning to international investment jurisprudence that inclines to such an ap- 68 proach, the tribunal in CMS, for example, held that ‘there can be no doubt (...) that a stable legal and business environment is an essential element of fair and equitable treatment.’165 In that vein, the tribunal in PSEG found a breach of the standard in what it described as ‘the “roller-coaster” effect of the continuing legislative changes.’166 ‘Stability’, it went on, ‘cannot exist in a situation where the law kept changing continuously and endlessly, as did its interpretation and implementation.’167 Similarly, the predictability of the legal framework governing the activity of 69 foreign investors is frequently considered an element of FET. The tribunal in Metalclad, for instance, based its finding of a violation of Article 1105(1) of NAFTA amongst other things on the argument that Mexico ‘failed to ensure a (...) predictable framework for Metalclad’s business planning and invest163 This is recognised, mostly as a constitutional standard, in many domestic legal systems. See for its implementation in the German Constitution Helmuth Schulze-Fielitz (n. 77) Article 20, para. 129 et seq.; see Richard Fallon (n. 83) 14 et seq. (with references to US constitutional practice); more generally, see also Joseph Raz, ‘The Rule of Law and its Virtue’ (1977) 93 LQR 195, 198. On legal certainty as a principle of EU law, see CJEU, 29 March 2011, Joined Cases C-201/09 P and C-216/09 P, ArcelorMittal Luxembourg SA v. Commission [2011] ECR I-2239, para. 68; see further Takis Tridimas, The General Principles of EU Law (Oxford University Press, 2006) 242–251. 164 Cf. VCLT Art. 31(1). See further Moshe Hirsch, ‘Between Fair and Equitable Treatment and Stabilization Clause: Stable Legal Environment and Regulatory Change in International Investment Law’ (2011) 12 JWIT 783–806. 165 CMS v. Argentina (n. 24) para. 274. See further Occidental Exploration and Production Company (OEPC) v. Ecuador, UNCITRAL, LCIA Case No. UN3467, Final Award, 1 July 2004, para. 183; LG&E v. Argentina (n. 149) para. 124; Enron Corp. v. Argentina (n. 134) paras. 259–260; Merrill & Ring v. Canada (n. 37) para. 232 (looking for an ‘abrupt change of the legal environment’); Unglaube and Unglaube v. Costa Rica (n. 113) para. 248. 166 PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Şirketi v. Turkey, ICSID Case No. ARB/02/5, Award, 19 January 2007, para. 250. 167 Ibid., para. 254.

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ment.’168 Likewise, the tribunal in Tecmed stressed that a foreign investor needs to ‘know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices and directives, to be able to plan its investment and comply with such regulations.’169 Accordingly, a lack of clarity of the legal framework or excessively vague rules can violate FET.170 70 Essentially the same concern can be framed as an issue of consistency. The tribunal in Lauder emphasised that FET could be violated if domestic agencies acted inconsistently in applying domestic legislation.171 Another tribunal found a violation of the standard due to ‘the inconsistency of action between two arms of the same Government vis-à-vis the same investor.’172 71 Yet once again, where to draw the line is problematic. Complete stagnation is neither demanded nor desirable. The stability and predictability of domestic law can only relate to the normal deployment of governmental law- and policy-making and, parallel to the function of the rule of law in constitutional contexts, should not be understood as an absolute requirement that would allow foreign investors to be effectively isolated from regulatory changes in the host State.173 This also makes sense from a commercial perspective, since it would not be efficient to insure the investment against any and all possible developments. Accordingly, stability and predictability should not be misunderstood as an immutable undertaking that the legal framework will never change or even serve as a business guarantee to investment projects.174 72 Indeed, the tribunal in AES Summit Generation pointed out in the context of Article 10(1) of the ECT that the need to provide a stable legal framework does not amount to a ‘stability clause.’175 It emphasised in its award that a legal framework was ‘by definition subject to change as it adapts to new circum-

168 See Metalclad v. Mexico (n. 141) para. 99. See further BG Group v. Argentina (n. 134) para. 307; Parkerings-Compagniet v. Lithuania (n. 21) para. 333; Duke Energy v. Ecuador (n. 134) para. 347. 169 Tecmed v. Mexico (n. 71) para. 154. 170 Cf. OEPC v. Ecuador (n. 165) para. 184. 171 Lauder v. Czech Republic (n. 58) para. 292 et seq. 172 MTD v. Chile (n. 62) para. 163. Similarly, Tecmed v. Mexico (n. 71) paras. 154 and 162 et seq. See also OEPC v. Ecuador (n. 165) para. 184; PSEG v. Turkey (n. 166) paras. 246 and 248; LG&E v. Argentina (n. 149) para. 131; Biwater Gauff v. Tanzania (n. 36) para. 602. 173 In this sense, see also Rudolf Dolzer (n. 23) 105. See also Enron Corp. v. Argentina (n. 134) para. 261; CMS v. Argentina (n. 24) para. 277; Continental Casualty Co. v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, para. 258; Moshe Hirsch (n. 164). 174 See Emilio Agustín Maffezini v. Spain, ICSID Case No. ARB/97/7, Award, 13 November 2000, para. 64; Marvin Roy Feldman Karpa v. Mexico, ICSID Case No. ARB(AF)/99/1 (NAFTA), Award, 16 December 2002, para. 112. CMS v. Argentina (n. 24) para. 277; EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, paras. 217–218; Ulysseas Inc. v. Ecuador (n. 133) para. 249; El Paso Energy v. Argentina (n. 127) paras. 365–368; Total v. Argentina (n. 13) para. 117; Parkerings-Compagniet v. Lithuania (n. 21) paras. 332, 336; Toto v. Lebanon (n. 13) para. 244. 175 AES Summit Generation Limited and AES-Tisza Erömü Kft. v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para. 9.3.29.

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stances day by day’ and noted that a ‘[host] state has the sovereign right to exercise its powers which include legislative acts.’176 Thus, the stability of the legal order due on account of FET will vary according to the circumstances:177 a serious crisis or even an emergency situation may call for different reactions than the deployment of public power in the normal course of things.178 Likewise, concerning consistency, one should be aware that domestic regulatory frameworks are never completely free of inconsistencies.179 A violation of this subelement should therefore be assessed in a measured manner. e) Non-Discrimination

It is regularly thought that FET provides an absolute standard of protection in 73 the sense of imposing minimum baseline treatment by the host State that operates irrespective of how it chooses to treat others. All the same, discriminatory behaviour can of course also be considered unfair or inequitable. Shielding foreign investors from prejudice hence plays an important role in FET,180 despite the patent relativity (‘compared to whom?’) implicit in such an assurance. The wording of FET clauses often permits such an understanding and elaborates accordingly.181 The fact that treaties usually contain express discrimination clauses does not rule this out.182 Non-discrimination and equality are iconic emanations of the rule of law. 74 They do not demand uniformity across the board, but rather the absence of arbitrary differentiation. The basic idea is that like ought to be treated alike. A fortiori this rules out targeted harassment and similarly obnoxious behaviour. This is for instance a fundamental principle of EU law.183 176 Ibid. See also Micula v. Romania (n. 96) para. 529. 177 See Parkerings-Compagniet v. Lithuania (n. 21) para. 335; Bayindir v. Pakistan (n. 93) paras. 193–194; AES Summit v. Hungary (n. 175) para. 9.3.30 (stating that providing stability is a ‘complex task’ that hinges on ‘the specific circumstances that surround the investor’s decision to invest and the measures taken by the state in the public interest’); Oostergetel et al. v. Slovakia (n. 101) para. 224; Ulysseas Inc. v. Ecuador (n. 133) para. 240 et seq. 178 Cf. ELSI (USA v. Italy) (n. 71) para. 74; National Grid v. Argentina (n. 62) para. 180; Continental Casualty v. Argentina (n. 173) (although applied specifically in the tribunal’s analysis of Article XI of the US–Argentina BIT, a non-precluded measures clause); Metalpar v. Argentina (n. 134) para. 201. Cf. also Duke Energy v. Ecuador (n. 134) para. 347 (concerning a case relating to national supply shortage during an energy crisis); Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, para. 6.66 (stressing that the respondent was undergoing ‘an important transitional stage, with profound and drastic economic, political and legal changes’). 179 See Susan D. Franck (n. 70) 1523. 180 See Andrew Newcombe and Lluís Paradell (n. 14) 289–291; Roland Kläger (n. 14) 187– 197. 181 Cf. e.g. Parkerings-Compagniet v. Lithuania (n. 21) para. 300; Biwater Gauff v. Tanzania (n. 36) para. 602; Rumeli v. Kazakhstan (n. 36) para. 609; Glamis Gold v. USA (n. 30) para. 616; Bayindir v. Pakistan (n. 93) para. 178; Impregilo v. Argentina (n. 125) para. 333. 182 See Rudolf Dolzer and Christoph Schreuer (n. 48) 191–197. 183 See TEU Preamble and Articles 2, 3(3), 9, 21(1); Treaty on the Functioning of the European Union (TFEU) [2010] OJ C83/47, Articles 8, 10, 18–19, 153, 157. See also CJEU, 1 March 2011, Case C-236/09, Association Belge des Consommateurs Test-Achats ASBL and Others

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The antagonism between arbitrariness and the rule of law was further explicitly evoked by the International Court of Justice in the ELSI case. Dealing with the government’s requisition of a foreign-owned factory in order to prevent its closure and the lay-off of workers, the Court observed that ‘Arbitrariness is not so much something opposed to a rule of law, as something opposed to the rule of law. This idea was expressed by the Court in the Asylum case, when it spoke of “arbitrary action” being “substituted for the rule of law.”’184 Although the case arose under an FCN treaty, the decision has been accepted widely as being relevant for the interpretation of FET under investment treaties.185 The reason for this may be that arbitrary conduct constitutes a qualified violation of the requirement to act in accordance with domestic law. Arbitrary conduct can be seen as a sufficient but not necessary requirement for a breach of FET. It can also be linked to the requirement to act in good faith.186 76 This nexus between FET treatment and the prohibition of discriminatory treatment was emphasised in Loewen. Here, the tribunal stated that the standard was violated by ‘[a] decision which is in breach of municipal law and is discriminatory against the foreign litigant.’187 Similarly, the tribunal in Waste Management elaborated that ‘fair and equitable treatment is infringed (…) if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice.’188 The possibility of overlap in this respect was acknowledged in AMTO, an ECT case.189 77 Yet other tribunals suggest drawing a clearer distinction between FET and the prohibition of discriminatory conduct. Some emphasise that ‘customary international law does not (…) require that a state treat all aliens (and alien property) equally, or that it treats aliens as favourable as nationals.’190 They only consider a violation of FET if the investor was ‘specifically targeted’ or if the differential treatment amounted to bad faith.191 Clearly, a perceived link or even identity between the treaty norm and the (non-relational) customary minimum standard is 75

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v. Conseil des ministres [2011] ECR I-773, para. 28. See further Karol Lasok, Timothy Millett and Anneli Howard (n. 99) 328–334. ELSI (USA v. Italy) (n. 71) para. 128 (internal citations omitted). See e.g. Alex Genin v. Estonia (n. 58) para. 371; Waste Management v. Mexico (n. 68) para. 98; Noble Ventures v. Romania (n. 106) para. 176. See further also Jacob Stone (n. 45). See Waste Management v. Mexico (n. 68) para. 138; Alex Genin v. Estonia (n. 58) para. 367; Tecmed v. Mexico (n. 71) para. 154. Loewen v. USA (n. 124) para. 135. Waste Management v. Mexico (n. 68) para. 98; similarly Eureko v. Poland (n. 135) para. 233; S.D. Myers v. Canada (n. 27) para. 266; Parkerings-Compagniet v. Lithuania (n. 21) paras. 287–288; Victor Pey Casado v. Chile (n. 113) paras. 670–673; Biwater v. Tanzania (n. 36) para. 602; Continental Casualty v. Argentina (n. 173) para. 261; Rumeli v. Kazakhstan (n. 36) para. 609; Glamis Gold v. USA (n. 30) para. 616; Bayindir v. Pakistan (n. 93) para. 178. Limited Liability Company AMTO v. Ukraine, SCC Case No. 080/2005, Final Award, 26 March 2008, para. 74. Cf. Cargill, Incorporated v. Mexico, ICSID Case No. ARB(AF)/05/2 (NAFTA), 18 September 2009, para. 285. Alex Genin v. Estonia (n. 58) para. 368; similarly Methanex Corp v. USA, UNCITRAL (NAFTA), Final Award, 3 August 2005, Part IV, Chapter C, paras. 14–16, 25–26. Alex Genin v. Estonia (n. 58) paras. 369 and 371.

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influential in this respect and probably explains the proclivity amongst NAFTA tribunals to adopt this more reserved stance under Article 1105(1) of NAFTA.192 Moreover, the expressio unius est exclusio alterius logic provides further support in light of frequent self-standing (relational) prohibitions of discrimination in investment treaties. What emerges is that it is difficult to draw a line between legal and illegal dis- 78 crepancies. Evidently differential treatment alone is insufficient. This is what the frequent addition of qualifiers such as arbitrariness, gross unfairness or injustice seeks to bring out in this context.193 The danger of relying solely on these in the determination of an infringement of FET is circularity – i.e. finding unfair conduct by calling it not fair – but it is the combination with divergent treatment that can enable a more meaningful assessment in this context. One particularly likely sphere is the inconsistent application of domestic law. 79 As the tribunal in AES Summit Generation held, not every divergence that results in an impairment of an investment amounts to unfair discrimination, provided the method for reaching these divergent outcomes was consistent.194 The crucial point is that there is a convincing reason or rational justification for different treatment, for example by matching capacity fees to cost structures.195 f) Transparency

Another important element that arbitral tribunals understand as forming part 80 of an FET clause is transparency. The concept is closely related to, and sometimes folded into, more general due process requirements.196 Undoubtedly, the transparent and public exercise of authority can be conceived as a central aspect of the rule of law, given that it is a basic requirement for contesting such acts and thus conducive to legality. To give only one example, legislative acts of the EU must, like in many other legal orders, be published.197 But again, the devil is in the details. Quite how much transparency is due in 81 the exercise of (sovereign) discretion eludes a simple and categorical answer. In192 See e.g. Grand River Enterprises v. USA (n. 34) paras. 208–209. 193 See e.g. Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/08/18, Decision on Jurisdiction and Liability, 14 January 2010, para. 253; Spyridon Roussalis v. Romania (n. 123) para. 314; Paushok v. Mongolia (n. 96) para. 315 (demanding that the sectors covered should relate to competitive and substitutable products, the absence of which rules out impermissible cross-industry or cross-sectoral discrimination). 194 AES Summit Generation v. Hungary (n. 175) para. 10.3.47. 195 Ibid., paras. 10.3.48–10.3.50; see also Spyridon Roussalis v. Romania (n. 123) paras. 324– 325 (with further references); Paushok v. Mongolia (n. 96) para. 316. 196 The point being that transparency is a necessary precondition for informed engagement with one’s situation. See e.g. Martin Redish and Lawrence Marshall, ‘Adjudicatory Independence and the Values of Procedural Due Process’ (1986) 95 Yale LJ 455, 485–486; Stephanie Newbold, ‘Federalist No. 27: Is Transparency Essential for Public Confidence in Government?’ (2011) 71(Issue Supplement s1) Public Administration Review s47 (on the links between transparency, accountability and trust). In this sense, Nordzucker v. Poland (n. 95) para. 12 et seq. 197 See TFEU Art. 297(1).

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ternational legal practice is moving at different speeds, be it at the WTO198 or in the international environmental law-inspired Aarhus Convention model.199 Many countries, particularly transitional and developing countries, struggle to meet their existing obligation in this respect, and some have adopted constitutional amendments200 or legislation to try to hasten both the change of bureaucratic culture and the practical processes of making information available.201 82 Some investment decisions have based a violation of FET on a lack of transparency. The tribunal in Metalclad, for instance, found that the respondent had breached Article 1105(1) of NAFTA because it ‘failed to ensure a transparent and predictable framework for Metalclad’s business planning and investment.’202 Similarly, the tribunal in Tecmed connected the element of legitimate expectations to the requirement of transparency by stating that: The foreign investor expects the host State to act (…) totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives.203

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The decision in Metalclad in particular has been the butt of stern criticism for interpreting FET as including a very wide transparency requirement; it was also set aside for this very reason by the Supreme Court of Columbia, exercising jurisdiction under the British Columbia International Arbitration Act.204 That rejection is itself not uncontroversial.205 But if transparency is considered to re198 See, for example, Robert Wolfe, ‘Regulatory Transparency, Developing Countries and the WTO’ (2003) 2 World Trade Rev. 157–182; Terry Collins-Williams and Robert Wolfe, ‘Transparency as a Trade Policy Tool: The WTO’s Cloudy Windows’ (2010) 9 World Trade Rev. 551–581. 199 See, for example, Svitlana Kravchenko, ‘The Aarhus Convention and Innovation in Compliance with Multilateral Environmental Agreements’ (2007) 18 Colo. J. Int’l Envt’l L & Pol’y 1–50; Michael Mason, ‘Information Disclosure and Environmentgal Rights: The Aarhus Convention’ (2010) 10 Glob. Envt’l Pol. 10–31. 200 This was the case, for example, in Chile where Law 20.050 of 26 August 2005, available at http://www.leychile.cl/Navegar?idNorma=241331&buscar=20050, amended the Constitution to include a new Article 8 providing that all public acts had to be public (publicness here means non-secretness, rather than the more active transparency required by the WTO and by the Aarhus Convention). 201 See e.g., the German Informationsfreiheitgesetz of 5 September 2005, BGBl. 2005, vol. I, p. 2722; on that law see Michael Sitsen, Das Informationsfreiheitsgesetz des Bundes – Rechtsprobleme im Zusammenhang mit dem Anspruch auf Informationszugang nach dem IFG (Verlag Dr. Kovač, 2009); Bodo Zumpe, Öffentlichkeit staatlicher Informationen (Bookstation, 2007); on UK law see Patrick Birkinshaw, Freedom of Information (Cambridge University Press, 2010); see with many comparative references and discussion, including EU law on freedom of information also John Macdonald, Ross Crail and Clive H. Jones, The Law of Freedom of Information (Oxford University Press, 2009). 202 Metalclad v. Mexico (n. 141) para. 99 (emphasis added). 203 Tecmed v. Mexico (n. 71) para. 154 (emphasis added); similarly Maffezini v. Spain (n. 174) para. 83; LG&E v. Argentina (n. 149) para. 131; Biwater Gauff v. Tanzania (n. 36) para. 602; Rumeli v. Kazakhstan (n. 36) paras. 609 and 617; Bayindir v. Pakistan (n. 93) para. 178. 204 See Supreme Court of British Columbia, Mexico v. Metalclad Corp. [2001] BCSC 644. See also Charles H. Brower (n. 70) 43. 205 See Charles H. Brower (n. 70) 43.

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quire ‘that all relevant legal requirements for the purpose of initiating, completing and successfully operating investments (…) should be capable of being readily known to all affected investors’, the standard would be onerous indeed.206 The same holds true for an arduous demand that the host State ‘ensure that 84 the correct position is promptly determined and clearly stated so that investors can proceed with all appropriate expedition in the confident belief that they are acting in accordance with all relevant laws.’207 Taken too far, FET would impose an advisory function on administrative agencies and unduly shift the burden of being aware of potential regulatory risks in the implementation of foreign investment projects to the administration.208 Nevertheless, a more restrictive reading of the transparency requirement 85 seems equally possible and indeed warranted by rule of law considerations. In Tecmed, for example, transparency mainly referred 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.209 Ultimately, these statements reiterate more general due process demands concerning foreign investors in administrative proceedings. Transparency therefore does not necessarily have to be viewed as an additional substantive requirement, but rather as an instrument for resolving uncertainty in the domestic framework through available procedures. Transparency understood in this way can, for instance, become relevant when 86 a government develops the practice of awarding licences outside the gaze of public scrutiny. In Lemire, the respondent State was thus found to have breached the FET standard ‘because it facilitate[d] the secret awarding of licences, without transparency, with total disregard of the process of law and without any possibility of judicial review.’210 Such an understanding is compatible with a procedural take on the rule of law and opens up the possibility for investors to challenge what they consider to be wrongful treatment. g) Proportionality and Reasonableness

Turning to the final element canvassed here, many arbitral tribunals stress the 87 proportionality or reasonableness of different types of conduct in the context of FET, often in the same breath.211 In the common law tradition, proportionality and reasonableness are traditionally very different concepts.212 It is certainly 206 Metalclad v. Mexico (n. 141) para. 76 (for both citations). 207 Ibid. 208 See Stephan W. Schill, ‘Revisiting a Landmark: Indirect Expropriation and Fair and Equitable Treatment in the ICSID Case Tecmed’ (2006) 3(2) TDM 1, 15. 209 See Tecmed v. Mexico (n. 71) paras. 123, 160, 164. The tribunal in Nordzucker v. Poland (n. 95) para. 28 et seq. added that timely reactions of the government entity may be required. 210 Lemire v. Ukraine (n. 193) para. 418. 211 See e.g. El Paso Energy v. Argentina (n. 127) para. 373 (‘In other words, fair and equitable treatment is a standard entailing reasonableness and proportionality.’). 212 See only James Goodwin, ‘The Last Defence of Wednesbury’ (2012) 3 P.L. 445, 445–450 (with further references).

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possible to make a distinction. The former can be considered a continental European – originally Prussian – principle and signifies an apposite means-ends relationship. The latter is a rather different yardstick to gauge the lawfulness of official behaviour, centring on the rational merits (anthropomorphically assessed)213 of a decision. 88 But mainstream arbitral jurisprudence appears not to have adopted this distinction, a fact that fits with the general proclivity to consider ‘equitable and reasonable’ treatment a synonym of ‘fair and equitable’ treatment.214 For instance, unreasonableness can be an expression of arbitrary or discriminatory treatment.215 It is also not uncommon to couch a finding of FET in the adjective ‘reasonable’.216 Reasonableness here does not however imply a subjective test or an assessment of what a ‘sensible person’ or ‘accepted moral standards’ would deem proper,217 and less still a full-blown substantive re-evaluation of the merits of a host State measure. It is hence considered either an unspecific catch-all term that asks whether FET was indeed afforded, i.e. a restatement of the principles outlined above, or a means-ends examination, i.e. proportionality. 89 That said, proportionality has long since played an increasingly important role in many legal systems, including in the law of the EU and in the system established by the European Convention on Human Rights (ECHR).218 It seems fair to say that it has become one of the most prominent global legal transplants.219 The essence is simply stated: public measures must be appropriate for attaining

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The question being asked is: would a reasonable person ever have come to such a result? See Parkerings-Compagniet v. Lithuania (n. 21) para. 198. See e.g. Saluka v. Czech Republic (n. 12) para. 309. See only White Industries v. India (n. 146) para. 10.3.12 (denying legitimate expectations in the present context). 217 For such stronger notions of ‘reasonableness’ in domestic judicial review see e.g. Council for Civil Service Unions v. Minister for the Civil Service (n. 98) 410. 218 See e.g. Helmuth Schulze-Fielitz (n. 77) Article 20, para. 179 et seq. (on German constitutional law, where the modern proportionality principle arguably originates). See generally Evelyn Ellis (ed), The Principle of Proportionality in the Laws of Europe (Hart, 1999); Georg Nolte, ‘General Principles of German and European Administrative Law – A Comparison in Historic Perspective’ (1994) 57 Modern L. Rev. 191–212; T. Jeremy Gunn, ‘Deconstructing Proportionality in Limitations Analysis’ (2005) 19 Emory Int’l L. Rev. 465– 498. On proportionality as a general principle of EU law see e.g. CJEU, 8.6.2010, Case C-58/08, The Queen, on the application of Vodafone Ltd and Others v. Secretary of State for Business, Enterprise and Regulatory Reform [2010] ECR I-4999, para. 51. See further Nicholas Emiliou, The Principle of Proportionality in European Law (Kluwer Law International, 1996) 23 et seq. On the ECHR see only Pieter van Dijk and Godefridus van Hoof, Theory and Practice of the European Convention on Human Rights (Martinus Nijhoff, 1998) 80 et seq. On the hesitation in US constitutional law to accept proportionality as a general principle, see Vicki C. Jackson, ‘Ambivalent Resistance and Comparative Constitutionalism: Opening up the Conversation on “Proportionality,” Rights and Federalism’ (1999) 1 U. Pa. J. Const. L. 583–639. For proportionality in English law see e.g. R. (Daly) v. Secretary of State for the Home Department [2001] 2 AC 532, 547. 219 Alec Stone Sweet and Jud Mathews, ‘Proportionality Balancing and Global Constitutionalism’ (2008) 47 Colum. J. Transnat’l L. 72, 74; Aharon Barak, Proportionality – Constitutional Rights and Their Limitations (Cambridge University Press, 2012) 175–210.

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the legitimate objectives pursued in the sense of not going beyond what is necessary to achieve these. In traditional public international law, proportionality has been utilised in resolving conflicts in the relationships between equal sovereigns. For example, in the Case Concerning the Dispute Regarding Navigational and Related Rights, the ICJ adopted proportionality reasoning in balancing the right of a State to regulate navigation on a river belonging to its territory with the right to free navigation as granted by an international treaty to a neighbouring country. The ICJ noted that Nicaragua’s power to regulate Costa Rica’s right to free navigation under the convention was ‘not unlimited’, but that, amongst other things, ‘its negative impact on the exercise of the right in question must not be manifestly excessive when measured against the protection afforded to the purpose invoked.’220 The means-ends relationship clearly identifies this as proportionality thinking. This basic idea of not cracking a nut with a sledgehammer is equally useful in the context of rendering FET more concrete. In international investment law, proportionality revolves around the idea of controlling the extent to which host States interfere with foreign investments. Inversely, proportionate means point towards permissible conduct. Indeed, the tribunal in Pope & Talbot repeatedly referred to what it loosely called the reasonableness of the conduct of an administrative agency in order to decline a violation of FET.221 The mitigating role of the principle of proportionality can also be seen in the decision in Saluka.222 In that case it featured as a tool to balance the host State’s interests with the opportunities of the foreign investor.223 Thus the tribunal observed that any determination that FET was violated required ‘a weighing of the Claimant’s legitimate and reasonable expectations on the one hand and the Respondent’s legitimate regulatory interests on the other.’224 In any event, treatment of a foreign investor had to be ‘justified by showing that it bears a reasonable relationship to rational policies not motivated by a preference for other investments over the foreign-owned investment.’225 This last statement can be critiqued for inviting circularity.226 But while the ungainly reference to reasonableness of course begs the question, the central 220 Navigational and Related Rights (Costa Rica v. Nicaragua) (n. 61) para. 87 (emphasis added). 221 See Pope & Talbot v. Canada (n. 28) paras. 123, 125, 128, 155; see also MTD v. Chile (n. 62) para. 109 (referring to a statement by Judge Schwebel). 222 See Saluka v. Czech Republic (n. 12) paras. 304 et seq.; cf. Tecmed v. Mexico (n. 71) para. 122, concerning the influence of proportionality on the concept of indirect expropriation. For further details on proportionality analysis in international investment law, see Benedict Kingsbury and Stephan W. Schill, ‘Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Interest – The Concept of Proportionality’ in Stephan W. Schill (n. 13) 75. 223 Balance rather than categorical black-or-white decisions between claims and responses is arguably inherent in the notion of equity and thus equitable treatment, see UNCTAD (n. 7) 7. 224 Saluka v. Czech Republic (n. 12) para. 306 (emphasis added). 225 Ibid., para. 307 (emphasis added). 226 See Roland Kläger (n. 14) 243.

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idea of a proportionate exercise of public authority is not doomed to fail on its own premises. The problem with pure reasonableness tests is that they provide little guidance other than suggesting an imposition of idiosyncratic views of what may be deemed to be proper; while also not without its shortcomings, proportionality at least disciplines legal argumentation to a degree. It provides a tool to assess whether a measure was fair and equitable by comparing the means used to the envisaged ends.227 This is particularly useful in the common situation in which there is more than one regulatory option open to the host State, as was the case in S. D. Myers.228 It will then be necessary to look for the least restrictive, yet still adequate, alternative that strikes a proportionate balance between the interests of foreign investors and host States. 94 Proportionality in international investment law and arbitration does not usually surface as a self-standing claim, given the way most investment treaties are drafted. It is however gaining traction as an auxiliary principle invoked to shed light on terse treaty terms, in particular – but by no means exclusively – FET. Here it can play an important role whenever arbitral tribunals scrutinise whether the exercise of administrative discretion conformed to that standard. 95 To give an early example of this more oblique use, the Middle East Cement Shipping decision involved the seizure and auctioning of the claimant’s vessel in order to recover debts the investor had incurred in relation to a State entity.229 A central issue was whether the procedural implementation of the auction was valid, in particular whether sufficient notice of the seizure was given. Since the claimant could not be found onboard the ‘Poseidon’, the notice was given by attaching a copy of a distraint report to the vessel. This was arguably in conformity with Egyptian law. The tribunal, however, considered this in absentia notification a wrongful exercise of discretion. Finding a failure to fulfil the FET requirement of the 1993 Egypt–Greece BIT, the tribunal reasoned that ‘a matter as important as the seizure and auctioning of a ship of the Claimant should have been notified by a direct communication (…) irrespective of whether there was a legal duty or practice to do so by registered mail with return receipt.’230 Although proportionality was not mentioned expressly, it is plain to see that the tribunal thought that an act as severe as seizing a ship should have prompted a more measured approach on behalf of the host State. 96 The arbitral tribunal in National Grid applied a common variant of proportionality analysis in its examination of FET when it stressed that the standard was not an absolute parameter; rather, the context mattered.231 Ergo, what might be unfair and inequitable in normal circumstances may not be so in a situation of 227 The deeper question of whether proportionality itself is problematic on account of inviting a culture of rampant arbitral ‘ad hockery’ is beyond the remit of this chapter on FET. 228 S.D. Myers v. Canada (n. 27) para. 255. 229 Middle East Cement Shipping and Handling Co S.A. v. Egypt, ICSID Case No. ARB/99/6, Award, 12 April 2002. 230 Ibid., para. 143 (emphasis added). 231 National Grid v. Argentina (n. 62) 180.

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economic and social crisis. Again, the means-end link is patent, as is the dislike for more categorical reasoning. Taking into account Argentina’s serious economic crisis, the tribunal thus chiefly found a breach of FET as concerns the thwarting of a possible renegotiation. Put differently, the host State’s ‘most extreme actions, blatantly in violation of specific assurances that it had made to the investor, were so disproportionate that they could not be said to have been within the investor’s reasonable contemplation.’232 In determining whether the standard was breached, proportionality analysis 97 also played a role for the tribunal in Lemire. Relying on the reference in the preamble of the Ukraine–United States BIT that the treaty should serve the economic development of both contracting States, the tribunal emphasised the importance of balancing investor and host State interests.233 It observed: Economic development is an objective which must benefit all, primarily national citizens and national companies, and secondarily foreign investors. Thus, the object and purpose of the Treaty is not to protect foreign investments per se, but as an aid to the development of the domestic economy. And local development requires that the preferential treatment of foreigners be balanced against the legitimate right of Ukraine to pass legislation and adopt measures for the protection of what as a sovereign it perceives to be its public interest.234

The measured approach is notable. While the tribunal considered that a raft of 98 factors were relevant for determining whether FET had been denied – including a failure to provide a stable and predictable legal framework, the existence of specific representations, the absence of due process and transparency in the legal procedure and the existence of arbitrary, discriminatory or inconsistent conduct on behalf of the State – it also pointed out that it could not evaluate a host State’s actions solely with a view to protecting the investors’ rights.235 The tribunal insisted that it had to ‘balance other legally relevant interests, and take into consideration a number of countervailing factors’ before finding a violation of FET, including the ‘sovereign right to pass legislation and to adopt decisions for the protection of its [i.e. the State’s] public interests, especially if they do not provoke a disproportionate impact on foreign investors.’236 Although the tribunal ultimately found the respondent to have engaged in arbitrary and discriminatory conduct, and did not actually engage in any balancing as such, Lemire illustrates that the idea of a proportionate relationship between the State’s conduct and the investor’s rights is an increasingly prevalent aspect of FET.

232 José Alvarez and Tegan Brink, ‘Revisiting the Necessity Defense: Continental Casualty v. Argentina’ (2010) 3 IILJ Working Paper, 40, available at http://www.iilj.org/publications/ documents/2010-3.Alvarez-Brink.pdf. 233 Lemire v. Ukraine (n. 193) paras. 272–273. 234 Ibid., para. 273. 235 Ibid., paras. 284–285. 236 Ibid., para. 285. On the balancing of interests as the ‘overriding principle of proportionality’ see Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Ecuador, ICSID Case No. ARB/06/11, Award, 5 October 2012, para. 450.

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Proportionality also featured prominently in Total.237 In deciding whether the investor’s expectations concerning the application of tariff guarantees and peso convertibility were protected against legislative change, the tribunal, following the decision in Saluka, engaged in a multifaceted balancing exercise in the context of assessing an alleged FET violation. In its words: The determination of a breach of the standard requires (...) ‘a weighing of the Claimant’s reasonable and legitimate expectations on the one hand and the Respondent’s legitimate regulatory interest on the other.’ Thus an evaluation of the fairness of the conduct of the host country towards an investor cannot be made in isolation, considering only their bilateral relations. The context of the evolution of the host economy, the reasonableness of the normative changes challenged and their appropriateness in the light of a criterion of proportionality also have to be taken into account.238

This relational circumspection allowed the tribunal to find that the claimant could not oppose changes to the respondent republic’s monetary policy,239 but that it was entitled to expect that the applicable regimes would respect certain baseline features, viz. that tariffs would be adjusted through negotiations with the competent authority so as to ensure ‘basic principles of economic equilibrium and business viability’ as enshrined in the respective regulatory frameworks.240 101 The test that crystallises in decisions such as Total resembles a broad-based examination of a variety of factors that contrasts the host State’s behaviour with the negative impact on an investment, taking into account familiar perceptions of economic rationality and public interest. This is properly done with a view to basic rule of law considerations, rather than to simply and one-sidedly further business profitability or national interest. The point is not to fix an intransigent and universal minimum standard of treatment, but rather to base findings of improper State conduct on an inacceptable result following a comparison of means and ends in a very specific context. This situational awareness and aversion to extremes is baked into the concept of proportionality.241 102 Although the result could again be phrased as a matter of basic rules of public administration vis-à-vis long-term foreign investment, these are really only the inductive findings of a series of such examinations, rather than a form of ‘topdown’ natural justice. That is of course not to deny that, in the end, the exercise retains an evaluative element. But that alone does not validate accusations of purely ideological decision-making. First, law and legal practice are argumenta100

237 Total v. Argentina (n. 13). 238 Ibid., para. 123 (quoting Saluka v. Czech Republic (n. 12) para. 306). Note also the Total tribunal’s insistence in para. 309 that ‘an evaluation of fairness must take into account the evolution of the host economy, the reasonableness of the normative changes challenged and their appropriateness in the light of a standard of reasonableness and proportionality.’ 239 Total v. Argentina (n. 13) paras. 135–165 (concerning the claimant’s investment in the gas distribution sector), paras. 315–324 (concerning its investment in the power generation sector), paras. 428–431 (concerning the hydrocarbons sector). 240 Ibid., paras. 168, 313, 325. 241 Cf. Continental Casualty v. Argentina (n. 173) para. 227 (couching this in terms of ‘reasonableness’).

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tive (rather than purely exegetical) exercises. Second, tribunals’ explanations lay bare the reasons for specific decisions, which in turn can be challenged. Applying this technique it is possible to come to more nuanced views as to whether FET was violated in a particular case that when a ‘one-size-fits-all’ standard is expounded. For instance, FET can be breached by fixing prices so that the investment made cannot be recouped or by preventing reasonable profits to be made contrary to the principles governing the activities of privately owned enterprises.242 Moreover, a retroactive revocation of tax exemptions can constitute a violation of the standard, but prospective regulatory changes on the other hand remain viable.243 To give another example of the utility of proportionality-based reasoning, this was also relevant for some tribunals when determining whether State emergency measures in reaction to the severe Argentine economic crisis of 2001/2002 satisfied a non-precluded measures clause such as Article XI of the 1991 Argentina– United States BIT.244 It is useful here to recall that the first few tribunals to interpret this provision however did not draw on the idea of proportionality. Instead, they focused heavily on the customary international law concept of necessity and Article 25 of the ILC Articles on State Responsibility. Some adopted a strict test of whether Argentina’s emergency legislation constituted the ‘only means’ to react to the economic crisis.245 Subsequent arbitrators, however, approached this problem quite differently. Continental Casualty is particularly notable in the present context.246 Responding to alleged treaty breaches resulting amongst other things from transfer restrictions and pesification, the respondent host State argued that those measures were adopted in reaction to its exceptional financial distress and that they were covered by Article XI of the Argentina–United States BIT in the sense of being ‘necessary for the maintenance of public order.’247 The tribunal largely accepted this argument. Relying on WTO Appellate Body jurisprudence on the interpretation of Article XX of GATT,248 it turned to 242 Total v. Argentina (n. 13) para. 333. 243 Ibid., paras. 437–444. 244 Art. XI reads: ‘This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.’ See Treaty between the United States and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment, signed 11 November 1991, entered into force 20 October 1994 (1992) 31 ILM 124; see Continental Casualty v. Argentina (n. 173) paras. 196 et seq., 226 et seq. 245 On the cases concerning measures adopted by Argentina in reaction to its economic crisis in 2001–2002, in particular the conceptualisations of the concept of necessity under customary international law and the interpretation of Art. XI of the Argentina–United States BIT (1991), see Jürgen Kurtz, ‘Adjudging the Exceptional at International Investment Law: Security, Public Order and Financial Crisis’ (2010) 59 ICLQ 325–371. See also Christina Binder and August Reinisch, ‘Economic Emergency Powers: A Comparative Law Perspective’ in Stephan W. Schill (n. 13) 503, 508–513. 246 Continental Casualty v. Argentina (n. 173). 247 Ibid., para. 160.

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a proportionality analysis in order to determine whether the measures adopted were necessary to maintain public order. In that vein, the tribunal stressed that a bilateral reciprocal treaty had to accommodate the different interests and concerns of the parties involved, afforded the host State a ‘significant margin of appreciation’ and considered such responses to economic crises to generally fall within the scope of application of Article XI.249 107 This was to be preferred to the more restrictive ‘only means’ approach. Recalling the Appellate Body in Korea Beef but also referring to ICJ jurisprudence, the tribunal in Continental Casualty observed that ‘necessary’ was not limited to whatever was ‘indispensable’ or ‘of absolute necessity’ or ‘inevitable’, but instead comprised a range of degrees.250 What is more, quoting a summation found in Brazil – Measures Affecting Imports of Retreaded Tyres, it observed: The necessity of a measure should be determined through ‘a process of weighing and balancing of factors’ which usually includes the assessment of the following three factors: the relative importance of interests or values furthered by the challenged measures, the contribution of the measure to the realization of the ends pursued by it and the restrictive impact of the measure on international commerce.251

Applying this, the tribunal in Continental Casualty found that the host State measures contributed materially to the realisation of legitimate aims, were a positive reaction to the crisis and satisfied ‘a genuine relationship of end and means in this respect.’252 As to any available alternatives the respondent could have pursued, the tribunal again underlined that a degree of deference was due to the host State and noted that the arbitrators were ‘not called upon to make any political or economic judgment on Argentina’s policies and of the Measures adopted to pursue them.’253 109 Four points emerge from such decisions. First, proportionality can be a viable tool both to substantiate and to deny claimed treaty violations. Second, this angle highlights that FET is not an inflexible standard, but rather allows for a measured approach that is mindful both of the interests of host States and foreign investors. Third, the analysis allows for more differentiated findings within a particular set of facts. Depending on the situation and evidence presented, the method makes it possible, for instance, to declare allowances for bank freezing, account withdrawals, currency devaluation and pegging, pesification and certain government bond restructurings permissible, while considering other security swaps illegal because of their specific tardiness, devaluation and connected neg108

248 It considered this parallel justified because ‘the text of Article XI derives from the parallel model clause of the U.S. FCN treaties and these treaties in turn reflect the formulation of Article XX of GATT 1947’ (ibid., para. 192). The reliance on WTO jurisprudence may well be grounded in the fact that Professor Sacerdoti, who has served as a member of the WTO Appellate Body, was the president of the tribunal. 249 Ibid., paras. 174, 181. 250 Ibid., paras. 193–195. 251 Ibid., para. 194 (with further references to Appellate Body case law in fn. 294). 252 Ibid., paras. 196–197. 253 Ibid., para. 199.

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ative implications.254 Fourth, despite the inherent flexibility of the concept and the need for tribunals to fully reason their decisions, proportionality properly understood does not degenerate to second-guessing or even usurping political decision-making. The power it affords to tribunals can also be channelled by recourse to comparative public law in order to reduce the risk of idiosyncratic adjudication. 3. Contextualising Fair and Equitable Treatment in an Archetypal Separation of Powers Framework

Although the sub-elements developed above give meaning to FET from a rule 110 of law perspective, they are still fairly general in nature. Yet, they can be further concretised in the context of discharging public power in a typical tripartite constellation including administration, legal proceedings, and law-making, i.e. in a basic separation of powers framework or a system of checks and balances. This need not necessarily be a national notion, as the EU amply demonstrates.255 The point is to conceive FET as a mechanism of accountability applicable to public functions much like that known to existing constitutional or administrative orders.256 There are however two crucial limitations: it only constitutes a regime applicable to foreign investors and only entitles to damages in case of a violation. Importantly, it does not assume normative supremacy over domestic law. It is however not confined to a specific State measure or sector of activity. Accordingly, FET can be concretised in relation to the obligations flowing from it for the different branches of government. a) Fair and Equitable Treatment and Domestic Administrative Law

National administrative law is particularly prone to the influence of FET since 111 foreign investors are habitually affected to a great extent by domestic administrative procedures at various stages during the life of an investment. This ranges from applications for and issuance of operating licences to general regulatory control and supervision of their undertaking. In this context, FET can serve as a yardstick for domestic administrative law. Of the sub-elements identified above, the principles of legality, administrative due process, proportionality and transparency are particularly fitting.

254 Ibid., paras. 201–222. 255 It is not difficult to read such a concept into the EU’s commitment to freedom, democratic principles, equality and the rule of law. See Allan Rosas, ‘Separation of Powers in the European Union’ (2007) 41 Int’l Law. 1033, 1034; Gerard Conway, ‘Recovering a Separation of Powers in the European Union’ (2011) 17 Eur. L. J. 304–322. But since grievances will result from national measures, domestic frameworks will be focal in what follows. 256 Cf. Peter Cane (n. 77) 18–19.

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(1) Administrative Procedure

With respect to administrative procedure, in particular concerning the granting, renunciation or renewal of operating licences, FET requires domestic administrations to grant foreign investors a fair hearing, conduct proceedings in a comprehensible way, and give reasons for their decisions. 113 The right to a fair hearing and the right to participation in administrative proceedings played a role in the (in)famous Metalclad decision, where the tribunal found a breach of the standard because the investor was not properly involved. According to the tribunal, the investor should have been given the chance to participate in a meeting of a local town council that discussed whether to issue a construction permit for the investor’s waste landfill.257 Similarly, the tribunal in Tecmed emphasised the right to a fair hearing as a part of FET in the context of an administrative procedure concerning the ending of an operating licence for a waste landfill.258 114 FET further obliges domestic administrations to give reasons for their decisions and base them on sufficient factual evidence. The purpose of this requirement is to rationalise the decision-making process and to secure that decisions are taken in accordance with the legal requirements contained in domestic law. They have to be comprehensible and thus open to a potential challenge. Against this backdrop, the tribunal in Metalclad determined that Mexico had failed to meet the standard because the council’s decision to deny the construction permit was not grounded in considerations relating to ‘construction aspects or flaws of the physical facility’,259 but was mainly motivated by political considerations and not supported by evidence pertaining to legitimate criteria under the municipal law. 115 The requirement to supply sufficient evidence also involves a duty to conduct adequate fact-finding and to verify evidence before a final decision is taken. Generally speaking, the requirement to give reasons aims at facilitating the legal review of an administrative decision.260 In sum, FET requires that domestic administrative proceedings conform to standards that are derived from a processoriented understanding of the rule of law.261 112

257 See Metalclad v. Mexico (n. 141) para. 91. 258 See Tecmed v. Mexico (n. 71) paras. 161 et seq.; similarly, Rumeli v. Kazakhstan (n. 36) para. 617. Cf. also Bayindir v. Pakistan (n. 93) paras. 344–348, noting that a hearing will not be necessary in contractual relations between investor and State. More specifically on the elements of a fair hearing required under fair and equitable treatment, see Todd Weiler, ‘NAFTA Article 1105 and the Principles of International Economic Law’ (2003) 42 Col J. Transnat’l L. 35, 79 et seq. 259 Metalclad v. Mexico (n. 141) para. 93. On the requirement to give reasons as part of fair and equitable treatment, see also Rumeli v. Kazakhstan (n. 36) para. 617; Glamis Gold v. USA (n. 30) para. 616; TECO v. Guatemala (n. 100) para. 458. 260 See Tecmed v. Mexico (n. 71) para. 123. 261 For parallel developments of administrative law in the context of administrative proceedings in the EU and similar developments under WTO law, see Giacinto della Cananea, ‘Beyond

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(2) Exercise of Administrative Discretion

Edging closer towards substance, FET can also restrict or channel the exer- 116 cise of the administration’s discretionary power. The standard requires administrative agencies to take into account sufficiently the effect of their decisions on foreign investors. Evidently, consistency and the protection of legitimate expectations play an important role regarding the exercise of administrative discretion. It is for this reason that the tribunal in Middle East Cement Shipping found a breach of FET when the authority chose to notify in absentia before seizing and auctioning the investor’s vessel in order to recover debts instead of notifying the claimant directly at his local address, a procedure that was equally available under Egyptian law.262 FET further requires that administrative agencies exercise their discretion ac- 117 cording to uniform standards and do not deviate from standard procedures or the usual assessment of comparable circumstances without a valid reason. Such considerations derived from the basic idea of consistency may not only influence administrative decision-making with respect to the granting of licences,263 but could also restrict intervention by agencies in order to enforce domestic law. If, for example, an administrative agency has consistently tolerated a specific unlawful conduct, FET may, depending on the circumstances, prevent it from intervening against a foreign investor who engaged in the same conduct.264 Similarly, acting contrary to representations made by government officials can constitute a breach of the standard.265 b) Fair and Equitable Treatment and Domestic Judicial Proceedings

The rule of law elements discussed above also influence the institutional fab- 118 ric of the host State’s judiciary and the procedural law national courts apply. FET requires that host States provide a fair and efficient system of justice,266 including effective judicial dispute settlement procedures for the review of administrative acts267 and dispute resolution between private parties.268 In Mondev, for example, the tribunal entertained the possibility that ‘the conferral of a general immunity from suit for conduct of a public authority affecting a NAFTA investment could amount to a breach of Article 1105(1) of NAFTA.’269 Accord-

262 263 264 265 266 267 268

the State: the Europeanization and Globalization of Procedural Administrative Law’ (2003) 9 Eur. Pub. L. 563–578. Middle East Cement Shipping v. Egypt (n. 229) para. 143. See also supra notes 229–230 and accompanying text. See MTD v. Chile (n. 62) para. 107 et seq. On this prohibition of venire contra factum proprium as a concept of administrative law see Steffen Hindelang, ‘“No Equals in Wrong?” The Issue of Discrimination in an Environment of Illegality. Some Thoughts to Encourage Discussion’ (2006) 7 JWIT 883–897. See International Thunderbird Gaming v. Mexico (n. 110) para. 137 et seq.; Metalclad v. Mexico (n. 141) para. 85 et seq. See further Hector Mairal (n. 140) 413, 418–421. Loewen v. USA (n. 124) para. 153 (with further references). Cf. Waste Management v. Mexico (n. 68) para. 116. Loewen v. USA (n. 124) paras. 123, 129.

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ingly, FET grants a right of reasonable access to domestic courts for foreign investors. 119 In addition, the obligation also requires the outcome of a court decision to conform to certain substantive rule of law standards, in particular to be devoid of arbitrariness.270 It does not however go as far as to demand a specific result, let alone one favourable to the investor. 120 Similarly, the procedural law applied by domestic courts has to conform to the rule of law requirements reflected in FET. This requires courts to entertain suits in a timely fashion,271 to give a fair hearing to the foreign investor on the essential questions, not to base a decision on unexpected legal grounds and to give reasons for the decisions reached.272 c) Fair and Equitable Treatment and Domestic Legislation

Finally and often most controversially, FET also restricts the leeway of the national legislator vis-à-vis foreign investors.273 Although domestic legislation is not as often subject to the direct scrutiny of investment tribunals, mainly due to the fact that it often requires specific implementation by administrative or judicial decisions,274 the standard can result in significant restrictions on domestic law-makers, mainly due to the protection of legitimate expectations. As the tribunal in Paushok v. Mongolia observed: ‘Actions by legislative assemblies are not beyond the reach of bilateral investment treaties. A State is not immune from claims by foreign investors in connection with legislation passed by its legislative body, unless a specific exemption is included in the relevant treaty.’275 122 To give a classical example, in CMS the tribunal specified that transparency, consistency in the governmental decision-making process, orderly procedures and predictability constituted core elements of FET also with respect to national legislation.276 Measures that completely converted the existing legal framework, such as the fundamental change in the US dollar-based tariff calculation that the investor relied upon when making its investment, were found to violate the standard. Arguably, the key factor in this context was the permanent abrogation of 121

269 See Mondev v. USA (n. 33) para. 151. 270 Rumeli v. Kazakhstan (n. 36) para. 653. Cf. also Aguas del Aconquija v. Argentina (n. 113) para. 80. See further Mondev v. USA (n. 33) para. 144. 271 See Victor Pey Casado v. Chile (n. 113) paras. 659–663; cf. also Jan de Nul v. Egypt (n. 116) paras. 202–224. 272 See Robert Azinian, Kenneth Davitian and Ellen Baca v. Mexico, ICSID Case No. ARB(AF)/97/2 (NAFTA), Award, 1 November 1999, para. 102. 273 The controversy is however put into perspective once one recalls that, rather unremarkably, almost all of international law is designed to restrict certain national behaviour and that international law traditionally treats States as singular entities regardless of domestic divisions of power. 274 Cf. Jahangir Mohtadi and others v. Iran, Award, 2 December 1996, 32 Iran–US CTR 124, 140 et seq.; Reza Said Malek v. Iran, Award, 11 August 1992, 28 Iran–US CTR 246, 266 et seq. 275 Paushok v. Mongolia (n. 96) para. 298. 276 CMS v. Argentina (n. 24) paras. 276 et seq. (with further references).

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the existing tariff system that wholly eviscerated expectations of foreign investors, which were deliberately induced by Argentina so that the investors would make their investments. Several other tribunals sitting in disputes against Argentina involving almost identical facts followed this lead and equally found that the FET standard could restrict the domestic legislator in making fundamental changes to a regulatory framework the stability of which investors could legitimately rely on when making their investment.277 Understandably, however, such a protection of confidence should not be inter- 123 preted as an absolute guarantee. First, the concept of legitimate expectations is limited to protecting what an investor, based on objective government conduct and based on the circumstances prevailing in the host State, can legitimately expect at the time of investing abroad.278 It is not a purely subjective test. Secondly, one clearly cannot presume that, although the stability of the legal framework is an essential factor for the investment decision of foreign investors, host States intended to entirely abrogate their sovereign right to legislate and change domestic legal rules by entering into investment treaties. The issue becomes one of how regulatory changes are ushered in, rather than whether.279 In this context, it seems appropriate to draw a distinction between cases in 124 which a host State has generated confidence in the broader stability of certain regulations, be it explicitly or implicitly, and cases where an investor idiosyncratically hoped for a very specific scenario or entered into an undependable or volatile setting. In the first case, the concepts of legitimate expectations, predictability and legal stability will find their genuine application. In this context, 277 LG&E v. Argentina (n. 149) paras. 119–139; Enron Corp. v. Argentina (n. 134) paras. 251– 268; Sempra Energy v. Argentina (n. 42) paras. 290–304; BG v. Argentina (n. 134) paras. 289–310; National Grid v. Argentina (n. 62) paras. 167–180; Total v. Argentina (n. 13) paras. 99 et seq., 305 et seq., 412 et seq.; EDF International S.A., SAUR International S.A., and León Participaciones Argentinas S.A. v. Argentina, ICSID Case No. ARB/03/23, Award, 11 June 2012, para. 994 et seq.; Toto v. Lebanon (n. 13) para. 239 et seq. 278 See LG&E v. Argentina (n. 149) para. 130; Duke Energy v. Ecuador (n. 134) para. 347; Continental Casualty v. Argentina (n. 173) para. 261; Parkerings-Compagniet v. Lithuania (n. 21) para. 331. 279 See e.g. CMS v. Argentina (n. 24) para. 277; Saluka v. Czech Republic (n. 12) para. 305. Parkerings-Compagniet v. Lithuania (n. 21) paras. 332–333 (stating that ‘[i]t is each State’s undeniable right and privilege to exercise its sovereign legislative power. A State has the right to enact, modify or cancel a law at its own discretion. Save for the existence of an agreement, in the form of a stabilization clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment.’); BG v. Argentina (n. 134) para. 298; Micula v. Romania (n. 96) para. 529 (stating that ‘the correct position is that the state may always change its legislation, being aware and thus taking into consideration that : (i) an investor’s legitimate expectations must be protected; (ii) the state’s conduct must be substantively proper (e.g., not arbitrary and discriminatory); and (iii) the state’s conduct must be procedurally proper (e.g., in compliance with due process and fair administration.’). See also the summary in UNCTAD (n. 7) 77 (‘investors must anticipate and accept that the regulatory and legislative environment may change over time. In light of the FET standard, investors can expect, however, that such changes will be implemented in good faith and in a non-abusive manner and that publicinterest arguments will not be used as a disguise for arbitrary and discriminatory measures.’).

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the host State can be taken to be responsible for a foreign investor’s reliance on the regulatory framework when making its investment decision. 125 In the second situation, such as when a foreign investor merely relies on the general legal framework without any specific commitments on behalf of the host State to attract foreign investors, those concepts may only have a more marginal scope of application. They might still come into play, however, especially with respect to legislation with retroactive effect.280 In sum, only in specific circumstances will FET restrict the host State’s power to regulate and introduce changes to existing regulation. The distinctive impact on administrative and judicial proceedings, by contrast, is much greater. 4. Methodological Implications of the Rule of Law Approach

Evidently, the FET standard is difficult to pin down in practice. It has been suggested here that a rule of law paradigm provides the most useful conceptualisation for the standard. This section deals with the method to go about this. The traditional lawyerly arsenal of interpretive aids – text, headings, preamble, prefixed or annexed definitions, systemic fit, preparatory material, history, explanatory notes – is usually of little avail, certainly with regard to the current crop of tersely-worded clauses.281 This is particularly so when it comes to determining what the actual obligation incumbent on States is. 127 It is common to say in this respect that FET is contingent or context-dependant. According to one commentator, ‘it offers a general point of departure in formulating an argument that the foreign investor has not been well treated by reason of discriminatory or other unfair measures that have been taken against its interests.’282 Yet statements to this effect must not be misunderstood to imply that the treaty standard should depend solely on the facts of a case or the whim of an arbitrator. Taking on board the imperative and inevitable critique of austere and naive textualism does not mean that the standard is not a legal norm or incapable of common application in substantially similar situations. 128 Rather than engaging in reversed legal reasoning by turning to the circumstances a tribunal is faced with or solely relying on arbitral jurisprudence, it is argued here that domestic and non-domestic law should be taken into account in 126

280 In principle, protection against retroactive legislation exists in most domestic legal systems, but the extent to which it is prohibited varies considerably. See e.g. Helmuth Schulze-Fielitz (n. 77) Article 20, para. 151 et seq. (on German law); Rainer Hofmann, ‘Die Bindung staatlicher Gewalt’ in Rainer Hofmann, Joseph Marko, Franz Merli and Ewald Wiederin (n. 77) 3, 16–17 (summarising the situation in Germany, Austria, Spain, Poland, Slovenia, the Czech Republic and the Slovak Republic). For EU law see Thomas von Danwitz (n. 98) 218; Takis Tridimas (n. 163) 252–273; Karol Lasok, Timothy Millett and Anneli Howard (n. 99). On US law see Andrew C. Weiler, ‘Has Due Process Struck Out? The Judicial Rubberstamping of Retroactive Economic Laws’ (1993) 42 Duke L. J. 1069–1140. 281 Which is of course not to say that these can never be decisive or useful, consider only the (in)famous interpretative note of the Free Trade Commission of 2001 concerning the relationship of NAFTA Art. 1105(1) to the international law minimum standard. 282 Peter Muchlinski (n. 107) 527, 531.

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interpreting and concretising FET clauses. For present purposes, little in the end turns on whether or not this is done with a view to forcing the results into one of the received formal categories of international legal sources. While it may be possible to consider the results of such an exercise to be general principles of international law or even customary international law,283 it would be equally viable to remain within the first indent of the first subsection of Article 38 of the ICJ Statute and to consider this an interpretation of the respective treaty that assures FET and that remains the source of any State obligation.284 Be that as it may, understanding FET as an embodiment of the rule of law 129 hence clarifies its normative content and lends itself to a specific methodology investment tribunals should follow in concretising the standard and in solving conflicts between the competing interests of host States and foreign investors. Instead of primarily relying on prior arbitral decisions, an approach that is not only of little help in disputes involving novel angles but also does not in fact relieve a later tribunal of an own evaluative effort, and instead of positing the content in an abstract way without adequate justification, tribunals should employ a comparative methodology. This can elucidate the meaning and implications of specific rule of law requirements. While of course itself not waterproof, this at the very least opens up a viable vocabulary for putting cases either way and for broader critique, should that be desired. a) Comparative Analysis of Domestic Legal Systems

A typical approach would draw on a comparison of rule of law standards con- 130 tained in domestic legal systems. Such a take based on commonalities has for instance already been proposed in order to concretise the concept of indirect expropriation under international law and its differentiation from non-compensable regulation.285 Turning to other legal orders, the Court of Justice of the European Union is also well-known to draw on the laws of EU member States in giving meaning to EU law, even if this is rarely cloaked in terms of ‘comparative law.’286 This can prove equally fruitful for the application of FET as viewed under a rule of law prism. Three points are worth bearing in mind.287 First, arbitral tribunals need to pay 131 attention to recurrent features legal systems set up for the exercise of public 283 For instance, the tribunal in Total v. Argentina (n. 13) para. 128 et seq. came to a comparative analysis via general principles of international law as mentioned in Art. 38(1)(c) of the ICJ Statute. 284 This is the approach taken by the tribunal in Toto v. Lebanon (n. 52) para. 193. 285 Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Springer, 1985) 213 et seq.; Rudolf Dolzer, ‘Indirect Expropriation of Alien Property’ (1986) 1 ICSID Rev.–FILJ 41–65. Similarly Jeswald Salacuse and Nicholas P. Sullivan, ‘Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain’ (2005) 46 Harv. Int’l L. J. 67, 115. 286 See only Koen Lenaerts, ‘Interlocking Legal Orders in the European Union and Comparative Law’ (2003) 52 ICLQ 873–906. 287 See further the references cited supra note 53.

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power. While that does not demand a certain mathematical minimum in terms of systems surveyed or in accordance with one another, it is unlikely to be very satisfactory if only one or two legal orders can convincingly be adduced. Second and importantly, the exercise nonetheless remains qualitative rather than purely quantitative. It would be facile to pretend that simply counting mentions elsewhere is all that matters. That alone cannot do away with the need to argue why a particular slant concerning FET is preferable. Conversely, a (numericallyspeaking) minority position is equally possible.288 Third, recourse to national positions is supplementary in the sense that it is unlikely to convince if it flies in the face of the unity, efficacy, and purpose of the investment agreement in question.289 132 A comparative analysis can concretise the interpretation of investors’ rights mainly in two ways. It may enable investment tribunals to deduce requirements from comparable domestic and international standards for a context-specific interpretation of the respective standard of treatment in question, such as fair and equitable treatment. National systems and their practical understanding of the rule of law might, for example, be used to justify standards relating to the form and duration of administrative proceedings affecting foreign investors.290 The general principles thus developed could then guide the application of treaty provisions requiring FET. 133 Alternatively, comparative public law analysis may also be used to justify the conduct of a State vis-à-vis a foreign investor. If conduct similar to that at issue in an investment arbitration is generally accepted by domestic legal systems, investment tribunals should adopt the same solution as an expression of a general principle. The tribunal in Noble Ventures, for example, in determining whether the initiation and conduct of bankruptcy proceedings, without more, was arbitrary, rightly attributed much weight to the fact that [s]uch proceedings are provided for in all legal systems and for much the same reasons. One therefore can not say that they were ‘opposed to the rule of law.’ Moreover, they were initiated and conducted according to the law and not against it. [The company] was in a situation that would have justified the initiation of comparable proceedings in most other countries. Arbitrariness is therefore excluded.291

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Similarly, the tribunal in Plama pointed out that because of evidence which shows that the tax laws of many countries around the world treat debt reductions, as were negotiated in this case, as income taxable to the beneficiary (…) [i]t cannot be said that Bulgaria’s law in this respect was unfair, inadequate, inequitable or discriminatory. It was part of the generally applicable law of the country like that of many other countries.292

288 Cf. in the context of EU law, CJEU, 20.2.2008, Joined Cases C-120/06 P and C-121/06 P, FIAMM v. Council, Opinion of AG Maduro [2008] ECR I-6513, para. 55 (rejecting an overly mechanistic approach to comparative law and referring to the example of legitimate expectations as originally only being known to German law). 289 For a parallel example from EU law, see only CJEU, 17.12.1980, Case 149/79, Commission v. Belgium [1980] ECR 3881, para. 19. 290 See also Giacinto della Cananea (n. 261) 563, 575. 291 Noble Ventures v. Romania (n. 106) para. 178.

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In this context, comparative public law can serve as a yardstick not only to 135 develop minimum but also to identify maximum standards of investment protection. It can thus help to interpret investment treaties so that they do not impose restraints on domestic legislators, administrations, and the judiciary that are more onerous than those imposed, in a comparative perspective, by the respective principles of domestic public law.293 This suggests that comparative public law does not one-sidedly work in favour of foreign investors, but is equally able to defend the public interests against private usurpation. Comparative public law thus can affect international investment law and arbi- 136 tration through various channels and in various aspects. It can help to clarify the meaning of other sources applicable in investor-State arbitration, in particular provisions in international investment treaties. Its functioning is thus not necessarily to the benefit of investors and capital-exporting countries. Instead, a rigorous methodology not only ensures to reduce the influence of subjective preferences of arbitrators but also guarantees outcomes that are as balanced (or imbalanced) as those of domestic legal systems. This rebuts much of the criticism that the increased use of comparative public 137 law will enhance the influence of subjective and biased preferences of arbitrators that one-sidedly work in favour of foreign investors and capital-exporting countries. Much to the contrary, the increased use of comparative public law can have a positive impact for reshaping international investment law and re-aligning it with domestic public law standards. b) Comparative Analysis of Inter- and Supranational Legal Regimes

It is equally possible to draw on a cross-regime comparison with other non- 138 domestic legal regimes that are faced with similar rule of law problems. A particularly promising field for such a comparative approach is EU law, which, albeit now actively pushing into much more diverse areas, began and was long dominated by an administrative and economic paradigm. In addition to that, the more recent turn to constitutionalism in EU law is certainly a rich source of inspiration for FET analysis. Similarly, and leaving supranational law aside, recourse could be had to the world trade order and WTO jurisprudence in order to further develop the rule of law requirements with respect to the exercise of pub-

292 Plama v. Bulgaria (n. 22) para. 269 (internal reference omitted). Cf. also Lemire v. Ukraine (n. 193) para. 506 (observing that ‘[t]he desire to protect national culture is not unique to Ukraine. France requires that French radio stations broadcast a minimum of 40 % of French music, Portugal has a 25–40 % Portuguese music quota and a number of other countries impose similar requirements.’ (footnotes omitted)). 293 See Santiago Montt (n. 40) 74–82 (summarising the normative claim that investment treaty standards should not be understood to go beyond the limits developed countries establish for government conduct in their own domestic legal orders).

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lic power.294 It almost goes without saying that general international law, e.g. as reflected in the position of aliens in foreign territory, is of course equally viable. 139 Another area of international law deserves special mention. International human rights law, be it regional or otherwise, is occasionally referred to in the course of investment arbitration. Undoubtedly, that field addresses very specific concerns related to the rule of law. Potential sources of inspiration could thus include the thought and doctrine relating to Article 6 of the ECHR on the right to a fair trial, Article 7 on retroactivity or Article 14 on discriminatory conduct. Such guarantees might be considered to express a more general standard of institutional and procedural understanding of the rule of law,295 in short, blueprints to further concretise FET.296 140 However, it is vitally important to take systemic specificities seriously and be alert not only to the use, but also the abuse, of comparative law.297 While there might be overlap in cases on the periphery of both spheres of application, the normative core and ultimate thrust of international investment law and human rights law are different. Human rights law is an emancipatory project. International investment law and treaties are far less ambitious, aiming after all at protecting and promoting foreign investment between the contracting parties. D. A Normative Justification of the Rule of Law Approach 141

Naturally, any comparative (public) law approach is subject to a degree of selection bias, even if it faithfully reflects prominent aspects of various legal sys294 On the increasing cross-fertilisation between trade and investment, but also the problems arising out of it see Jürgen Kurtz, ‘The Use and Abuse of WTO Law in Investor–State Arbitration’ (2009) 20 EJIL 749–771; Jürgen Kurtz, ‘The Merits and Limits of Comparativism: National Treatment in International Investment Law and the WTO’ in Stephan W. Schill (n. 13) 243–278; Freya Baetens, ‘Discrimination on the Basis of Nationality: Determining Likeness in Human Rights and Investment Law’ in Stephan W. Schill (n. 13) 279–316; Tomer Broude, ‘Investment and Trade: The “Lottie and Lisa” of International Economic Law’ in Roberto Echandi and Pierre Sauvé (eds), Prospects in International Investment Law and Policy (Cambridge University Press, 2013) 139–155; Nicholas DiMascio and Joost Pauwelyn, ‘Nondiscrimination in Trade and Investment Treaties’ (2008) 102 AJIL 48–89. Trade and investment are also brought increasingly together in treaty practice as the rise of preferential trade and investment agreements shows. On these agreements see the contributions in further Rainer Hofmann, Stephan W. Schill and Christian Tams (eds), Preferential Trade and Investment Agreements – From Recalibration to Reintegration (Nomos, 2013). 295 Cf. Mondev v. USA (n. 33) paras. 138 and 141 et seq.; Tecmed v. Mexico (n. 71) paras. 166 and 122. 296 See Pieter van Dijk and Godefridus van Hoof (n. 218) 391 et seq. See also Ali Ehsassi, ‘Cain and Abel: Congruence and Conflict in the Application of the Denial of Justice Principle’ in Stephan W. Schill (n. 13) 213–242. More generally on the interaction of human rights law and international investment law see also Ursula Kriebaum, Eigentumsschutz im Völkerrecht (Duncker & Humblot, 2008); Bruno Simma, ‘Foreign Investment Arbitration. A Place for Human Rights?’ (2011) 60 ICLQ 573–596; Patrick Dumberry and Gabrielle DumasAubin, ‘When and How Allegations of Human Rights Violations can be Raised in Investor– State Arbitration’ (2012) 13 JWIT 349–372; Timothy Nelson, ‘Human Rights Law and BIT Protection: Areas of Convergence’ (2011) 12 JWIT 27–47. 297 This aspect is stressed by Jürgen Kurtz, The Merits and Limits (n. 294).

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tems and recurrent strands of arbitral jurisprudence. That is inescapable whenever a particular perspective is chosen. It is however important to note that explaining FET as an embodiment of the rule of law cannot only serve as a reconstruction in favour of claims brought by aggrieved investors, let alone from a certain range of countries. The greater precision brought about by more specific content obviously works both ways, with the question always being where to draw the line between permissible and impermissible State conduct. The general approach suggested here can further be buttressed in light of the 142 teleology of international investment treaties by the importance institutional economics attribute to the rule of law with respect to economic growth and development and, more specifically, to foreign investment. This reinforces the argument that FET can justifiably be understood as an emanation of the rule of law and hence provides support for the requisite normative content of the standard. 1. The Teleology of International Investment Treaties

As expressed in many of their titles and preambles, and as implied in promo- 143 tion and admission clauses, investment treaties aim not only at protecting but also at promoting foreign investment.298 Such investment flows, however, depend on a decision of foreign investors to invest in a certain country. One relevant factor in this process is the political risk in the host country.299 Investment treaties intend to establish a regime that reduces the political risk associated with foreign investment.300 The mechanisms for the protection and promotion of foreign investment as 144 enshrined in inter-State conventions, however, are not an end in themselves. Instead, they can be read with a view to fostering economic growth and development, in particular in what were historically capital-importing countries. This opportunity is perhaps too readily dismissed by the ‘special privilege’ view of investment law and arbitration. But the kinship with FCN treaties is telling. Moreover, this was even mentioned as one of the objectives of the ICSID Convention, which recognised ‘the need for international cooperation for economic development, and the role of private international investment therein.’301 Arguably, the implementation of an investor-State dispute settlement mechanism under the ICSID Convention aims, in the interest of growth and development, at

298 See Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff, 1995) 11 et seq., 20 et seq. On the effects of BITs on actual investment flows, see e.g. Eric Neumayer and Laura Spess, ‘Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?’ (2005) 33 World Development 1567–1585; Jeswald Salacuse and Nicholas Sullivan (n. 285). 299 On the connection between investment treaties and the reduction of political risk, see Noah Rubins and Stephan Kinsella (n. 161) 1. 300 See Kenneth J. Vandevelde, ‘The Economics of Bilateral Investment Treaties’ (2000) 41 Harv. Int’l L. J. 469, 478 et seq. 301 Preamble to the ICSID Convention.

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making more attractive investment in developing countries with weaker domestic institutions and less stable legal and political infrastructures. 145 Plainly, public intervention alone is no longer considered sufficient for lasting economic (and thus societal) progress. Foreign investment can then also be perceived as ‘a supplement to a necessarily limited volume of public development finance.’302 This important perspective has waned with the rise of modern corporationism, but it remains truer to the inter-State nature of the broader project than the current obsession with private investors and dispute settlement does. 2. Institutional Economics and the Role of the Rule of Law

Institutional economics can help to explain the function of the rule of law with respect to both objectives of international investment treaties, i.e. the promotion of foreign investment, on the one hand, and economic growth and development, on the other. Institutional economics analyses the relationship between institutions, markets and growth. It rejects or at least seriously questions classical economic theory and mathematical formalism. Institutions, in this context, are ‘rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.’303 147 More rudimentarily, this also includes actual institutions, as familiar to lawyers, that shape markets and make them work in the first place.304 Institutions are characterised by constraints with a certain permanence and durability that are imposed on social actors.305 They are essential for the functioning of markets as they ‘structure incentives in human exchange, whether political, social, or economic.’306 In this sense, the rule of law as a concept of channelling and restricting public power can be understood as an institution that constitutes one of the bases of market economies. 148 With respect to the objectives of investment treaties, the rule of law is important in the context of attracting investment to foreign, particularly developing countries and keeping it there. This is supported by empirical observations. According to one World Bank survey, investors also base their decision to invest on the credibility of States to ensure a predictable and stable legal framework, i.e. to effectively implement the rule of law.307 Conversely, government activity and domestic legal procedures that do not adhere to the rule of law tend to deter investment. 146

302 Aron Broches, ‘The Convention on the Settlement of Investment Disputes between States and Nationals of Other States’ (1972-II) 136 RC 331, 343. Evidently it also remains a profitfocused, commercial enterprise. 303 Douglass C. North, Institutions, Institutional Change and Economic Performance (Cambridge University Press, 1990) 3. 304 See Richard Posner, Overcoming Law (Harvard University Press, 1995) 429. 305 Edward L. Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘Do Institutions Cause Growth?’ (2004) 9 J. Econ. Growth 271, 275. 306 Douglass North (n. 303) 3. 307 World Bank, World Development Report 1997 – The State in a Changing World (World Bank/Oxford University Press, 1997) 34 et seq.

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Yet, the rule of law not only influences the investor’s microeconomic perspective. Institutional economics also suggests a link between the rule of law and the other objective of investment treaties, i.e. economic growth and development: ‘Economic institutions matter for economic growth because they shape the incentives of key economic actors in society, in particular, they influence investments in physical and human capital and technology, and the organization of production.’308 The importance of the rule of law in the decision-making process of economic actors has long featured in socio-economic literature. Max Weber noted the interdependence of modern forms of growth-creating market economies in Western civilizations and a modern legal system based on rational and predictable rules.309 For him, the core explanation for economic growth in Europe was the rationality of the legal institutions, including the existence and enforcement of contracts and property rights, which had emerged in the socio-legal discourse in the eighteenth and nineteenth centuries and subsequently paved the way for the development of modern market economies.310 Although Weber primarily focused on the function of legal institutions to create horizontal order between private individuals by enabling them to use private law institutions, institutions are also critical in the relationship between the State and society. In this context, the rule of law is the primary and, at the same time, most general expression for the legitimate exercise of public power. This aspect complements the function of the rule of law as an institution that aims at not only avoiding private disorder but also public dictatorship.311 It is this aspect of the rule of law that grasps the public law understanding of the concept and its function of limiting the exercise of public power and that features so notably in the FET standard. Going back further still, even Adam Smith noted: ‘Commerce and manufacturers (…) can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government.’312 It is hard to deny that market economies are based on the initiatives and decision-making of individuals who, 308 Daron Acemoglu, Simon Johnson and James Robinson, ‘Institutions as the Fundamental Cause of Long-Run Growth’ in Philippe Aghion and Steven N. Durlauf (eds), Handbook of Economic Growth (North-Holland, 2005) vol. 1A, 385, 389. 309 Max Weber, Wirtschaft und Gesellschaft – Grundriss der verstehenden Soziologie (Mohr, 1956). 310 See David Trubek, ‘Toward a Social Theory of Law: An Essay in the Study of Law and Development’ (1972) 82 Yale L. J. 1, 11 et seq. 311 See Simeon Djankov, Edward Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘The New Comparative Economics’ (2003) 31 J. Comp. Econ. 595–619. 312 Adam Smith, cited in Dani Rodrik, Arvind Subramanian and Francesco Trebbi, ‘Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development’ (2004) 9 J. Econ. Growth 131–165. See also Douglass C. North and Barry Weingast, ‘Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England’ (1989) 49 J. Econ. Hist. 803–832; J. Bradford De Long and Andrei Shleifer, ‘Princes and Merchants: European City Growth Before the Industrial Revolution’ (1993) 36 J. L. & Econ. 671–702.

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in order to be able to plan their efforts, require governmental action to be restricted according to rules ‘made in advance, in the shape of formal rules which do not aim at the wants and needs of particular people [but] are intended to be merely instrumental in the pursuit of people’s various individual ends.’313 153 While the function of legal institutions was initially mainly of interest in explaining the economic development of industrialised nations and was debated in the ideological conflict between liberalism and socialism, lawyers and social scientists took an interest in institutional economics after decolonisation gained momentum following World War II in order to explain and remedy the economic weaknesses of many developing countries. In this context, the ‘law and development’ movement focused on the function of law in the developing world and its possible impact on sustainable economic growth.314 The movement viewed ‘modern law (…) as a functional prerequisite of an industrial economy’315 and accorded a prominent importance to the concept of the rule of law.316 154 More recently, the linkage between institutions, growth and development has been analysed by the so-called ‘new’ institutional economics. Scholars in this field particularly emphasise the significance for economic growth and development of a well-functioning legal system that embodies the rule of law. Richard Posner, for instance, points to the ‘empirical evidence showing that the rule of law does contribute to a nation’s wealth and its rate of economic growth.’317 This is buttressed by theoretical analyses.318 313 314 315 316

Ibid., at 73. See David Trubek (n. 310). Ibid., at 6 et seq. See David Trubek and Marc Galanter, ‘Scholars in Self-Estrangement: Some Reflections on the Crisis in Law and Development Studies in the United States’ (1974) Wis. L. Rev. 1062, 1071; see also David Trubek (n. 310) 6 et seq. (with further references). On the new law and development movement, see David Trubek and Alvaro Santos (eds), The New Law and Economic Development (Cambridge University Press, 2006). 317 Richard A. Posner, ‘Creating a Legal Framework for Economic Development’ (1998) 13 The World Bank Research Observer 1, 3. See further Hernando De Soto, The Other Path (Harper & Row, 1989); Bradford De Long and Andrei Shleifer (n. 312); Timothy Besley, ‘Property Rights and Investment Incentives: Theory and Evidence from Ghana’ (1995) 103 J. Pol. Econ. 903–937; William Easterly and Ross Levine, ‘Africa’s Growth Tragedy: Policies and Ethnic Divisions’ (1997) 112 Quart. J. Econ. 1203–1250; William Easterly and Ross Levine, ‘Tropics, Germs, and Crops: How Endowments Influence Economic Development’ (2003) 50 J. Monetary Econ. 3–39; Stephen Knack and Philip Keefer, ‘Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures’ (1995) 7 Econ. & Pol. 207–228; Daron Acemoglu, Simon Johnson and James Robinson, ‘The Colonial Origins of Comparative Development: An Empirical Investigation’ (2001) 91 Am. Econ. Rev. 1369–1401; Dani Rodrik, Arvind Subramanian and Francesco Trebbi et al. (n. 313). 318 Friedrich A. Hayek, The Constitution of Liberty (University of Chicago Press, 1960); Mancur Olson, The Logic of Collective Action (Harvard University Press, 1965); Mancur Olson, Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships (Basic Books, 2000); Harold Demsetz, ‘Towards a Theory of Property Rights’ (1967) 57 Am. Econ. Rev. 347–359; Douglass C. North, Structure and Change in Economic History (Norton, 1981) 201 et seq.; Douglass North (n. 303) 3; Richard A. Posner, ‘Equality, Wealth, and Political Stability’ (1997) 13 J. L. Econ. & Org. 344–365; Robert J. Barro, ‘Economic Growth

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The findings of new institutional economics have been at the core of the development strategy of the World Bank. The connection between the rule of law and economic development, in particular, has materialised in the bank’s legal reform programme319 and was reiterated in the World Bank’s good governance agenda, which comprises, as one of the core concepts that should help to establish good government in developing countries, the rule of law.320 While the economic literature consistently points to parallels and interdependencies between economic development and the emergence of stable and reliable institutions, the nature of the relationship between institutions and economic growth is debated – in particular to what extent, if any, a causal relationship exists between institutions and growth.321 From this perspective it is unclear whether the development of legal institutions, including the rule of law, will result in economic growth or whether, in turn, legal institutions are a result of prior economic development and the pressure exercised by the respective interests of society. Yet, even if institutions do not trump all other factors in the quest for economic growth,322 they constitute an influential factor. In addition, the debate about a causal relationship between institutions and growth seems to be mitigated in the context of foreign investment by the fact that a certain institutional infrastructure that reduces the investment risk is necessary to attract foreign investment. Therefore the critique concerning the causality between institutions and growth seems to be less material than in a setting where growth should result solely from endogenous economic activity. Although the rule of law is certainly not the only variable that influences economic growth,323 institutional economics showcase the importance of the basic concept in the present context. Therefore, it seems appropriate to draw a connection between these findings and the normative framework of investment treaties, in particular FET.324 This provides a deeper normative foundation for rendering the standard more concrete and hence workable in practice, not least since States

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in a Cross Section of Countries’ (1991) 106 Quart. J. Econ. 407–443; Gerald W. Scully, ‘The Institutional Framework and Economic Development’ (1988) 96 J. Pol. Econ. 652–662. For a critical analysis of the economic underpinnings and the development strategy of the World Bank’s law reform programme, see Lawrence Tshuma, ‘The Political Economy of the World Bank’s Legal Framework for Economic Development’ (1999) 8 Soc. & Legal Stud. 75–96. See World Bank, Governance and Development (World Bank, 1992) 28. See e.g. Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer (n. 305) (denying a causal relationship and emphasising the importance of human capital); William Easterly and Ross Levine (n. 317) (emphasising the importance of geography as the decisive factor for economic growth in developing countries). Arguing instead for a positive causal relationship, see Dani Rodrik, Arvind Subramanian and Francesco Trebbi (n. 312); Daron Acemoglu, Simon Johnson and James Robinson (n. 317) 1395. In this sense Dani Rodrik, Arvind Subramanian and Francesco Trebbi (n. 312). See Douglass C. North, ‘Economic Performance Through Time’ (1994) 84 Am. Econ. Rev. 359, 366. See David Schneiderman, ‘Investment Rules and the Rule of Law’ (2001) 8 Constellations 521.

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can be presumed to have intended the establishment of institutions that effectively contribute to the object and purpose of investment treaties. E. Relation to Other Standards of Treatment

With direct expropriations becoming increasingly rare since the 1980s, but certainly not extinct,325 the prominence of the FET standard as a response to State economic policy, including but not limited to expropriatory measures, grows. Tacking a FET claim onto a submission of other investment assurances has rightly been called a ‘popular litigation strategy.’326 There are, however, not only overlaps with the expropriation provisions of investment treaties, but potentially also with respect to other treaty standards, including full protection and security, umbrella clauses, capital transfer provisions, national treatment, and MFN treatment.327 160 Addressing this relationship is important because the elements required to establish a breach, as well as the standard and burden of proof may differ between claims for breach of FET and other treaty provisions, as may the consequences and available remedies and the availability of exception clauses that can cover some but not other breaches.328 Likewise, the scope of the dispute settlement clause may permit bringing some but not other causes of action.329 161 F. A. Mann famously considered FET to be a catch-all clause, i.e. 159

[s]o general a provision [which] is likely to be almost sufficient to cover all conceivable cases, and it may well be that other provisions of the agreements affording substantive protection are no more than examples or specific instances of this overriding duty.330

325 Consider only measures taken in Argentina, Bolivia or Zimbabwe a decade into the new millennium. See e.g. ‘Just when you thought it was safe: Evo Morales nationalises a Spanish electric company’, The Economist, 5 May 2012. 326 UNCTAD (n. 7) 10. 327 See on the relationship between FET and other standards of treatment more generally Roland Kläger (n. 14) 281‑316; Christoph Schreuer, ‘Fair and Equitable Treatment (FET): Interactions with Other Standards’ (2007) 4(5) TDM 1–26. 328 See, for example, Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment of 27 August 1993 (Ecuador–United States BIT) Art. X that provides that the treaty shall not apply in matters of taxation except when questions of expropriation, capital transfers, or compliance with an investment agreement are at stake. This would exclude measuring the tax measures in question against FET. 329 At the same time, it is important to realise that the breadth of interpretation of substantive treaty standards is closely connected to the scope of the dispute settlement clause. This is obvious, for example, as regards the interpretation of expropriation provisions. Thus, old socialist BITs virtually always limited jurisdiction of an investment treaty tribunal to determining the amount of compensation for expropriation only. Breaches of FET, by contrast, could not be brought. This, however, led to the tendency of arbitral tribunals to have a broader understanding of what fell under the heading of expropriation, as compared to tribunals who could fall back to FET concerning a specific matter. See in this context, Kaj Hobér, Investment Arbitration In Eastern Europe: In Search of a Definition of Expropriation (JurisNet, 2007). 330 Frederick A. Mann, ‘British Treaties for the Formation and Protection of Investment’ (1981) 24 BYIL 241, 243; similarly, Christoph Schreuer (n. 327) 27.

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The relationship between FET and other standards of treatment would then be one of speciality. At the same time, this understanding leaves open the question whether FET and the more specific other treaty provision can apply cumulatively, with FET serving as a gap-filling device that only comes into play in case other standards of treatment do not afford an investor protection against government acts,331 or whether the other treaty provision excludes the FET standard as a fall-back. Although much depends on the circumstances of each case, FET will not be excluded because a more specific standard of treatment is applicable. This may be different, however, if specific host State conduct is expressly permitted under other standards of treatment. In any event, in our view, it is difficult to determine the relationship between FET and other standards of treatment in general terms; instead, it seems preferable to address the relationship with a view to the specific treaty standards in question. Again, it seems helpful to consider the analogous situations in domestic public law systems, namely how the concept of the rule of law relates to, for example, the more specific protection against arbitrary and discriminatory conduct or the protection of property against expropriation without compensation. Despite the close relationship, those are specific emanations with their own particularities. So even though there is significant overlap in particular between the protection of legitimate expectations under FET and the protection against the taking of property interests, which are often also understood as comprising protection of ‘reasonably-to-be-expected economic benefit[s]’,332 FET and the protection against direct and indirect expropriations can be distinguished mainly in terms of the effect and gravity of the host State’s measure in question. In order to constitute a direct or indirect expropriation the measure needs to amount to an eradication of an essential component of a protected right or the substantial neutralisation of its use or benefit;333 breaches of FET can however arise from an interference that may not fulfil this two-pronged test, but which could in actual fact still be similarly deleterious for the aggrieved claimant. FET can be separated more clearly from other standards of treatment. The distinction between FET and non-discrimination provisions (i.e. national treatment and MFN treatment) stems from regulating different subject matters, provided national and MFN treatment are understood to target differentiations based on nationality only. Differential treatment based on nationality is not automatically at odds with the concept of the rule of law. Yet such distinctions may still contravene national treatment provisions, but not be per se contrary to the rule of law, as long as the differentiation is not arbitrary, is aimed to implement a 331 On this view see the discussion in Roland Kläger (n. 14) 306–308. 332 Metalclad v. Mexico (n. 141) para. 103. On this overlap see also Stephen Fietta, ‘Expropriation and the “Fair and Equitable” Standard: The Developing Role of Investors’ “Expectations” in International Investment Arbitration’ (2006) 23 J. Int’l Arb. 375–399. 333 Cf. El Paso Energy v. Argentina (n. 127) para. 244 et seq.

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legitimate policy purpose and is overall proportionate. Conceptually, the main difference vis-à-vis non-discrimination obligations (i.e. national treatment and most favoured nation treatment) is said to be that FET posits an absolute standard in the sense of imposing a non-contingent baseline for the treatment of foreign investors.334 166 Turning to other obligations contained in investment treaties, FET is sometimes considered to be closely related to obligations to provide full protection and security. A difference between the two might be that the former demands resiling from a certain kind of behaviour, while the latter urges an active undertaking.335 But there is again perhaps more overlap than this categorical distinction suggests. Abiding by FET can in the end, both from a logical and linguistic point of view, but also in very practical terms, demand positive efforts on behalf of the State, namely to act fairly and equitably or, for example, to grant a licence where there are no other reasonable objections and indeed a legitimate expectation to that effect. 167 While prone to elicit confusion, the overlap with umbrella clauses is actually rather minimal. Only when the host State’s measures interfering with an investor’s contractual rights constitute an exercise of public authority will both FET and umbrella clauses be applicable; purely commercial breaches, by contrast, are not actionable under FET.336 In case the host State has indeed exercised public authority, an umbrella clause would be the more specific provision, and its violation most likely easier to prove; but FET may still come into play on a subsidiary basis in order to view the complete circumstances of the relations between the investor and the host State in question. Similarly, capital transfer provisions are more specific compared to FET. F. Conclusion 168

Three aspects combine to afford FET a central place in modern international investment law: ubiquity, efficacy, and vagueness. Guarantees of FET have become near omnipresent in international investment treaties and are regularly vindicated by arbitral tribunals. They curb host States’ exercise of sovereign power, limiting national courts, administrative bodies, and even legislators. The scope 334 This distinction, epitomised by the historical struggle between ‘classical’ international law concerning the minimum standard of treatment of aliens and the (relational) Calvo doctrine, should not however lead one to believe that there is not a degree of overlap. First, a particular grievance can often be phrased as either discriminatory or unfair, thus inviting recourse under both types of provisions. Second, arbitrary and wilful singling out of foreign investors, i.e. discriminatory conduct, can be an important pointer in determining whether FET has been infringed. 335 Christoph Schreuer (n. 327) 4. See also Helge Zeitler, ‘Full Protection and Security’ in Stephan W. Schill (ed) (n. 13) 183–212 (stating that full protection and security requires ‘positive action by the host state to protect foreigjn investment through preventive and repressive action’). 336 See supra n. 95.

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given to such clauses in recent jurisprudence is increasingly wide, a dynamic occasioned and reinforced by broad and fertile treaty language. The price of this malleable utility is controversy, above all because arbitrators are given a central position in shaping the contours of how investor-State relations are structured under FET. While FET allows them to curb illegitimate government conduct, there is an undeniable risk that the various demands under FET sketched above can quickly read like ‘a programme of good governance that no State in the world is capable of guaranteeing at all times.’337 This chapter has argued in an attempt to pinpoint the normative content of 169 FET that the standard can be understood as an embodiment of the rule of law as it is familiar to numerous domestic and international legal regimes. Viewed in this light, FET can be likened to a (partly pre-emptive) public law concept with quasi-constitutional ramifications that conditions the conduct of States vis-à-vis foreign investors. A purely private paradigm has after all never been particularly fitting for international investment law.338 Indeed, tribunals have interpreted FET as encompassing diverse elements which are broadly associated with the rule of law in many legal systems, including a stable and predictable legal framework, consistent decision-making, the principle of legality, legitimate expectations, due process, the prohibition of denial of justice, transparency, and proportionality. It would of course be naïve to pretend or hope for complete certainty in this respect, but at the very least this provides a familiar legal vocabulary that does not drown in endless questions of material justice or terminological sophistry. This rule of law understanding is not free from substantive notions or politi- 170 cally void; nothing ever is. But whether or not this is itself a target for substantive critique in the wake of a larger legitimacy crisis, it is worth noting that arbitral jurisprudence primarily puts the rule of law understanding into effect in institutional and procedural (i.e. formalistic) terms. The control exercised by investment tribunals over the conduct of host States is mainly concerned with the institutional architecture and procedural implementation of the law and policy that affects foreign investors. For instance, FET requires the existence of a minimal separation of powers in host States, the possibility of recourse to courts for the adjudication of private rights, review of acts of public authorities, legal security, protection of legitimate expectations, and the observance of procedural rights in administrative and judicial proceedings. There is in itself merit in structuring legal discourse and putting things out in 171 the open and up for wider debate. This requires a framework for analysis beyond hermeneutic textual tricks, and the understanding presented here provides one. Beyond that, such an understanding of FET further reverberates in the broader 337 El Paso Energy v. Argentina (n. 127) paras. 342–343 (with further references). 338 Cf. Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 151–289; Anthea Roberts, ‘Clash of Paradigms: Actors and Analogies Shaping the Investment Treaty System’ (2013) 107 AJIL 45–94.

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aspirations of investment treaties. This is particularly true considering the treaties’ object and purpose of protecting and promoting foreign investment flows and seeking to foster economic growth and development. The purposive link between the protection standards contained in the treaties and the promotion of investment justifies drawing a parallel to the economic literature that expands on the relationship between the rule of law and economic growth. The positive economic impacts that are linked to the rule of law and the incentive structure necessary for foreign investors to invest in a specific country suggest that such an understanding of FET is appropriate in the context of investment treaties. 172 Finally, this chapter submits that, when it comes to legal method, tribunals should draw – using a comparative approach – on the law and jurisprudence of domestic, inter- and supranational courts when applying and interpreting elements of the rule of law in order to narrow down the normative content of FET and to operationalise the standard in individual cases. This requires evaluation and argumentation. It is not an exercise in magically producing a white rabbit from a hat (i.e. finding the ‘one true meaning’ of FET), but a justificatory process that makes decisions as convincing and intelligible as possible and opens them up to what might be better arguments to the contrary. 173 Ultimately, the reference to rule of law concepts under domestic and other legal regimes stresses that FET is not an apodictic and intransigent dogma but rather allows for open-ended interaction between the interests of host States and foreign investors. In this context, one should perhaps keep in mind the words of Joseph Raz, who once sagaciously concluded: ‘After all the rule of law is meant to enable the law to promote social good, and should not be lightly used to show that it should not do so. Sacrificing too many social goals on the altar of the rule of law may make the law barren and empty.’339 174 The orthodox demarcation line that conceptually separates FET from the other cardinal non-expropriatory standard of treatment, i.e. non-discrimination via national treatment or MFN obligations, is that of non-relational versus relational treatment. However one might define it in the end, FET is considered to provide an absolute (i.e. autonomous) threshold that can be violated even if the investor in question is treated no worse than a host State national or another foreigner.340 Indeed, historically the treaty standard as proposed by the Abs–Shawcross Draft of 1959 and long before that its customary law antecedent proved divisive for just that reason, with left-wing and nationalist voices disfavouring such depoliticisation and delocalisation and preferring to link the treatment of foreign investors to that of nationals.341 The comparative public law approach sketched here softens that border up. Theoretical niceties aside, FET is then not so much a 339 Joseph Raz (n. 163) 211. 340 See only CME v. Czech Republic (n. 139) para. 611; United Parcel Service of America Inc. v. Canada, UNCITRAL (NAFTA), Decision on Jurisdiction, 22 November 2002, para. 80. 341 Cf. Marc Jacob, ‘Investments, Bilateral Treaties’ in Rüdiger Wolfrum (ed) (n. 34) vol. VI, 318–328.

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free-floating conception privileging certain transnational economic actors, but rather a standard of treatment that is noticeably characterised by common principles of public law encountered elsewhere. At the same time, it retains a normative sting that tries to keep might and right separate.

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Ralph Alexander Lorz A. Overview: A Standard in Various Appearances. . . . . . . . . . . . . . . . . . . . . . . . . . .

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B. ‘Protection and Security’ and Customary International Law . . . . . . . . . . . . 1. Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Wording . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Object and Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. In Particular: The NAFTA Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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C. The Content of ‘Protection and Security’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The Uncontested Core: Protection against Physical Harm . . . . . . . . . . 2. State Responsibility and Liability Standards . . . . . . . . . . . . . . . . . . . . . . . . . a) Damages by State Organs: Strict Liability . . . . . . . . . . . . . . . . . . . . . . . . b) Damages by Private Actors: Due Diligence. . . . . . . . . . . . . . . . . . . . . . . (1) The Basic Idea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Measuring Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Area of Contest: beyond Physical Harm . . . . . . . . . . . . . . . . . . . . . . . . . a) Demands for Repressive Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Real Issue: Guarantee of a Stable Legal Environment?. . . . .

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D. Relationship of ‘Protection and Security’ to Other Standards . . . . . . . . . . . 1. General Remarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. In Particular: Fair and Equitable Treatment . . . . . . . . . . . . . . . . . . . . . . . . . .

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E. Concluding Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Giuditta Cordero Moss, ‘Full Protection and Security’, in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 131–150; Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Wolters Kluwer, 2009) 307–314; Jeswald W. Salacuse, The Law of Investment Treaties (Oxford University Press, 2010) 207–217; Christoph Schreuer, ‘Full Protection and Security’ (2010) 1(2) J. of Int’l Disp. Settlement 353–369; Helge Elisabeth Zeitler, ‘Full Protection and Security’, in Stephan W. Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010) 183–212; Helge Elisabeth Zeitler, ‘The Guarantee of “Full Protection and Security” in Investment Treaties Regarding Harm Caused by Private Actors’, (2005) Stockholm Int’l Arb. Rev. 1–34.

A. Overview: A Standard in Various Appearances 1

‘Protection and security’ is one of the most common guarantees in international investment treaties. Countless BITs as well as the ECT and NAFTA explicitly grant protection and security to investors coming from the other contracting parties.1 The wordings of these guarantees, however, show several vari1 Very few international investment treaties do not include a clause granting protection and security in some form; examples of treaties which do not include such a provision are the Egypt– Albania BIT (Agreement between the Government of the Arab Republic of Egypt and The Government of the Republic of Albania for the Encouragement and Reciprocal Protection of Investments), available at http://www.unctad.org/sections/dite/iia/docs/bits/egypt_albania.pdf, visited

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ations on which arbitral tribunals have drawn to distinguish their cases from potential precedents set by other tribunals. For instance, the 2006 French Model BIT2 uses the phrase ‘full and complete protection and safety’ in its Art. 5(1). The 2008 German Model BIT3 – a newer version of 2009 has so far not been officially released, but remains unchanged in that regard – employs the probably most common formulation ‘full protection and security’ in Art. 4(1). But that has apparently not been enough in the eyes of the drafters, because ‘protection’ is emphasised elsewhere as well: Art. 2(2) demands ‘fair and equitable treatment as well as full protection under this Treaty’. An older version, for example enshrined in the Germany–China BIT of 2003, calls for ‘constant protection and security’.4 Art. 5 of the 2007 Norwegian Model BIT5 puts the clause in a different context, stating in Art. 5 the obligation to grant ‘treatment in accordance with customary international law, including fair and equitable treatment and full protection and security’. And finally, there are of course also treaties which forego the phrase altogether: e.g. the 2003 Indian Model BIT6 does not address the protection and security standard as such, but limits itself to the guarantee of ‘fair and equitable treatment’ in Art. 3(2). This little sample may already suffice to illustrate the three main problems 2 that are associated with this standard: first of all, it is as usual a question of interpretation what the relatively vague and potentially broad expression ‘protection and security’ is supposed to encompass. In particular, the pivotal dispute coming up here revolves around the question whether the standard is limited to protection from physical harm or whether it comprises more than just physical security. This in turn affects its relationship to other common BIT standards, especially fair and equitable treatment (FET). And a third issue on which opinions diverge concerns the connection between the various treaty guarantees of protection and security and the corresponding (minimum) standard of customary international law.

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on 28 January 2014, and the 2003 Indian Model BIT, available at http://italaw.com/sites/default/ files/archive/ita1026.pdf, visited on 28 January 2014. However, even if a treaty which does not comprise a protection and security clause is applicable, the protection and security standard can easily become relevant through provisions granting most favoured nation (MFN) treatment. France 2006 Model BIT, available at http://italaw.com/documents/ModelTreatyFrance2006.pdf, visited on 28 January 2014. Germany 2008 Model BIT, http://italaw.com/documents/2008-GermanModelBIT.doc, visited on 28 January 2014. Agreement between the People’s Republic of China and the Federal Republic of Germany on the Encouragement and Reciprocal Protection of Investments, done at Beijing on 1 December 2003, available at http://www.unctad.org/sections/dite/iia/docs/bits/china_germany.pdf, visited on 28 January 2014. Norway 2007 Model BIT, available at http://italaw.com/documents/NorwayModel2007.doc, visited on 28 January 2014. 2003 Indian Model BIT (n. 1).

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B. ‘Protection and Security’ and Customary International Law 1. Origin 3

It seems appropriate to start with the latter point because at least the origin of the protection and security standard can be easily traced back to customary international law, namely, the rules governing the treatment of aliens. One can discern a common understanding that every State has a fundamental duty to physically protect the personal integrity as well as the property of aliens within its territory.7 The International Court of Justice (ICJ) in its famous ELSI case ruled accordingly that ‘protection and security’ must conform to this minimum international standard.8 Likewise, the Iran–US Claims Tribunal pointed out the ‘requirements of (…) customary international law to accord protection and security’.9 The tribunal in Noble Ventures v. Romania spoke of ‘a general duty to provide for protection and security of foreign nationals found in the customary international law of aliens’.10 And the Amco v. Indonesia tribunal formulated as follows: It is a generally accepted rule of international law, clearly stated in international awards and judgments and generally accepted in the literature, that a State has a duty to protect aliens and their investment against unlawful acts committed by some of its citizens.11

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It is therefore beyond doubt that the concept of ‘protection and security’ as embodied in so many investment treaties12 is derived from customary international law. But what exactly does the (minimum) standard of this law embrace? 2. Scope

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This is difficult to ascertain because, as a matter of principle, the treatment standards under customary international law are not carved in stone, but rather continuously evolving. A treatment that seemed perfectly lawful a while ago may now be internationally condemned and vice versa. The NAFTA tribunal in Mondev v. USA noted as ‘common ground between the parties’ that ‘like all customary international law, the international minimum standard [including principles of full protection and security] has evolved and can evolve’.13 However, 7 For an overview of the customary minimum standard, see Hollin Dickerson, ‘Minimum Standards’ in Rüdiger Wolfrum (ed), The Max Planck Encyclopedia of Public International Law (Oxford University Press, 2008, online edition, available at www.mpepil.com). 8 Elettronica Sicula S.P.A. (ELSI) (USA v. Italy), ICJ Judgment, 20 July 1989, ICJ Rep. 1989, para. 111. 9 Rankin v. Islamic Republic of Iran, Award No. 326-10913-2, Award of 3 November 1987, 17 Iran–US CTR 135, para. 30(c). 10 Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 164. 11 Amco Asia Corporation and Others v. Indonesia, ICSID Case No. ARB/81/1, Award, 20 November 1984, para. 172. 12 Hollin Dickerson (n. 7) paras. 17–18; with regard to the US treaties of this kind, see Kenneth Vandevelde, ‘The Bilateral Investment Treaty Program of the United States’ (1988) 21 Cornell Int’l L. J. 201–276.

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some basic features may be safely determined. Two main obligations seem generally accepted: to prevent attacks on persons and to punish the perpetrators of such attacks.14 Consequently, cases dealing with customary international law usually concern the physical impairment of rights of foreign nationals and the host State’s duty to prevent it or to employ its administrative and judicial system to remedy it as far as possible. This case law does not necessarily focus on the protection of investors. For instance, the famous Neer15 and Roberts16 cases decided by the Mexican–US General Claims Commission in 1926, which set the stage for the development of the customary international law minimum standard of treatment of aliens, were triggered by the murder of a US national and by the imprisonment under poor conditions of another one, respectively. By contrast, the ELSI case already mentioned above17 arose from an invest- 6 ment dispute, namely, the requisition of a plant and the reaction of the authorities. Since then, various investment tribunals have referred to the customary standard in determining the scope of the obligation to protect under a corresponding investment treaty.18 Moreover, also various international investment agreements specify protection and security to be granted in accordance with customary international law.19 Art. 5(2) of the 2004 US Model BIT, for example, prescribes ‘the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments’.20 In sum, the protection and security standard certainly confirms what should 7 already be guaranteed to aliens under customary international law. But under which circumstances and conditions do BITs extend its scope beyond that?

13 Mondev International Ltd. v. USA, ICSID Case No. ARB(AF)/99/2, Award, 11 October 2002, paras. 124–125. 14 Olivier de Frouville, ‘Attribution of Conduct to the State: Private Individuals’ in James Crawford, Alain Pellet, Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010), 257–280, 277 with further references. 15 USA (Neer) v. Mexico, The Mexican–United States General Claim Commission, Award, 15 October 1926, (1926) 4 RIAA 60–66. 16 USA (Harry Roberts) v. Mexico, The Mexican–United States General Claim Commission, Award, 1926, (1926) 4 RIAA 77–81. 17 Elettronica Sicula S.P.A. (ELSI) (n. 8). 18 See, e.g., PSEG Global, Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Turkey, ICSID Case No. ARB/02/5, Award, 19 January 2007, para. 258; Mondev International Ltd. v. USA (n. 13), para. 125. 19 E.g. Art. 5 of the 2004 US Model BIT, available at http://www.state.gov/documents/organization/117601.pdf, visited on 28 January 2014; Art. 5 of the 2004 Canadian Model FIPA, available at http://italaw.com/documents/Canadian2004-FIPA-model-en.pdf, visited on 28 January 2014; and various Japanese treaties dealing with investment protection, such as Art. 60 of the Agreement between Japan and the United Mexican States for the Strengthening of the Economic Partnership, done at Mexico City on 17 September 2004, and Art. 91 of the Agreement between Japan and the Republic of the Philippines for an Economic Partnership, done at Helsinki on 9 September 2006. On the Notes of Interpretation of the NAFTA Free Trade Commission, see below B.5. 20 2004 US Model BIT (n. 19).

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3. Interpretation a) Wording

This is first of all a question of the respective BIT itself and its interpretation. And as with any other treaty clause, the generally accepted rules of interpretation which are laid down in Art. 31 et seq. of the Vienna Convention on the Law of Treaties (VCLT) govern the interpretation of any protection and security standard.21 Accordingly, many arbitral tribunals spend a lot of efforts on citing the VCLT rules and explaining them in detail,22 even though the connection between these general considerations and their application to the concrete case often remains far from compelling. 9 VCLT Art. 31(1) provides for a treaty interpretation ‘in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’. Thus, interpretation usually starts by looking at the precise wording of the clause at issue. Unfortunately, in the case of the protection and security standard, as has already been illustrated at the beginning, this inquiry does not carry us very far, since the differentiations in the wordings of most BITs are insignificant.23 One scholar aptly describes the situation in arbitral practice following from that: 8

The wording of the treaty is often the starting point for the tribunal’s reasoning, but it does not seem to play a decisive role in the result.24

10

To be sure, there are exceptions, especially when it comes to limiting the potential reach of the protection and security standard. Art. 5(2) of the 2004 US Model BIT, which has already been cited above,25 also reads, referring to the customary international law minimum standard of treatment of aliens: ‘The concept(s) of (…) “full protection and security” do[es] not require treatment in addition to or beyond that which is required by that standard, and do[es] not create additional substantive rights’. A formulation like this one, which is similarly used in the Canadian Model FIPA of the same year26 and various Japanese investment treaties,27 makes clear that the agreement’s scope does not provide for 21 For an overview on the principles of treaty interpretation, see Matthias Herdegen, ‘Interpretation in International Law’ in Rüdiger Wolfrum (ed), The Max Planck Encyclopedia of Public International Law (Oxford University Press, 2008, online edition, available at www.mpepil.com), paras. 5–49; for an in-depth analysis, see Richard K. Gardiner, Treaty Interpretation (Oxford University Press, 2008). 22 The tribunal in Asian Agricultural Products Ltd. (AAPL) v. Sri Lanka, ICSID Case No. ARB/ 87/3, Final Award, 27 June 1990, paras. 38–54 conducts an extensive interpretation of the protection and security clause of the relevant treaty, taking into account wording (paras. 47, 50), context (para. 52), object and purpose (para. 51) and case law (paras. 48–49, 53); it lays down several abstract rules on interpretation in para. 40. 23 Christoph Schreuer, ‘Full Protection and Security’ (2010) 1 J. of Int’l Disp. Settlement, 353– 369, 353. 24 Giuditta Cordero Moss, ‘Full Protection and Security’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 131–150, 134. 25 United States 2004 Model BIT (n. 19). 26 2004 Canadian Model FIPA (n. 19).

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any better protection of investments than customary international law, and thereby cuts short any possibilities of an interpretative overreach. The additional benefits for the investor that agreements of this kind produce are therefore not a matter of substance, but of procedure, insofar as they contain the option to submit disputes about the host State’s compliance with the minimum standard to investor-State arbitration. However, most international investment agreements do not state limitations of 11 this kind, but remain silent on the issue. One could thus be tempted to draw the opposite conclusion from this silence: if some agreements find it necessary to spell out that protection and security shall not guarantee more than the minimum standard under customary international law, those agreements which forego such an explicit determination probably assume that there is more to protection and security than the minimum standard would cover. This might be true if contracting parties like the US and Canada are involved which regularly employ the sort of limitation clauses presented above. But it would most likely overstretch the consensus reached by other States in this regard: just because somebody else wants to be on the safe side, you do not necessarily have to follow suit in laying down something in writing that was perhaps a common understanding of the parties. The two adjectives most commonly used in qualifying the protection and se- 12 curity standard, namely, ‘full’ and ‘constant’, are therefore often the only hinges on which tribunals can rely in determining whether protection and security as guaranteed by the concrete agreement require a standard of due diligence that is higher than the minimum standard of customary international law.28 But again, arbitral practice is far from being uniform in that respect: some tribunals take the word ‘full’ as an indicator that the clause is supposed to mean more than the minimum standard29 – or the absence of a qualifying word as evidence that it is not30 –, others deny any relevance of this qualification.31

27 See, e.g., Art. 60 of the Agreement between Japan and the United Mexican States for the Strengthening of the Economic Partnership (n. 19) and Art. 91 of the Agreement between Japan and the Republic of the Philippines for an Economic Partnership (n. 19). 28 Jeswald W. Salacuse, The Law of Investment Treaties (Oxford University Press, 2010) 217. 29 E.g., Azurix v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006, para. 408; Biwater Gauff (Tanzania) Ltd. v. Tanzania, ICSID Case No. ARB/05/22, Award, 24 July 2008, para. 729, both of which rely on the word ‘full’ to justify an extensive interpretation of the protection and security clause. 30 E.g., Suez, Sociedad General de Aguas de Barcelona S.A., and InterAguas Servicios Integrales del Agua S.A. v. Argentina, ICSID Case No. ARB/03/17, Decision on Liability, 30 July 2010, para. 169. 31 E.g., Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, para. 354, referring to Noah Rubins and Stephan Kinsella, International Investment, Political Risk and Dispute Resolution (Oceana Publications, 2005).

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b) Context

If the wording of an agreement does not entail sufficient clarity as to its content – and rarely it does –, then other means of interpretation become important. This is first of all the context of the provision at issue. In case of the protection and security standard, context mainly refers to the existence of other standards of protection in the same investment agreement. The precise relationship between these standards – especially between protection and security and FET, if the agreement in question contains an FET clause – is to be determined later; here, suffice it to mention the general principle of interpretation that every treaty provision should be given a meaning of its own. Thus, an interpretation of a treaty that would render one of the employed standards of protection utterly useless seems hardly convincing.32 14 The tribunals in Enron v. Argentina and Sempra v. Argentina used this argument to support a relatively narrow interpretation of the protection and security standard. They reasoned that if the standard were interpreted broadly, it would become ‘difficult to distinguish such situation from one resulting in the breach of fair and equitable treatment, and even from some form of expropriation’.33 However, again many awards do not really distinguish protection and security from FET in particular, even if the underlying BITs list them as separate standards.34 15 This is well understandable and shows the reduced significance of context with regard to the protection and security standard. Only if the agreement in question does not contain an FET clause or a similar standard, a broader field of application for protection and security could really extend the scope of investment protection – but precisely in these cases, the consensus of the parties will most likely not cover such a broad interpretation. Under most existing investment agreements, however, the question whether protection and security should extend to more than just the customary international law standard will not be decisive for the result of any dispute, since other standards of protection are ready to fill the gap. And the remaining problem of intensity, i.e. whether a protection and security clause at least heightens the standard of due diligence compared with the minimum standard, cannot be answered by a contextual interpretation either. 13

32 Cf. Christoph Schreuer, ‘Introduction: Interrelationship of Standards’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 1–7, 4; Christoph Schreuer, ‘Fair and equitable treatment (FET): interactions with other standards’ in Graham Coop and Clarisse Ribeiro (eds), Investment Protection and The Energy Charter Treaty, 63– 100, 68. 33 Enron Corporation and Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007, para. 286; Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 323. 34 E.g., Siemens v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007, paras. 304, 309; Azurix v. Argentina, Award (n. 29) para. 408; Occidental Exploration and Production Company v. Ecuador, LCIA Case No. UN3467, Final Award, 1 July 2004, para. 187.

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c) Object and Purpose

Provisions of a treaty shall also be interpreted, as Art. 31(1) of the VCLT 16 states, ‘in the light of its object and purpose’. The object and purpose of an international agreement is usually stated in its preamble, which in the case of BITs frequently includes a phrase stating the parties’ intention to create favourable conditions for foreign investments. However, this alone does not suffice to support a considerably broader interpretation of the protection and security standard compared with the minimum standard of customary international law. It could only be employed to establish that the level of protection granted by the treaty must not fall short of this minimum standard, since then the treaty would not ‘create’ anything more favourable to investments. Even in this case, though, if the treaty were just there to facilitate the option of investor-State arbitration for some specific violations alleged by the investor, it could be argued that this procedural improvement suffices to fulfil the promises of the preamble – and in substantive terms, the minimum customary international law standard could not be reduced through a treaty anyway. 4. Conclusion

Interpretation alone can therefore not really solve the problem how the pro- 17 tection and security standard relates to the minimum standard of customary international law. In theory, there are four conceivable approaches to this relationship:35 (1) The minimum standard may constitute the ‘floor’ of the obligations under the treaty; (2) it may constitute the ‘ceiling’ above which these obligations must not rise; (3) it may be identical, so that protection and security would equal the minimum standard; (4) or there may be no relationship at all. Approach (4) can be discarded with relative ease. It has been pleaded, for in- 18 stance, in the AAPL v. Sri Lanka case, where the claimant called upon the tribunal to consider the term ‘full protection and security (…) independent of any link to customary international law’.36 Apart from the fact that the meaning of this phrase might not be entirely clear, it can hardly be denied that the protection and security standard is historically rooted in the customary minimum standard of treatment of aliens, as explained above, and that the State parties to all pertinent investment agreements were perfectly aware of that. To be sure, a number of authors argues with good reason that the standard as it is now embodied in such agreements ‘represents an autonomous treaty standard that is independent of the international minimum standard under customary international law’.37 But 35 Cf. Giuditta Cordero Moss (n. 24) 136–137 on the first three approaches. 36 AAPL v. Sri Lanka, Final Award (n. 22) paras. 26, 45.

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this is not meant to say that there is no relationship between those two; it rather underlines the general principle that treaty standards, even if they are derived from customary law standards, can evolve differently and assume a meaning of their own. 19 A similar consideration also leaves approach (3) – apparently followed by the Noble Ventures v. Romania tribunal,38 for example – wanting as a matter of principle. If the BIT standard of protection and security were completely equivalent to the customary minimum standard, this would mean that there has been absolutely no autonomous development – something which is rather unlikely in the case of international treaties. Absent a clear expression of intent by the State parties that exactly such a development should be prevented, this approach is therefore hardly convincing. It would bereave the corresponding treaty clauses of an independent substantive content and reduce their benefits to the procedural option of investor-State arbitration, provided the treaty in question contains a provision to this effect at all. 20 Regarding approach (2), the relevant clauses of the 2004 US Model BIT and its Canadian and Japanese counterparts have already been pointed out above. Where it is explicitly stated that protection and security shall ‘not require treatment in addition to or beyond that which is required by that [customary minimum] standard, and (…) not create additional substantive rights’,39 the intent of the parties to cut off any autonomous development in that direction is clear. However, since the BITs in question simultaneously prescribe the customary minimum standard as the ‘standard of treatment to be afforded to covered investments’,40 in fact this does not only establish a ‘ceiling’ for the obligations flowing from the treaty, but forces them to be equivalent to the minimum standard – and no one really advocates the substantive protection of investments to fall short of that. Thus, approach (2) does not really exist as an avenue of its own, but merges with approach (3) – provided the treaty in question explicitly says so. 21 This leaves us with approach (1), which can also be found anchored in writing in BITs, for instance when they require that an investment ‘shall in no case be accorded treatment less than that required by international law’.41 In Azurix v. Argentina, the tribunal drew on this clause to establish that its purpose was ‘to 37 Cf. Christoph Schreuer, ‘Full Protection and Security’ (n. 23) 364 with further references. 38 Noble Ventures v. Romania, Award (n. 10) para. 164. 39 Art. 5(2) of the 2004 US Model BIT (n. 19); cf. also the Canadian Model FIPA and the Japanese BITs discussed above (n. 19). 40 Ibid. 41 Examples for such clauses can be found, e.g., in older US BITs such as the US–Argentina BIT (Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment), Art. II(2)(a), the US–Ecuador BIT (Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment), Art. II(3) and the US–Romania BIT (Treaty between the Government of the United States of America and the Government of Romania Concerning the Reciprocal Encouragement and Protection of Investment), Art. 2(2).

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set a floor, not a ceiling’.42 But what if the respective treaty does not say anything about its relationship to customary law standards? As elaborated above, only two options have proved viable under these circumstances: the customary law standard could be ‘floor’ or equivalent. Since the ‘equivalent’ option rules out an autonomous development of the treaty standard, though, in case of doubt it seems preferable to consider the customary minimum standard a ‘floor’ – as its denomination as ‘minimum’ already suggests. Thus, the most convincing solution is to see this standard just as the bottom line of protection and security, unless the State parties to the treaty at issue have clearly stated their intent to stall the development of the treaty standard at this point. 5. In Particular: The NAFTA Approach

Art. 1105(1) of the North American Free Trade Agreement (NAFTA) grants 22 to investments coming from one of the other State parties to it ‘treatment in accordance with international law, including fair and equitable treatment and full protection and security’. This is as such a rather vague wording and does not seem crucially different from the clauses dealt with above. However, the NAFTA regime exhibits a particular feature which does not exist under a normal BIT: its Free Trade Commission (FTC) has the power under Art. 1131(2) to issue Notes of Interpretation which are binding upon tribunals established under Chapter 11, with the consequence that arbitral tribunals set up under NAFTA cannot deviate from these quasi-official interpretations rendered by the FTC. Following several investor claims directed against the US and Canada43 and 23 an award on the merits in Pope & Talbot v. Canada, in which the tribunal had interpreted Art. 1105(1) as going beyond the minimum standard of customary international law,44 the FTC made use of this power in order to limit the scope of Art. 1105(1).45 The relevant part of the corresponding Notes of Interpretation reads as follows: Minimum Standard of Treatment in Accordance with International Law 1.

2.

Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 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.46

42 Azurix v. Argentina, Award (n. 29) para. 361. 43 E.g. the proceedings in the cases of Ethyl Corporation v. Canada, UNCITRAL; Pope & Talbot Inc. v. Canada, UNCITRAL; Loewen Group, Inc. and Raymond L. Loewen v. USA, ICSID Case No. ARB(AF)/98/3. 44 Pope & Talbot Inc. v. Canada, UNCITRAL, Award on the Merits of Phase 2, 10 April 2001, para. 113. 45 On the background of this interpretation, see Christopher Dugan, Don Wallace, Jr., Noah Rubins, and Borzu Sabahi, Investor-State Arbitration (Oxford University Press, 2008) 500–502.

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The substantive identity of these notes – issued in 2001 – and the 2004 Model BITs of the US and Canada is obvious. The conclusion reached in the analysis of these BITs above thus holds true here as well: the FTC – although its interpretation has often been described as using the customary international law minimum standard as a ‘ceiling’47 – has in fact forced the NAFTA standard of full protection and security to remain equivalent to this customary law standard. 25 The award on damages in Pope & Talbot v. Canada, which was rendered after the issuance of these notes that followed the first award on the merits in that case, apparently tried to put up some resistance. It analysed the drafting history of NAFTA and concluded that the FTC’s action was rather an amendment than a proper interpretation.48 However, it remained isolated in that regard. Most tribunals have in the meantime taken the FTC’s notes as a binding interpretation within the meaning of NAFTA Art. 1131(2).49 The tribunal in Methanex v. United States even stated that the relevance of the notes would not be different if they constituted an amendment.50 26 Consequently, in the case of NAFTA ‘full protection and security’ means whatever customary international law demands as the minimum standard of treatment of aliens. The agreement as such does not add anything of its own in this regard, but only confirms this standard and arms it with the arbitration mechanism provided in Chapter 11. The tribunal in Merrill & Ring Forestry v. Canada insisted ‘that general principles of law also have a role to play in this discussion’,51 but it is hard to see how such a general principle could alter the customary law contents of the full protection and security standard. Cases and academic writings can therefore only contribute to identifying these contents. But of course, they might be subject to gradual changes over time, just as customary law develops through modifications in State practice and the underlying opinio iuris. Various arbitral awards have already endorsed such an evolutionary approach.52 24

46 Notes of Interpretation of Certain Chapter 11 Provisions (NAFTA Free Trade Commission, 31 July 2001), available at http://www.naftalaw.org/files/NAFTA_Comm_1105_Transparency.pdf (visited on 28 January 2014). 47 Giuditta Cordero Moss (n. 24) 136; Helge Elisabeth Zeitler, ‘The Guarantee of “Full Protection and Security” in Investment Treaties Regarding Harm Caused by Private Actors’, Stockholm Int’l Arb. Rev. 2005, 1–34, 33. 48 Pope & Talbot Inc. v. Canada, UNCITRAL, Award on Damages, 31 May 2002, paras. 24, 43– 47. 49 E.g., Loewen Group, Inc. and Raymond L. Loewen v. USA, ICSID Case No. ARB(AF)/98/3, Award on Merits, 26 June 2003, para. 126; Glamis Gold, Ltd. v. USA, UNCITRAL, Award, 8 June 2009, para. 599; Grand River Enterprises et al. v. USA, UNCITRAL, Award, 12 January 2011, para. 175. 50 Methanex v. USA, UNCITRAL, Final Award, 3 August 2005, Part IV, Chapter C, para. 20–22. 51 Merrill & Ring Forestry L.P. v. Canada, UNCITRAL, ICSID Administered Case, Award, 31 March 2010, para. 187; the award also gives an overview of the development of the international minimum standard on the treatment of aliens in paras. 195–213. 52 Mondev International Ltd. v. USA (n. 13), para. 125; Glamis Gold, Ltd. v. USA (n. 49) paras. 600 et seq.; Merrill & Ring Forestry L.P. v. Canada (n. 51) paras. 190, 192; ADF Group Inc. v. USA, ICSID Case No. ARB (AF)/00/1, Award, 9 January 2003, paras. 180–184; Waste Man-

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C. The Content of ‘Protection and Security’ 1. The Uncontested Core: Protection against Physical Harm

In any case, the minimum standard of customary international law marks the 27 starting point for every analysis of the precise scope of obligations incurred by States under the protection and security standard. Thus, it is rather uncontested that ‘protection and security’ comprises the duty to prevent physical harm to investor and investment.53 The tribunal in Saluka v. Czech Republic named ‘civil strife and physical violence’ as the essential applications of the standard and saw its specific purpose in protecting ‘the physical integrity of an investment against interference by use of force’.54 In Rumeli v. Kazakhstan, the tribunal stated that the standard obliged the host State ‘to provide a certain level of protection to foreign investment from physical damage’.55 The PSEG v. Turkey award speaks of ‘the physical safety of persons and installations’.56 And the Suez v. Argentina tribunal called the protection ‘primarily from physical injury’ the ‘traditional interpretation’ of the standard and decided not to depart from it.57 In this context, it is also important to note that tribunals usually make no distinction between ‘protection’ and ‘security’, but treat them as a single standard of protection, and it has become common in international investment agreements to use these two words almost interchangeably together. Whenever this is not the case, though, tribunals might be tempted to make a 28 big deal out of it. A good example for that is the Siemens v. Argentina award, which dealt with a provision in the Germany–Argentina BIT that – in the English translation used by the tribunal – employed the phrase ‘full protection and legal security’. The tribunal referred to the definition of protected investments in the BIT, which encompassed tangible as well as intangible assets, and concluded: It is difficult to understand how the physical security of an intangible asset would be achieved. In the instant case, ‘security’ is qualified by ‘legal’. (…) It is clear that in the context of this meaning the Treaty refers to security that is not physical.58

Apart from the fact that the challenged measures taken by Argentina in this 29 case did not impair the investment physically, so this statement only represents an obiter dictum, the irritating point of the tribunal insisting on the specific qual-

53 54 55 56 57 58

agement, Inc. v. Mexico (Number 2), ICSID Case No. ARB(AF)/00/3, Final Award, 30 April 2004, paras. 91–93; Gami Investments, Inc. v. Mexico, UNCITRAL, Final Award, 15 November 2004, paras. 95–96. Christoph Schreuer, ‘Full Protection and Security’ (n. 23) 354; Giuditta Cordero Moss (n. 24) 131, 138; Jeswald W. Salacuse (n. 28) 217. Saluka Investments BV v. Czech Republic, UNCITRAL, Partial Award, 17 March 2006, paras. 483–484. Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, para. 668. PSEG v. Turkey (n. 18) para. 258. Suez et al. v. Argentina, Decision on Liability (n. 30) para. 173. Siemens v. Argentina, Award (n. 34) para. 303.

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ification of security as ‘legal’ is that the English translation was apparently taken from the Spanish text of the BIT. In the equally authoritative German version, by contrast, both ‘protection’ and ‘security’ were explicitly qualified as ‘legal’.59 The Siemens v. Argentina award should therefore not be read as questioning the protection against physical harm; its thrust rather is to extend the scope of the protection and security standard beyond mere physical protection, which is a different issue to be explored later. In sum, at least those types of assets which can be physically protected are supposed to enjoy this protection under the standard.60 2. State Responsibility and Liability Standards 30

Nevertheless, even with regard to this uncontested core of the standard, the level of protection to be expected from the host State may vary, which in turn influences the type of liability incurred by the State. Two main constellations must be distinguished here. a) Damages by State Organs: Strict Liability

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The clearer one of the two occurs when (physical) harm is inflicted on the investment by the State – through its organs – itself. The first ICSID treaty arbitration ever may insofar serve as a typical example: in AAPL v. Sri Lanka, the host State’s security forces destroyed an investor’s property in an operation directed against armed rebels.61 Similarly, the AMT v. Zaire case concerned looting by government troops; the host State had done nothing to prevent this behaviour and was consequently held responsible by the tribunal.62 Moreover, State organs may be found to have instigated violent actions against foreigners and their property, even if they did not use official forces to carry them out – then again direct responsibility of the State is established.63 The Eastern Sugar v. Czech Republic award marks a certain exception here: the tribunal limited the application of the protection and security standard to an ‘obligation of the host state to protect the investor from third parties’ and treated all behaviour of State organs as a possible violation of the FET standard only;64 however, this opinion has remained a stray position. Most tribunals and authors consider it beyond doubt 59 The German version of the BIT text reads ‘vollen rechtlichen Schutz und volle rechtliche Sicherheit’, the Spanish version reads ‘plena protección y seguridad jurídica’, both of which are equally authoritative. 60 Cf. Jeswald W. Salacuse (n. 28) 216. 61 Asian Agricultural Products Ltd. v. Sri Lanka (n. 22). 62 American Manufacturing and Trading, Inc. v. Zaire, ICSID Case No. ARB/93/1, Award, 21 February 1997, paras. 6.04–6.11. 63 Rankin v. Islamic Republic of Iran, Award No. 326-10913-2, Award of 3 November 1987, 17 Iran–US CTR 135, para. 30(c); in Eureko B.V. v. Poland, Partial Award, 19 August 2005, paras. 236–237, the tribunal declined a breach only because the claimant had not been able to prove that Poland was ‘author or instigator of the actions in question’. 64 Eastern Sugar B.V. v. Czech Republic, SCC Case No. 088/2004, Partial Award, 27 March 2007, paras. 203–207.

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that ‘protection and security’ extends to actions by organs and representatives of the host State itself.65 With regard to those actions, the host State simply owes abstention from be- 32 haviour harmful to the investor.66 The standard of liability that applies in case of a violation is not exactly clear. Considering the comprehensive responsibility standard laid down in Art. 4 of the ILC Draft Articles on State Responsibility, though, much speaks in favour of imposing strict liability on the host State for the conduct of its organs. The tribunal in AMT v. Zaire seems to have followed this approach when it left open whether the State was under an obligation of result or of conduct, but rather found the protection and security standard violated ‘by mere recognition of the existing reality of the damage caused’ by government troops.67 The assessment of liability might become more difficult in a situation of com- 33 plicity between State organs and private actors, although the ILC Draft Articles also provide some guidance in this respect: Art. 8 equalises conduct directed or controlled by a State with an act of that State, and Art. 11 even considers conduct which is otherwise not attributable to a State an act of that State ‘if and to the extent that the State acknowledges and adopts the conduct in question as its own’. The latter constellation points to the Tehran Hostages case of the ICJ, which may well be cited as a prime example of complicity.68 So far, however, no comparable cases from the field of investment law are discernible; in Tecmed v. Mexico the tribunal addressed the question, but found no evidence for complicity on the part of Mexican authorities.69 The great majority of cases that are concerned with protection against harm done by private actors do not deal with a situation of complicity, but rather with the degree of (police) protection to be provided by the State in order to prevent this harm. b) Damages by Private Actors: Due Diligence (1) The Basic Idea

This brings us to the second, much more frequent and more complicated con- 34 stellation and to the question when State responsibility for completely private 65 In addition to the decisions quoted above, cf. Biwater Gauff (Tanzania) Ltd. v. Tanzania, Award (n. 29) para. 730; Christoph Schreuer, ‘Full Protection and Security’ (n. 23) 357. 66 Helge Elisabeth Zeitler, ‘Full Protection and Security’ in Stephan W. Schill (ed), International Investment Law and Comparative Public Law, 183–212, 191; Christoph Schreuer, ‘Full Protection and Security’ (n. 23) 357, referring to Art. 4 of the International Law Commission’s Articles on State Responsibility. 67 American Manufacturing and Trading, Inc. v. Zaire (n. 62) paras. 6.08, 6.11; cf. the discussion of the decision in Giuditta Cordero Moss (n. 24) 140. 68 United States Diplomatic and Consular Staff in Tehran (USA v. Iran), ICJ Judgment, ICJ Rep. 1980, 3 et seq.; cf. the discussion in Helge Elisabeth Zeitler, ‘The Guarantee of “Full Protection and Security” in Investment Treaties Regarding Harm Caused by Private Actors’ (n. 47) 7–8. 69 Técnicas Medioambientales Tecmed, S.A. v. Mexico, ICSID Case No. ARB (AF)/00/2, Award, 29 May 2003, para. 176.

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actions is incurred. The tribunal in Lauder v. Czech Republic stated that the BIT obligation to grant full protection and security ‘does not oblige the Parties to protect foreign investment against any possible loss of value caused by persons whose acts could not be attributed to the State’.70 This makes clear that a host State cannot be held strictly liable for any damage to investments on its territory.71 In the AAPL v. Sri Lanka arbitration, the claimant had tried to achieve exactly this kind of liability, but was rebuffed by the tribunal: (…) the Tribunal declares unfounded the Claimant’s main plea aiming to consider the Government of Sri Lanka assuming strict liability under Article 2.(2) of the Bilateral Investment Treaty, without any need to prove that the damages suffered were attributable to the State or its agents, and to establish the State’s responsibility for not acting with ‘due diligence’.72

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Lacking any specific investment law precedents, the AAPL v. Sri Lanka tribunal relied on the jurisprudence of the ICJ, in particular the ELSI case decided shortly before, where the court had stated: The reference in Article V [of the relevant treaty] to the provision of ‘constant protection and security’ cannot be construed as the giving of a warranty that property shall never in any circumstances be occupied or disturbed.73

This judgment itself fell perfectly in line with the former case law of the court. The ICJ had already concluded in the Corfu Channel case of 1949 that – as a rule of customary international law – ‘the mere fact of the control exercised by a State over its territory (…) neither involves prima facie responsibility nor shifts the burden of proof’.74 37 Strict liability of the host State is therefore out of the question with regard to damages caused by private parties. However, it must be borne in mind that one specific feature distinguishes the protection and security standard from the other common standards of protection usually enshrined in international investment agreements. Whereas these other standards mainly prohibit certain behaviour by the host State and its organs that would damage the investment, the pivotal thrust of protection and security goes beyond that: it imposes on the host State not only a duty to refrain from certain actions, but an obligation to take active measures for the protection of the investment, namely, to prevent private actors from harming it. This means that a different standard of liability is needed. 36

70 Lauder v. Czech Republic, UNCITRAL, Award (Final), 3 September 2001, para. 308. 71 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 149–150; Christoph Schreuer, ‘Full Protection and Security’ (n. 23) 366; this has also been pointed out by, e.g., by the tribunals in AES Summit Generation Limited and AES-Tisza Erömü Kft v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para. 13.3.2. and Tecmed v. Mexico (n. 69) para. 177, which has been quoted by Saluka v. Czech Republic (n. 54) para. 484 and Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 181. 72 AAPL v. Sri Lanka (n. 22) para. 53. 73 Elettronica Sicula S.P.A. (ELSI) (n. 8) para. 108. 74 Corfu Channel Case (United Kingdom v. Albania), ICJ Judgment of 9 April 1949, ICJ Rep. 1949, 4 et seq., 18.

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Tribunals and authors alike usually call this standard ‘due diligence’. The 38 term appears, for instance, in the Noble Ventures v. Romania award, where the tribunal regards ‘the general duty to provide for protection and security of foreign nationals’ as ‘one requiring due diligence to be exercised by the State’.75 Similarly, the tribunal in Lauder v. Czech Republic stated: The Arbitral Tribunal is of the opinion that the Treaty obliges the Parties to exercise such due diligence in the protection of foreign investment as reasonable under the circumstances.76

The latter citation also points to another term that is commonly used to deter- 39 mine the due diligence standard in more detail, namely, the adjective ‘reasonable’. Again, the use of this term goes all the way back to the AAPL v. Sri Lanka award and the definition employed by the tribunal there: The ‘due diligence’ is nothing more or less than the reasonable measures of prevention which a well-administered government could be expected to exercise under similar circumstances.77

In Saluka v. Czech Republic, the tribunal described the host State’s duty as 40 one to ‘adopt all reasonable measures to protect assets and property from threats or attacks which may target particularly foreigners or certain groups of foreigners’.78 Other tribunals have more or less followed suit.79 Thus, depending on the circumstances of the concrete case, the crucial ques- 41 tion is what could reasonably be expected from the host State in terms of protective measures. If a host State fails to meet these expectations, this failure constitutes a breach of the protection and security standard.80 However, if the investor’s injuries and losses could not have been prevented even if the host State had done everything that would have been required under due diligence, the investor might claim the breach thereby committed, but still not be able to demand any actual compensation; here the usual yardstick of causality applies.81 (2) Measuring Due Diligence

In substantiating what may reasonably be expected from a host State, as cited 42 above, frequently the ideal of ‘a well-administered government’ is put up as a benchmark. But this sword can again cut two ways: it can be interpreted, as for instance the AMT v. Zaire award seems to do it, as an ‘objective’ standard of vigilance, ‘in the sense that [the host State] shall take all measures necessary to ensure the full enjoyment of protection and security of (…) investments’.82 The 75 Noble Ventures, Inc. v. Romania (n. 10) para. 164. 76 Lauder v. Czech Republic (n. 70) para. 308. 77 AAPL v. Sri Lanka (n. 22) para. 77; Ian Brownlie, System of the Law of Nations: State Responsibility (1986), 162, similarly defines it as ‘a reasonable measure of prevention which a welladministered government could be expected to exercise under similar circumstances’. 78 Saluka v. Czech Republic (n. 54) para. 484. 79 E.g., Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011, paras. 323, 325. 80 Giuditta Cordero Moss (n. 24) 138. 81 Noble Ventures v. Romania (n. 10) para. 166. 82 American Manufacturing and Trading, Inc. v. Zaire (n. 62) para. 6.05.

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benchmark would then be the abstract idea of ‘a reasonably well organized modern state’, as the AAPL v. Sri Lanka tribunal put it.83 Moreover, AAPL v. Sri Lanka also stands for the attempt to invoke the wording of the underlying BIT clause in favour of a heightened standard of due diligence, provided the clause adds qualifying words like ‘constant’ or ‘full’ to the protection and security standard.84 However, as Newcombe and Paradell have remarked: In practice, tribunals will likely consider the state’s level of development and stability as relevant circumstances in determining whether there has been due diligence. An investor investing in an area with endemic civil strife and poor governance cannot have the same expectation of physical security as one investing in London, New York or Tokyo.85

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The host State’s ‘subjective’ development and stability might therefore influence the determination of the investor’s reasonable expectations in terms of the State’s due diligence. A prime example of this approach is the award in Pantechniki v. Albania, where the renowned sole arbitrator Paulsson advocated the application of the proportionality principle to failures of protection and security, arguing they were likely to arise in an unpredictable instance of civil disorder which could have been readily controlled by a powerful state but which overwhelms the limited capacities of one which is poor and fragile. (…) it seems difficult to maintain that a government incurs international responsibility for failure to plan for unprecedented trouble of unprecedented magnitude in unprecedented places.86

It is interesting to note in this context that Paulsson explicitly rejected the validity of this argument outside the area of protection and security, concretely with regard to a denial of justice claim, since such claims would not relate to the physical infrastructure that developing States might lack.87 45 So far, no clearly marked exit leads out of this quagmire. But an approach developed in the field of human rights, especially social and economic rights, where benchmarking processes taking into account the actual resources of a State are commonplace, might be of some help in paving the way. One could try to delineate some ‘absolute’ minimum standard of protection and security that every State must guarantee under all circumstances. Above this standard, though, due diligence could be determined in ‘relative’ terms according to the proportionality principle and paying due respect to a host State’s specific level of development and stability. After all, this is probably the type of analysis that a reasonable investor would conduct himself to ascertain what he might have to expect in the respective State. 44

83 AAPL v. Sri Lanka (n. 22) para. 77. 84 AAPL v. Sri Lanka (n. 22) para. 50; this is also considered by Jeswald W. Salacuse (n. 28) 217. 85 Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Wolters Kluwer, 2009) 310. 86 Pantechniki S.A. Contractors & Engineers v. Albania, ICSID Case No. ARB/07/21, Award, 30 July 2009, para. 77. 87 Ibid., para. 76.

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3. The Area of Contest: beyond Physical Harm

The issues of State responsibility and the applicable liability standards are rel- 46 evant for the determination of breaches of ‘protection and security’ in any case, i.e. at least in all cases involving physical harm. But one question remains open: is the protection and security standard to be extended beyond this uncontested core, which in particular means that it would be interpreted so as to encompass the maintenance of a stable legal and commercial environment? The arbitral tribunals are highly divergent on this matter. Their task is indeed 47 not easy: while some BITs explicitly limit the protection and security clause to physical protection,88 the wording of most international investment agreements is ambiguous, to say the least. Many awards therefore trace the protection and security standard back to its origins that were explained before and oppose the view that it should comprise more than physical protection. In Suez v. Argentina, this essentially historical analysis was especially thoroughly conducted by the tribunal, which summed it up as follows: Having considered the specific language of both of the applicable BITs and the historical development of the ‘full protection and security’ standard under international law, as well as the recent jurisprudence, this Tribunal is not persuaded that it needs to depart from the traditional interpretation given to this term.89

Other tribunals reach this result by only generally referring to the traditional 48 notions of protection and security and the pertinent case law.90 But even in awards which in principle belong to that category, sometimes tribunals hint at a (theoretical) possibility of extending the scope of the standard beyond mere physical protection in exceptional circumstances. For instance, the tribunals in Enron v. Argentina and Sempra v. Argentina even used the identical wording to emphasise that they could not ‘exclude as a matter of principle that there might be cases where a broader interpretation could be justified’.91 However, these tribunals also see the point that remains to be examined later: the broader the interpretation of protection and security, the more difficult it becomes to distinguish this standard from FET in particular. The PSEG v. Turkey tribunal found a very euphemistic way to express that: To the extent that there is such an exceptional situation, the connection with fair and equitable treatment becomes a very close one.92

88 E.g., Art. 3(1) of the Netherlands–Romania BIT (Agreement on encouragement and reciprocal protection of investments between the Government of the Kingdom of the Netherlands and the Government of Romania of 19 April 1994) speaks of ‘full physical security and protection’. 89 Suez et al. v. Argentina, Decision on Liability (n. 30) para. 173. 90 E.g., Saluka v. Czech Republic (n. 54) para. 484; BG Group Plc v. Argentina, UNCITRAL, Award, 24 December 2007, paras. 324, 326; Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Kazakhstan (n. 55) para. 669. 91 Enron Corporation and Ponderosa Assets, L.P. v. Argentina, Award (n. 33) para. 286; Sempra Energy International v. Argentina, Award (n. 33) para. 323. 92 PSEG v. Turkey (n. 18) para. 258.

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a) Demands for Repressive Action 49

In order to frame the issue of a possible extension of protection and security beyond the protection against physical harm more precisely, it is first of all necessary to point out an additional aspect that does not really constitute such an extension: the host State does not only owe the prevention of physical impairment of the investment, but also the availability of remedies if such attacks occur. The relatively recent Paushok v. Mongolia award puts this obligation in bold terms: The minimum standard of vigilance and care set by international law comprises a duty of prevention and a duty of repression. A well-established aspect of the international standard of treatment is that States must exercise ‘due diligence’ to prevent wrongful injuries to the person or property of aliens within their territory, and, if they did not succeed, to exercise at least ‘due diligence’ to punish such injuries.93

In the case of Wena Hotels v. Egypt, where the seizure of hotels was at stake, the tribunal – albeit not really distinguishing between ‘full protection and security’ on the one hand and FET on the other – heavily relied on the absence of remedies for the investor and vice versa of sanctions against the responsible officials to determine a breach of BIT obligations by the host State.94 Conversely, in Saluka v. Czech Republic, where – among other things – documents had been seized by the police, the tribunal viewed the fact that the claimant successfully lodged a petition with the Czech Constitutional Court as evidence that ‘the Claimant can no longer be aggrieved’ and that the Czech Republic had not ‘violated its Treaty obligation to accord ‘full protection and security’ to Saluka’s investment’.95 51 Consequently, the due diligence obligations of a host State under the protection and security standard do not only call for the prevention of physical harm in the first place, but also – if such prevention is not successful – for remedying this harm and engaging in (criminal) prosecution of the perpetrators. However, this cannot be regarded as an extension of the standard as long as the availability of the judicial system in particular to remedy and to prosecute stays connected with a physical impairment of the investment. It appears rather natural that the impossibility of complete prevention of harm and the necessity of deterring further wrongdoers call for repressive action to be generally included in a standard of protection. 52 By contrast, the issue of extension is raised by cases where tribunals considered the availability of judicial remedies an element of protection and security even in absence of a connection to physical impairment. The tribunal in Saluka v. Czech Republic posed this question with regard to the freezing of shares, but did not decide it because it failed to see a valid denial of justice claim.96 In the 50

93 Sergei Paushok v. Mongolia (n. 79) para. 324. 94 Wena Hotels Ltd. v. Egypt, ICSID Case No. ARB/98/4, Award on Merits, 8 December 2000, paras. 84, 94. 95 Saluka v. Czech Republic (n. 54) paras. 495–496.

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cases of Lauder v. Czech Republic and Parkerings v. Lithuania, the tribunals stipulated in almost literal unison that ‘[t]he Respondent’s (only) duty under the Treaty was, first, to keep its judicial system available for the Claimant’ concerning contractual claims and claims arising from legal relationships between two companies, respectively.97 The Tecmed v. Mexico tribunal addressed the judicial system as an element of the protection and security standard with regard to reversing administrative measures,98 and the award in Gemplus v. Mexico also implies that access to legal remedies before State courts is generally required by protection and security clauses.99 b) The Real Issue: Guarantee of a Stable Legal Environment?

But the real issue of whether protection and security should be understood to- 53 day as extending beyond the protection against physical harm is still a different one. There is by now a chain of arbitral awards, in which tribunals have read much farther-reaching guarantees into the respective BIT clauses, thereby at least partially creating an open conflict with the cases cited above. In essence, these tribunals consider protection and security now to generally warrant a stable legal environment, where investors do not have to fear unilateral regulatory changes of some magnitude by the host State. Some of these awards may have been prompted by specific formulations in the underlying BITs or at least try to invoke specific treaty terms in order to justify this extension. By and large, however, this string of arbitral jurisprudence cannot be explained by specific circumstances or BIT features, but rather reflects a general attitude towards using the protection and security standard for an improvement of investors’ positions visà-vis the host State. In hindsight, the first link of the chain seems to be the CME v. Czech Republic 54 award. The tribunal there relied on a BIT that guaranteed ‘full security and protection’ and interpreted this clause as follows: 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.100

An interesting particularity of this case is the fact that the very closely related 55 case of Lauder v. Czech Republic was almost simultaneously decided the other way. Several years later, the Suez v. Argentina tribunal still referred to this divergence – together with the failure of the CME tribunal to reach a unanimous decision and its alleged lack of a detailed analysis – in order to play down the rele-

96 97 98 99

Ibid., para. 493. Lauder v. Czech Republic (n. 70) para. 314; Parkerings v. Lithuania (n. 31) para. 360. Tecmed v. Mexico (n. 69) para. 177. Gemplus S.A. and Talsud S.A. v. Mexico, ICSID Case Nos. ARB(AF)/04/3 and ARB(AF)/ 04/4, Award, 16 June 2010, paras. 9–12. 100 CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001, para. 613.

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vance of the CME award.101 However, the Lauder tribunal was not only based on a different – although almost identically worded – BIT,102 but reached its conclusion mainly because of a different assessment of the facts,103 so the convincing power of this argument appears limited. 56 Moreover, as mentioned above, in the meantime a considerable number of other tribunals have followed the CME approach. Sometimes this happens without deeper reasoning, as in the Occidental v. Ecuador award, where the tribunal simply held that ‘a treatment that is not fair and equitable automatically entails an absence of full protection and security of the investment’,104 or in the case of CSOB v. Slovak Republic, where a loan was found to be covered by ‘full protection and security’.105 The tribunal in Azurix v. Argentina nevertheless heavily relied on the Occidental case as a precedent and further argued: (…) when the terms ‘protection and security’ are qualified by ‘full’ and no other adjective or explanation, they extend, in their ordinary meaning, the content of this standard beyond physical security.106

57

The true motivation behind the Azurix award, though, is revealed just two sentences before that passage, where the tribunal states that ‘the stability afforded by a secure investment environment is as important from an investor’s point of view’.107 The tribunal in Biwater Gauff v. Tanzania explicitly adhered to this holding and added that ‘when the terms ‘protection’ and ‘security’ are qualified by ‘full’, (…) [this] implies a State’s guarantee of stability in a secure environment, both physical, commercial and legal’.108 A similarly phrased argument was employed in the case of National Grid Plc v. Argentina, where the pertinent BIT clause called for ‘protection and constant security’. The tribunal concluded that this particular formulation ‘does not carry with it the implication that this protection is inherently limited to protection and security of physical assets’, and reinforced this conclusion by referring to the fact that the ‘protection and constant security’ standard and the FET standard were included in the same sentence of the BIT.109

101 Suez et al. v. Argentina, Decision on Liability, 30 July 2010 (n. 30) para. 161. 102 The CME tribunal ruled on Art. 3(2) of the Netherlands–Czech BIT (Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic of 29 April 1991), which provides ‘full security and protection’; the Lauder tribunal ruled on Art. II(2)(a) of the US–Czech Republic BIT (Treaty between the Czech and Slovak Federal Republic and the United States of America Concerning the Reciprocal Encouragement and Protection of Investments of 22 October 1991), which grants ‘full protection and security’. 103 Lauder v. Czech Republic (n. 70) para. 311. 104 Occidental v. Ecuador (n. 34) para. 187. 105 Ceskoslovenska Obchodni Banka, a.s. v. Slovakia, ICSID Case No. ARB/97/4, Final Award, 29 December 2004, para. 170. 106 Azurix v. Argentina (n. 29) para. 408. 107 Ibid. 108 Biwater Gauff (Tanzania) Ltd. v. Tanzania (n. 29) para. 729. 109 National Grid plc v. Argentina, UNCITRAL, Award, 3 November 2008, para. 189.

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Siemens v. Argentina was already mentioned in a different context, but must 58 be highlighted here again, even though the rather unusual wording of the particular BIT behind this case makes it difficult to draw general conclusions from it. This time, the tribunal found the adjective ‘legal’ to be decisive in holding that the term ‘security’ in the BIT could not be reduced to its physical dimension.110 Likewise, the tribunal in Aguas del Aconquija v. Argentina had to deal with a BIT that was insofar unusual as it explicitly formulated the protection and security clause as a specification to the FET standard.111 But this award is especially remarkable for another argument, namely, that in the absence of any qualifying terms protection and security should always be understood as broadly covering all kinds of unfair and inequitable treatment: If the parties to the BIT had intended to limit the obligation to ‘physical interferences’, they could have done so by including words to that effect in the section. (…) actions or measures [which deprive an investment of protection] need not threaten physical possession or the legally protected terms of operation of the investment.112

This stocktaking leaves us with a deplorably fundamental disagreement of the 59 arbitral jurisprudence on this point. Whereas a considerable number of tribunals stick to the traditional meaning of protection and security as protecting against physical harm only, an equally considerable array of awards now interpret this standard as a general clause supposed to make the investor’s position secure with regard to possible changes in the legal or even commercial environment. As understandable as this broadening of the standard appears from the perspective of an optimal protection of investments, it seems extremely questionable whether the State parties to international investment agreements really wanted to give this kind of comprehensive assurances. The recent award in AES v. Hungary has framed this criticism most concisely: To conclude that the right to constant protection and security implies that no change in law that affects the investor’s rights could take place, would be practically the same as to recognizing[sic] the existence of a non-existent stability agreement as a consequence of the full protection and security standard.113

110 Siemens v. Argentina (n. 34) para. 303. 111 Art. 5(1) of the France–Argentina BIT (Agreement between the Argentine Republic and the Republic of France for the Promotion and Reciprocal Protection of Investments of 3 July 1991) reads: ‘investments (...) shall enjoy (...) protection and full security in accordance with the principle of fair and equitable treatment referred to in Article 3 of this Agreement’. 112 Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 7.4.15. 113 AES Summit Generation Limited and AES-Tisza Erömü Kft v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para. 13.3.5.

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D. Relationship of ‘Protection and Security’ to Other Standards 1. General Remarks

Moreover, depending on the position that is taken regarding the scope and content of protection and security, the relationship of this standard to the other standards of protection commonly contained in international investment agreements also varies. Some constellations of possible conflict or overlap are even independent of the divergences laid out above. For instance, if a BIT contains a ‘combat damage clause’ that explicitly addresses (physical) damages caused by combat action in the context of insurrection, riots and the like, the question arises whether this clause represents a lex specialis capable of putting the general protection and security standard aside. The tribunals in AAPL v. Sri Lanka and AMT v. Zaire remained split on this issue.114 61 By contrast, a conflict or an overlap with the expropriation standard is much more likely if a broader interpretation of protection and security is chosen. In Enron v. Argentina and Sempra v. Argentina, the tribunals used this argument to caution against such a broader interpretation.115 Contrary to that, the Siag v. Egypt award found the ‘full protection’ clause of the underlying BIT violated precisely because an expropriation had occurred.116 60

2. In Particular: Fair and Equitable Treatment 62

But the pivotal and inevitable potential of overlap exists between protection and security and the fair and equitable treatment (FET) standard. Again, the arbitral jurisprudence on this matter strays in all possible directions. Many awards either mix up the two standards or avoid drawing a distinction between them at all, sometimes determining a violation of both based on the same set of facts.117 Others acknowledge the close connection between the two, especially if a broader interpretation of protection and security is applied, but refuse to take a stance on this issue and decide their case on other points.118 There is, however, also a 114 AAPL v. Sri Lanka (n. 22); American Manufacturing and Trading, Inc. v. Zaire (n. 62); in both cases, the majority applied the ‘protection and security’ clause, while the individual opinions argued for the combat damage clause to be lex specialis: AAPL v. Sri Lanka, Dissenting opinion of Samuel K. B. Asante, 628, 632 et seq.; American Manufacturing and Trading, Inc. v. Zaire, Statement of the individual opinion of Mr. Heribert Golsong, para. 6 et seq. 115 Enron Corporation and Ponderosa Assets, L.P. v. Argentina (n. 33) para. 286; Sempra Energy International v. Argentina (n. 33) para. 323. 116 Waguih Elie George Siag and Clorinda Vecchi v. Egypt, ICSID Case No. ARB/05/15, Award and Dissenting Opinion, 1 June 2009, para. 448. 117 Wena Hotels Ltd. v. Egypt (n. 94) paras. 84–95; CME v. Czech Republic (n. 100) para. 611; Siemens v. Argentina (n. 34) paras. 274 et seq., 309; Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina (n. 112) paras. 7.4. et seq.; National Grid plc v. Argentina (n. 109) para. 190. 118 PSEG v. Turkey (n. 18) paras. 257–258; Plama Consortium Limited v. Bulgaria (n. 71) para. 180; Impregilo S.p.A. v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, para. 334.

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good deal of awards which address the problem directly. Unfortunately, the two positions most commonly found here are once more diametrically opposed. The first one suggests that a violation of the FET standard comprises a viola- 63 tion of protection and security as well. It has mainly been stated by the tribunals in Occidental v. Ecuador – where it was said that ‘a treatment that is not fair and equitable automatically entails an absence of full protection and security of the investment’119 – and Azurix v. Argentina, the latter one expressly relying on the Occidental award: The Tribunal is persuaded of the interrelationship of fair and equitable treatment and the obligation to afford the investor full protection and security. (…) To conclude, the Tribunal, having held that the Respondent failed to provide fair and equitable treatment to the investment, finds that the Respondent also breached the standard of full protection and security under the BIT.120

The problem with this position is that it treats FET either as an equivalent or 64 as a subcategory of the protection and security standard. But if FET and protection and security were equivalents, what would then be the benefit of putting them together in one agreement? And the classification of FET as a subcategory of protection and security does not only lack any indication in the wording of the respective treaties, but also flies in the face of the historical origins of the two standards; as was explained above, protection and security started out with a relatively narrow meaning. To be sure, this does not rule out the development of a different interpretation, but at least it creates a strong presumption against it. The opposite position, which views protection and security as a specification 65 of FET, can already point to some BITs which define the relationship of these two standards exactly that way. The most famous example that has been the subject of no less than three arbitral decisions is Art. 5(1) of the Argentina–France BIT, which reads: Investments (…) shall be fully and completely protected and safeguarded in the territory and maritime zone of the other Contracting Party, in accordance with the principle of just and equitable treatment mentioned in article 3 of this Agreement.121

Consequently, the tribunals in Suez v. Argentina and Total v. Argentina more 66 or less clearly ruled the concept of ‘full protection and security’ to be included within the concept of FET, but having a narrower scope than the latter standard.122 But the Noble Ventures v. Romania tribunal, which faced a more classical ‘full protection and security’ clause with the identical wording and position119 Occidental v. Ecuador (n. 34) para. 187. 120 Azurix v. Argentina (n. 29) para. 408. 121 Art. 5(1) Argentina–France BIT (Agreement between the Argentine Republic and the Republic of France for the Promotion and Reciprocal Protection of Investments), done at Paris on 3 July 1991, French version available at http://www.unctad.org/sections/dite/iia/docs/bits/ france_argentina_fr.pdf, visited on 28 January 2014; translation from Suez et al. v. Argentina, Decision on Liability (n. 30) para. 152. 122 Suez et al. v. Argentina, Decision on Liability (n. 30) para. 165; Total S.A. v. Argentina, ICSID Case No. ARB/04/01, Decision on Liability, 27 December 2010, para. 343. Cf., however, Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina (n. 112) paras. 7.4.15, where the tribunal disagreed on the latter point.

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ing as in the Occidental case, reached the same conclusion through a more general observation of the FET standard: Considering the place of the fair and equitable treatment standard at the very beginning of Art. II(2), one can consider this to be a more general standard which finds its specific application in inter alia the duty to provide full protection and security, the prohibition of arbitrary and discriminatory measures and the obligation to observe contractual obligations towards the investor.123

E. Concluding Observations

As a general observation, it does not appear convincing to assume that two standards, which are contained in the same document and just separately listed there, are supposed to have exactly the same meaning. They may overlap, but if any kind of meaningful distinction can be found between them, the corresponding interpretation seems very much preferable compared to an alternative that would deprive one of these two treaty provisions of any meaning of its own.124 This observation militates in particular against a too extensive interpretation of the protection and security standard. If it is interpreted so as to include what the respective tribunals have called ‘legal security’, then in effect this standard is more or less merged with the FET standard, which is an undesirable outcome from the premise stated above. It must be conceded that the often ambiguous wording of most international investment agreements does not per se prohibit such an interpretation, but one should in general refrain from the assumption that State parties to a treaty fill it with basically redundant provisions, even though this might not be totally implausible considering that sometimes a ‘double safety net’ is deliberately installed. The least that should be demanded in order to buttress an assumption to the contrary, though, is a clear indication in the wording of the treaty in question. Of course, this observation applies vice versa as well: that is to say, one should be also restrictive in assuming that protection and security is merely a specification of the FET standard, unless the treaty expressly states such an understanding as agreed to by the State parties, like the famous Argentina–France BIT does in Art. 5(1). 68 For similar reasons the possible identity of the protection and security standard with the customary minimum standard of treatment of aliens, which was discussed at the beginning of this chapter, is called into question. To be sure, concluding a BIT would make sense even if the material protection standard of the BIT did not exceed this customary minimum standard, provided the BIT contains an investor-State arbitration clause so as to at least – vastly – improve the procedural position of the investor. But this idea alone could not explain why the standard then needed a special formulation like ‘(full or constant) protection and security’; it would rather suffice to confirm that the minimum standard of 67

123 Noble Ventures v. Romania, Award, 12 October 2005 (n. 10) para. 182. 124 Cf. Christoph Schreuer, ‘Full Protection and Security’ (n. 23) 365–366; Jan de Nul N.V. and Dredging International N.V. v. Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008, para. 269.

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customary international law is to be guaranteed, and to focus on the elaboration of the procedural part of the treaty at issue. Thus, the assumption that protection and security is just equivalent to the customary minimum standard should also be entertained only if, as in the case of NAFTA, the State parties to the treaty have made pretty clear that this is their understanding of the standard. Taken together, this means that the protection and security standard – absent a 69 specific definition in the treaty concerned – defines a scope and level of protection that lies somewhere in-between the minimum standard of customary international law and the FET standard now contained in most BITs. In assessing its reach and intensity in detail, one must focus on its uncontested core, namely, the protection of the investor and his investment from physical harm. But this more limited interpretation of protection and security does not make it a mere special case of FET, something which is very important to point out: whereas the FET standard, as Schreuer has put it, ‘consists mainly of an obligation on the host State’s part to desist from a certain course of action’,125 the central distinguishing element of the protection and security standard is that it also requires the host State ‘to actively create a framework that grants security. The necessary measures must be capable of protecting the investment against adverse action by private persons as well as by State organs.’126 This encompasses preventive police protection as well as the availability of 70 an administrative and judicial system that is capable and ready to deal with corresponding threats. And protection and security is the only one of the common BIT standards that is directly and obviously related to this sort of preventive and vindicative action from a functional point of view.

125 Christoph Schreuer, ‘Fair and equitable treatment (FET): interactions with other standards’ (n. 32) 68–69. 126 Ibid.

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Ursula Kriebaum A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Treaty Language varies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

C. Overlap with Other Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Arbitrary or Discriminatory Measures standing Alone or Part of the Fair and Equitable Treatment or the Full Protection and Security Clause?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Overlap between Non-Discrimination, Most Favoured Nation and National Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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D. The Meaning of Arbitrary/Unreasonable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Public Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Provided for by the Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Proportionality of the Interference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24 33 35 38

E. The Meaning of Discriminatory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Discriminatory Intent or Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Basis of Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Justification for the Difference in Treatment . . . . . . . . . . . . . . . . . . . . . . . . .

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F. Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Kurt J. Hamrock, ‘The ELSI Case: Toward an International Definition of “Arbitrary” Conduct’ (1992) 27 Tex. Int’l L. J. 837–864; Veijo Heiskanen, ‘Arbitrary and Unreasonable Measures’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 87–110; Federico Ortino, ‘Non-Discriminatory Treatment in Investment Disputes’ in Pierre-Marie Dupuy, Francesco Francioni, Ernst-Ulrich Petersmann (eds), Human Rights in International Investment Law and Arbitration (Oxford University Press, 2009) 344–366; Christoph H. Schreuer, ‘Protection against Arbitrary or Discriminatory Measures’ in Catherine A. Rogers and Roger P. Alford (eds), The Future of Investment Arbitration (Oxford University Press, 2009) 183–198; Christoph H. Schreuer, ‘Fair and Equitable Treatment (FET): Interactions with other Standards’ in Clarisse Ribeiro (ed), Investment Protection and the Energy Charter Treaty (JurisNet, 2008) 63–100; Olivier De Schutter, International Human Rights Law (Cambridge University Press, 2010); Stephen Vasciannie, ‘The Fair and Equitable Treatment Standard in International Investment Law and Practice’ (1999) 70 BYIL 99–164; Alfred Verdross, ‘Les règles internationales concernant le traitement des étrangers’ (1931-III) 37 RC 323–412.

A. Introduction 1

Clauses protecting investors from arbitrary/unreasonable/unjustifiable or discriminatory measures are a common feature in investment treaties, notably in bilateral investment treaties (BITs).1 However, even without a pertinent treaty provision and long before the invention of BITs, there were suggestions that arbi-

* This contribution is current as of January 2012. 1 Veijo Heiskanen, ‘Arbitrary and Unreasonable Measures’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 87–110; Christoph H. Schreuer, ‘Protection against Arbitrary or Discriminatory Measures’ in Catherine A. Rogers and Roger P. Alford (eds), The Future of Investment Arbitration (Oxford University Press, 2009) 183–198.

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trary action against a foreigner is in violation of international law. Alfred Verdross already wrote in 1931: Un Etat viole, par conséquent, le droit des gens s’il porte arbitrairement atteinte aux droit acquis des étrangers, (…) Tout ce que le droit international prescrit à cet égard, c’est que l’Etat ne doit pas violer arbitrairement les droits privés des étrangers, fût-ce même par un acte du législateur.2 [The State, therefore, violates international law if it arbitrarily impairs the acquired rights of aliens, (...) All that international law prescribes in this respect is that the State may not arbitrarily violate the private rights of aliens even by legislative action.]

This suggests that the protection against arbitrary measures is part of the in- 2 ternational minimum standard to be found in customary international law.3 Many, though not all, of the modern investment protection treaties contain a separate guarantee against arbitrary and/or discriminatory measures.4 The treaties have in common that the ‘arbitrary’/’unreasonable‘/’unjustifi- 3 able’ measure has to impair the investment. The measure must have a detrimental effect on the investment.5 Furthermore, the treaties have in common that they also protect against discriminatory measures. B. Treaty Language varies

The provisions in BITs and multilateral investment treaties (MITs) covering 4 arbitrary or discriminatory measures vary.

2 Alfred Verdross, ‘Les règles internationales concernant le traitement des étrangers’ (1931-III) 37 RC 323, 358, 359 (italics in original). 3 See Christoph H. Schreuer (n. 1) 183, 189. 4 The most prominent multilateral treaty lacking such a provision is the NAFTA (North American Free Trade Agreement, 1992, (1993) 32 ILM 289). For BITs lacking such a provision see e.g. the Austria–Croatia BIT (Agreement between the Republic of Austria and the Republic of Croatia for the Promotion and Protection of Investments, 19 February 1997, entry into force 1 November 1999); the Austria–Egypt BIT (Agreement between the Republic of Austria and the Government of the Arab Republic of Egypt for the Promotion and Protection of Investments, 12 April 2001, entry into force 29 April 2002); the Austria–India BIT (Agreement between the Republic of Austria and the Government of the Republic of India for the Promotion and Protection of Investments, 8 November 1999, entry into force 1 March 2001); the Austria–Korea BIT (Agreement between the Republic of Korea and the Republic of Austria on the Encouragement and Protection of Investments, 14 March 1991, entry into force 1 November 1991); the Argentina–Canada BIT (Agreement between the Government of Canada and the Government of the Republic of Argentina for the Promotion and Protection of Investments, 5 November 1991); the Argentina–Korea BIT (Agreement between the Government of the Republic of Korea and the Government of the Republic of Argentina on the Promotion and Protection of Investments, 17 May 1994, entry into force 24 September 1996); the Bangladesh–Germany BIT (Agreement between the Federal Republic of Germany and the People’s Republic of Bangladesh concerning the Promotion and Reciprocal Protection of Investments, 6 May 1981, entry into force 14 September 1986). By contrast, Art. 10(1) of the Energy Charter Treaty (ECT, 1994, (1995) 34 ILM 360, 385) provides that the parties shall not ‘in any way impair by unreasonable or discriminatory measures their [i.e. the investments’] management, maintenance, use, enjoyment or disposal.’ 5 See e.g. Siag and Vecchi v. Egypt, ICSID Case No. ARB/05/15, Award, 1 June 2009, para. 458.

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Treaties contain three different wordings as far as the ‘arbitrary’ element is concerned: ‘arbitrary’,6 ‘unreasonable’7 and ‘unjustifiable’.8 Tribunals seem to 6 See e.g. Art. II(2)b of the Argentina–US BIT (Treaty between the United States of America and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investment, 14 November 1991, entry into force 20 October 1994, (1991) 31 ILM 124); Art. 2(2) of the Argentina–Italy BIT (Agreement between the Argentine Republic and the Republic of Italy on the Promotion and Protection of Investments, 22 May 1990); Art. 2(2) of the Bolivia–Germany BIT (Federal Republic of Germany and Bolivia, Treaty concerning the Promotion and Mutual Protection of Investments, 23 March 1987); Art. II(2) of the Romania–US BIT (Treaty between the Government of the United States of America and the Government of Romania concerning the Reciprocal Encouragement and Protection of Investment, 28 May 1992, entry into force 15 January 1994, (1995) 34 ILM 1158); Art. 22(3) of the Turkey–US BIT (Treaty between the United States of America and the Republic of Turkey concerning the Reciprocal Encouragement and Protection of Investments, 3 December 1985, entry into force 18 May 1990); Art. 2(3) of the Argentina–Germany BIT (Treaty for the Mutual Protection and Promotion of Investments made between Germany and Argentina, 9 July 1991); Art. II(3)b of the Ecuador–US BIT (Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment, 27 August 1993, entry into force 11 May 1997); Art. II(3)(b) of the Ukraine–US BIT (Treaty between the United States of America and Ukraine concerning the Encouragement and Reciprocal Protection of Investment, 4 March 1994, entry into force 16 November 1996). 7 Art. 3 of the Armenia–Austria BIT (Agreement between the Government of the Republic of Austria and the Government of the Republic of Armenia, 17 October 2001, entry into force 12 November 2002); Art. 3(1) of the Argentina–China BIT (Agreement between the Government of the People’s Republic of China and the Government of the Argentine Republic on the Promotion and Reciprocal Protection of Investments, 5 November 1992, entry into force 17 June 1994, (1995) 1862 UNTS 3); Art. 2(2) of the Argentina–Finland BIT (Agreement between the Government of the Republic of Finland and the Government of the Republic of Argentina on the Promotion and Reciprocal Protection of Investments, 5 November 1993); Art. 3(2) of the Argentina–New Zealand BIT (Agreement between the Government of the Argentine Republic and the Government of New Zealand for the Promotion and Reciprocal Protection of Investments, 27 August 1999); Art. 3(2) of the Austria–Jordan BIT (Agreement between the Hashemite Kingdom of Jordan and the Republic of Austria for the Promotion and Protection of Investments, 23 January 2001, entry into force 25 November 2001); Art. 3(1) of the Argentina–Netherlands BIT (Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Argentine Republic, 20 October 1992, entry into force 1 October 1994); Art. 3(1) of the Czech Republic–Denmark BIT (Agreement between the Czech and Slovak Federal Republic and the Kingdom of Denmark for the Promotion and Reciprocal Protection of Investments, 6 March 1991); Art. 2(2) of the Czech Republic–Israel BIT (Agreement between the Government of the Czech Republic and the Government of the State of Israel for the Reciprocal Promotion and Protection of Investments, 23 September 1997); Art. 3(1) of the Czech Republic–Netherlands BIT (Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic, 29 April 1991, entry into force 1 October 1992 (2004) 2242 UNTS 205); Art. 2(2) of the Czech Republic–UK BIT (Agreement between the Government of the United Kingdom and of Great Britain and Northern Ireland and the Government of the Czech and Slovak Federal Republic for the Promotion and Protection of Investments, 10 July 1990, entry into force 26 October 1992 (1993) UKTS 42); Art. 2(2) of the Romania–UK BIT (Agreement between the Government of the United Kingdom and of Great Britain and Northern Ireland and the Government on the Socialist Republic of Romania for the Mutual Promotion and Protection of Investments of Capital, 19 March 1976, entry into force 22 November 1976 (1977) UKTS 15); Art. 2(2) of the Kazakhstan–UK BIT (Agreement between the Government of the United Kingdom and of Great Britain and Northern Ireland and the Government of the Republic of Kazakhstan for the Promotion and Protection of Investments, 23 November 1995, (1996) UKTS 30). 8 Art. 4 of the Argentina–Australia BIT (Agreement between the Government of Australia and the Government of the Argentine Republic on the Promotion and Protection of Investment, 23

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use these terms synonymously.9 The tribunals in National Grid v. Argentina10 and in Plama v. Bulgaria11 explicitly explained that the meaning of the terms ‘arbitrary’ and ‘unreasonable’ is substantially the same. The National Grid tribunal said: It is the view of the Tribunal that the plain meaning of the terms ‘unreasonable’ and ‘arbitrary’ is substantially the same in the sense of something done capriciously, without reason.12

The Siemens tribunal also used the notions ‘arbitrary’ and ’unreasonable’ in- 6 terchangeably when it discussed a violation of the provision against arbitrary and discriminatory measures.13 Investment protection treaties typically use ‘or’ as conjunction between arbi- 7 trary/unreasonable and discriminatory measures. This indicates that a violation of either standard is sufficient for a violation of the guarantee. It is not required that a measure is arbitrary as well as discriminatory. This is in line with the case law of a number of investment tribunals such as Azurix v. Argentina,14 Siag v. Egypt15 and Joseph Charles Lemire v. Ukraine.16 Only the Tribunal in Lauder v. Czech Republic17 required a measure to be ar- 8 bitrary and discriminatory in order to violate the US–Czech Republic BIT. It justified this approach with the text of the US–Czech Republic BIT: 219. The Arbitral Tribunal considers that a violation of Article II(2)(b) of the Treaty requires both an arbitrary and a discriminatory measure by the State. It first results from the plain wording of the pro-

9 10 11 12 13 14

15 16 17

August 1995, entry into force 11 January 1997, (1997) ATS 4); Art. 3(1) of the Argentina– Croatia BIT (Agreement between the Government of the Republic of Croatia and the Government of the Argentine Republic on the Promotion and Reciprocal Protection of Investments, 2 December 1994); Art. 2(4) of the Argentina–Bulgaria BIT (Agreement between the Government of the Republic of Bulgaria and the Government of the Republic of Argentina on the Promotion and Reciprocal Protection of Investments, 21 September 1993); Art. 3(1) of the Argentina–Jamaica BIT (Agreement between the Government of the Republic of Jamaica and the Government of the Argentine Republic on the Promotion and Reciprocal Protection of Investments, 18 February 1994); Art. 2(2) of the Federal Republic of Yugoslavia–Greece BIT (Agreement between the Federal Republic of Yugoslavia and the Republic of Greece on the Reciprocal Promotion and Protection of Investments). Christoph H. Schreuer (n. 1) 183. The finding of the tribunal in BG v. Argentina is a rare exception to the contrary, BG Group Plc v. Argentina, UNCITRAL, Final Award, 24 December 2007, para. 341. National Grid v. Argentina, UNCITRAL, Award, 3 November 2008, para. 197. Plama Consortium Ltd. v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 184. See also AES Summit Generation Ltd and AES-Tisza Erömü Kft. v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para. 10.3.37. National Grid v. Argentina (n. 10) para. 197. Siemens v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 319. Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006, para. 391: ‘The Tribunal agrees with the interpretation of the Claimant that a measure needs only to be arbitrary to constitute a breach of the BIT. This interpretation has not been contested by the Respondent and it follows from the alternative way in which the term “measures” is qualified by the adjectives “arbitrary or discriminatory”’. Siag and Vecchi v. Egypt (n. 5) para. 457. Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB(AF)/98/1, Decision on Jurisdiction and Liability, 14 January 2010, para. 260. Ronald S. Lauder v. Czech Republic, UNCITRAL, Award, 3 September 2001, para. 219.

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9

However, the Tribunal seemingly based its interpretation on an incorrect version of the BIT. The text of the US–Czech Republic BIT displayed on the US government’s homepage as well as on the UNCTAD homepage contains the commonly used formula of arbitrary or discriminatory measures: (b) Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments.18

10

Therefore, the standards are disjunctive. In order to violate these standards a measure need not be arbitrary/unreasonable as well as discriminatory.19 C. Overlap with Other Standards 1. Arbitrary or Discriminatory Measures standing Alone or Part of the Fair and Equitable Treatment or the Full Protection and Security Clause?

11

Some investment protection treaties offer the guarantee against arbitrary/ unreasonable or discriminatory measures as a separate guarantee.20 Other treaties combine it with the ‘fair and equitable treatment’ (FET) or the ‘full protection and security’ (FPS) guarantee or with both.21 18 See the US government’s homepage, available at http://tcc.export.gov/Trade_Agreements/ All_Trade_Agreements/exp_002809.asp, and the UNCTAD homepage, available at http:// www.unctad.org/sections/dite/iia/ docs/bits/czech_us.pdf (emphasis added). 19 Christoph. H. Schreuer (n. 1) 183, 184. 20 See e.g. Art. 2(2) of the Austria–Chile BIT (Agreement between the Republic of Chile and the Republic of Austria for the Promotion and Reciprocal Protection of Investment, 8 September 1994); Art. 2(2) of the Austria–Lebanon BIT (Agreement between the Lebanese Republic and the Republic of Austria on the Reciprocal Promotion and Protection of Investments, 26 May 2001); Art. 3(2) of the Austria–Armenia BIT (Agreement between the Government of the Republic of Austria and the Government of the Republic of Armenia for the Promotion and Protection of Investments, 30 October 2002, entry into force 12 November 2002); Art. II(2)b of the Argentina–US BIT (n. 6); Art. 3(2) of the Austria–Jordan BIT (n. 7); Art. 3(2) of the Austria–Libya BIT (Agreement between the Republic of Austria and the Great Socialist People’s Libyan Arab Jamahiriya for the Promotion and Protection of Investments, 18 June 2002, entry into force 1 January 2004); Art. II(3)b of the Ecuador–US BIT (n. 6); Art. II(3)b of the Ukraine–US BIT (n. 6). 21 See e.g. Art. 3(1) of the Argentina–China BIT (n. 7); Art. 2 of the Austria–Hong Kong BIT (Agreement between the Government of Hong Kong and the Government of the Republic of Austria for the Promotion and Protection of Investments, 11 October 1996); Art. 4 of the Argentina–Australia BIT (n. 8); Art. 2(2) of the Argentina–UK BIT (Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Argentina for the Promotion and Protection of Investments, 11 December 1990 (unreasonable), entry into force 19 February 1993, (1994) 1765 UNTS 33); Art. 3(2) of the Argentina–New Zealand BIT (n. 7); Art. 2(2) of the Kazakhstan–UK BIT (n. 7); Art. 2(2) of the Argentina–Italy BIT (n. 6); Art. 2(2) of the Romania–UK BIT (unreasonable) (n. 7); Art. 2 of the Argentina–Finland BIT (n. 7); Art. 2(4) of the Argentina–Bulgaria BIT (unjustified) (n. 8); Art. 3(1) of the Argentina–Jamaica BIT (unjustified) (n. 8); Art. 3(1)

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However, this has very limited influence on the way tribunals assess a viola- 12 tion of the treaty standards. The situation is different with regard to the NAFTA which does not contain a separate provision on arbitrary or discriminatory measures.22 Outside NAFTA some tribunals considered the FET standard and the arbi- 13 trary/unreasonable or discriminatory standard as closely related.23 It did not make any difference whether in the underlying treaty the clause on arbitrary/ unreasonable or discriminatory measures was contained in the same sentence. In all but one24 of these cases the clause on arbitrary/unreasonable or discriminatory measures was in a separate sentence25 sometimes even a different paragraph.26 But even tribunals that considered the standards as closely related usually examined them consecutively. These tribunals declined to distinguish the two standards or found arbitrary/unreasonable or discriminatory measures to be a specification of FET, without even discussing their systematic placement in the text. An example of such an approach is the tribunal in Impregilo v. Argentina.27 14 The Impregilo tribunal declined to examine whether a violation of the ‘full protection and security’ standard had occurred since it had already found a violation

22

23

24 25

26 27

Argentina–Netherlands BIT (unreasonable) (n. 7). On the relationship of arbitrary or discriminatory measures and FET see Christoph H. Schreuer (n. 1) 183, 189; Christoph H. Schreuer, ‘Fair and Equitable Treatment (FET): Interactions with other Standards’ in Clarisse Ribeiro (ed), Investment Protection and the Energy Charter Treaty (JurisNet, 2008) 63; Stephen Vasciannie, ‘The Fair and Equitable Treatment Standard in International Investment Law and Practice’ (1999) 70 BYIL 99, 133. NAFTA tribunals often used the concept of ‘arbitrary’ treatment as an element of fair and equitable treatment in NAFTA Art. 1105(1). See e.g. S.D. Myers v. Canada, UNCITRAL (NAFTA), Award on Liability, 13 November 2000, para. 263; Mondev Intl. Ltd. v. USA, ICSID Case No. ARB(AF)/99/2, Award, 11 October 2002, para. 127; Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004, para. 98. CMS Gas Transmission Co. v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para. 290; MTD Equity Sdn. Bhd. and MTD Chile S. A. v. Chile, ICSID Case No. ARB/01/7, Award, 25 May 2004, para. 196; Saluka Investments BV (The Netherlands) v. Czech Republic, UNCITRAL (PCA), Partial Award, 17 March 2006, para. 460; Rumeli Telekom AS v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, paras. 679–681; PSEG v. Turkey, ICSID Case No. ARB/02/5, Award, 19 January 2007, para. 261; Biwater Gauff v. Tanzania, ICSID Case No. ARB/05/22, Award, 24 July 2008, para. 692; Impregilo v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, paras. 332–333. Saluka v. Czech Republic (n. 23), Art. 3(1) of the Czech Republic–Netherlands BIT (n. 7). Rumeli Telekom AS v. Kazakhstan (n. 23), Art. 2(2) of the Kazakhstan–UK BIT (MFN) (n. 7); PSEG v. Turkey (n. 23), Art. II(3) of the Turkey–US BIT (n. 6); Biwater Gauff v. Tanzania (n. 23), Art. 2(2) of the Tanzania–UK BIT (Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United Republic of Tanzania for the Promotion and Protection of Investments, 7 January 1994, 2 August 1996, (1996) UKTS 90); Impregilo v. Argentina (n. 23), Art. 2(2) of the Argentina–Italy BIT (n. 6). CMS Gas Transmission Co. v. Argentina (n. 23), Art. II(2)b of the Argentina–US BIT (n. 6); MTD Equity Sdn. Bhd. and MTD Chile S. A. v. Chile (n. 23) two different BITs (MFN). Impregilo v. Argentina (n. 23) para. 333. For further examples of a joint examination see Impregilo v. Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction, 22 April 2005, paras. 264–270; MCI Power Group LC and New Turbine Inc. v. Ecuador, ICSID Case No. ARB/03/6, Award, 31 July 2007, paras. 366, 357, 371; Rumeli Telekom AS v. Kazakhstan (n. 23) paras. 679–681.

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of the FET standard.28 The Joseph Charles Lemire v. Ukraine tribunal treated arbitrary and discriminatory measures as one possibility of a violation of the FET standard.29 15 A number of tribunals have treated the two standards separately.30 All of them applied BITs which contained FET and arbitrary or discriminatory measures in two different paragraphs. Some tribunals discussed the relationship of the two standards and found that they should examine compliance with them separately.31 16 The tribunal in Plama v. Bulgaria had to apply Art. 10(1) of the Energy Charter Treaty (ECT). Therein, a whole number of standards including the FET and ‘unreasonable or discriminatory measures’ are contained in the same paragraph. The tribunal observed that other tribunals had found a strong correlation between the prohibition of unreasonable or discriminatory measures and other standards.32 Nevertheless it reached the result that the standards had distinct meanings: (…) this Tribunal believes that, while the standards can overlap on certain issues, they can also be defined separately. Unreasonable or arbitrary measures – as they are sometimes referred to in other investment instruments – are those which are not founded in reason or fact but on caprice, prejudice or personal preference. With regard to discrimination it corresponds to the negative formulation of the principle of equality of treatment.33

In other cases tribunals dealt with the standards separately without discussing this issue.34 18 In some cases there are independent findings of violations. A number of tribunals found that a violation of the FET standard had occurred and at the same time denied a violation of the arbitrary or discriminatory measures standard.35 17

28 Impregilo v. Argentina (n. 23) para. 334. 29 Joseph Charles Lemire v. Ukraine (n. 16) para. 259. 30 Occidental Exploration and Production Co. v. Ecuador, LCIA Case No UN 3467, Award, 1 July 2004, paras. 159–166, Art. II(3) of the Ecuador–US BIT (n. 6); Ronald S. Lauder v. Czech Republic (n. 17) paras. 214–288, Art. II(2)b of the Czech Republic–US BIT (Treaty with the Czech and Slovak Federal Republic Concerning the Reciprocal Encouragement and Protection of Investment, 22 October 1991, entry into force 19 December 1992); Genin, Eastern Credit Ltd. Inc. and AS Baltoil v. Estonia, ICSID Case No. ARB/99/2, Award, 25 June 2001, paras. 368–371, Art. II(3)b of the Estonia–US BIT (Treaty between the Government of the United States of America and the Government of the Republic of Estonia for the Encouragement and Reciprocal Protection of Investment, 19 April 1994, entry into force 16 February 1997, (1997) 1987 UNTS 131); Noble Ventures v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, paras. 175–180, Art. II(2)b of the Romania–US BIT (n. 6); Azurix Corp. v. Argentina (n. 14) paras. 385–393, Art. II(2)b of the Argentina–US BIT (n. 6); Siemens v. Argentina (n. 13) paras. 310–321, Art. 2(3) of the Argentina–Germany BIT (n. 6). 31 See e.g. Duke Energy v. Ecuador, ICSID Case No. ARB/04/19, Award, 18 August 2008, paras. 372, 377. 32 Plama v. Bulgaria (n. 11) para. 183. 33 Ibid., para. 184 (footnote omitted). 34 See e.g. Ronald S. Lauder v. Czech Republic (n. 17) paras. 214–288; Genin, Eastern Credit Ltd. Inc. and AS Baltoil v. Estonia (n. 30) paras. 368–371; Noble Ventures v. Romania (n. 30) 175–180; Azurix Corp. v. Argentina (n. 14) paras. 385–393; Siemens v. Argentina (n. 13) paras. 310–321.

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The tribunals in LG&E v. Argentina36 and Joseph Charles Lemire v. Ukraine37 both explicitly found that it was possible to violate the FET standard without violating the arbitrary or discriminatory standard. The LG&E tribunal made no statement whether a violation of the arbitrary or discriminatory standard would necessarily entail a violation of the FET standard. The tribunal in Joseph Charles Lemire v. Ukraine stated that any ‘arbitrary or discriminatory measure, by definition, fails to be fair and equitable’.38 Only the tribunal in Lauder v. Czech Republic found a violation of the arbitrary or discriminatory measures standard but denied a violation of FET.39 It follows from the above survey of practice that, despite the tendency of 19 some tribunals to view the prohibition of arbitrary or discriminatory measures as part of the FET standard, an equally large number examined them separately. As Schreuer points out, there are good reasons to treat the two standards as conceptually different. It is difficult to see why treaty drafters would use two different terms when they mean one and the same thing.40 Furthermore, it is difficult to explain why one standard should be part of the other when they are often not even in the same paragraph of the treaty. However, this is not to say that the criteria used to identify arbitrary/unreason- 20 able measures do not to some extent overlap with those that have been developed for FET.41 Therefore, one particular set of facts may violate both the FET standard and the rule against arbitrary or discriminatory measures. 2. Overlap between Non-Discrimination, Most Favoured Nation and National Treatment

Customary international law does not require that a State treat all aliens (and 21 alien property) equally, or that it treat aliens as favourably as nationals.42 Often, investment treaties establish such an obligation. Several types of protection against discrimination are available. They include most favoured nation (MFN) and national treatment. The tribunal in BG v. Argentina,43 pointed out that a measure in breach of the national treatment or MFN standards would inevitably also be discriminatory in the sense of the provision on unreasonable or discriminatory measures.44 35 LG&E v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 162; Duke Energy v. Ecuador (n. 31) paras. 364, 383, 491; CMS Gas Transmission Co. v. Argentina (n. 23) para. 295, dispositif 1; PSEG v. Turkey (n. 23) paras. 261, 262, dispositif 1; Joseph Charles Lemire v. Ukraine (n. 16) para. 259. 36 LG&E v. Argentina (n. 35) para. 162. 37 Joseph Charles Lemire v. Ukraine (n. 16). 38 Ibid., para. 259. 39 Ronald S. Lauder v. Czech Republic (n. 17) paras. 230, 235, 293. 40 Christoph H. Schreuer (n. 1) 183, 192. 41 Ibid. 42 Genin, Eastern Credit Ltd. Inc. and AS Baltoil v. Estonia (n. 30) para. 368. 43 BG Group Plc v. Argentina (n. 9). 44 Ibid., para. 355. See also National Grid v. Argentina (n. 10) para. 198.

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Therefore, the question of the relation of the prohibition of discrimination with the more specific clauses arises. The prohibition of discrimination in the provisions on arbitrary/unreasonable or discriminatory measures is not focussed on a specific type of discrimination. It covers all forms of discrimination including discrimination based on race, religion, political affiliation, disability, and nationality.45 Discrimination based on nationality is the most prevalent form in international investment law. This explains why there are also specific standards of non-discrimination with regard to nationality.46 The guarantees of MFN and national treatment also address non-discrimination but are limited to distinctions based on nationality.47 23 Therefore, a certain overlap among the non-discrimination standards is inevitable. So far, distinctions in cases before investment tribunals were all based on nationality. But it cannot be excluded that in the future cases with other distinctive criteria will arise.48 Therefore, the existence of a protection against discrimination as a separate treaty standard does make sense. 22

D. The Meaning of Arbitrary/Unreasonable

BITs or MITs usually do not define the terms ‘arbitrary’ or ‘unreasonable’ measures.49 Tribunals have used different methods to establish whether the standard has been breached. 25 Some tribunals have looked for guidance in the ordinary meaning rule of the Vienna Convention on the Law of Treaties (VCLT) and have turned to dictionaries for help.50 However, all these definitions do not offer more precise criteria than the words arbitrary/unreasonable do. 24

45 See e.g. National Grid v. Argentina (n. 10) para. 198. 46 Since NAFTA contains no prohibition of discriminatory measures as such NAFTA tribunals have dealt with this question in a number of cases when interpreting the provision of Art. 1102 of the NAFTA on national treatment. That article requires the host States to accord to an investor and to investments treatment not less favourable than it accords its own investors and investments ‘in like circumstances’. For cases dealing with this issue see e.g. S.D. Myers v. Canada (n. 22) para. 250; Pope and Talbot v. Canada, UNCITRAL (NAFTA), Award on the Merits, 10 April 2001, paras. 45–63, 68–69, 78; Marvin Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1 (NAFTA), Award, 16 December 2002, para. 171; Methanex v. USA, UNCITRAL (NAFTA), Award, 3 August 2005, part IV, ch. B, paras. 17–37. 47 See e.g. Federico Ortino, ‘Non-Discriminatory Treatment in Investment Disputes’ in PierreMarie Dupuy, Francesco Francioni, Ernst-Ulrich Petersmann (eds), Human Rights in International Investment Arbitration (Oxford University Press, 2009) 344, 344. 48 In Siderman de Blake and Others v. Argentina and Others, the US Court of Appeals, Ninth Circuit, found that discriminatory treatment based on ethnicity could also lead to a discriminatory and therefore illegal expropriation (Siderman de Blake and Others v. Argentina and Others, US Court of Appeals Judgment, Ninth Circuit, 22 May 1992, (1996) 103 ILR 454–480). 49 A number of tribunals explicitly pointed out this fact. See e.g. Noble Ventures v. Romania (n. 30) para. 31; LG&E v. Argentina (n. 35) para. 156. 50 Ronald S. Lauder v. Czech Republic (n. 17) para. 221; Occidental Exploration and Production Co. v. Ecuador (n. 30) para. 162. Shorter Oxford English Dictionary (Oxford University Press, 1973) 98, 2428; Black’s Law Dictionary (West Publishing Company, 1999) 100, 1537.

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A number of tribunals followed the approach of the International Court of 26 Justice (ICJ) in the ELSI case.51 The court defined arbitrariness as a violation of ‘the rule of law’. It further characterised the requirement by elements such as acts which shock or at least surprise a sense of judicial propriety or which violate due process of law: 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 judicial propriety.52

This quote embodies two different elements: an objective element (disregard 27 of due process, something opposed to the rule of law) and a subjective element (an act which shocks, or at least surprises, a sense of judicial propriety). The subjective element offers little guidance and predictability.53 Heiskanen called it in reference to Justice Potter Stewart the ‘I know it when I see it approach’.54 The tribunal in Noble Ventures v. Romania can serve as example of a tribunal 28 that followed the ICJ’s example. It also relied on a number of objective criteria to reach its conclusion that the measure was not arbitrary.55 These criteria were: a public purpose, necessary to achieve the invoked purpose, provided for by the law not only in Romania but also in other countries. Other tribunals have relied on the subjective element of the ICJ’s require- 29 ments. The tribunal in Duke Energy v. Ecuador stated that mere contract breaches, such as non-payment of a debt, were not arbitrary and measured them against the subjective element of ‘a sense of judicial propriety’.56 The tribunals in Enron v. Argentina and in Sempra v. Argentina also applied a subjective approach when they qualified measures as not arbitrary although they were not in accordance with domestic law and the treaty framework: (…) a finding of arbitrariness requires that some important measure of impropriety is manifest, and this is not found in a process which although far from desirable is nonetheless not entirely surprising in the context it took place.57

51 Azurix Corp. v. Argentina (n. 14) para. 392; Noble Ventures v. Romania (n. 30) paras. 177, 178; Siemens v. Argentina (n. 13) para. 318; Duke Energy v. Ecuador (n. 31) para. 378. The ICJ applied a provision in an FCN treaty between the US and Italy providing that the nationals of the two countries ‘shall not be subjected to arbitrary or discriminatory measures’. 52 Elettronica Sicula SpA (ELSI) (United States of America v. Italy), ICJ Judgment, 20 July 1989, ICJ Rep. 1989, 15. For a critical analyses of the judgment, see Kurt J. Hamrock, ‘The ELSI Case: Toward an International Definition of “Arbitrary” Conduct’ (1992) 27 Tex. Int’l L. J. 837–864. 53 See Kurt J. Hamrock (n. 52) 849 et seq.; Veijo Heiskanen (n. 1) 87, 103. 54 Veijo Heiskanen (n. 1) 87, 103. Justice Potter Stewart in Jacobellis v. Ohio, 378 US 184 (1964), on hard-core pornography: ‘I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.’ 55 Noble Ventures v. Romania (n. 30) paras. 177, 178. 56 Duke Energy v. Ecuador (n. 31) para. 381. 57 Enron v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007, para. 281.

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The tribunal in BG v. Argentina relied on the expectations of the parties to the BIT to decide what is reasonable.58 31 Other tribunals relied on objective criteria that Schreuer59 had summarised as follows. A measure has to correspond to the following set of criteria to be neither arbitrary nor unreasonable: 30

1) It has to be for a public purpose. The government must justify the interference with investors’ rights in terms of rational reasons related to the facts. 2) The measure has to be taken for the reasons invoked. 3) The measure has to be provided for by the law. This implies that the measure has to have a legal basis in the domestic law that does not contravene international law. 4) The measure must be in accordance with due process requirements of the domestic as well as international law. 32

Only few tribunals have tested interferences with investors’ rights against this full set of criteria. The tribunal in EDF v. Romania can serve as example for a tribunal that made use of the full test.60 A number of tribunals have used individual elements of these criteria to decide whether a measure was arbitrary or unreasonable. 1. Public Purpose

A number of tribunals have examined whether the measure taken by the State was adopted to achieve a public purpose.61 Some of the tribunals also inquired whether the measure adopted by the State served the public purpose invoked by the State.62 34 The intention to deprive the investor of its investment under the pretext of a decision based on law was the decisive criterion for the unreasonableness of the measure in CME v. Czech Republic.63 33

58 BG Group Plc v. Argentina (n. 9) para. 342: ‘Like the “fair and equitable treatment” standard, “reasonableness” should be measured against the expectations of the parties to the BIT, rather than as a function of the means chosen by the State to achieve its goals: “(…) As with the fair and equitable standard, the determination of reasonableness is in its essence a matter for the arbitrator’s judgment. That judgment must be exercised within the context of asking what the parties to bilateral investment treaties should jointly anticipate, in advance of a challenged action, to be appropriate behaviour in light of the goals of the Treaty.”’ (footnotes omitted). 59 Christoph H. Schreuer (n. 1) 183, 188. 60 EDF (Services) Ltd. v. Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, para. 303. The tribunals in SAUR v. Argentina, ICSID Case No. ARB/04/4, Decision on Jurisdiction and Liability, 6 June 2012, para. 488 and Toto v. Lebanon, ICSID Case No. ARB/07/12, Award, 7 June 2012, para. 157 referred to the criteria used in EDF. 61 LG&E v. Argentina (n. 35) para. 162; Saluka v. Czech Republic (n. 23) paras. 460, 470; National Grid v. Argentina (n. 10) para. 198; see also AES v. Hungary (n. 11) paras. 10.3.7.– 10.3.9, 10.3.36; Biwater Gauff v. Tanzania (n. 23) paras. 693, 696, 698, 707. 62 AES v. Hungary (n. 11) para. 10.3.36; Biwater Gauff v. Tanzania (n. 23) para. 709. 63 CME v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001, para. 612; see also MCI v. Ecuador (n. 27) para. 369.

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2. Provided for by the Law

For a number of tribunals the legal foundation of a measure in domestic law 35 was a criterion for the arbitrariness of a measure.64 However, some tribunals, albeit a minority, required an additional element of 36 impropriety or a blatant violation of the domestic law to consider an unlawful measure as arbitrary.65 In LG&E v. Argentina and Waste Management v. Mexico66 the tribunals took 37 into account the domestic decision making process to decide on the arbitrariness of a measure. 3. Proportionality of the Interference

Some tribunals have examined the reasonableness of the act of the State in 38 relation to the policy objective. The tribunal in AES v. Hungary can serve as example for this approach.67 To introduce a proportionality test in investment law is of course possible. It 39 could range from a test requiring that the measure can achieve the public purpose to a test requiring that it is necessary to achieve the purpose or that it is the least interfering measure to achieve the purpose.68 Therefore, the introduction of such a test would have important consequences for the margin of appreciation of States. The stricter the test, the less margin of appreciation is available for the host States and the more power rests with the investment tribunal which ultimately decides whether a measure is arbitrary. E. The Meaning of Discriminatory

Investment protection treaties usually do not define the term discriminatory. 40 Treaties typically provide in similar though not identical language that Each Contracting Party (…) shall not impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment, operation, sale and liquidation of such investments.69

64 Azurix Corp. v. Argentina (n. 14) para. 393; Noble Ventures. Inc. v. Romania (n. 30) para. 178; Duke Energy v. Ecuador (n. 31) para. 382; Saluka v. Czech Republic (n. 23) paras. 467, 470; Ronald S. Lauder v. Czech Republic (n. 17) para. 232. 65 Enron v. Argentina (n. 57) para. 281; Sempra v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 318; Joseph Charles Lemire v. Ukraine (n. 16) para. 385. 66 LG&E v. Argentina (n. 35) para. 158; Waste Management, Inc. v. Mexico (n. 22) para. 98. 67 AES v. Hungary (n. 11) paras. 10.3.7.10.3.9. 68 Arts. 8–10 of the European Convention on Human Rights (ECHR) provide for a set of criteria similar to the ones suggested by Schreuer with regard to norms that allow for interferences with human rights. These interferences must not be arbitrary. These human rights norms contain the additional requirement that the measure is necessary in a democratic society to achieve the public interest invoked. See also the case law to Art. 1 of the Additional Protocol to the ECHR and the case law to Arts. 17, 18, 19 of the International Covenant on Civil and Political Rights (ICCPR, adopted by UN General Assembly resolution 2200A (XXI) of 16 December 1966, entry into force on 23 March 1976). 69 Art. 2 of the Austria–Chile BIT (n. 20).

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Black’s Law Dictionary70 includes the following definitions for ‘discrimination’: 1. 2.

The effect of a law or established practice that confers privileges on a certain class or that denies privileges to a certain class because of race, age, sex, nationality, religion, or disability. Differential treatment; esp. a failure to treat all persons equally when no reasonable distinction can be found between those favoured and those not favoured.

This is in line with the case law of investment tribunals which also considers different treatment of similar investments without a reasonable justification as prohibited discrimination. 43 The tribunal in Lemire v. Ukraine summarised the definitions used by tribunals in the following way: 42

Discrimination, in the words of pertinent precedents, requires more than different treatment. To amount to discrimination, a case must be treated differently from similar cases without justification; a measure must be ‘discriminatory and expose[s] the claimant to sectional or racial prejudice’; or a measure must ‘target[ed] Claimant’s investments specifically as foreign investments’.71

In principle, discrimination can occur in various ways, through a law or de facto, direct or indirect. Therefore, a violation of the domestic law is not a requirement for discrimination. The law itself may be at the origin of the discriminatory treatment.72 45 Direct discrimination occurs in case of unjustifiable distinctions either by the law or by its application or by treating equally situations which require a differentiation.73 Indirect discrimination is usually the result of criteria, practices, or procedures which are apparently neutral but result in effects similar to that of direct discrimination.74 46 To establish whether a measure is discriminatory a three step approach has been suggested.75 First, the basis for comparison has to be established. Second, the measures taken with respect to investors have to be identified. Third, it has to be established whether factors exist that justify the difference in treatment. 44

1. Discriminatory Intent or Effect 47

Most of the tribunals which dealt with the issue of discrimination did not discuss whether in addition to a de facto difference in treatment a discriminatory 70 Black’s Law Dictionary (West Publishing Company, 2005) 393. 71 Joseph Charles Lemire v. Ukraine (n. 16) para. 261 (footnotes omitted). See also Plama v. Bulgaria (n. 11) para. 184. 72 Ronald S. Lauder v. Czech Republic (n. 17). 73 Olivier De Schutter, International Human Rights Law (Cambridge University Press, 2010) 596. 74 Ibid., 625. 75 The claimant in Thunderbird Gaming Corporation v. Mexico, UNCITRAL (NAFTA), Award, 26 January 2006, para. 170, suggested such an approach with regard to national treatment and most favoured nation treatment under NAFTA Art. 1102. Tribunals like BG Group Plc v. Argentina (n. 9) (para. 356) applied this test on issues of discrimination. The test contains no elements which would not be equally suit to be followed with regard to any other kind of discrimination.

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intent is required. Tribunals that considered and discussed the matter explicitly found that discrimination need not be intended by the host State’s authorities.76 However, in some cases tribunals identified a discriminatory intent and on 48 that basis found that there had been discriminatory measures.77 But these tribunals did not explicitly require proof of such intent. The same is true for NAFTA tribunals deciding upon violations of the national treatment requirement in Art. 1102 of the NAFTA.78 Therefore, the investor does not bear the burden of proof that the differential 49 treatment was motivated by either foreign nationality, religion, or any other distinctive criterion. A discriminatory effect either through the action of State organs or the law is sufficient for a violation of this standard. 2. The Basis of Comparison

Most of the discussion in the case law of investment tribunals has circled 50 around the question how to determine the basis of comparison for the alleged discrimination. The determination of the basis of comparison has important consequences for the finding whether discrimination has occurred. The options range from companies active in exactly the same activity to companies engaged in any economic activity. Three groups of cases can be distinguished in the case law of investment tribunals.79 In the first group the issue of the basis of comparison never arose since the 51 companies to compare were engaged in the same area of activity. Therefore, the cases are of limited informative value for the question under consideration.80 76 Occidental Exploration and Production Co. v. Ecuador (n. 30) para. 177; Siemens v. Argentina (n. 13) para. 321; Eastern Sugar v. Czech Republic, SCC Case No. 88/2004, Partial Award, 27 March 2007, para. 338. 77 In Lauder v. Czech Republic the tribunal found that Czech authorities measures were politically motivated and influenced by the investor’s foreign nationality: ‘The measure was discriminatory because it provided the foreign investment with a treatment less favorable than domestic investment. It indeed results from the above mentioned circumstances that the Media Council changed its mind because of its fear that the strong and rising political opposition to the granting of the License to an entity with significant foreign capital could lead to an attack on the entire selection process. It is probable that if CEDC had been a Czech investor, there would have been no political outcry, and the original plan of becoming a shareholder in CET 21 could have been carried out.’ (Ronald S. Lauder v. Czech Republic (n. 17) para. 231). LG&E v. Argentina (n. 35) paras. 146, 148. 78 S.D. Myers v. Canada (n. 22) paras. 252–254; Marvin Feldman v. Mexico (n. 46) paras. 173– 187. The tribunal in Methanex v. USA (n. 46) is an exception in this regard. At part IV, ch. B, para. 1, it states that an affirmative finding under NAFTA Art. 1102 does not require the demonstration of malign intent. At para. 12 of the same chapter it states that in order to sustain its claim under Art. 1102(3) the claimant must demonstrate that California intended to favour domestic investors. 79 NAFTA tribunals have dealt with a similar question in a number of cases when interpreting the provision on national treatment of Art. 1102 of the NAFTA. See S.D. Myers v. Canada (n. 22) para. 250; Pope and Talbot v. Canada (n. 46) paras. 45–63, 68–69, 78; Marvin Feldman v. Mexico (n. 46) para. 171; Methanex v. USA (n. 46) part IV, ch. B, paras. 17–19, 25–37. 80 Nykomb v. Latvia, SCC Case No. 118/2001, Award, 16 December 2003, para. 4.3.2.(a). (The investor and its competitors were all electricity generation companies.) Saluka v. Czech Republic (n. 23) (The case concerned four banks of comparable size and market position. Three

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In a second group of cases tribunals refused to make cross-sector comparisons and adopted a narrow basis for comparison. In CMS v. Argentina81 the tribunal rejected the argument that the different public service providers are in like circumstances. The same approach was adopted by the tribunal in BG v. Argentina.82 The tribunal decided that the different treatment between gas distributors and electricity distributors was not discriminatory. The tribunal in Metalpar v. Argentina83 also refused to make cross-sector comparisons. 53 A third group of tribunals adopted a wide approach and allowed for cross-sector comparisons. In Occidental v. Ecuador the tribunal had to apply a provision in a BIT which provided for national treatment ‘in like situations’. The claimant was engaged in the oil business in Ecuador and argued that Ecuador had discriminated against it because a number of other companies involved in the export of other goods, particularly flowers, mining, seafood, lumber, bananas, and palm oil products had received value added tax (VAT) refunds whereas the claimant had not. The tribunal favoured a cross-sector approach and found that Ecuador had breached its national treatment obligation.84 54 Enron v. Argentina,85 Sempra v. Argentina86 and National Grid v. Argentina87 also allowed cross-sector comparisons. 52

3. Justification for the Difference in Treatment 55

Astonishingly little discussion has so far emerged on the possibilities to justify differences in treatment.88 The European Court of Human Rights (ECHR) which also has to decide upon discriminatory measures requires for a justification of a difference in treatment: (1) a legitimate aim and (2) a reasonable relationship of proportionality between the means employed and the aim sought.89

81 82 83 84

85 86 87 88

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of them were domestically owned at the relevant times. They had received massive State aid while the fourth, in which the claimant had invested, had not received similar aid.) In Gami Investments, Inc. v. Mexico, UNCITRAL (NAFTA), Award, 15 November 2004, para. 114 the NAFTA tribunal compared national and international investors in mills. CMS Gas Transmission Co. v. Argentina (n. 23) paras. 287, 293. BG Group Plc v. Argentina (n. 9) para. 357. Metalpar S.A. and Buen Aire S.A. v. Argentina, ICSID Case No. ARB/03/5, Award, 6 June 2008, paras. 161, 162, 164. Occidental Exploration and Production Co. v. Ecuador (n. 30) paras. 167–176, 179. Para. 173: ‘(...) “in like situations” cannot be interpreted in the narrow sense advanced by Ecuador as the purpose of national treatment is to protect investors as compared to local producers, and this cannot be done by addressing exclusively the sector in which that particular activity is undertaken.’ The issue of the basis of comparison does not differ between ‘discrimination’ and ‘national treatment’. The only difference between the two standards is that discrimination is not limited to discrimination based on nationality. Enron v. Argentina (n. 57). Sempra v. Argentina (n. 65). National Grid v. Argentina (n. 10). For a discussion on the public policy justification concerning the national treatment standard see Federico Ortino, ‘Non-Discriminatory Treatment in Investment Disputes’ in Pierre-Marie Dupuy, Francesco Francioni and Ernst-Ulrich Petersmann (eds), Human Rights in International Investment Arbitration (Oxford University Press, 2009) 344, 351–353.

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In investment law only some tribunals have stated explicitly how they distin- 56 guish a permitted from an impermissible differentiation. These tribunals allowed for cross-sector comparisons and for differentiations as long as they were rational. They stated that in case of cross-sector comparisons a reasonable and therefore justified differentiation will be more likely than in a narrow field of the economy. Enron v. Argentina,90 Sempra v. Argentina91 and National Grid v. Argentina92 can serve as examples for such an approach. In Enron v. Argentina93 and in Sempra v. Argentina94 the tribunals decided 57 that some degree of differentiation between different sectors was permissible as long as it was rational.95 The tribunal in National Grid v. Argentina,96 said that, while it was permissi- 58 ble to make cross-sector comparisons, this added to the possibilities to make a reasonable differentiation: While these cases show the possibility of making comparisons across sectors (…), the elements that may justify reasonable and objective differentiation are bound to be more numerous in cross-sector comparisons and, hence, the discrimination more difficult to establish. Furthermore, any such comparison needs to take into account ‘circumstances that would justify governmental regulations that treat them differently in order to protect the public interest.’97

Therefore, a tribunal which has to apply a provision that prohibits discrimina- 59 tion could use an approach in concentric circles as suggested by Schreuer. The tribunal would start from the inner circle representing the same line of business.98 The narrower the circle the more compelling reasons for a difference in treatment has to be demonstrated. In the absence of discrimination within this narrow group in the inner circle the tribunal will have to enlarge the circle until a workable basis for comparison can be found. Any differentiation between investors within the circle of comparison would 60 have to be based on rational and objectively verifiable criteria. As the circle of areas of activity is widened for purposes of this comparison it will become increasingly easier for the host State to offer compelling reasons for differential treatment and correspondingly more difficult for the investor to prove discrimination.

89 See e.g. ECHR, 18.2.1999, Case No. 29515/95, Larkos v. Cyprus [GC], ECHR 1999-1, para. 29. 90 Enron v. Argentina (n. 57). 91 Sempra v. Argentina (n. 65). 92 National Grid v. Argentina (n. 10). 93 Enron v. Argentina (n. 57). 94 Sempra v. Argentina (n. 65). 95 Sempra v. Argentina (n. 65) para. 319. The corresponding passage in Enron v. Argentina (n. 57) para. 282. 96 National Grid v. Argentina (n. 10) paras. 200, 201. 97 Ibid., para. 200 (footnote omitted). 98 See Christoph H. Schreuer (n. 1) 183, 196.

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The claimant has the burden of proof for the difference in treatment.99 Once a difference in treatment is established in a group of comparable investors, the respondent has the burden of proof to establish that the differentiation is justified.100 F. Summary and Conclusions

While many of the modern investment protection treaties contain a separate guarantee against arbitrary and/or discriminatory measures the language of the guarantee varies. What the treaties have in common is that either arbitrary or discriminatory treatment triggers a violation of the treaty. The guarantee can either be a stand-alone clause or it is combined with the fair and equitable treatment or the full protection and security clause. Tribunals are not entirely clear on whether the prohibition of arbitrary or discriminatory measures is part of the FET standard or a separate guarantee. There are good reasons to treat the two standards as conceptually different. However, since both standards address nondiscrimination, a certain overlap is inevitable. So far, relevant distinctions are all based on nationality. It remains to be seen whether in future cases other distinctive criteria will arise. 63 Because of a lack of definition of the terms ‘arbitrary’/‘unreasonable’ or ‘discriminatory’, tribunals have had to establish their own methods to decide when the standard was breached. Tribunals have used different methods to this end. 64 The predictability of the protection against arbitrary treatment could be improved if future tribunals were to follow the example of EDF v. Hungary101 and inquire whether the treatment was in fact for the public purpose invoked by the State, whether it was provided for by law and whether it was proportionate to achieve the public purpose invoked. 65 The provisions on discrimination in the treaties also contain similar but not identical language. It is common ground in the case law of the tribunals that the effect of the measure and not its intention are decisive for the finding of a violation. The key questions are the basis of comparison and the possibility to justify differences in treatment once established. So far tribunals have only focussed on the first of the two questions and only little discussion has so far emerged on the justification of differences in treatment. To shift attention to the second question (justification) would provide more clarity which kinds of distinctions are acceptable. In addition, it would remove pressure from the first question (basis of comparison). 62

99 See e.g. Noble Ventures Inc v. Romania, ICSID Case No. ARB/01/11, Rectification of Award, 9 May 2006, para. 180. Joseph Charles Lemire v. Ukraine (n. 16) para. 405. The tribunal found that even if singular pieces of evidence by themselves are not sufficient to support an allegation of discriminatory treatment the tribunal has to consider whether the evidence in the aggregate might establish such a treatment. 100 Nykomb v. Latvia (n. 80) para. 4.3.2.(a). 101 EDF (Services) Ltd. v. Romania (n. 60) para. 303.

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IV. Most Favoured Nation Treatment*

August Reinisch A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Historic Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7

C. The Functioning and Basic Concepts of MFN Clauses. . . . . . . . . . . . . . . . . . . 1. The Concept of MFN Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. MFN as a Treaty, not Custom-Based Obligation . . . . . . . . . . . . . . . . . . . . . 3. The ‘Basic Treaty’ as the Legal Basis of MFN Treatment . . . . . . . . . . 4. The Temporal Scope of MFN Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. The Scope of MFN Clauses – The ejusdem generis Principle . . . . . . 6. The Scope of MFN Treatment – Treaty Stipulations and de facto Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Treatment ‘No Less Favourable’ – Not ‘Equal’ Treatment. . . . . . . . . . 8. What constitutes More Favourable Treatment? . . . . . . . . . . . . . . . . . . . . . .

10 11 13 14 16 18

D. MFN in International Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. MFN in the Pre-Establishment Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. MFN Linked to Fair and Equitable Treatment . . . . . . . . . . . . . . . . . . . . . . . 3. MFN and National Treatment Combined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. MFN Clauses and Dispute Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Exceptions from MFN Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31 34 36 38 39 44

E. The Application of MFN Clauses in Investment Practice . . . . . . . . . . . . . . . . 1. MFN and the Scope of Protected Investment. . . . . . . . . . . . . . . . . . . . . . . . . 2. Substantive Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Fair and Equitable Treatment in NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Fair and Equitable Treatment in Non-NAFTA Cases . . . . . . . . . . . . . . . . 5. MFN and Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. MFN and de facto Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Treatment in Regard to Dispute Settlement. . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Maffezini Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Post-Maffezini Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Cases Following and Widening the Maffezini Approach . . . . . . . . . d) Cases Rejecting the Maffezini Approach . . . . . . . . . . . . . . . . . . . . . . . . . .

46 48 50 52 55 58 61 64 67 73 75 94

23 25 27

F. The Main Aspects of the Post-Maffezini Debate . . . . . . . . . . . . . . . . . . . . . . . . . . 122 G. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Literature: Lee Caplan and Jeremy Sharpe, ‘United States’ in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013) 755–851; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008); Zachary Douglas, The International Law of Investment Claims (Cambridge University Press, 2009); Zachary Douglas, ‘The MFN Clause in Investment Arbitration: Treaty Interpretation Off the Rails’ (2011) 2(1) J. Int’l Disp. Settlement 97–113; Jörn Griebel, Internationales Investitionsrecht (C.H. Beck, 2008); Todd Grierson-Weiler and Ian Laird, ‘Standards of Treatment’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 259–304; Matthias Herdegen, Internationales Wirtschaftsrecht (C.H. Beck, 2005); Meinhard Hilf and Robin Geiß, ‘Most-Favoured-Nation Clause’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law, vol. VII (Oxford University Press, 2012) 384–395; Stanley Hornbeck, ‘The Most-Favored-Nation Clause’ (1909) 3 AJIL 395–422; France Houde * I am very indebted to Dr Peter Bachmayer who contributed excellently to the formatting of this chapter. It is current as of September 2013.

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Chapter 8: Standards of Protection and Fabrizio Pagani, ‘Most-Favoured-Nation Treatment in International Investment Law’ in OECD (ed), International Investment Law: A Changing Landscape (OECD, 2005) 127–161; Robert Hudec, ‘Tiger, Tiger in the House: A critical Evaluation of the Case against discriminatory Trade Measures’ in Ernst-Ulrich Petersmann and Meinhard Hilf (eds), The New GATT Round of Multilateral Trade Negotiations: Legal and Economic Problems (Kluwer Law and Taxation, 1988) 165–196; ILC, ‘Draft Articles on Most-Favoured-Nation Clauses with Commentaries 1978’ (1978) YBILC, vol. II, Part Two; Meg Kinnear, Andrea Bjorklund, John Hannaford, Investment Disputes under NAFTA – An Annotated Guide to NAFTA Chapter 11 (Kluwer Law International, 2006); Martins Paparinskis, ‘Latvia’ in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013) 445–463; Stephanie Parker, ‘A BIT at a Time: The Proper Extension of the MFN Clause to Dispute Settlement Provisions in Bilateral Investment Treaties’ (2012) 2(1) The Arbitration Brief 30–63; Yannick Radi, ‘The Application of the Most-Favoured-Nation Clause to the Dispute Settlement Provisions of Bilateral Investment Treaties: Domesticating the Trojan Horse’ (2007) 18 EJIL 757–774; August Reinisch, ‘How Narrow are Narrow Dispute Settlement Clauses in Investment Treaties?’ (2011) 2 J. Int’l Disp. Settlement 115–174; Stephan Schill, ‘Multilateralizing Investment Treaties through Most-Favoured-Nation-Clause’ (2009) 27 Berkeley J. Int’l L. 496–569; Stephan Schill, The Multilateralization of International Investment Law (Cambridge University Press, 2009); Christoph Schreuer, Loretta Malintoppi, August Reinisch, Anthony Sinclair, The ICSID Convention – A Commentary (Cambridge University Press, 2009); Georg Schwarzenberger ‘The Most-Favoured-Nation Standard in British State Practice’ (1945) XXII BYIL 96–121; Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2010); UNCTAD, Most-Favoured-Nation Treatment, U.N. Doc. UNCTAD/ITE/IIT/10 (United Nations, 1999); UNCTAD, MostFavoured-Nation Treatment, UNCTAD/DIAE/IA/2010/1 XIII (United Nations, 2010); UNCTAD, National Treatment, UNCTAD/ITE/IIT/11 (United Nations, 1999); Andreas Ziegler, ‘The Nascent International Law on Most-Favoured-Nation (MFN) Clauses in Bilateral Investment Treaties (BITs)’ (2009) EYIEL 77–101.

A. Introduction

BITs and multilateral investment agreements regularly contain clauses providing for most favoured nation (MFN) treatment. Such MFN clauses require the contracting parties to accord investors and investments from the other contracting party/parties treatment no less favourable than that accorded to their own investors and investments from third States. Together with national treatment provisions, MFN clauses are the central non-discrimination rules usually contained in international investment agreements (IIAs). Thus, they often appear in ‘combined’ versions, i.e. clauses that combine national and MFN treatment. 2 Like national treatment MFN treatment is a so-called contingent,1 ‘comparative’2 or ‘relative’3 investment standard, according treatment depending upon 1

1 See Anglo-Iranian Oil Co. case (United Kingdom v. Iran), (1952) ICJ Pleadings 533. 2 Todd Grierson-Weiler and Ian Laird, ‘Standards of Treatment’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 259, 261. 3 UNCTAD, National Treatment, UNCTAD/ITE/IIT/11 (United Nations, 1999) 7; UNCTAD, Most-Favoured-Nation Treatment, UNCTAD/DIAE/IA/2010/1 XIII (United Nations, 2010); Jörn Griebel, Internationales Investitionsrecht (C.H. Beck, 2008) 79; Lee Caplan and Jeremy

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the level of treatment given to national or other foreign investors. Thus, the treatment accorded may not necessarily be particularly beneficial. MFN clauses are traditionally included in investment treaties. Their language has remained relatively uniform. Treaties do, however, vary considerably as regards the exceptions from MFN treatment. Additionally, they may vary as to whether their application is limited to the post-establishment phase or extends to the pre-establishment phase. In practice, investment tribunals only rarely had to address claims alleging violations of MFN treatment as regards substantive treatment. Rather, most of the MFN debate centres around the so-called Maffezini approach, named after a leading 2000 decision on jurisdiction,4 in which an ICSID tribunal found that a claimant was entitled to rely on an MFN clause in order to ‘import’ more favourable procedural treatment available under a third country BIT of the host State. Since then investment tribunals have failed to develop a uniform interpretation of the potential reach of MFN clauses in IIAs. While some have held that they may extend not only to procedural advantages, but also to admissibility and even jurisdictional issues, others have strictly limited the potential reach of MFN clauses to substantive treatment. These inconsistent interpretations of MFN clauses remain among the most controversial issues of international investment arbitration. In connection with its work on the law of treaties, the International Law Commission (ILC) dealt with the topic of MFN clauses between 1964 and 1978. In 1978, the Commission adopted draft articles on MFN clauses with a detailed commentary.5 However, the draft articles were not adopted by the General Assembly. Nevertheless, the work of the ILC provided valuable insights into a number of conceptual underpinnings of MFN treatment. In 2006, the ILC debated again whether the MFN clause should be re-considered and included in the Commission’s future work programme. In 2007, the ILC established an openended Working Group to examine the possibility of the inclusion of the topic ‘Most-favoured-nation clause’ in its long-term programme of work.6

Sharpe, ‘United States’ in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013) 755, 776. 4 Emilio Agustín Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000. 5 ILC, ‘Draft Articles on Most-Favoured-Nation-Clauses with Commentaries 1978’ (ILC Draft Articles) (1978) 2 YBILC, Part Two, 16. 6 The Working Group made such a recommendation stating that ‘the Working Group concluded that the Commission could play a useful role in providing clarification on the meaning and effect of the most-favoured-nation clause in the field of investment agreements. Such work was seen as building on the past work of the Commission on the most-favoured-nation clause’. ILC, Most-Favoured-Nation Clause – Report of the Working Group, Doc. A/CN.4/L.719 of 20 July 2007, para. 1.

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B. Historic Origin

Like the national treatment standard, examples of MFN provisions in the field of commercial and economic relations, date back to the middle ages. Already treaties entered into by various city states in the 12th and 13th centuries contained MFN treatment.7 In the late 18th century, however, some States started to extend MFN treatment only conditionally. This treaty practice was pursued in particular by the United States which intended to protect its nascent industries. Beginning with the Treaty of Amity and Commerce with France8 the US extended MFN treatment only on the condition that the beneficiary State agreed to grant compensation equivalent to that given by the third State. On that basis, France and the US granted MFN treatment to each other’s nationals. 8 By the early 20th century, the unconditional MFN clause became the ‘cornerstone’ of international commercial relations.9 With the world economic crisis in 1929 the multilateralizing effect of MFN treatment was no longer welcome and States increasingly turned to preferential bilateral trade arrangements. Only with the establishment of the post-World War II liberal economic order of the Bretton Woods system, States generally reintroduced unconditional MFN treatment,10 most prominently in Article I of the GATT 1947. 9 Today, MFN clauses appear in numerous treaties covering a variety of topics. They are not reserved to trade and investment law but also include, inter alia, international regulation of trade and payments (e.g. exports, imports, customs tariffs), international investment protection, the establishment of foreign physical and juridical persons, their personal rights and obligations, international taxation or the protection of intellectual and industrial property. 7

C. The Functioning and Basic Concepts of MFN Clauses 10

International jurisprudence on MFN issues has been rather limited in the past. The ‘explosion’ of MFN issues in investment arbitration is a relatively recent phenomenon and can be traced back to the seminal Maffezini decision in 2000.11 Additionally, a few leading ICJ cases and arbitral awards have been closely ob7 See Meinhard Hilf and Robin Geiß, ‘Most-Favoured-Nation Clause’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law, vol. VII (Oxford University Press, 2012) 384, 387. See on the historic development of MFN clauses also Stephan Schill, ‘Multilateralizing Investment Treaties through Most-Favoured-Nation Clause’ (2009) 27 Berkeley J. Int’l L. 496, 509 et seq.; Robert Hudec, ‘Tiger, Tiger in the House: A critical Evaluation of the Case against discriminatory Trade Measures’ in Ernst-Ulrich Petersmann and Meinhard Hilf (eds), The New GATT Round of Multilateral Trade Negotiations: Legal and Economic Problems (Kluwer Law and Taxation, 1988) 165–212, 177. 8 Art. II of the Treaty of Amity and Commerce between the United States and France, done 6 February 1778, 8 Statutes at Large 12 (1848). 9 Stanley Hornbeck, ‘The Most-Favored-Nation Clause’ (1909) 3 AJIL 395–422. 10 Stephan Schill, ‘Multilateralizing Investment Treaties through Most-Favoured-Nation Clause’ (n. 7) 513 et seq. 11 Emilio Agustín Maffezini v. Spain (n. 4).

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served by international doctrine and found their way into the work of the ILC which culminated in the 1978 Draft Articles on Most-Favoured-Nation clauses with commentaries.12 1. The Concept of MFN Treatment

Pursuant to Article 5 of the ILC Draft Articles on Most-Favoured-Nation- 11 Clauses MFN treatment is: (…) treatment accorded by the granting State to the beneficiary State, or to persons or things in a determined relationship with that State, not less favourable than treatment extended by the granting State to a third State or to persons or things in the same relationship with that third State.13

The reference to ‘persons or things in a determined relationship with’ a bene- 12 ficiary State14 is of particular relevance in the context of investment law since the treatment to be extended in IIAs usually is treatment of investors and investments of a beneficiary (home) State. 2. MFN as a Treaty, not Custom-Based Obligation

Although MFN clauses have been routinely included in commercial treaties 13 throughout the 19th and early 20th century in treaties relating to bilateral economic relations, it is generally accepted that this has not given rise to a customary law obligation to grant MFN treatment.15 Thus, in the absence of specific treaty commitments, States are free to discriminate between third States in particular in their economic relations.16 3. The ‘Basic Treaty’ as the Legal Basis of MFN Treatment

An MFN clause aims at extending a certain form of treatment not expressly 14 provided for in a treaty to that treaty’s contracting parties. The more favourable 12 ILC Draft Articles (n. 5). 13 Ibid. 14 Ibid., Commentary (4) to Article 5, 22 (‘Such relationships are nationality or citizenship of persons, place of registry of vessels, State of origin or products, etc.’). 15 See UNCTAD, Most-Favoured-Nation Treatment (n. 3) 22 (‘It is a treaty-based obligation that must be contained in a specific treaty.’ (emphasis added)); ibid. (‘Even though thousands of IIAs currently in force contain an MFN treatment clause, it remains a treaty-based obligation. It is a conventional obligation and not a principle of international law which applies to States as a matter of general legal obligation independent of specific treaty commitments.’); Matthias Herdegen, Internationales Wirtschaftsrecht (C.H. Beck, 2005) 11; Georg Schwarzenberger ‘The Most-Favoured-Nation Standard in British State Practice’ (1945) XXII BYIL 96, 103 (‘[T]hough widely recognized in treaties by which States grant to each other reciprocal freedom of commerce, it cannot be admitted that that principle has as yet developed into a rule of customary international law.’); Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 206; ILC Draft Articles (n. 5), Commentary (3) to Article 7, 25. 16 France Houde and Fabrizio Pagani, ‘Most-Favoured-Nation Treatment in International Investment Law’ in OECD (ed), International Investment Law: A Changing Landscape (OECD, 2005) 129 (‘While MFN is a standard of treatment which has been linked by some to the principle of the equality of States, the prevailing view is that a MFN obligation exists only when a treaty clause creates it.’).

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treatment may be extended as a matter of mere practice or, in the context of economic relations most frequently, will be accorded pursuant to treaty obligations. The latter are contained in the so-called third-party treaty, whereas the treaty containing the MFN clause is referred to as the basic treaty. 15 Although third-party treaties are determinative of the (relative) standard of treatment owed to the beneficiary State of an MFN clause, they are technically res inter alios acta and do not directly give rise to the beneficiary’s rights. Rather, it is the basic treaty that forms the legal basis for an improved treatment along the lines of the third-party treaty.17 4. The Temporal Scope of MFN Treatment

While MFN clauses obviously intend to apply to more favourable future treatment, it appears less certain whether MFN clauses also refer to already existing, more favourable treatment stipulated in third-party treaties concluded before the conclusion of the basic treaty. 17 This issue was raised but not clearly solved in Bayindir v. Pakistan, an ICSID case in which an investment tribunal confirmed the ‘possibility of importing an FET obligation through the MFN clause expressly included in the Treaty.’18 When it came to the question which third-party treaty could be imported the tribunal was confronted with the respondent State’s objection with regard to a third-party BIT that had been concluded before the basic treaty and eventually decided that an MFN clause could import more favourable treatment contained in subsequent third-party treaties without clearly stating whether this also applied to already existing third-party treaties. 16

5. The Scope of MFN Clauses – The ejusdem generis Principle

An MFN clause ‘imports’ treatment extended to a third party. However, the scope of such importation is not unlimited. Rather, it extends to all matters that are covered by the basic treaty. 19 This ratione materiae limitation of an MFN clause is also referred to as the ejusdem generis principle which provides that only matters of the same kind are covered by MFN treatment.19 The ejusdem generis principle ensures that only ‘matters belonging to the same subject matter or the same category of subject’ as to which the MFN clause relates can be ‘imported’ through MFN treatment.20 It 18

17 See Anglo-Iranian Oil Co. case (United Kingdom v. Iran), Preliminary Objection, Judgment of 22 July 1952, ICJ Rep. 1952, 109 (‘this is the treaty which establishes the juridical link between the beneficiary State and a third party treaty and confers upon that State the rights enjoyed by the third party. A third-party treaty, independent and isolated from the basic treaty, cannot produce any legal effect as between (…) the beneficiary State and (…) the granting State (it is res inter alios acta).’). 18 Bayindir v. Pakistan, ICSID Case No. ARB/03/29, Award, 27 August 2009, para. 155. 19 Rudolf Dolzer and Christoph Schreuer (n. 15) 206. 20 France Houde and Fabrizio Pagani (n. 16) 142; UNCTAD, Most-Favoured-Nation Treatment (n. 3) xiii (‘An MFN clause is governed by the ejusdem generis principle, in that it may only

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is generally regarded to mean that ‘general words following or perhaps preceding special words are limited to the genus indicated by the special words.’21 Thus, an MFN clause in an investment treaty cannot import consular treatment and an MFN clause in a trade treaty cannot lead to the recognition of foreign judgments or to extradition obligations. The ejusdem generis principle is largely accepted both in theory and judicial 20 as well as arbitration practice.22 However, its application has sometimes led to difficulties in practice, in particular, when it comes to identifying the precise subject matter of treatment. The relevant international judicial and arbitral practice is instructive and has 21 found its way into modern investment arbitration since many tribunals refer to these precedents. The three major cases regularly cited are the Anglo-Iranian Oil Company case,23 Rights of Nationals of the United States of America in Morocco,24 and the Ambatielos case.25 Moreover, the ejusdem generis principle is widely adhered to by investment tribunals. Already in the leading case of Maffezini v. Spain, an ICSID tribunal held that under the principle ejusdem generis the most favored nation clause can only operate in respect of the same matter and cannot be extended to matters different from those envisaged by the basic treaty.26

However, more recent decisions have been more nuanced in their application 22 of the ejusdem generis principle and opined that it does not solve the issue whether dispute settlement is covered by an MFN clause which can only be deduced from the parties’ intentions.27 6. The Scope of MFN Treatment – Treaty Stipulations and de facto Treatment

An MFN clause obliges States to accord the best (most favoured nation) treat- 23 ment extended to a third party to the treaty partner of the basic treaty. Such treatment may be treatment extended as a matter of fact28 – without any specific le-

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23 24 25 26 27

apply to issues belonging to the same subject matter or the same category of subjects to which the clause relates.’ (emphasis in original)). Ian Brownlie, Principles of Public International Law (Oxford University Press, 2003) 604. ILC Draft Articles (n. 5), Commentary (1) to Articles 9 and 10, 27 as well as Commentary (10) to Articles 9 and 10, 30 (‘No writer would deny the validity of the ejusdem generis rule which, for the purposes of the most-favoured nation clause, derives from its very nature. It is generally admitted that a clause conferring most-favoured-nation rights in respect of a certain matter, or class of matter, can attract the rights conferred by other treaties (or unilateral acts) only in regard to the same matter or class of matter.’). The Anglo-Iranian Oil Company case (United Kingdom v. Iran), Jurisdiction, 22 July 1952, ICJ Rep. 1952, 109. The Case Concerning Rights of Nationals of the United States of America in Morocco (France v. United States of America), 27 August 1952, ICJ Rep. 1952, 176. The Ambatielos case (Greece v. United Kingdom), Award, 6 March 1956, (1963) UNRIAA, vol. XII, 107. Emilio Agustín Maffezini v. Spain (n. 4) para. 41. Daimler Financial Services AG v. Argentina, ICSID Case No. ARB/05/1, Decision on Jurisdiction, 22 August 2012, para. 215.

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gal obligation – or it may in turn be based on treatment owed to a third party by reason of a treaty obligation contained in the third-party treaty. 24 While MFN in trade treaties often relates to the de facto treatment given to products from third parties, MFN clauses in investment agreements regularly concern treatment obligations found in third-party treaties.29 Thus, most investment cases involve attempts by investors to ‘import’ either more favourable substantive treatment obligations or – more controversially – more favourable procedural rights from third-party treaties. 7. Treatment ‘No Less Favourable’ – Not ‘Equal’ Treatment

MFN clauses are a form of non-discrimination clauses. Nevertheless, it is clear that MFN treatment – like national treatment – does not require granting States to accord precisely the ‘same’ treatment extended to third States also to the beneficiary State. States are free to accord more favourable treatment to the beneficiary State. All the MFN clause demands is treatment ‘no less favourable’ than that accorded to third parties.30 26 While this has been expressly endorsed by certain investment tribunals,31 some tribunals appear to have equalised MFN with equal treatment. For instance, in the Suez and AWG case,32 the tribunal concluded that as a result of the applicable MFN clause the investors covered by the basic treaty would be entitled to access investor-State arbitration under the ‘same’ terms as investors under a third party treaty.33 25

8. What constitutes More Favourable Treatment?

In trade matters it is usually easy to determine that the charging of lower tariffs constitutes more favourable treatment. In the context of more complex investment relations the question what constitutes more favourable treatment gains particular weight. 28 This may apply to both ‘substantive’ and ‘procedural treatment’. Complex expropriation clauses may contain different elements, some of which may appear more or less favourable to investors. The same is true with dispute settlement clauses that often do not simply provide for investor-State arbitration, but consti27

28 ILC Draft Articles (n. 5), Commentary (6) to Article 5, 23. 29 Rudolf Dolzer and Christoph Schreuer (n. 15) 207. 30 See also ILC Draft Articles (n. 5), Commentary (5) to Article 5, 23 (‘(…) while mostfavoured-nation treatment excludes preferential treatment of third States by the granting State, it is fully compatible with preferential treatment of the beneficiary State by the granting State, although it may be required to accord such preferential treatment under other most-favourednation clauses. Consequently, the treatment accorded to the beneficiary State and that accorded to the third State are not necessarily “equal”.’). 31 Daimler Financial Services AG v. Argentina (n. 27) para. 243. 32 Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/03/19 and AWG Group Ltd. v. Argentina, UNCITRAL, Decision on Jurisdiction, 3 August 2006. 33 Ibid., para. 55.

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tute a multifaceted system of waiting periods, alternative remedies, fork in the road clauses, etc. In such situations, it may not be easy to determine whether a particular dispute settlement provision is ‘more’ favourable than another. Interestingly, investment tribunals rarely address this issue. In most cases, it 29 appears that they accept claimants’ characterisation of what they consider to be more favourable treatment under a third country IIA. For instance, in Maffezini and other cases, tribunals followed claimants’ char- 30 acterisation of direct access to arbitration without waiting periods as more favourable treatment than access after exhaustion of such periods.34 A number of tribunals indicated that they considered a choice of dispute settlement options more favourable than only limited options.35 D. MFN in International Investment Agreements

Already FCN treaties – often regarded as precursors to modern BITs – rou- 31 tinely included MFN clauses.36 Most modern model BITs include the MFN treatment standard and almost all BITs contain MFN clauses. While MFN clauses often appear as stand-alone provisions in IIAs, they are also often combined with the other non-discrimination standard of national treatment or with other treatment standards. However, there are also some IIAs which do not contain MFN treatment.37 While differences in wording of MFN clauses regularly occur, it has also been 32 cautioned that the underlying concept of MFN is a fairly clear and standard one that does not necessarily change with textual nuances adopted by treaty-makers.38 One is reminded of Georg Schwarzenberger’s dictum that ‘[t]hough there is no such thing as the m.f.n. clause, it is equally necessary to emphasize that there is such a thing as the m.f.n. standard.’39

34 Emilio Agustín Maffezini v. Spain (n. 4) para. 64; Gas Natural SDG SA v. Argentina, ICSID Case No. ARB/03/10, Decision on Jurisdiction, 17 June 2005, para. 31; Telefónica SA v. Argentina, ICSID Case No. ARB/03/20, Decision of the Tribunal on Objections to Jurisdiction, 25 May 2006, para. 103. 35 Impregilo S.p.A. v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, para. 101; Hochtief AG v. Argentina, ICSID Case No. ARB/07/31, Decision on Jurisdiction, 24 October 2011, para. 100; Plama Consortium Ltd. v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, para. 208. 36 See, e.g., UNCTAD, Most-Favored-Nation Treatment, U.N. Doc. UNCTAD/ITE/IIT/10 (United Nations, 1999) 39 (referring to MFN clauses as a ‘core element of international investment agreements.’). 37 UNCTAD reported in 2010 that almost 20 percent of IIAs would not have an MFN clause. See UNCTAD, Most-Favoured-Nation Treatment (n. 3) 12 (‘A sample of 715 IIAs reviewed by UNCTAD reveals that only 19.6 per cent did not include a reference to MFN.’). 38 UNCTAD, Most-Favoured-Nation Treatment (n. 3) 6 (‘There is no evidence that, by using different wording, the parties to these various agreements intended to give the MFN clauses a different scope. Whatever the specific terminology used, it does not change the basic thrust of MFN.’). 39 Georg Schwarzenberger (n. 15) 104 (emphasis in original).

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MFN clauses in investment agreements typically stipulate ‘treatment’ no less favourable than that accorded to third State investors and investments. Sometimes, language is added clarifying that the treatment concerns investments and/or investors ‘in like circumstances’.40 Other IIAs provide that MFN applies to ‘all matters subject to this agreement’.41 The following paragraphs provide an overview of textual variations found in IIA practice. 1. MFN in the Pre-Establishment Phase

The most significant variation found in IIAs relates to whether MFN and national treatment is also owed in the pre-establishment (pre-entry) phase or only in the post-establishment phase. While NAFTA as well as US and Canadian BITs typically provide for MFN and national treatment in both phases, most European BITs restrict MFN treatment to the post-establishment phase. 35 That MFN should also apply in the pre-establishment phase is usually expressed by language indicating that MFN should apply ‘with respect to the establishment, acquisition, expansion, (…),’42 while IIAs limiting the application of their MFN clauses to the post-establishment phase do not have such language. 34

2. MFN Linked to Fair and Equitable Treatment

Some BITs link MFN to fair and equitable treatment as, for instance, the Chile–Malaysia BIT.43 This wording has given rise to uncertainty whether MFN should thus be limited to fair and equitable treatment. In MTD v. Chile,44 an ICSID tribunal appeared to give such a limited interpretation to the applicable MFN clause.45 The annulment committee in the same case, however, made clear that the MFN clause ‘attract[ed] any more favourable treatment extended to third State investments and [did] so unconditionally.’46 37 A more express limitation of MFN obligations to fair and equitable treatment can be seen in the Russian Model BIT which expressly relates MFN to fair and equitable treatment.47 36

40 Art. 1103 of NAFTA (1992); Art. 4 of the US Model BIT (2012); Art. 4 of the Canadian Model FIPA (2004). 41 Art. IV(2) of the Argentina–Spain BIT 1991. 42 See e.g. Art. 1103 of NAFTA (1992); Art. 4 of the US Model BIT (2012); Art. 4 of the Canadian Model FIPA (2004). 43 Art. 3(1) of the Chile–Malaysia BIT 1992, Agreement between the Government of Malaysia and the Government of the Republic of Chile for the Promotion and Protection of Investments (‘Investments made by investors of either Contracting Party in the territory of the other Contracting Party shall receive treatment which is fair and equitable, and not less favourable than that accorded to investments made by investors of any third State.’). Similar clauses have been widely used in Latvian BITs; see Martins Paparinskis, ‘Latvia’, in Chester Brown (ed) (n. 3) 445. 44 MTD Equity v. Chile, ICSID Case No. ARB/01/7, Award, 25 May 2004. 45 Ibid., para. 104. 46 MTD Equity v. Chile, ICSID Case No. ARB/01/7, Decision on Annulment, 21 March 2007, para. 64.

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3. MFN and National Treatment Combined

While MFN clauses may appear as stand-alone obligations, many IIAs com- 38 bine them with national treatment obligations.48 In some instances, IIAs provide that investors should receive the better of MFN or national treatment.49 Another variation of MFN clauses provides for the automatic extension of more favourable treatment under international law or under domestic law to treatment obligations under the basic treaty.50 4. MFN Clauses and Dispute Settlement

The question whether MFN clauses are limited to substantive treatment or 39 may also encompass dispute settlement issues, whether qualified as jurisdictional or admissibility questions, has been the central controversial issue in investment arbitration since the 2000 Maffezini decision on jurisdiction.51 It is therefore not surprising that States have reacted to this jurisprudential development by expressly rejecting or endorsing the Maffezini approach. A number of States have rejected the interpretation given to an MFN clause 40 by the Maffezini tribunal. The techniques vary. Some have said so in the treaty or in an annex to it,52 while others have opted for the adoption of instruments relating to MFN clauses in existing IIAs.53 An interesting alternative to reject the Maffezini approach without formally adopting specific treaty language arose 47 Art. 3 of the Russian Model BIT (2002) (‘1. Each Contracting Party shall ensure in its territory fair and equitable treatment of investments by investors of the other Contracting Party related to the management and disposal of investments. 2. The treatment referred to in paragraph 1 of this Article shall be at least as favourable as that granted to investments of its own investors or to investors of a third State whichever is more favourable according to the investor. (…).’). 48 E.g. Art. 3(1) of the UK Model BIT (2005); Art. III(1) of the Italian Model BIT (2003); Art. IV(1) of the Colombian Model BIT (2009). See also the references in UNCTAD, National Treatment (n. 3) 42 et seq. 49 E.g. Art. II(2)(a) of the Egypt–US BIT (1986); Art. II(2) of the Pakistan–Turkey BIT (1995); Art. 3(3) of the Austrian Model BIT (2008); Art. 3(1) of the Latvian Model BIT (2009) (‘Each Contracting Party shall accord to investments of investors of the other Contracting Party, treatment no less favourable than that which it accords to investments of its own investors or investments of investors of any third State, whichever is the most favourable to the investor.’). 50 Art. 3(5) of the Czechoslovakia–Netherlands BIT 1991 (‘If the provisions of law of either Contracting Party or obligations under international law existing at present or established hereafter between the Contracting Parties in addition to the present Agreement contain rules, whether general or specific, entitling investments by investors of the other Contracting Party to a treatment more favourable than is provided for by the present Agreement, such rules shall to the extent that they are more favourable prevail over the present Agreement.’). 51 Emilio Agustín Maffezini v. Spain (n. 4). 52 Colombia–Switzerland Agreement, 17 May 2006, annex; cited in Andreas Ziegler, ‘The Nascent International Law on Most-Favoured-Nation (MFN) Clauses in Bilateral Investment Treaties (BITs)’ (2009) EYIEL 77–101, 95. Similar clauses can be found in the Canada–Peru FIPA 2006; Art. 5(4) of the ASEAN–China Investment Agreement (2009); Art. IV(2) of the Colombian Model BIT (2009). 53 See, e.g., the National Grid decision on jurisdiction in which the tribunal noted that ‘the Argentine Republic and Panama exchanged diplomatic notes with an “interpretative declaration” of the MFN clause in their 1996 investment treaty to the effect that, the MFN clause does not

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in the course of the negotiations for the Free Trade of the Americas Agreement. A footnote, disapproving of the Maffezini approach, was included in the draft of 21 November 2003, which was to be deleted before the adoption of the final text (thus sometimes referred to as ‘vanishing footnote’), but thereby had become part of the negotiating history of the treaty.54 41 On the contrary, a number of States have expressly endorsed the Maffezini approach and formulated MFN clauses in a way to remove any doubt that dispute settlement was intended to be covered by them.55 An example of this intention is found in the 2008 Austrian Model BIT which adds to the language ‘with respect to the management, operation, maintenance, use, enjoyment, sale and liquidation’ ‘as well as dispute settlement’.56 42 It is clear, however, that also the clarifying language inserted in some postMaffezini BITs may not remove all interpretation difficulties. Clauses now expressly encompassing dispute settlement may give rise to an e contrario interpretation, implying that all other MFN clauses of such countries do not refer to dispute settlement. But they could also be regarded as reaffirmations that MFN clauses in general include dispute settlement. Such ambiguity could be avoided by language suggesting that one or the other interpretation of the scope of an MFN clause is not limited to the MFN clause of a particular investment agreement. 43 An even safer approach may be the one chosen by some States that have exchanged diplomatic notes in which they express their understanding of MFN clauses. 5. Exceptions from MFN Obligations 44

BITs and other IIAs vary considerably with regard to the exceptions from MFN treatment. In addition to the ‘classic exceptions’ of regional economic integration organisations and taxation, States have used a variety of other explicit derogations from MFN obligations.57

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extend to dispute resolution clauses, and that this has always been their intention.’ National Grid plc v. Argentina, UNCITRAL, Decision on Jurisdiction, 20 June 2006, para 85. The text is reproduced in Plama Consortium Ltd. v. Bulgaria (n. 35) para. 202. In a similar vein, it has been argued that the reference typically found in US BITs ‘with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments’ refers to ‘the life cycle of investments’ and ‘does not therefore create MFN treatment protection with respect to dispute resolution mechanisms.’ See Lee Caplan and Jeremy Sharpe (n. 3) 780. See, e.g., Art. 3(3) of the UK Model IPPA 2008. See Art. 3(3) of the Austrian Model BIT 2008 (‘Each Contracting Party shall accord to investors of the other Contracting Party and to their investments or returns treatment no less favourable than that it accords to its own investors and their investments or to investors of any third country and their investments or returns with respect to the management, operation, maintenance, use, enjoyment, sale and liquidation as well as dispute settlement of their investments or returns, whichever is more favourable to the investor.’). UNCTAD, Most-Favoured-Nation Treatment (n. 3) 10.

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The most important exception to MFN treatment relates to preferences mem- 45 bers of regional economic organisations mutually grant each other.58 Thus, many BITs contain clauses ensuring that MFN does not apply with regard to special rights based on customs unions, free trade organisations and similar regional economic integration organisations (REIOs).59 Another very common exception relates to tax treatment.60 Some countries granting MFN in the pre-establishment phase have inserted in their IIAs country exceptions.61 In a few cases, countries have also inserted specific subject-matter exceptions, relating, e.g. to aviation and fisheries matters.62 E. The Application of MFN Clauses in Investment Practice

In investment arbitration, MFN clauses – though standard in most IIAs – are 46 less often invoked than the obligation to treat foreign investors in a fair and equitable manner and to grant them full protection and security. In fact, most invocations of MFN clauses concern attempts by claimants to receive better (‘more favourable’) treatment in regard to dispute settlement than that provided for in a basic investment treaty.63

58 See Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2010) 205. 59 See e.g. Art. 3(3) of the 1998 German Model BIT (‘Such treatment shall not relate to privileges which either Contracting State accords to investors of third States on account of its membership of, or association with, a customs or economic union, a common market or a free trade area.’); Art. 3(2) of the Bulgaria–Cyprus BIT (‘This treatment shall not be applied to the privileges which either Contracting Party accords to investors from third countries in virtue of their participation in economic communities and unions, a customs union or a free trade area.’); Art. IV(3) of the Argentina–Spain BIT 1991 (‘Such treatment shall not extend, however, to the privileges which either Party may grant investors of a third State by virtue of its participation in: – a free trade area; – a customs union; – a common market; – a regional integration agreement; or an organization of mutual economic assistance by virtue of an agreement concluded prior to the entry into force of this Agreement, containing terms analogous to those accorded by that Party to participants of the said organization.’); Annex III(2)(a) (Exceptions from Most-Favoured-Nation Treatment) of the Canadian Model FIPA 2004 (‘Article 4 shall not apply to treatment by a Party pursuant to any existing or future bilateral and multilateral agreement: (a) establishing, strengthening or expanding free trade area or customs union; (…)’). 60 See e.g. Art. 3(4) of the 1998 German Model BIT (‘The treatment granted under this Article shall not relate to advantages which either Contracting State accords to investors of third States by virtue of a double taxation agreement or other agreements regarding matters of taxation.’); Art. IV(4) of the Argentina–Spain BIT 1991 (‘The treatment accorded under this article shall not extend to tax deductions or exemptions or other analogous privileges granted by either Party to investors of third countries by virtue of an agreement to prevent double taxation or any other tax agreement.’). 61 Canada and the US. See France Houde and Fabrizio Pagani (n. 16) 135. 62 See e.g. Annex III(2)(b) (Exceptions from Most-Favoured-Nation Treatment) of the Canadian Model FIPA 2004 (‘Article 4 shall not apply to treatment by a Party pursuant to any existing or future bilateral and multilateral agreement: (…) (b) relating to: (i) aviation; (ii) fisheries; (iii) maritime matters, including salvage.’). 63 See also UNCTAD, Most-Favoured-Nation Treatment (n. 3) 17 et seq.

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The following overview of the actual investment law practice starts with the potential reach of MFN clauses to the scope of investment. It then analyses the limited case law dealing with the less controversial question of ‘importing’ better substantive treatment from third party investment treaties and continues to address the core dispute of whether an MFN clause may serve to provide better dispute settlement treatment than the one provided for under the basic treaty. 1. MFN and the Scope of Protected Investment

While MFN clauses have been mostly invoked in order to claim a better substantive treatment or to ‘import’ more beneficial procedural advantages from third party treaties, there have also been a few attempts to rely on an MFN clause in order to achieve other purposes. 49 One such example can be witnessed in the HICEE case64 in which a claimant sought to rely on an MFN clause which was expressly linked to full protection and security in order to broaden the scope of ‘investments’ protected under the basic BIT. The claimant’s attempt to receive BIT protection by relying on the applicable MFN was unsuccessful as the tribunal held that 48

[t]he clear purpose of the [MFN clause] [was] to broaden the scope of the substantive protection granted to the eligible investments of eligible investors; it [could not] legitimately be used to broaden the definition of the investors or the investments themselves.65

2. Substantive Treatment

It is widely accepted that MFN clauses may be relied upon by investors in order to claim a better substantive treatment accorded by a host State to investors of a third State.66 51 In fact, the first investment arbitration dealing with an MFN clause, Asian Agricultural Products Ltd. (AAPL) v. Sri Lanka67 can be read this way. The case primarily concerned the physical destruction of an investor’s shrimp farm during civil war in the host State and primarily rested on full protection and security. But the claimant also argued that it could rely on the more favourable liability provisions of the 1981 Sri Lanka–Switzerland BIT which contained neither a war clause nor a civil disturbance exemption. Although the ICSID tribunal rejected the investor’s claim, it did not reject the possibility to import a more favourable substantive treaty provision as such. Rather, it found that it was not clear whether the Sri Lanka–Switzerland treaty contained indeed more favourable provisions.68 50

64 HICEE B.V. v. Slovakia, UNCITRAL, Partial Award, 23 May 2011. 65 Ibid., para. 149 (emphasis in original). 66 Berschader v. Russia, SCC Case No. 080/2004, Award, 21 April 2006, para. 179 (‘It is universally agreed that the very essence of an MFN provision in a BIT is to afford to investors all material protection provided by subsequent treaties (…).’). Rudolf Dolzer and Christoph Schreuer (n. 15) 211. 67 AAPL v. Sri Lanka, ICSID Case No. ARB/87/3, Award, 27 June 1990. 68 Ibid., para. 54.

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3. Fair and Equitable Treatment in NAFTA

NAFTA tribunals have developed a specific line of jurisprudence according to 52 which the fair and equitable treatment standard of NAFTA Article 1105 is one coextensive to the international minimum standard. Though this equalisation was initially controversial and some NAFTA tribunals obviously struggled with that concept, at least since the interpretation of the NAFTA Free Trade Commission in 201169 most Chapter 11 panels have followed this approach. It is thus not surprising that investors have resorted to NAFTA’s MFN clause in order to claim more favourable fair and equitable treatment from non-NAFTA investment agreements entered into by NAFTA host States. An early example of such an attempt was evident in a 1999 procedural order 53 in Pope & Talbot Inc. v. Canada which did not reach the MFN issue. The US investor had invoked the MFN clause of NAFTA70 in order to import the ‘fair and equitable treatment’ standard as contained in various BITs concluded by Canada with third States and which was arguably not limited to the NAFTA Article 1105 Minimum Standard of Treatment. While the claim was subsequently dropped, thus hindering the tribunal to address it in detail,71 it did briefly touch upon the issue in its award on the merits.72 Since the tribunal adopted the controversial position that NAFTA Article 1105 was not to be considered as coextensive to the international minimum standard of treatment, but rather went beyond that and formed an autonomous treaty standard, it could directly rely on such higher standard of protection and did not have to ‘import’ an autonomous standard via NAFTA’s MFN clause. But in a telling obiter dictum the tribunal stated that (…) there is a practical reason for adopting the additive interpretation to Article 1105. As noted, the contrary view of that provision would provide to NAFTA investors a more limited right to object to laws, regulation and administration than accorded to host country investors and investments as well as to those from countries that have concluded BITs with a NAFTA party. This state of affairs would surely run afoul of Articles 1102 and 1103, which give every NAFTA investor and investment the right to national and most favoured nation treatment. NAFTA investors and investments that would be denied access to the fairness elements untrammeled by the ‘egregious’ conduct threshold that Canada would graft onto Article 1105 would simply turn to Articles 1102 and 1103 for relief.73

Clearly, the Pope & Talbot tribunal suggests that a limited interpretation of 54 the fair and equitable treatment standard contained in NAFTA Article 1105

69 NAFTA Free Trade Commission, Notes of Interpretation of certain Chapter 11 Provisions (31 July 2001), available at http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/NAFTA-Interpr.aspx. 70 NAFTA Art. 1103. 71 Pope & Talbot Inc. v. Canada, UNCITRAL (NAFTA), Procedural Order No. 2, 28 October 1999, as referred to in Meg Kinnear, Andrea Bjorklund, John Hannaford, Investment Disputes under NAFTA – An Annotated Guide to NAFTA Chapter 11 (Kluwer Law International, 2006) 1103–1109. 72 Pope & Talbot Inc. v. Canada, UNCITRAL (NAFTA), Award on the Merits, 10 April 2001. 73 Ibid., para. 117.

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could be avoided by recourse to NAFTA’s MFN clause through which higher fair and equitable treatment standards of third country BITs could be imported. 4. Fair and Equitable Treatment in Non-NAFTA Cases

The possibility to ‘import’ a fair and equitable treatment provision through an MFN clause in a basic treaty, in which such fair and equitable treatment was not included, was expressly endorsed by the ICSID tribunal in Bayindir v. Pakistan.74 56 In its decision on jurisdiction the tribunal found that the applicable MFN clause75 prima facie permitted the Turkish investor to rely on fair and equitable treatment provisions contained in other Pakistani BITs. The tribunal reasoned: 55

Neither in its Reply nor at the jurisdictional hearing, did Pakistan dispute Bayindir’s assertion that the investment treaties which Pakistan has concluded with France, the Netherlands, China, the United Kingdom, Australia, and Switzerland contains an explicit fair and equitable treatment clause. (…) Under these circumstances and for the purposes of assessing jurisdiction, the Tribunal considers, prima facie, that Pakistan is bound to treat investments of Turkish nationals ‘fairly and equitably.’76

57

In its award, the Bayindir tribunal confirmed its preliminary finding and reaffirmed the ‘possibility of importing an FET obligation through the MFN clause expressly included in the Treaty.’77 It held that the fact that fair and equitable treatment was mentioned in the preamble of the Pakistan–Turkey BIT78 was not sufficient to consider that the contracting States were bound by such a standard. Thus the Bayindir tribunal turned to the applicable MFN clause as well as its limitations79 and concluded: The ordinary meaning of the words used in Article II(2) together with the limitations provided in Article II(4) show that the parties to the Treaty did not intend to exclude the importation of a more favourable substantive standard of treatment accorded to investors of third countries. This reading is supported by the preamble’s insistence on FET.80

74 Bayindir v. Pakistan, ICSID Case No. ARB/03/29, Decision on Jurisdiction, 14 November 2005. 75 Art. II(2) of the Pakistan–Turkey BIT (‘Each Party shall accord to these investments, once established, treatment no less favourable than that accorded in similar situations to investments of its investors or to investments of investors of any third country, which ever is the most favourable.’). 76 Bayindir v. Pakistan (n. 74) paras. 231, 232. 77 Bayindir v. Pakistan (n. 18) para. 155. 78 Preamble to the Pakistan–Turkey BIT (‘Agreeing that fair and equitable treatment of investment is desirable in order to maintain a stable framework for investment and maximum effective utilization of economic resources.’). 79 Art. II(4) of the Pakistan–Turkey BIT (‘The provisions of this Article shall have no effect in relation to following agreements entered into by either of the Parties: (a) relating to any existing or future customs unions, regional economic organization or similar international agreements, (b) relating wholly or mainly to taxation.’). 80 Bayindir v. Pakistan (n. 18) para. 157.

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5. MFN and Expropriation

Investment tribunals have also relied upon MFN clauses in order to import 58 certain provisions relevant in the context of expropriation for the solution of specific disputes. For instance, in CME v. Czech Republic,81 an UNCITRAL tribunal relied on 59 the MFN clause of the Czech Republic–Netherlands BIT82 in order to hold that an investor was entitled to ‘fair market value’ as the relevant standard of compensation though such standard was not expressly contained in the applicable BIT. Rather, the BIT provided for ‘just compensation’ which should reflect the ‘genuine value of the investment’.83 The CME tribunal, however, was of the opinion that the various references to genuine or fair market value all referred to the same basic, underlying notion that full compensation had to be paid in case of expropriation.84 In addition, the tribunal reasoned: The determination of compensation under the Treaty between the Netherlands and the Czech Republic on basis of the ‘fair market value’ finds further support in ‘the most favored nation’ provision of Art. 3 (5) of the Treaty. That paragraph specifies that if the obligations under national law of either party in addition to the present Treaty contain rules, whether general or specific, entitling investments by investors of the other party to a treatment more favourable than provided by the present treaty, ‘such rules shall to the extent that they are more favourable prevail over the present Agreement.’ The bilateral investment treaty between the United States and the Czech Republic provides that compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken (see also Maffezini (…)). The Czech Republic therefore is obligated to provide no less than ‘fair market value’ to Claimant in respect of its investment, should (in contrast to this Tribunal’s opinion) ‘just compensation’ representing the ‘genuine value’ be interpreted to be less than ‘fair market value’.85

Other tribunals, however, have taken a more cautious approach in their as- 60 sessment of MFN clauses in respect to importing expropriation relevant obligations from other sources.86

81 CME Czech Republic B.V. v. Czech Republic, Final Award, 14 March 2003. 82 Art. 3(5) of the Czechoslovakia–Netherlands BIT 1991 (‘If the provisions of law of either Contracting Party or obligations under international law existing at present or established hereafter between the Contracting Parties in addition to the present Agreement contain rules, whether general or specific, entitling investments by investors of the other Contracting Party to a treatment more favourable than is provided for by the present Agreement, such rules shall to the extent that they are more favourable prevail over the present Agreement.’). 83 Art. 5 of the Czechoslovakia–Netherlands BIT 1991 (‘Neither Contracting Party shall take any measures depriving, directly or indirectly, investors of the other Contracting Party of their investments unless the following conditions are complied with: (…) (c) the measures are accompanied by provision for the payment of just compensation. Such compensation shall represent the genuine value of the investments affected and shall, in order to be effective for the claimants, be paid and made transferable, without undue delay, to the country designated by the claimants concerned and in any freely convertible currency accepted by the claimants.’). 84 CME Czech Republic B.V. v. Czech Republic (n. 81) para. 497. 85 Ibid., para. 500. 86 See, e.g., Accession Mezzanine Capital L.P. and Danubius Kereskedöház Vagyonkezelö Zrt. v. Hungary, ICSID Case No. ARB/12/3, Decision on Respondent’s Objection under Arbitration Rule 41(5), 16 January 2013.

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6. MFN and de facto Discrimination

Most investment cases in which an investor invoked an MFN clause concerned the attempt to ‘import’ more favourable treatment obligations under a third party IIA. It is clear, however, that the MFN treatment standard also prohibits host States from factually discriminating between foreign investors by extending better treatment to third party investors than to those of the beneficiary State of the basic investment treaty. 62 Such an issue was discussed in detail in the 2007 ICSID case of Parkerings v. Lithuania.87 The claimant had argued that the fact that the construction and operation of parking facilities in the city of Vilnius were granted to another foreign investor constituted such de facto less favourable treatment. In spite of the broad and unqualified wording of the applicable MFN clause,88 the tribunal held that any comparison between different investors required that such investors be in a comparable situation.89 63 On this basis, the Parkerings tribunal specifically compared the two projects which were both planned for the old city of Vilnius, the tribunal found that Claimant’s bigger project raised significant concerns as regards historical preservation as well as environmental protection and was thus not in like circumstances.90 Consequently, the tribunal denied a violation of the MFN treatment obligation. 61

7. Treatment in Regard to Dispute Settlement

Since the leading case of Maffezini v. Spain,91 ICSID and other arbitral tribunals have been split on whether an MFN clause can be relied upon in order to invoke more favourable dispute settlement provisions contained in third party BITs. At the same time, the Maffezini jurisprudence has led to a considerable debate among academics and practitioners on the advantages and disadvantages of applying MFN to dispute settlement issues.92 65 A number of authors consider the Maffezini approach as ‘unwarranted adventurism’ and the ‘product of the liberal expansiveness of the period’.93 The main point of criticism usually refers to the ‘unintended’94 or ‘unexpected’95 effect of 64

87 Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007. 88 Art. IV of the Lithuania–Norway BIT (‘1. Investments made by investors of one contracting party in the territory of the other contracting party, as also the returns therefrom, shall be accorded treatment no less favourable than that accorded to investments made by investors of any third state.’). 89 Parkerings v. Lithuania (n. 87) para. 369. 90 Ibid., para. 396. 91 Emilio Agustín Maffezini v. Spain (n. 4). 92 ILC, Most-Favoured-Nation Clause – Report of the Working Group (n. 6) para. 19 (‘The scope accorded to certain MFN provisions and the differing approaches taken by various investment tribunals has created what is perhaps the greatest challenge in respect of MFN provisions.’). 93 Muthucumaraswamy Sornarajah (n. 58) 322.

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extending MFN to dispute settlement questions. Critics of Maffezini usually assert that MFN was only intended to apply to substantive treatment and that the extension of MFN to dispute settlement will ‘undermine the possibility of a valid and binding arbitration agreement’.96 Those who support the application of MFN clauses to dispute settlement in 66 principle stress the importance of dispute settlement as a means of investment protection and emphasise that there is nothing in the notion of ‘treatment’ that would suggest that dispute settlement is excluded. They argue that the extension of rights of investors is in the nature of MFN clauses.97 They also contend that a broad application of MFN clauses to dispute settlement provisions will further the goals of bilateral investment treaties.98 a) The Maffezini Case

In Maffezini v. Spain,99 an ICSID tribunal came to the conclusion that an Ar- 67 gentinian investor could rely on the broad MFN clause contained in the 1991 Argentina–Spain BIT in order to avoid an 18-month waiting period before resorting to investment arbitration since he was held to be entitled to invoke the more favourable dispute settlement provisions of the Chile–Spain BIT 1991 which permitted the institution of investment arbitration without such a waiting period. Spain had argued that the investor had failed to exhaust domestic remedies as 68 required by Article 10 of the Argentina–Spain BIT.100 The Maffezini tribunal found, however, that Article 10 of the BIT did not require such exhaustion of 94 Ibid. 95 UNCTAD, Most-Favoured-Nation Treatment (n. 3) xiv (‘(…) an unexpected application of MFN treatment in investment treaties gave raise [sic!] to a debate that has so far not found an end and that has generated different and sometimes inconsistent decisions by arbitral tribunals. The issue at stake is the application of the MFN treatment provision to import investor-State dispute settlement (ISDS) provisions from third treaties considered more favourable to solve issues relating to admissibility and jurisdiction over a claim, such as the elimination of a preliminary requirement to arbitration or the extension of the scope of jurisdiction.’). 96 Zachary Douglas, ‘The MFN Clause in Investment Arbitration: Treaty Interpretation Off the Rails’ (2011) 2(1) J. Int’l Disp. Settlement 97, 114. 97 See Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention – A Commentary (Cambridge University Press, 2009) 248. 98 Stephan Schill, The Multilateralization of International Investment Law (Cambridge University Press, 2009); Stephan Schill (n. 7); Stephanie Parker, ‘A BIT at a Time: The Proper Extension of the MFN Clause to Dispute Settlement Provisions in Bilateral Investment Treaties’ (2012) 2(1) The Arbitration Brief 30, 33. 99 Emilio Agustín Maffezini v. Spain (n. 4). 100 Art. 10(2) of the Argentina–Spain BIT provided that a dispute which cannot be settled amicably ‘shall be submitted to the competent tribunal of the Contracting Party in whose territory the investment was made.’ Pursuant to Art. 10(3) of the Argentina–Spain BIT, the ‘dispute may be submitted to international arbitration in any of the following circumstances: a) at the request of one of the parties to the dispute, if no decision has been rendered on the merits of the claim after the expiration of a period of eighteen months from the date on which the proceedings referred to in paragraph 2 of this Article have been initiated, or if such decision has been rendered, but the dispute between the parties continues; b) if both parties to the dispute agree thereto.’

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69

70

71

72

domestic remedies; rather it ‘wanted to give their respective courts the opportunity, within the specified period of eighteen months, to resolve the dispute before it could be taken to international arbitration.’101 Since the claimant had not complied with the requirement to go to Spanish courts in the first place, the tribunal had to address Maffezini’s submission that he was not required to do so as a result of the more favourable dispute settlement provisions contained in the Chile–Spain BIT and applicable to him by operation of the MFN clause in Article IV (2) of the Argentina–Spain BIT.102 The tribunal expressly rejected the host State’s argument that ‘matters’ can only be understood to refer to substantive matters or material aspects of the treatment granted to investors and not to procedural or jurisdictional questions. Relying on international precedents and considering the broad wording of the MFN clause which referred to ‘all matters subject to this Agreement’, the Maffezini tribunal emphasised that dispute settlement provisions in BITs were ‘essential to the protection of the rights envisaged under the pertinent treaties; they are also closely linked to the material aspects of the treatment accorded.’103 The tribunal did, however, narrow down its broad interpretation of the MFN clause by stating that ‘the beneficiary of the clause should not be able to override public policy considerations that the contracting parties might have envisaged as fundamental conditions for their acceptance of the agreement in question.’104 In the tribunal’s view this would apply, for instance, where a State has conditioned its consent to arbitration on the exhaustion of local remedies, where a BIT contains a ‘fork in the road’ clause according to which a choice between domestic or international courts or tribunals becomes irreversible once made, or where a particular forum such as ICSID or NAFTA has been chosen. In the specific case, the requirement of Article 10 of the Argentina–Spain BIT to first resort to domestic courts did not deprive the investor of the ultimate possibility to access international arbitration after a ‘waiting period’ of 18 months. Thus, it did not reflect a fundamental question of public policy which would have limited the scope of the MFN clause. As a result the Maffezini tribunal upheld its jurisdiction. b) Post-Maffezini Cases

73

The Maffezini approach of interpreting an MFN clause as extending to dispute settlement has become one of the most controversial issues in investment arbitration.105 To date no clearly prevailing view has emerged, though the case law has led to some commonly accepted principles. 101 Emilio Agustín Maffezini v. Spain (n. 4) para. 35. 102 Art. IV(2) of the Argentina–Spain BIT (‘In all matters subject to this Agreement, this treatment shall not be less favorable than that extended by each Party to the investments made in its territory by investors of a third country.’). 103 Emilio Agustín Maffezini v. Spain (n. 4) para. 55. 104 Emilio Agustín Maffezini v. Spain (n. 4) para. 62. 105 Berschader v. Russia (n. 66) para. 179.

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The cases rejecting the Maffezini approach have initially stressed that an 74 MFN clause cannot have the effect of supplanting consent to arbitration where no such consent was contained in the basic treaty,106 but then even denied the possibility to overcome mere procedural hurdles like waiting periods.107 c) Cases Following and Widening the Maffezini Approach

In an exceptionally long treatment of the issue, the tribunal in Siemens v. Ar- 75 gentina108 endorsed the Maffezini approach in interpreting the applicable MFN clause in the Argentina–Germany BIT.109 Like in Maffezini, the ICSID tribunal allowed the claimant to bypass the BIT obligation to pursue local remedies for 18 months before commencing investment arbitration by ‘importing’ a more favourable dispute settlement provision contained in the Argentina–Chile BIT. In addition, the tribunal allowed the investor to ‘cherry pick’ single aspects of 76 the ‘imported’ dispute settlement provisions.110 While the Argentina–Chile BIT did not provide for a waiting period before initiating arbitration, it contained a so-called ‘fork in the road’ provision according to which the investor had to choose between local remedies or international arbitration with the implication that once an option has been pursued, the other becomes unavailable. By rejecting the Argentine argument that Siemens should be prevented from instituting ICSID arbitration as a result of administrative proceedings started earlier before Argentine tribunals, the Siemens panel literally provided most favourable treatment to the investor.111 The Siemens tribunal summed up the rationale of the Maffezini interpretation 77 of an MFN clause by stating that BITs included (…) as a distinctive feature special dispute settlement mechanisms not normally open to investors. Access to these mechanisms is part of the protection offered under the Treaty. It is part of the treatment of foreign investors and investments and of the advantages accessible through a[sic] MFN clause.112

106 Salini Costruttori S.p.A and Italstrade S.p.A v. Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, 29 November 2004; Plama Consortium Ltd. v. Bulgaria (n. 35). 107 Wintershall Aktiengesellschaft v. Argentina, ICSID Case No. ARB/04/14, Award, 8 December 2008. 108 Siemens AG v. Argentina, ICSID Case No ARB/02/08, Decision on Jurisdiction, 3 August 2004, paras. 32–121. 109 Art. 3(1) and 3(2) of the Argentina–Germany BIT, as translated by the Siemens tribunal, Siemens AG v. Argentina (n. 108) para. 82 (‘(1) None of the Contracting Parties shall accord in its territory to the investments of nationals or companies of the other Contracting Party or to investments in which they hold shares, a less favorable treatment than the treatment granted to the investments of its own nationals or companies or to the investments of nationals or companies of third States. (2) None of the Contracting Parties shall accord in its territory to nationals or companies of the other Contracting Party a less favorable treatment of activities related to investments than granted to its own nationals and companies or to the nationals and companies of third States.’). 110 Stephan Schill (n. 7) 533. 111 Siemens AG v. Argentina (n. 108) para. 120. 112 Ibid., para. 102.

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Interpreting the same MFN clause of the Argentina–Germany BIT, the tribunal in Hochtief v. Argentina113 came to the same result. The 18-month waiting period of the basic BIT could be avoided through the invocation of more favourable dispute settlement clauses via the applicable MFN clause. 79 The ICSID tribunal in Gas Natural v. Argentina114 followed the Maffezini approach in an equally detailed fashion. It stressed that investor-State dispute settlement was an important aspect of treatment, ‘essential to a regime of protection of foreign direct investment.’115 It further noted the broad wording of the applicable MFN clause of the Argentina–Spain BIT116 (the same provision that was relied upon in the Maffezini case, referring to ‘all matters governed by the present Agreement’) and the fact that the BIT contained certain exceptions, none of which related to dispute settlement.117 The tribunal thus came to the following conclusion: 78

The Tribunal holds that provision for international investor-state arbitration in bilateral investment treaties is a significant substantive incentive and protection for foreign investors; further, that access to such arbitration only after resort to national courts and an eighteen-month waiting period is a less favorable degree of protection than access to arbitration immediately upon expiration of the negotiation period. Accordingly, Claimant is entitled to avail itself of the dispute settlement provision in the United States–Argentina BIT in reliance on Article IV(2) of the Bilateral Investment Treaty between Spain and Argentina.118

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The avoidance of the 18-month waiting period in the Argentina–Spain BIT was also permitted by the ICSID tribunal in Telefónica v. Argentina119 where the tribunal specifically noted that it was not asked to extend ‘ICSID arbitration beyond what is provided for in the Argentina–Spain BIT by virtue of the reference to another BIT under the MFN clause’,120 but merely to declare that the investor was ‘exempted from the precondition of submitting the claim to the domestic courts of the host state, thanks to the application of the MFN clause.’121 As to the more preferential treatment by avoiding the 18-month waiting period, the tribunal held: It is undisputable that it is preferable for an investor not to be obliged to submit, and pursue for 18 months, its claim before the courts of the host State before being allowed to submit it to the specific investment arbitration at ICSID. Being exempted from such a requirement (also considering the unlikelihood that a decision on the merits be rendered within this time limit) represents a ‘better treatment’ in respect of which, therefore, the MFN clause operates.122

113 Hochtief AG v. Argentina, ICSID Case No. ARB/07/31, Decision on Jurisdiction, 24 October 2011. 114 Gas Natural SDG SA v. Argentina (n. 34) 2005. 115 Ibid., para. 29. 116 Art. IV(2) of the Argentina–Spain BIT (‘In all matters subject to this Agreement, this treatment shall not be less favorable than that extended by each Party to the investments made in its territory by investors of a third country.’). 117 Gas Natural SDG SA v. Argentina (n. 34) para. 30. 118 Ibid., para. 31 (emphasis in original). 119 Telefónica SA v. Argentina (n. 34). 120 Ibid., para. 102. 121 Ibid. 122 Telefónica SA v. Argentina (n. 34) para. 103.

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The view that international arbitration is an important element in investor pro- 81 tection was also endorsed in National Grid v. Argentina123 in which the tribunal concluded (…) that, in the context in which the Respondent has consented to arbitration for the resolution of the type of disputes raised by the Claimant, ‘treatment’ under the MFN clause of the Treaty makes it possible for UK investors in Argentina to resort to arbitration without first resorting to Argentine courts, as is permitted under the US–Argentina Treaty.124

It reached this result by stressing that the wide unqualified MFN clause in the 82 applicable Argentina–UK BIT had to be interpreted as including dispute settlement since the specific exceptions to MFN treatment in the BIT did not mention dispute settlement. The tribunal stated that (…) the MFN clause does not expressly refer to dispute resolution or for that matter to any other standard of treatment provided for specifically in the Treaty. On the other hand, dispute resolution is not included among the exceptions to the application of the clause. As a matter of interpretation, specific mention of an item excludes others: expressio unius est exclusio alterius.125

In the joined ICSID and UNCITRAL arbitrations of Suez, Sociedad General 83 de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentina and AWG Group Ltd. v. Argentina,126 the tribunal had to look at two different BITs containing differently worded MFN clauses. Nevertheless, the tribunal permitted both claimants to rely on these MFN clauses in order to ‘import’ more favourable dispute settlement provisions. With regard to the MFN clause of the Argentina–Spain BIT which referred to 84 ‘all matters’ the tribunal concurred with the Maffezini tribunal and held that such a clause extended to dispute settlement being a matter regulated by the BIT.127 It further held that dispute settlement was certainly a ‘matter’ governed by the BIT and that the ‘ordinary meaning’ of the term ‘treatment’ included the rights and privileges granted by a contracting State to investors covered by the treaty.128 With regard to the Argentina–UK BIT the tribunal came to the same conclu- 85 sion, though it noted the textual differences of the applicable MFN clause. It held that

123 124 125 126

National Grid plc v. Argentina (n. 53). Ibid., para. 96. Ibid., para. 82. Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentina and AWG Group Ltd. v. Argentina (n. 32). 127 Ibid., para. 55 (‘The text quoted above clearly states that “in all matters” (en todas las materias) a Contracting party is to give a treatment no less favorable than that which it grants to investments made in its territory by investors from any third country. Article X of the Argentina–Spain BIT specifies in detail the processes for the “Settlement of Disputes between a Party and Investors of the other Party.” Consequently, dispute settlement is certainly a “matter” governed by the Argentina–Spain BIT.’). 128 Ibid., para. 55 (‘The word “treatment” is not defined in the treaty text. However, the ordinary meaning of that term within the context of investment includes the rights and privileges granted and the obligations and burdens imposed by a Contracting State on investments made by investors covered by the treaty.’).

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In Impregilo v. Argentina,130 an ICSID tribunal permitted an investor to rely on the Argentina–Italy BIT’s broad MFN clause131 and stressed its reference to ‘all other matters regulated by this Agreement’ which was crucial for the majority’s decision that the investor was entitled to invoke the more favourable dispute settlement provisions of another BIT that did not contain a comparable waiting period.132 87 The most far-reaching interpretation of an MFN clause in relation to dispute settlement was adopted by the SCC tribunal in RosInvest v. Russia.133 In that case an investment tribunal found that it had jurisdiction to decide whether an expropriation had occurred on the basis of a jurisdictional provision ‘imported’ via the UK–USSR BIT’s MFN clause.134 88 Recourse to the MFN clause was necessary because the narrow dispute settlement clause of the basic treaty only permitted to arbitrate the amount of compensation in case of expropriation.135 In the view of the RosInvest tribunal, this dispute settlement clause ‘[did] not include jurisdiction over the questions whether an expropriation occurred and was legal.’136 86

129 Ibid., para. 57. 130 Impreglio S.p.A. v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011. 131 Article 3(1) of the Argentina–Italy BIT provided: ‘Each Contracting Party shall, within its own territory, accord to investments made by investors of the other Contracting Party, to the income and activities related to such investments and to all other matters regulated by this Agreement, a treatment that is no less favorable than that accorded to its own investors or investors from third-party countries.’ 132 Impreglio S.p.A. v. Argentina, para. 108 (‘Nevertheless, the Arbitral Tribunal finds it unfortunate if the assessment of these issues would in each case be dependent on the personal opinions of individual arbitrators. The best way to avoid such a result is to make the determination on the basis of case law whenever a clear case law can be discerned. It is true that (…) the jurisprudence regarding the application of MFN clauses to settlement of disputes provisions is not fully consistent. Nevertheless, in cases where the MFN clause has referred to “all matters” or “any matter” regulated in the BIT, there has been near-unanimity in finding that the clause covered the dispute settlement rules.’). 133 RosInvestCo UK Ltd. v. Russia, Award on Jurisdiction 2007, SCC Case No. Arb. V079/2005. 134 Art. 3(2) of the 1989 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Union of Soviet Socialist Republics for the Promotion and Reciprocal Protection of Investments (UK–USSR BIT) (‘Neither Contracting Party shall in its territory subject investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to investors of any third State.’). 135 Art. 8(1) of the UK–USSR BIT 1989 (‘This Article shall apply to any legal disputes between an investor of one Contracting Party and the other Contracting Party in relation to an investment of the former either concerning the amount or payment of compensation under Articles 4 or 5 of this Agreement, or concerning any other matter consequential upon an act of expropriation in accordance with Article 5 of this Agreement, or concerning the consequences of the non-implementation, or of the incorrect implementation, of Article 6 of this Agreement.’). 136 RosInvestCo UK Ltd. v. Russia (n. 133) para. 114.

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With regard to the scope of the MFN clause, the RosInvest tribunal reasoned 89 that it would be (…) difficult to doubt that an expropriation interferes with the investor’s use and enjoyment of the investment, and that the submission to arbitration forms a highly relevant part of the corresponding protection for the investor by granting him, in case of interference with his ‘use’ and ‘enjoyment’, procedural options of obvious and great significance compared to the sole option of challenging such interference before the domestic courts of the host state.137

In the eyes of the tribunal, an MFN clause should apply not only to substan- 90 tive, but also to procedural issues.138 Most important for its finding was, however, the specific wording of the exceptions to MFN treatment. These related explicitly to preferential trade agreements and to tax matters.139 Considering this detailed and carefully formulated exceptions clause, the RosInvest tribunal concluded that (…) it can certainly not be presumed that the Parties ‘forgot’ arbitration when drafting and agreeing on Article 7. Had the Parties intended that the MFN clauses should also not apply to arbitration, it would indeed have been easy to add a subsection (c) to that effect in Article 7. The fact that this was not done, in the view of the Tribunal, is further confirmation that the MFN-clauses in Article 3 are also applicable to submissions to arbitration in other Treaties.140

Consequently, the tribunal held that as a result of the MFN clause it had juris- 91 diction beyond the narrow dispute settlement clause of the UK–USSR BIT in order to assess whether an expropriation had taken place and was lawful.141 A clear endorsement of the Maffezini approach can finally be seen in the Tein- 92 ver v. Argentina decision.142 In that case, the tribunal qualified the specific waiting periods in the Argentina–Spain BIT 1991 as mere admissibility requirements which could be avoided through reliance on an MFN clause. As the tribunal in Maffezini, the Teinver tribunal held that the ‘broad “all matters” language of the Article IV(2) MFN clause [was] unambiguously inclusive’.143 The tribunal emphasised that the claimant only asked to overcome a procedu- 93 ral obstacle in the basic treaty and did not request the broadening of the tribunal’s jurisdiction.144

137 Ibid., para. 130. 138 Ibid., para. 132. 139 Art. 7 of the UK–USSR BIT (‘The provisions of Articles 3 and 4 of this Agreement shall not be construed so as to oblige one Contracting Party to extend to the investors of the other the benefit of any treatment, preference or privilege resulting from (a) any existing or future customs union, organisation for mutual economic assistance or similar international agreement, whether multilateral or bilateral, to which either of the Contracting Parties is or may become a party, or (b) any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation relating wholly or mainly taxation.’). 140 RosInvestCo UK Ltd. v. Russia (n. 133) para. 135. 141 Ibid., para. 139. 142 Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. Argentina, ICSID Case No. ARB/09/1, Decision on Jurisdiction, 21 December 2012. 143 Ibid., para. 186. 144 Ibid., para. 182.

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d) Cases Rejecting the Maffezini Approach 94

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Shortly after the Siemens v. Argentina145 decision, another ICSID tribunal in Salini v. Jordan,146 rejected the Maffezini approach. The tribunal held that the applicable MFN clause in the Jordan–Italy BIT147 – as opposed to the MFN clause in Maffezini referring to ‘all matters’ subject to the agreement – was not broad enough to form the basis for ICSID jurisdiction over contractual disputes, as provided for in other BITs of the host State. The Salini tribunal had first held that the applicable dispute settlement clause in the Jordan–Italy BIT only allowed investor-State arbitration in regard to alleged violations of the BIT (treaty claims) not with regard to contractual disputes (contract claims) which were supposed to be litigated exclusively according to their own contractual dispute settlement clauses.148 Relying on the Maffezini approach, the claimant had invoked the MFN clause in order to bring also contractual claims under the tribunal’s jurisdiction arguing that this would have been possible under third country BITs. The Salini tribunal, however, rejected this attempt, concluding that the MFN clause did ‘not apply insofar as dispute settlement clauses [were] concerned.’149 Rather, the applicable dispute settlement provisions in the Jordan–Italy BIT, giving preference to the remedies directly provided for in contracts between the investor and the host State, had to be complied with. The Salini tribunal invoked the danger of ‘disruptive treaty shopping’ identified by the Maffezini tribunal150 which would guard against a broad extension of MFN clauses to dispute settlement.151 More specifically the tribunal noted that the applicable MFN clause, as opposed to others, neither directly referred to dispute settlement nor broadly covered ‘all matters’ of the basic BIT as in Maffezini.152 Further, it could not identify any intention of the parties to have dispute settlement included in the reach of MFN treatment.153 Soon after the Salini decision, another ICSID tribunal in Plama v. Bulgaria,154 forcefully rejected the argument that its jurisdiction could be based on dispute settlement clauses in third party BITs through an MFN clause.

145 Siemens AG v. Argentina (n. 108) para. 120. 146 Salini Costruttori S.p.A and Italstrade S.p.A v. Jordan (n. 106). 147 The combined national treatment and MFN Clause in Art. 3(1) of the Jordan–Italy BIT provided as follows: ‘Both Contracting Parties, within the bounds of their own territory, shall grant investments effected by, and the income accruing to, investors of the Contracting Party no less favourable treatment than that accorded to investments effected by, and income accruing to, its own nationals or investors of Third States.’ 148 Salini Costruttori S.p.A and Italstrade S.p.A v. Jordan (n. 106) para. 101. 149 Ibid., para. 119. 150 Maffezini v. Spain (n. 4) para. 63. 151 Salini Costruttori S.p.A and Italstrade S.p.A v. Jordan (n. 106) para. 115. 152 Ibid., paras. 116, 117. 153 Ibid., para. 118. 154 Plama Consortium Ltd. v. Bulgaria (n. 35).

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The applicable Bulgaria–Cyprus BIT contained a typical narrow dispute set- 100 tlement clause providing only for UNCITRAL arbitration concerning disputes over the amount of compensation in the event of expropriation. Plama had invoked the treaty’s MFN clause155 which applied to ‘all aspects of treatment’ and, thus, according to the claimant, also to the dispute settlement provisions in other Bulgarian BITs, in order to gain access to ICSID arbitration also over other matters than the amount of compensation. The Plama tribunal, however, rejected this attempt arguing that a ‘clear and 101 unambiguous intention’156 of the parties was required in order to find an agreement to arbitrate and that basically such could not be presumed through a standard MFN clause.157 It was highly critical of the Maffezini decision and proposed an alternative more restrictive principle: an MFN provision in a basic treaty does not incorporate by reference dispute settlement provisions in whole or in part set forth in another treaty, unless the MFN provision in the basic treaty leaves no doubt that the Contracting Parties intended to incorporate them.158

As regards the wording of the exception to MFN treatment, the tribunal ac- 102 knowledged that the specific mentioning of preferential trade agreements could lead to the e contrario argument that dispute settlement was covered by the MFN clause; however, it also remarked that the reference to ‘privileges’ could indicate that only substantive treatment was covered.159 The Plama tribunal was equally dismissive with regard to the suggestion that because dispute settlement was an important aspect of investment protection it should be regarded as covered by MFN clauses. Rather, the tribunal emphasised the crucial importance of consent to arbitration as a basis for jurisdiction which must be ‘clear and unambiguous’.160 Though it acknowledged that such consent may be given by reference,161 it found that in the case of the applicable MFN clause this was not ‘clear and unambiguous’.162 155 Art. 3 of the Bulgaria–Cyprus BIT (‘1. Each Contracting Party shall apply to the investments in its territory by investors of the other Contracting Party a treatment which is not less favourable than that accorded to investments by investors of third states. 2. This treatment shall not be applied to the privileges which either Contracting Party accords to investors from third countries in virtue of their participation in economic communities and unions, a customs union or a free trade area.’). 156 Plama Consortium Ltd. v. Bulgaria (n. 35) para. 199. 157 Ibid., para. 223. 158 Ibid. 159 Plama Consortium Ltd. v. Bulgaria (n. 35) para. 191. 160 Ibid., para. 198. 161 Ibid., para. 200 (‘(…) a reference may in and of itself not be sufficient; the reference is required to be such as to make the arbitration clause part of the contract (i.e., in this case, the Bulgaria–Cyprus BIT). This is another way of saying that the reference must be such that the parties’ intention to import the arbitration provision of the other agreement is clear and unambiguous.’). 162 Ibid., para. 200 (‘(…) A clause reading “a treatment which is not less favourable than that accorded to investments by investors of third states” as appears in Article 3(1) of the Bulgaria–Cyprus BIT, cannot be said to be a typical incorporation by reference clause as appearing in ordinary contracts. It creates doubt whether the reference to the other document (in this

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On this basis, and taking note of the Maffezini tribunal’s concern over ‘disruptive treaty-shopping’,163 the Plama tribunal reversed the Maffezini presumption by claiming: the principle with multiple exceptions as stated by the tribunal in the Maffezini case should instead be a different principle with one, single exception: an MFN provision in a basic treaty does not incorporate by reference dispute settlement provisions in whole or in part set forth in another treaty, unless the MFN provision in the basic treaty leaves no doubt that the Contracting Parties intended to incorporate them.164

In Telenor v. Hungary165 an ICSID tribunal found that MFN clauses might help to overcome procedural obstacles, but could not be permissibly relied upon in order to expand the scope of ICSID jurisdiction to substantive claims that the BIT parties had deliberately excluded from submission. The claimant had tried to expand the scope of jurisdiction which, according to the Hungary–Norway BIT, was limited to issues concerning the amount and payment of compensation in case of expropriation. 105 In a particularly sweeping assertion, the tribunal found that the ‘ordinary meaning’ of a BIT clause calling for ‘treatment no less favourable than that accorded to investments made by investors of any third State’ is ‘that the investor’s substantive rights in respect of the investments are to be treated no less favourably than under a BIT between the host State and a third State, and there is no warrant for construing the above phrase as importing procedural rights as well.’166 106 One of the more extreme forms of rejecting Maffezini can be discerned in the majority opinion of the SCC tribunal in Berschader v. Russia.167 With regard to an MFN clause,168 similar to the one applicable in Maffezini, the tribunal questioned the literal interpretation given by many other investment panels. It stated that 104

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case the other BITs concluded by Bulgaria) clearly and unambiguously includes a reference to the dispute settlement provisions contained in those BITs.’). Cited in Plama Consortium Ltd. v. Bulgaria (n. 35) para. 202 (‘It is clear, in any event, that a distinction has to be made between the legitimate extension of rights and benefits by means of the operation of the clause, on the one hand, and disruptive treaty-shopping that would play havoc with the policy objectives of underlying specific treaty provisions, on the other hand.’). Plama Consortium Ltd. v. Bulgaria (n. 35) para. 223. Telenor Mobile Communications AS v. Hungary, ICSID Case No. ARB/04/15, Award, 13 September 2006. Ibid., para. 92. Berschader v. Russia (n. 66). Art. 2 of the Belgium and Luxembourg–USSR BIT 1989 (‘Each Contracting Party guarantees that the most favoured nation clause shall be applied to investors of the other Contracting Party in all matters covered by the present Treaty, and in particular in articles 4, 5 and 6, with the exception of benefits provided by one Contracting Party to investors of a third country on the basis – of its participation in a customs union or other international economic organisations, or – of an agreement to avoid double taxation and other taxation issues.’).

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The tribunal concluded that the ‘expression “all matters covered by the 107 present Treaty” certainly cannot be understood literally.’170 Rather, it should be read to relate only to the ‘classical elements of material investment protection, i.e. fair and equitable treatment, non-expropriation and free transfer of funds’ as referred to in the clarification.171 The Berschader tribunal concluded (…) that the expression ‘all matters covered by the present Treaty’ does not really mean that the MFN provision extends to all matters covered by the Treaty. Therefore, the ‘ordinary meaning’ of that expression is of no assistance in the instant case, and the expression as such does not warrant the conclusion that the parties intended the MFN provision to extend to the dispute resolution clause.172

The Berschader tribunal reviewed the pertinent cases of Maffezini, Siemens, 108 and Plama at length and expressly sided with the restrictive approach of the Plama decision and its presumption173 that an MFN clause would extend to dispute settlement only if it could be unambiguously deduced from the contracting parties’ intent.174 A more nuanced rejection of the Maffezini approach was expressed in the 109 Renta4 v. Russian Federation case.175 In that case, an SCC tribunal rejected the claimant’s attempt to rely on the MFN clause of the Spain–Russia BIT in order to avoid a narrow dispute settlement clause176 similar to the one applicable in the RosInvest case. The Renta4 tribunal stressed, however, that this finding resulted from the par- 110 ticular wording and structure of the rather specific MFN clause which only ap169 170 171 172 173

Berschader v. Russia (n. 66) para. 184. Ibid., para. 192. Ibid., para. 193. Ibid., para. 194. Plama Consortium Ltd. v. Bulgaria (n. 35) para. 223 (‘(…) an MFN provision in a basic treaty does not incorporate by reference dispute settlement provisions in whole or in part set forth in another treaty, unless the MFN provision in the basic treaty leaves no doubt that the Contracting Parties intended to incorporate them.’). 174 Berschader v. Russia (n. 66) para. 181 (‘(…) the principle that an MFN provision in a BIT will only incorporate by reference an arbitration clause from another BIT where the terms of the original BIT clearly and unambiguously so provide or where it can otherwise be clearly inferred that this was the intention of the contracting parties.’). 175 Renta4 S.V.S.A, Ahorro Corporación Emergentes F.I., Ahorro Corporación Eurofondo F.I., Rovime Inversiones SICAV S.A., Quasar de Valors SICAV S.A., Orgor de Valores SICAV S.A., GBI 9000 SICAV S.A. v. Russia, SCC No. 24/2007, Award on Preliminary Objections, 20 March 2009. 176 Art. 10 of the Spain–Russia BIT (‘1. Any dispute between one Party and an investor of the other Party relating to the amount or method of payment of the compensation due under Article 6 of this Agreement, shall be communicated in writing, together with a detailed report by the investor to the Party in whose territory the investment was made. The two shall, as far as possible, endeavour to settle the dispute amicably. 2. If the dispute cannot be settled thus within six months of the date of the written notification referred to by [sic] either of the following, the choice being left to the investor: [Stockholm Chamber of Commerce arbitration or UNCITRAL arbitration].’).

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plied to fair and equitable treatment.177 The outcome of the majority decision was very much determined by the fact that ‘the terms of the Spanish BIT restrict MFN treatment to the realm of FET as understood in international law.’178 111 With the 2008 decision on jurisdiction in Wintershall v. Argentina179 a new extremely limited interpretation of MFN clauses was introduced. An ICSID tribunal disallowed a German investor to avoid an 18-month waiting period by relying on the dispute settlement clause of a more favourable BIT. The Wintershall tribunal came to this conclusion: not because ‘treatment’ in Article 3 may not include ‘protection’ of an investment by the investor adopting ICSID arbitration, but primarily because of the significance that has been attached by the Contracting States to the eighteen-month requirement in Article 10(2): it is part and parcel of Argentina’s integrated ‘offer’ for ICSID arbitration; this ‘offer’ must be accepted by the investor on the same terms.180

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The tribunal rejected the proposition of the Maffezini tribunal that treatment is not limited to substantive rights, but also encompasses the enforcement of such rights through dispute settlement because it found that ‘treatment’ could only relate to substantive rights. In its line of argumentation, the Wintershall tribunal noted that [t]he ordinary meaning of expressions such as ‘investment related activities’ or ‘associated activities’ used in BITs refer generally to activities of the investor for the conduct of his/its business in the territory of the host State rather than to activities related to or associated with the settlement of disputes between the investors and the Host State.181

This outcome of the Wintershall case is in direct conflict with the decision on jurisdiction in the Siemens case which was also based on the Argentina–Germany BIT. 114 That BIT was also the basis for the award in Daimler v. Argentina,182 in which an ICSID tribunal very explicitly rejected the Maffezini approach. In a lengthy discussion of existing precedent the tribunal’s majority stressed the im113

177 Art. 5 of the Spain–Russia BIT (‘1. Each Party shall guarantee fair and equitable treatment within its territory for the investments made by investors of the other Party. 2. The treatment referred to in paragraph 1 above shall be no less favourable than that accorded by either Party in respect of investments made within its territory by investors of any third State. 3. Such treatment shall not, however, include privileges which may be granted by either Party to investors of a third State, by virtue of its participation in: – A free trade area; – A customs union; – A common market; – An organization of mutual economic assistance or other agreement concluded prior to the signing of this Agreement and containing conditions comparable to those accorded by the party to the participants in said organization. The treatment granted under this article shall not include tax exemptions or other comparable privileges granted by either Party to the investors of a third State by virtue of a double taxation agreement or any other agreement concerning matters of taxation.’). 178 Renta4 S.V.S.A, Ahorro Corporación Emergentes F.I., Ahorro Corporación Eurofondo F.I., Rovime Inversiones SICAV S.A., Quasar de Valors SICAV S.A., Orgor de Valores SICAV S.A., GBI 9000 SICAV S.A. v. Russia (n. 175) para. 119. 179 Wintershall Aktiengesellschaft v. Argentina (n. 107). 180 Ibid., para. 162. 181 Ibid., para. 171. 182 Daimler Financial Services AG v. Argentina (n. 27).

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portance of the 18-month waiting period as a jurisdictional requirement conditioning the respondent State’s consent to arbitration. This discussion is related to the more general debate of how to qualify so- 115 called waiting periods which usually require investors to engage in consultations/negotiations or to initiate dispute settlement in domestic courts before instituting investment arbitration. In the past, many tribunals have qualified such ‘consultation periods as directory and procedural rather than as mandatory and jurisdictional in nature,’183 i.e. as questions of admissibility or procedure, and have found that non-compliance with them would not deprive them of their jurisdiction.184 In 2010, however, two ICSID decisions in Burlington185 and Murphy186 found that non-compliance with a waiting period would not be merely a procedural or admissibility problem, but constituted a jurisdictional defect.187 In a similar vein, the tribunal in Daimler v. Argentina emphasised that under 116 the applicable Argentina–Germany BIT it was not a mere waiting period, but rather an obligation to submit the dispute to the local courts of the respondent State for a period of at least 18 months.188 It specifically endorsed the Wintershall approach189 and held that ‘[a]ll BIT-based dispute resolution provisions (…) are by their very nature jurisdictional.’190 On this basis the Daimler tribunal concluded:

183 SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003, para. 184. 184 Ronald S. Lauder v. Czech Republic, UNCITRAL, Final Award, 3 September 2001, para. 190 (holding that insistence on the expiry of a waiting period before the commencement of arbitration proceedings would ‘amount to an unnecessary, overly formalistic approach which would not serve to protect any legitimate interests of the Parties.’); Western NIS Enterprise Fund v. Ukraine, ICSID Case No ARB/04/2, Order, 16 March 2006, paras. 6–7 (holding that the fact that ‘[p]roper notice of the present claim was not given’ did not ‘in and of itself, affect the Tribunal’s jurisdiction.’). 185 Burlington Resources Inc. v. Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador), ICSID Case No. ARB/08/5, Decision on Jurisdiction, 2 June 2010. 186 Murphy Exploration and Prod. Co. Int’l v. Ecuador, ICSID Case No. ARB/08/4, Award on Jurisdiction, 15 December 2010. 187 Burlington Resources Inc. v. Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador) (n. 185) para. 340; Murphy Exploration and Prod. Co. Int’l v. Ecuador (n. 186) para. 149. 188 Daimler Financial Services AG v. Argentina (n. 27) para. 189. 189 The Daimler tribunal at Daimler Financial Services AG v. Argentina (n. 27) para. 193, found that the applicable BIT ‘describes its dispute resolution process in mandatory and necessarily sequential language’ and that it sets forth ‘the conditions under which an investor-State tribunal may exercise jurisdiction with the contracting state parties’ consent, much in the same way in which legislative acts confer jurisdiction upon domestic courts.’ This finding is followed by approvingly citing the Wintershall tribunal which stated: ‘That an investor could choose at will to omit the second step [the 18-month domestic courts requirement] is simply not provided for nor even envisaged by the Argentina–Germany BIT – because (Argentina’s) the Host State’s “consent” (standing offer) is premised on there being first submitted to the courts of competent jurisdiction in the Host State the entire dispute for resolution in the local courts.’ Wintershall Aktiengesellschaft v. Argentina (n. 179) para. 160. 190 Daimler Financial Services AG v. Argentina (n. 27) para. 193.

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Chapter 8: Standards of Protection Since the 18-month domestic courts provision constitutes a treaty-based pre-condition to the Host State’s consent to arbitrate, it cannot be bypassed or otherwise waived by the Tribunal as a mere ‘procedural’ or ‘admissibility-related’ matter.191

The Daimler tribunal continued by dismissing the Plama dictum that 18month domestic court litigation requirements may be ‘nonsensical’.192 In the opinion of the Daimler tribunal it was not for the tribunal to second-guess the BIT parties’ choice of dispute settlement procedures and it would uphold them as long as they were not ‘futile’.193 118 Its ultimate rejection of extending MFN to dispute settlement resulted from a number of other findings. First, the Daimler tribunal emphasised that the applicable MFN clause was qualified by the words ‘in the territory’ which implied that only dispute settlement before national courts could be covered, not, however, international investment arbitration.194 Second, the Daimler tribunal found that the MFN clause’s failure to refer to ‘all matters’ subject to the treaty suggested that international dispute settlement was not included.195 Third, the tribunal was of the opinion that the specific exceptions relating to tax and regional economic preferences related to treatment in the territory of a host State and thus could not imply that the parties intended to include dispute settlement.196 Fourth, the tribunal did not find that the third party treaty’s dispute resolution provisions (which contained a fork in the road provision) were more favourable than those of the basic treaty.197 Further, the Daimler tribunal concluded that since the basic treaty’s dispute settlement mechanism was not ‘objectively less favorable’ than that of the third party treaty invoked, it would have been incorrect to ‘characterize the Claimant’s position as more compatible with the Treaty’s objects and purposes then the Respondent’s position.’198 Finally, the tribunal reviewed State practice following the Maffezini decision,199 including some statements of treaty parties rejecting the Maffezini approach, and concluded that they ‘converge in signalling that the specified MFN clauses do not, and were never intended to, reach the international dispute resolution provisions of the respectively mentioned investment agreements.’200 119 The findings in Daimler were echoed in Kılıç v. Turkmenistan201 where another ICSID tribunal equally considered that the procedural steps which included a requirement to pursue local remedies for a 12-month period ‘constitute[d] funda117

191 192 193 194 195 196 197 198 199 200 201

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Ibid., para. 194. Plama Consortium Ltd. v. Bulgaria (n. 35) para. 224. Daimler Financial Services AG v. Argentina (n. 27) para. 198. Ibid., para. 225. Ibid., paras. 234–236. Ibid., paras. 237–239. Ibid., paras. 240–250. Ibid., para. 260. Ibid., paras. 261–278. Ibid., para. 276. Kılıç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v. Turkmenistan, ICSID Case No. ARB/10/1, Award, 2 July 2013.

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mental jurisdictional conditions to the Contracting Parties’ offers to arbitrate disputes with investors of the other Party’202 which could not be avoided by an MFN clause. Following the tribunals in Berschader v. Russian Federation,203 Renta4 v. 120 Russian Federation,204 and Telenor v. Hungary,205 two UNCITRAL tribunals rejected attempts to invoke an MFN clause in order to avoid a narrow dispute settlement clause in the Austria–Czech and Slovak Federal Republic BIT.206 Both the majority in Austrian Airlines v. Slovakia207 and the tribunal in Euram v. Slovakia208 held that claimants could not invoke their jurisdiction over issues not expressly contained in the basic treaty through reliance on its MFN clause. The applicable BIT contained a broad and unqualified MFN clause209 and an exceptions clause relating to regional economic integration treaties. The Austrian Airlines tribunal rejected the claimant’s e contrario argument 121 that the limited specific exceptions to the MFN clause indicated that other exceptions should not be read into the broad wording of Article 3(1) of the BIT on the basis of a somewhat vague contextual interpretation of the MFN clause. The tribunal held: Faced with a manifest, specific intent to restrict arbitration to disputes over the amount of compensation for expropriation to the exclusion of disputes over the principle of expropriation, it would be paradoxical to invalidate that specific intent by virtue of the general, unspecific intent expressed in the MFN clause. As a result of these contextual considerations, the specific intent expressed in Articles 8, 4(4) and 4(5) informs the scope of the general intent expressed in Article 3(1), with the result that the former prevails over the latter. In other words, the restrictive dispute settlement mechanism for expropriation claims set out in Articles 8, 4(4) and 4(5) constitutes an exception to the scope of

202 Ibid., para. 6.5.2. 203 Berschader v. Russia (n. 66). 204 Renta4 S.V.S.A, Ahorro Corporación Emergentes F.I., Ahorro Corporación Eurofondo F.I., Rovime Inversiones SICAV S.A., Quasar de Valors SICAV S.A., Orgor de Valores SICAV S.A., GBI 9000 SICAV S.A. v. Russia (n. 175). 205 Telenor Mobile Communications A.S. v. Hungary (n. 165). 206 Art. 8 of the Agreement between the Republic of Austria and the Czech and Slovak Federal Republic Concerning the Promotion and Protection of Investments, 15 October 1990 (Austria–Czech and Slovak Federal Republic BIT 1990) (emphasis added) (‘1. Any dispute arising out of an investment, between a Contracting Party and an investor of the other Contracting Party, concerning the amount or the conditions of payment of a compensation pursuant to Article 4 of this Agreement, or the transfer obligations pursuant to Article 5 of this Agreement, shall, as far as possible, be settled amicably by the parties to the disputes. 2. If a dispute pursuant to para. 1 above cannot be amicably settled within six months as from the date of a written notice containing sufficiently specified claims, the dispute shall, unless otherwise agreed, be decided upon the request of the Contracting Party or the investor of the other Contracting Party by way of arbitral proceedings in accordance with the UNCITRAL Arbitration Rules, as effective at the date of the motion for the institution of the arbitration proceedings.’). 207 Austrian Airlines AG v. Slovakia, UNCITRAL, Final Award, 9 October 2009. 208 Euram v. Slovakia, UNCITRAL, Award on Jurisdiction, 22 October 2012. 209 Art. 3(1) of the Austria–Czech and Slovak Federal Republic BIT (‘Each Contracting Party shall accord to investors of the other Contracting Party and to their investments treatment that is no less favourable than that which it accords to its own investors or to investors of any third State and their investments.’).

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F. The Main Aspects of the Post-Maffezini Debate 122

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Though the Maffezini debate is relatively recent, the potential reach of MFN clauses remains one of the main controversial issues in international investment arbitration. The central dilemma surrounding the Maffezini approach lies in the insoluble question whether dispute settlement can be regarded as ‘treatment’ and whether the provisions on dispute settlement can be seen as part of the ‘protection’ granted by IIAs.211 On the one hand, tribunals and commentators stress that access to the effective mechanism of directly enforcing the substantive guarantees of IIAs is in itself a major aspect of treatment. On the other hand, tribunals and commentators base their concept of MFN clauses being limited to substantive as opposed to procedural treatment on preconceived distinctions between substance and procedure. Those who support the application of MFN clauses to dispute settlement stress the importance of dispute settlement as a means of investment protection212 and emphasise that there is nothing in the notion of ‘treatment’ that would suggest that dispute settlement is excluded.213 Apparently, a number of tribunals have adopted a presumption that MFN clauses should be presumed to include dispute settlement unless a contrary intention of the treaty parties can be clearly discerned.214 Those who oppose the application of MFN clauses to dispute settlement stress that, unless specifically provided otherwise, ‘treatment’ only refers to substantive rights.215 Many tribunals have thus adopted a reverse presumption according to which MFN clauses should be presumed not to include dispute settlement unless a contrary intention of the treaty parties can be clearly discerned.216 Tribunals and scholars regularly stress the importance of the specific wording of MFN clauses contained in IIAs.217 However, even if tribunals agree on the re210 Austrian Airlines AG v. Slovakia (n. 207) para. 135. 211 Gas Natural SDG SA v. Argentina (n. 34) para. 29. 212 E.g., Emilio Agustín Maffezini v. Spain (n. 4) para. 54; Gas Natural SDG SA v. Argentina (n. 34) para. 29; ibid., para. 49; Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentina and AWG Group Ltd. v. Argentina (n. 32) para. 59. 213 E.g., Siemens AG v. Argentina (n. 108) para. 86. 214 Gas Natural SDG, S.A. v. Argentina (n. 34) para. 49. 215 Wintershall Aktiengesellschaft v. Argentina (n. 179) para. 168. 216 Plama Consortium Ltd. v. Bulgaria (n. 35) para. 223. See also Rule 43 suggested by Douglas that an MFN clause in a basic investment treaty ‘does not incorporate by reference provisions relating to the jurisdiction of the arbitral tribunal, in whole or in part, set forth in a third investment treaty, unless there is an unequivocal provision to that effect in the basic investment treaty.’ Zachary Douglas, The International Law of Investment Claims (Cambridge University Press, 2009) 344.

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quirement to interpret each specific MFN clause, they may still come to opposing results.218 It may be doubtful whether the term ‘treatment’ itself is sufficient to deter- 129 mine whether dispute settlement should be included. Nevertheless, tribunals have attempted to provide definitions of ‘treatment’. While the Siemens tribunal considered that ‘“[t]reatment” in its ordinary 130 meaning refers to behaviour in respect of an entity or a person’,219 the tribunal in the joined ICSID and UNCITRAL arbitrations of Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentina and AWG Group Ltd. v. Argentina noted that [t]he word ‘treatment’ is not defined in the treaty text. However, the ordinary meaning of that term within the context of investment includes the rights and privileges granted and the obligations and burdens imposed by a Contracting State on investments made by investors covered by the treaty.220

Though they ultimately held that the applicable MFN clauses extended to dis- 131 pute settlement, it appears that this conclusion was based more on additional considerations than merely on the meaning of the expression ‘treatment’. The definitions of treatment as found in the Siemens and the Suez cases were 132 cited in the Daimler decision and qualified as broad and indeterminate of what exactly they included or excluded.221 The Daimler tribunal added its own definition by stating that In common usage, ‘treatment’ evokes one party’s manner of dealing with or behaving towards another party. In the international law setting, the term typically carries with it the sense of how a State or other legal authority regulates, protects, or otherwise interacts with specified actors, whether public or private (…).222

The indeterminate notion of ‘treatment’ was also expressly mentioned by the 133 Plama tribunal which held that ‘[i]t [was] not clear whether the ordinary meaning of the term “treatment” in the MFN provision of the BIT includes or excludes dispute settlement provisions contained in other BITs to which Bulgaria is a Contracting Party.’223 This ambiguity was addressed from a different perspective in the Renta4 case 134 in which an SCC tribunal held that there was ‘no textual basis or legal rule to say that “treatment” does not encompass the host state’s acceptance of international arbitration.’224

217 HICEE B.V. v. Slovakia (n. 64) para. 149 (‘The Tribunal endorses the approach adopted by other investment tribunals that each most-favoured-nation clause is to be interpreted according to its own terms.’). 218 See also August Reinisch, ‘How Narrow are Narrow Dispute Settlement Clauses in Investment Treaties?’ (2011) 2 J. Int’l Disp. Settlement 115–174. 219 Siemens AG v. Argentina (n. 108) para. 85. 220 Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentina and AWG Group Ltd. v. Argentina (n. 32) para. 55. 221 Daimler Financial Services AG v. Argentina (n. 27) para. 218. 222 Ibid. 223 Plama Consortium Ltd. v. Bulgaria (n. 35) para. 189.

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Apparently other, additional elements of MFN clauses may be more helpful when it comes to their interpretation. As mentioned above, a number of MFN clauses specifically qualify the treatment concerned, e.g. by referring to treatment with respect to ‘the management, maintenance, use, enjoyment or disposal of their investment.’ Other IIAs add the qualification ‘in the territory’ of the Contracting State Parties to the treatment owed under an MFN clause. Another phrase often, but not always found in the context of MFN clauses is the addition ‘in respect to all matters’ covered by the respective IIA. However, also these forms of more specific wording have given rise to divergent interpretations. A number of tribunals that had to interpret MFN clauses specifically referring to treatment with respect to ‘the management, maintenance, use, enjoyment or disposal of their investment’ stressed, however, that the ‘right to have recourse to international arbitration is (…) particularly related to the “maintenance” of an investment, a term which includes the protection of an investment.’225 The Wintershall tribunal concluded that BIT language referring to ‘investment related activities’ or ‘associated activities’ generally refers to activities of investors for the conduct of their business in the territory of the host State rather than to activities related to or associated with the settlement of disputes between them and the host state.’226 The Daimler tribunal particularly emphasised the ‘limiting effect of the words “in its territory” on the scope of the MFN clauses’.227 Though a rather standard formulation, it appears that the Daimler tribunal was the first to derive a specific lesson for the question whether an MFN clause covered international dispute settlement or not. According to the tribunal, an MFN clause may prohibit dis224 Renta4 S.V.S.A, Ahorro Corporación Emergentes F.I., Ahorro Corporación Eurofondo F.I., Rovime Inversiones SICAV S.A., Quasar de Valors SICAV S.A., Orgor de Valores SICAV S.A., GBI 9000 SICAV S.A. v. Russia (n. 175) para. 101. 225 Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentina and AWG Group Ltd. v. Argentina (n. 32) para. 57 (‘Paragraph (2) of Article 3 of the Argentina–UK BIT, quoted above, states that a Contracting state may not subject an investor to a treatment less favorable with respect to “the management, maintenance, use, enjoyment or disposal of their investment” than it accords to investors from other countries. The right to have recourse to international arbitration is very much related to investors’ “management, maintenance, use, enjoyment, or disposal of their investments.” It is particularly related to the “maintenance” of an investment, a term which includes the protection of an investment.’). See also Hochtief AG v. Argentina (n. 35) para. 68 (‘(…) recourse to arbitration in addition to the right to have recourse to national courts, are a form of protection that is enjoyed within the scope of “the management, utilization, use and enjoyment of an investment”.’). 226 Wintershall Aktiengesellschaft v. Argentina (n. 179) para. 171 (‘The ordinary meaning of expressions such as “investment related activities” or “associated activities” used in BITs refer generally to activities of the investor for the conduct of his/its business in the territory of the host State rather than to activities related to or associated with the settlement of disputes between the investors and the Host State.’ (emphasis in original)). 227 Daimler Financial Services AG v. Argentina (n. 27) paras. 225–224 (heading to these paragraphs).

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criminatory access to domestic courts of a host State since this would be treatment ‘in its territory’.228 However, because of the international nature of investment arbitration, the same would not be the case for investment arbitration.229 The Daimler tribunal therefore held that (…) the Treaty’s clearly expressed territorial limitation upon the scope of its MFN clauses establishes that the Contracting State Parties to the German–Argentine BIT did not intend for the Treaty’s extra-territorial dispute resolution provisions to fall within the scope of those clauses.230

Already the Maffezini tribunal attributed particular importance to the fact that 140 the applicable MFN clause of the Argentina–Spain BIT referred ‘to all matters subject to this Agreement.’ This formulation was indicative for the intention of the parties that the MFN clauses extended to dispute settlement. Also a number of other tribunals found the inclusion or absence of such a qualification, at least co-determinative for their findings.231 Nevertheless, there are also tribunals which have not given any particular weight to this language.232 G. Conclusions

The apparently conflicting interpretations of MFN clauses in Maffezini and its 141 followers, on the one hand, and in Salini, Plama, and others, on the other hand, initially could be distinguished with regard to a number of important factors that may have explained that these cases did not necessarily form inconsistent case law. The Plama tribunal hinted at an important distinction that could be made be- 142 tween the two types of approaches. The tribunal found that [i]t is one thing to add to the treatment provided in one treaty more favorable treatment provided elsewhere. It is quite another thing to replace a procedure specifically negotiated by parties with an entirely different mechanism.233

228 Ibid., para. 227 (‘(…) the resolution of an investor-State dispute within the domestic courts of a Host State would constitute an activity that takes place within its territory. Thus, if a Host State were to accord to the investors of some third State more favorable rights in relation to domestic dispute resolution than the rights accorded to the investors of the other contracting State party to the BIT, this could give rise to a violation of the MFN clause.’). 229 Ibid., para. 228 (‘The same cannot be said, however, of international arbitration, which almost without exception takes place outside the territory of the Host State and which per definition proceeds independently of any state control. (…)’ (emphasis in original)). 230 Ibid., para. 231. 231 Ibid., para. 236. 232 See, e.g., Berschader v. Russia (n. 66) para. 194 (‘(…) the expression “all matters covered by the present Treaty” does not really mean that the MFN provision extends to all matters covered by the Treaty. Therefore, the “ordinary meaning” of that expression is of no assistance in the instant case, and the expression as such does not warrant the conclusion that the parties intended the MFN provision to extend to the dispute resolution clause.’). 233 Plama Consortium Ltd. v. Bulgaria (n. 35) para. 209.

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After the awards in Wintershall v. Argentina234 and in RosInvest v. Russia,235 however, this potentially harmonising interpretation suffered a severe blow. Tribunals now follow the entire range of possible outcomes, from denying any effect of MFN clauses beyond substantive protection (Wintershall) to permitting the importation of all (substantive, procedural and jurisdictional) advantages of other BITs (RosInvest). 144 It has been noted, however, that the Wintershall tribunal qualified the applicable waiting period as a jurisdictional and not merely an admissibility issue. One could thus still maintain that MFN clauses can serve to avoid admissibility related access restrictions.236 145 In a 2010 UNCTAD publication this distinction237 was also upheld, as is expressly reflected in the 2012 Teinver v. Argentina decision.238 Indeed, if one is willing to discount the divergent characterisations of waiting periods and domestic litigation requirements as admissibility-related or jurisdictional, one can still 143

234 235 236 237

Wintershall Aktiengesellschaft v. Argentina (n. 179). RosInvestCo UK Ltd. v. Russia (n. 133). See Stephan Schill (n. 7) 530. UNCTAD, Most-Favoured-Nation Treatment (n. 3), distinguished between the so-called admissibility cases, in which claimants ‘have invoked the MFN treatment clause to override a procedural requirement that constitutes a condition for the submission of a claim to international arbitration’ and so-called jurisdictional cases in which claimants ‘have attempted to extend via MFN the jurisdictional threshold, i.e., the scope of the mandate of the arbitral tribunal, beyond that specifically set forth in the basic treaty. This use of the MFN clause would give the arbitral tribunal jurisdiction to hear issues or disputes that the basic treaty does not contemplate or expressly excludes.’ 238 Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. Argentina (n. 142) paras. 170–171 (‘UNCTAD identifies the following cases as fitting within the “admissibility” category: Maffezini, Siemens, Gas Natural, National Grid, Suez InterAguas, AWG Group and Wintershall. To these cases, the Tribunal would add Impregilo, Hochtief, Abaclat, ICS, and Daimler. In each of these cases, the claimant was required under the respective terms of its BIT’s dispute settlement provisions to seek a remedy before a local court of the host State for a period of time before bringing arbitration. Each of the claimants in these cases sought to use its BIT’s MFN clause in order to “borrow” a dispute settlement provision from another treaty that did not contain a local court requirement as a precondition of arbitration. With the exceptions of Wintershall, ICS and Daimler the claimants’ arguments were successful. UNCTAD identifies the following cases as fitting within the “scope of jurisdiction” category: Salini, Plama, Telenor, Berschader, and Tza Yap Shum. In these cases, the claimants sought to use the MFN clause to expand the scope of jurisdiction under their applicable BIT. In Salini, the claimant attempted to use the MFN clause to bring in contract claims before an ICSID tribunal. In Plama, the claimant attempted to use the MFN clause to broaden the scope of jurisdiction beyond that of its applicable BIT, which only provided jurisdiction to resolve issues of compensation in the case of an expropriation. Similarly, in Telenor and Berschader, the claimants attempted to use the MFN clause to broaden jurisdiction beyond their BITs, which only provided jurisdiction over expropriation claims. In each of these cases, the claimant’s attempts to rely on the MFN clause were rejected by the tribunals. UNCTAD identified only one case within this category, RosInvestCo, that departed from this trend.’ (footnotes omitted)).

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maintain the basic dividing line according to which most tribunals appear to accept that mere procedural/admissibility obstacles may be overcome through reliance on an MFN clause, while it may not serve to establish a jurisdiction where no such jurisdiction would be available under the basic treaty.

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V. National Treatment*

August Reinisch A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. History of National Treatment Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6

C. National Treatment Clauses in International Investment Agreements . .

11

D. Investment Cases Addressing National Treatment Issues . . . . . . . . . . . . . . . . 1. The Identification of a Domestic Comparator – ‘Like Circumstances’ or ‘Like Situations’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Less Favourable Treatment – Discrimination . . . . . . . . . . . . . . . . . . . . . . . . 3. Lack of Justification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17 32 50 62

E. The Issue of Discriminatory Intent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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F. The Relevance of Trade Law Jurisprudence on National Treatment for Investment Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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G. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Freya Baetens, ‘Discrimination on the Basis of Nationality: Determining Likeness in Human Rights and Investment Law’ in Stephan Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010) 279–315; Andrea K. Bjorklund, ‘National Treatment’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 29–58; Andrea K. Bjorklund, ‘The National Treatment Obligation’ in Katia Yannaca-Small (ed), Arbitration under international investment agreements: a guide to the key issues (Oxford University Press, 2010) 411–444; Nicholas DiMascio and Joost Pauwelyn, ‘Nondiscrimination in Trade and Investment Treaties: Worlds Apart or Two Sides of the Same Coin?’ (2008) 102 AJIL 48–89; Todd Grierson-Weiler and Ian Laird, ‘Standards of Treatment’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 259–304; Veijo Heiskanen, ‘Arbitrary and Unreasonable Measures’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 87–110; Robert Howse and Efraim Chalamish, ‘The Use and Abuse of WTO Law in Investor-State Arbitration: A Reply to Jürgen Kurtz’ (2010) 20 EJIL 1087–1094; Meg Kinnear, Andrea Bjorklund and John Hannaford, Investment Disputes Under NAFTA: An Annotated Guide to NAFTA Chapter 11, 2007 Update (Kluwer Law International, November 2007); Jürgen Kurtz, ‘National Treatment, Foreign Investment and Regulatory Autonomy: The Research for Protectionism or Something More?’ in Philippe Kahn and Thomas Wälde (eds), New Aspects of International Investment Law (Martinus Nijhoff Publishers, 2007) 311–352; Jürgen Kurtz, ‘The Merits and Limits of Comparativism: National Treatment in International Investment Law and the WTO’ in Stephan Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010) 243–278; Jürgen Kurtz, ‘The Use and Abuse of WTO Law in InvestorState Arbitration: Competition and Discontents’ (2009) 20 EJIL 749–771; Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2007); Andrew Newcombe, ‘National Treatment’ in Andrew Newcombe and Lluís Paradell, The Law and Practice of Investment Treaties (Kluwer Law International, 2009) 147–191; Federico Ortino, ‘Non-Discriminatory Treatment in Investment Disputes’ in Pierre-Marie Dupuy, Francesco Francioni and Ernst-Ulrich Petersmann (eds), Human Rights in International Investment Law and Arbitration (Oxford University Press, 2009) 344–366; Borzu Sabahi, ‘National Treatment – Is Discriminatory Intent Rele-

* This contribution is current as of March 2012.

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V. National Treatment vant?’ in Todd Weiler (ed), Investment Treaty Arbitration and International Law (JurisNet, 2008) 269–297; Sylvie Tabet, ‘Application de l’obligation de traitement national et de traitement de la nation la plus favorisée dans la jurisprudence arbitrale en matière d’investissement. Nouveaux problèmes à la lumière de la jurisprudence de l’OMC’ in Philippe Kahn and Thomas Wälde (eds), New Aspects of International Investment Law (Martinus Nijhoff Publishers, 2007) 353–390; Sylvie Tabet, ‘Beyond the Smoking Gun – Is a Discriminatory Objective Necessary to Find a Breach of National Treatment?’ in Todd Weiler (ed), Investment Treaty Arbitration and International Law (JurisNet, 2008) 299–313; UNCTAD, National Treatment, UNCTAD Series on Issues in International Investment Agreements, Volume IV, UNCTAD/ITE/IIT/11 (1999); Don Wallace, Jr. and David B. Bailey, ‘The Inevitability of National Treatment of Foreign Direct Investment with Increasingly Few and Narrow Exceptions’ (1998) 31 Cornell Int’l L. J. 615–630; Todd Weiler, ‘Methanex Corp. v. USA – Turning the Page on NAFTA Chapter Eleven’ (2005) 6 JWIT 903–921; Todd Weiler, ‘Saving Oscar Chin: Non-Discrimination in International Investment Law’ in Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005) 557–595.

A. Introduction

Almost all international investment agreements (IIAs), bilateral investment 1 treaties (BITs) as well as multilateral agreements with investment chapters, contain national treatment provisions requiring contracting parties to provide investors and investments from other contracting parties treatment no less favourable than that accorded to their own investors and investments. Together with its twin obligation of most favoured nation (MFN) treatment, national treatment forms a cornerstone of the non-discrimination rules usually contained in IIAs. Other than the so-called absolute treatment standards, like fair and equitable 2 treatment or full protection and security, MFN and national treatment belong to the ‘comparative’1 or ‘relative’2 standards which accord treatment depending upon the level of treatment given to national or other foreign investors. The specific formulations and impact of national treatment obligations vary 3 considerably, in particular concerning the question of whether they apply to the pre-establishment phase or are limited to the post-establishment phase and with regard to exceptions.3

1 Todd Grierson-Weiler and Ian Laird, ‘Standards of Treatment’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008), 259, 261. 2 Andrea Bjorklund, ‘The National Treatment Obligation’ in Katia Yannaca-Small (ed), Arbitration under international investment agreements: a guide to the key issues (Oxford University Press, 2010) 411–444; Andrew Newcombe, ‘National Treatment’ in Andrew Newcombe and Lluís Paradell, The Law and Practice of Investment Treaties (Kluwer Law International, 2009) 147, 148; UNCTAD, National Treatment, UNCTAD Series on Issues in International Investment Agreements, vol. IV, UNCTAD/ITE/IIT/11 (1999) 7, available at http://www.unctad.org/e n/docs/psiteiitd11 v 4.en.pdf; Jörn Griebel, Internationales Investitionsrecht (C. H. Beck, 2008) 79. 3 See below text at n. 24.

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National treatment obligations aim at creating ‘a level playing field between foreign and local investors’4 by preventing protectionist measures whereby host States tend to favour their own investors to the detriment of foreign ones.5 5 Although the basic concept of national treatment appears simple, its correct application to specific fact-patterns often poses considerable difficulties.6 Especially the parallel to national treatment in trade law and the question to what degree investment tribunals may rely on GATT/WTO jurisprudence remains controversial.7 4

B. History of National Treatment Obligations

National treatment provisions have been included in commercial and trade agreements since the Middle Ages8 and gained prominence in the 19th century.9 In the late 19th century, national treatment clauses were also included in treaties dealing with other topics like the 1883 Paris Convention for the Protection of Industrial Property.10 7 The end of the 19th century also witnessed the rise of the so-called Calvo doctrine.11 Its aim was to secure that foreigners are not treated better than nationals. Thus, national treatment was intended to be limiting, not broadening rights of foreigners. This doctrine, developed by the Latin American jurists Carlos Calvo and Andres Bello,12 was widely invoked by South American states to reject any claims by the home States of foreign investors to insist on the international minimum standard. National treatment provisions in trade and investment agreements, however, seek treatment as favourable as that accorded to national investors and their investments. Thus, it aims at expanding the rights of foreigners. 6

4 Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Pakistan, ICSID Case No. ARB/03/29, Award, 27 August 2009, para. 387. 5 Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. Mexico, ICSID Case No. ARB(AF)/04/5 (NAFTA), Award, 21 November 2007, para. 193 (‘The basic function of this provision [i.e. Art. 1102 NAFTA] is to protect foreign investors vis-à-vis internal regulation affording more favorable treatment to domestic investors. (…).’). 6 Andrea Bjorklund, ‘National Treatment’ in August Reinisch, Standards of Investment Protection (Oxford University Press, 2009) 29, 58; Federico Ortino, ‘Non-Discriminatory Treatment in Investment Disputes’ in Pierre-Marie Dupuy, Francesco Francioni and Ernst-Ulrich Petersmann (eds), Human Rights in International Investment Law and Arbitration (Oxford University Press, 2009) 344, 345. 7 See below text at n. 119. 8 See Pieter VerLoren van Themaat, The Changing Structure of International Economic Law (Brill, 1981) 19–21; UNCTAD (n. 2) 7–8. 9 Andrea Bjorklund, ‘The National Treatment Obligation’ (n. 2) 411, 413; Georg Schwarzenberger, ‘The Principles and Standards of International Economic Law’, (1966) 117 RC 1, 67. 10 Article 2 of the Paris Convention for the Protection of Industrial Property (1883), 828 UNTS 306; Article 5(3) of the Berne Convention for the Protection of Literary and Artistic Works (1886), 828 UNTS 222. 11 Donald Shea, The Calvo Clause, A Problem of Inter-American and International Law and Diplomacy (University of Minnesota Press, 1955). 12 See Santiago Montt, State Liability in Investment Treaty Arbitration. Global Constitutional and Administrative Law in the BIT Generation (Hart Publishing, 2009).

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V. National Treatment

The most influential trade-related national treatment obligation can be found 8 in Article III of the GATT.13 Together with other WTO Agreements14 it has influenced investment treaty practice to the extent that some tribunals have expressly relied upon GATT/WTO jurisprudence when interpreting investment agreements, though the relevance of trade law principles for investment cases has remained controversial.15 Since the 19th century, also the forerunners to modern BITs, US American 9 FCN treaties have routinely included national treatment clauses which applied not only to trade.16 The 1929 Draft Convention on the Treatment of Foreigners17 foresaw national treatment with regard to ‘commercial transactions of every kind’ and explicitly extended to legal and property rights and to fiscal treatment. It may have been this experience which made attempts to codify investment law principles after World War II more cautious. Neither the 1959 Abs–Shawcross Draft Convention on Investments Abroad,18 nor the 1961 Harvard Draft Convention on the International Responsibility of States for Injury to Aliens19 con-

13 Art. III (‘National Treatment on Internal Taxation and Regulation’) of the General Agreement on Tariffs and Trade (GATT), 55 UNTS 194 (‘1. The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production. 2. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1. (…) 4. The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges, which are based exclusively on the economic operation of the means of transport and not on the nationality of the product.’). 14 Art. XV of the General Agreement on Trade in Services (GATS), Marrakesh Agreement Establishing the World Trade Organization (1994), Annex IB, Legal Instruments – Results of the Uruguay Round, 33 ILM 1167; Art. 3 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (1994), Marrakesh Agreement Establishing the World Trade Organization (1994), Annex IC, Legal Instruments – Results of the Uruguay Round, 33 ILM 1197. 15 See below text at n. 119. 16 UNCTAD (n. 2) 8; Art. 4(4) of the USA–Belgium Friendship, Establishment and Navigation Treaty (1961); Art. V of the US–Costa Rica Friendship, Commerce and Navigation Treaty (1851); Art. V(1) of the US–Denmark Friendship, Commerce and Navigation Treaty (1951); Art. 2 of the US–United Kingdom Friendship and Commerce Treaty (1815). 17 International Conference on the Treatment of Foreigners; Preparatory Documents, L.N. Doc. C.36.M.21.1929.II. This Convention was prepared under the auspices of the League of Nations, but due to the economic crisis of the late 1920s and the rising trend towards protectionism it failed to gain support. See Andrew Newcombe (n. 2) 153. 18 See Herman Abs and Hartley Shawcross, ‘Draft Convention on Investment Abroad’, 9 J. Pub. L. 115–118 (1960); also reprinted in UNCTAD, International Investment Instruments: A Compendium. vol. V, Regional Integration, Bilateral and Non-governmental Instruments 332, 333 (2000), UNCTAD/DITE/2 (vol. V).

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tained a national treatment provision. Also the 1967 OECD Draft Convention on the Protection of Foreign Property20 did not contain an express national treatment obligation. It only prohibited ‘unreasonable and discriminatory measures’ impairing the management, use, enjoyment or disposal of foreign property.21 10 Various bilateral commercial treaties in the post-World War II period as well as bilateral investment treaties after 1959 regularly included national treatment provisions. C. National Treatment Clauses in International Investment Agreements

National treatment clauses in IIAs usually do not differ in significant ways. Still, there are some textual variations. National treatment provisions often appear as stand-alone obligations. However, frequently they can be found in combination with MFN obligations.22 In some instances, IIAs provide that investors should receive the better of MFN or national treatment.23 12 A typical example is Article 10(7) of the 1995 Energy Charter Treaty which provides as follows: 11

Each Contracting Party shall accord to Investments in its Area of Investors of other Contracting Parties, and their related activities including management, maintenance, use, enjoyment or disposal, treatment no less favourable than that which it accords to Investments of its own Investors or of the Investors of any other Contracting Party or any third state and their related activities including management, maintenance, use, enjoyment or disposal, whichever is the most favourable.

13

Usually, treatment to investors and investment are addressed in such a combined form. However, some IIAs comprise different paragraphs for treatment extended to investors and to investments. An example is NAFTA Article 1102, of which the first two paragraphs run as follows: 1.

2.

Each Party shall accord to investors of another Party treatment no less favorable 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. Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of its own investors with respect

19 Louis Sohn and Richard Baxter, ‘Responsibility of States for Injuries to the Economic Interests of Aliens’, (1961) 55 AJIL 545–584. 20 OECD Draft Convention on the Protection of Foreign Property and Resolution of the OECD on the Draft Convention, 12 October 1967, OECD Publication No. 23081 (1967); (1968) 7 ILM 117. 21 Art. 1(a) of the OECD Draft Convention on the Protection of Foreign Property. It has been suggested, however, that the examples for ‘unreasonable and discriminatory measures’ given in the Draft’s commentary indicate that this included national treatment. See Andrew Newcombe (n. 2) 155. 22 E.g. Art. 3(1) of the UK Model BIT (2005). See also the references in UNCTAD (n. 2) 42 et seq. 23 E.g. Art. II(2)(a) of the Treaty between the United States of America and the Arab Republic of Egypt Concerning the Reciprocal Encouragement and Protection of Investments of 11 March 1986; Art. II(2) of the Agreement between the Islamic Republic of Pakistan and the Republic of Turkey Concerning the Reciprocal Promotion and Protection of Investments of 16 March 1995; Art. 3(3) of the Austrian Model BIT (2008).

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NAFTA Article 1102, like other US and Canadian BITs, exhibits another 14 more significant difference; it expressly extends national treatment to establishment, acquisition and expansion, the so-called pre-entry phase. In effect, this implies that foreign investors thereby receive a right of entry on an equal footing with national investors.24 The other field where IIAs differ most considerably is the scope of exceptions 15 from national treatment. In addition to general exceptions relating to public health and morality as well as the environment,25 many treaties specifically exempt certain economic sectors.26 Other treaties permit exceptions for ‘development purposes.’27 In addition to national treatment provisions, some IIAs also contain clauses 16 prohibiting ‘arbitrary and discriminatory treatment’.28 This discrimination may go beyond nationality-based discrimination. In practice, investment tribunals often address both forms of discrimination, sometimes without clearly distinguishing between them.29 This problem arose in some of the Argentina cases since the Argentina–US BIT contains both a national treatment clause30 and a prohibition of ‘arbitrary and discriminatory’ treatment.31

24 Andrew Newcombe (n. 2) 158. 25 See e.g. NAFTA Art. 1106(6) and 1114(1), (2) (1992); ECT Art. 24(2)(b)(i) (1994); GATS Art. XIV and Art. XIV bis (1994). 26 See UNCTAD (n. 2) 12, 45. Pursuant to NAFTA, Annex I, at I-C-10, I-M-55, I-U-13; NAFTA, Annex II, at II-C-9, II-M-11, II-U-5, all NAFTA parties have made exceptions for air transportation and social services. See also NAFTA Art. 2106 containing Canada’s cultural industries exception. 27 E.g. Art. 3(3) of the Italy–Morocco BIT, Accord entre le Gouvernement du Royaume du Maroc et le Gouvernement de la République Italienne Relatif à la Promotion et la Protection Réciproques des Investissements of 18 July 1990, cited in UNCTAD (n. 2) 50 (‘Investors of the two Contracting Parties shall not be entitled to national treatment in terms of benefiting from aid, grants, loans, insurance and guarantees accorded by the Government of one of the Contracting Parties exclusively to its own nationals or enterprises within the framework of activities carried out under national development programmes.’). 28 See Veijo Heiskanen, ‘Arbitrary/Unreasonable or Discriminatory Measures’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 87–110; see also contribution of Ursula Kriebaum, ‘Arbitrary and/or Discriminatory Treatment’, ch. 8.III., 790–806. 29 E.g. Consortium RFCC v. Morocco, ICSID Case No. ARB/00/6, Award, 22 December 2003, para. 74. 30 Art. II(1) of the Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment of 14 November 1991. 31 Art. II(2)(b) of the Argentina–US BIT (n. 30) (‘Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments. For the purposes of dispute resolution under Articles VII and VIII, a measure may be arbitrary or discriminatory notwithstanding the opportunity to review such measure in the courts or administrative tribunals of a Party.’).

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D. Investment Cases Addressing National Treatment Issues

It is a remarkable fact that, in investment arbitration, national treatment has played a relatively minor role compared to other substantive standards of protection.32 Most of the relevant practice stems from NAFTA disputes in which tribunals repeatedly had to deal with allegedly discriminatory measures by host States.33 Only recently, ICSID tribunals had to address national treatment claims more frequently. 18 One of the first national treatment cases was S. D. Myers v. Canada34 which can be considered an ‘easy’ case because the actual discrimination was accompanied by evidence of discriminatory intent for protectionist purposes. 19 The case arose from the imposition of a temporary export ban on hazardous waste. This ban affected the US investor which had set up a subsidiary in Canada in order to market its waste remediation services there. The actual remediation operations were to take place across the border in the US. S. D. Myers claimed that the ban constituted disguised discrimination aimed at its investment in Canada contrary to NAFTA Article 1102. 20 The tribunal started its analysis by an attempt to contextualize the requirement of ‘like circumstances’ found in NAFTA Article 1102. In its view, 17

(…) the interpretation of the phrase ‘like circumstances’ in Article 1102 must take into account the general principles that emerge from the legal context of the NAFTA, including both its concern with the environment and the need to avoid trade distortions that are not justified by environmental concerns. The assessment of ‘like circumstances’ must also take into account circumstances that would justify governmental regulations that treat them differently in order to protect the public interest. The concept of ‘like circumstances’ invites an examination of whether a non-national investor complaining of less favourable treatment is in the same ‘sector’ as the national investor. The Tribunal takes the view that the word ‘sector’ has a wide connotation that includes the concepts of ‘economic sector’ and ‘business sector’.35

21

It then concluded that S. D. Myers was in like circumstances with Canadian companies providing waste remediation services.36 What is more remarkable is the tribunal’s view that the like circumstances assessment should permit it not only to identify the relevant business sector, but also to take into account potential public interest justifications for discriminatory regulations. The tribunal may have come to this finding because of the absence of a general exceptions clause

32 Jürgen Kurtz, ‘National Treatment, Foreign Investment and Regulatory Autonomy: The Research for Protectionism or Something More?’ in Philippe Kahn and Thomas Wälde (eds), New Aspects of International Investment Law (Martinus Nijhoff Publishers, 2007) 311, 330. 33 Andrea Bjorklund, ‘National Treatment’ (n. 6) 29, 37. 34 S. D. Myers v. Canada, Partial Award, 13 November 2000. 35 Ibid., para. 250. 36 Ibid., para. 251.

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comparable to GATT Article XX.37 It ‘incorporated’ such a clause through a contextual interpretation of the NAFTA provisions. The tribunal considered that (…) the legal context of Article 1102 includes the various provisions of the NAFTA, its companion agreement the NAAEC and principles that are affirmed by the NAAEC (including those of the Rio declaration). The principles that emerge from that context, to repeat, are as follows: –

– –

states have the right to establish high levels of environmental protection. They are not obliged to compromise their standards merely to satisfy the political or economic interests of other states; states should avoid creating distortions to trade; environmental protection and economic development can and should be mutually supportive.38

The tribunal’s determination that ‘like circumstances’ required an inquiry into 22 the same business sector was also crucial to demonstrate the importance of the competitive relationship between the foreign investor and domestic companies for a finding of a national treatment violation. Ultimately, the competitive disadvantage for the US investor, relying on the remediation possibility in the US, vis-à-vis its Canadian competitors, operating in Canada and thus being unaffected by the export ban was crucial. In the tribunal’s words, 37 Art. XX of the GATT (‘Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: (a) necessary to protect public morals; (b) necessary to protect human, animal or plant life or health; (c) relating to the importations or exportations of gold or silver; (d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices; (e) relating to the products of prison labour; (f) imposed for the protection of national treasures of artistic, historic or archaeological value; (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; (h) undertaken in pursuance of obligations under any intergovernmental commodity agreement which conforms to criteria submitted to the CONTRACTING PARTIES and not disapproved by them or which is itself so submitted and not so disapproved;* (i) involving restrictions on exports of domestic materials necessary to ensure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a governmental stabilization plan; Provided that such restrictions shall not operate to increase the exports of or the protection afforded to such domestic industry, and shall not depart from the provisions of this Agreement relating to non-discrimination; (j) essential to the acquisition or distribution of products in general or local short supply; Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, which are inconsistent with the other provisions of the Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist. The CONTRACTING PARTIES shall review the need for this sub-paragraph not later than 30 June 1960.’). 38 Ibid., para. 247.

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Though the S. D. Myers tribunal cautioned that intent was important, but ‘protectionist intent [was] not necessarily decisive on its own’, the fact that there was ample evidence of protectionist intent made its finding of a violation of NAFTA’s national treatment standard relatively easy. The Canadian measure was intended to protect Canadian competitors of the US investor and it actually did so. Thus, it constituted a breach of NAFTA Article 1102. 24 A similar approach was pursued by the NAFTA tribunal in Pope & Talbot v. Canada,40 a case in which Canada’s softwood lumber export quotas were at issue. These had been imposed as a result of the settlement of a trade dispute between the US and Canada and affected the claimant’s lumber export business in British Columbia, Canada. Pope & Talbot specifically argued that it was denied national treatment by the way the export quotas were actually implemented. On the one hand, it argued that it was treated less favourably than Canadian exporters in the so-called non-covered provinces where no quotas applied; on the other hand, Pope & Talbot complained that in British Columbia, one of the covered provinces, it received a lesser quota share than its Canadian competitors. 25 The Pope & Talbot tribunal set out to determine, as a first issue, whether the claimant was in like circumstances as national competitors. Before doing so, it stressed that 23

[b]y their very nature, ‘circumstances’ are context dependent and have no unalterable meaning across the spectrum of fact situations. And the concept of ‘like’ can have a range of meanings, from ‘similar’ all the way to ‘identical.’ In others words, the application of the like circumstances standard will require evaluation of the entire fact setting surrounding, in this case, the genesis and application of the [softwood lumber] Regime.41

The approach of the Pope & Talbot tribunal to the issue of ‘like circumstances’ is very remarkable because it shows that the tribunal was intent on including room for justified differentiation, where such differentiation is based on valid government policies. Interestingly, it did so not by reserving a justification option once like circumstances and differentiation have been demonstrated. Rather, it found that such a justification implied that the complainant and its competitors were not in like circumstances. 27 According to the tribunal 26

[d]ifferences in treatment will presumptively violate Article 1102(2), unless they have a reasonable nexus to rational government policies that (1) do not distinguish, on their face or de facto, between foreign-owned and domestic companies, and (2) do not otherwise unduly undermine the investment liberalizing objectives of NAFTA.42

39 Ibid., para. 251. 40 Pope & Talbot Inc. v. Canada, UNCITRAL (NAFTA), Award on the Merits of Phase 2, 10 April 2001. 41 Ibid., para. 75 (footnotes omitted). 42 Ibid., para. 78 (footnotes omitted).

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With regard to the first group of Canadian exporters it held that limiting ex- 28 ports only from the covered provinces was ‘reasonably related to the rational policy of removing the threat of CVD [countervailing duty] actions.’43 Thus, these exporters were not in like circumstances. With regard to the second group of Canadian exporters in the covered provinces, the tribunal equally dismissed the discrimination argument. In fact, lumber producers in interior British Columbia had to pay an extra fee to settle a dispute about British Columbian stumpage fees (charged for the privilege of cutting timber on Crown land), while coastal producers were exempt from such fee. The Pope & Talbot tribunal acknowledged that ‘[t]he settlement undoubtedly had a greater adverse effect on some B.C. producers than others’, but it went on to say that ‘there [was] no convincing evidence that it was based on any distinction between foreign-owned and Canadian owned companies.’44 Again, the tribunal determined that Pope & Talbot was not in like circumstances with the more favourably treated coastal producers because there existed a ‘rational choice of solution.’45 The tribunals in S. D. Myers and Pope & Talbot set the scene for further na- 29 tional treatment analysis by investment panels by, firstly, examining whether a foreign investor is in ‘like circumstances’ or ‘like situations’ with domestic competitors, secondly, identifying whether there is a difference in treatment, and thirdly, whether there may be objective justifications. This three-step test was aptly summarised by the Methanex tribunal in its ac- 30 count of the claimant’s proposed test: According to Methanex: ‘Article 1102 requires a three-step analysis. First, the Tribunal must determine whether the U.S. ethanol industry is “in like circumstances” with Methanex and its investments. Second, if they are in like circumstances, the Tribunal must determine whether any portion of the domestic ethanol industry received better treatment than Methanex and its investments did. Third, if the Tribunal finds that Methanex is not accorded the most favorable treatment, then the burden shifts to the U.S. to justify the disparate treatment accorded to methanol producers by showing that the measures should be permitted because they implement valid environmental goals’.46

In addition to Methanex, many tribunals have adopted this three-step test47 31 which will also be used as an analytical framework for the following case law overview.

43 44 45 46

Ibid., para. 87. Ibid., para. 103. Ibid. Methanex v. USA, UNCITRAL (NAFTA), Final Award, 3 August 2005, Part IV, Ch. B, para. 13. 47 See also Sylvie Tabet, ‘Application de l’obligation de traitement national et de traitement de la nation la plus favorisée dans la jurisprudence arbitrale en matière d’investissement. Nouveaux problèmes à la lumière de la jurisprudence de l’OMC’ in Philippe Kahn and Thomas Wälde (eds), New Aspects of International Investment Law (Martinus Nijhoff Publishers, 2007) 353, 359; Todd Weiler, ‘Saving Oscar Chin: Non-Discrimination in International Investment Law’ in Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005) 557, 567.

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1. The Identification of a Domestic Comparator – ‘Like Circumstances’ or ‘Like Situations’ 32

33

34

35

36

37

S. D. Myers and Pope & Talbot have established the importance of an initial inquiry whether the foreign investor is in ‘like circumstances’ with domestic competitors. Thus, it is not surprising that a finding of a lack of ‘like circumstances’ will often determine the (negative) outcome of an investment claim. A good case in point is GAMI v. Mexico48 which concerned a programme of nationalisation of certain domestic and foreign sugar mills by Mexico. Since all of GAMI’s mills were expropriated, but some domestic ones with very similar characteristics were not, GAMI claimed to have been discriminated against. The preliminary issue for the tribunal was whether GAMI’s Mexican subsidiary, GAM, which owned five mills, all of which were expropriated, was in like circumstances with owners of non-expropriated mills. The tribunal denied this assertion holding that the fact that some sugar mills were insolvent and thus expropriated set them apart from others that were not insolvent.49 Another prominent NAFTA case in which the question of ‘like circumstances’ was decisive is United Parcel Service Inc. v. Canada.50 In it the US investor, United Parcel Service (UPS), alleged that Canada accorded more favourable treatment to Canada Post than to UPS and its Canadian subsidiary UPS Canada in the non-monopoly postal services market. The UPS tribunal rejected this claim because it found that UPS had failed to establish that either UPS or UPS Canada was in ‘like circumstances’ with Canada Post. It considered that the importation of goods by post was sufficiently distinguishable from the importation of goods by courier, and it thus concluded that the different characteristics of each service permitted different customs treatment.51 In general, investment tribunals appear to regard the fact that a claimant foreign investor operates in the same business sector and is in a competitive relationship with domestic investors as a clear indication that it is in ‘like circumstances’. Expressly relying on S. D. Myers and Pope & Talbot, the tribunal in Archer Daniels Midland v. Mexico52 stressed the relevance of the ‘economic’ or ‘business’ sector ‘as the appropriate comparator’ for national treatment cases. The Archer Daniels Midland case is also important because it clearly endorsed the relevance of a competitive relationship between the foreign investor and domestic investors for ascertaining whether they are in like circumstances. The case arose from the imposition of an excise tax on soft drinks sweetened by 48 GAMI Investments Inc. v. Mexico, UNCITRAL (NAFTA), Final Award, 15 November 2004. 49 Ibid., para. 114. 50 United Parcel Service of America, Inc., v. Canada, UNCITRAL (NAFTA), Award, 24 May 2007. 51 Ibid., para. 99. 52 Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. Mexico (n. 5) para. 198.

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high fructose corn syrup (HFCS) by Mexico. This tax did not apply to soft drinks using cane sugar as sweetener. It was undisputed that most Mexican producers used cane sugar whereas foreign producers, including the claimants, relied on HFCS. Thus, the claimants argued that Mexico’s tax favoured domestic investors and investment over their foreign competitors in contravention of NAFTA Article 1102.53 For its finding that foreign HFCS and domestic cane sugar producers were in 38 ‘like circumstances’, the tribunal particularly relied upon the competitive relationship between them. According to the tribunal [the claimant] and the Mexican sugar industry are in like circumstances. Both are part of the same sector, competing face-to-face in supplying sweeteners to the soft drink and processed food markets. The competitive relationship between them was confirmed by Mexico’s administrative and judicial authorities, when the Government initiated anti-dumping investigations in 1997 on HFCS, based on a petition filed by the Sugar Chamber. In addition, Mexico’s Federal Competition Commission has confirmed that HFCS is a substitute of sugar and that both products compete in the same market (…).54

That operation in the same ‘economic’ or ‘business’ sector need not be de- 39 cisive for a determination that investors are in ‘like circumstances’ is proven by the tribunal in Champion Trading Company v. Egypt55 which insisted on the importance of like circumstances for the determination of a national treatment violation.56 The case arose from the fact that Egypt had made certain payments to cotton producers who had sold cotton at national collection centres at fixed prices which were not paid to cotton producers selling on the free market. The payments to the former were made under compensation settlements in order to compensate them for the losses they incurred through selling at fixed prices. The investors’ companies, which did not sell to the government collection centres, received nothing.57 This triggered the investors’ claim that Egypt had violated the national treatment obligation of the applicable Egypt–US BIT.58 The tribunal, however, rejected that claim because it found that the claimants’ 40 investment and Egyptian cotton companies were not in ‘like situations.’ In its view, as the claimant did not participate in the cotton trading system through collection centres at fixed prices, it could not be compared with such other cot53 Ibid., para. 186. 54 Ibid., para. 201. 55 Champion Trading Company, Ameritrade International, Inc., James T. Wahba, John B. Wahba, Timothy T. Wahba v. Egypt, ICSID Case No. ARB/02/9, Award, 27 October 2006. 56 Ibid., para. 387 (‘The national treatment obligation does not generally prohibit a State from adopting measures that constitute a difference in treatment. The obligation only prohibits a State from taking measures resulting in different treatment in like circumstances. (…).’). 57 Ibid., para. 101. 58 Art. II (2)(a) of the Treaty between The United States of America and The Arab Republic of Egypt Concerning the Reciprocal Encouragement and Protection of Investments, 29 September 1982 (‘Each Party shall accord investments in its territory, and associated activities in connection with these investments of nationals or companies of the other Party, treatment no less favorable than that accorded in like situations to investments and associated activities of its own nationals and companies, or nationals and companies of any third country, whichever is the most favourable.’).

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ton trading companies concerning the compensation settlements.59 Thus, although all cotton companies operated in the same business sector, it was their participation or non-participation in the compensation scheme which meant that they were not ‘in like situations.’60 41 The existence of a competitive relationship between a foreign investor and national entities, specifically stressed by S. D. Myers and a number of other awards, has, however, not been adopted by all investment tribunals as a necessary criterion for a finding of like circumstances. A good example on point is the award in Occidental Exploration and Production Co. v. Ecuador.61 The case arose from the fact that Ecuador refused to Occidental the option to claim a VAT refund on its oil exports, while it permitted a number of other exporters, among them exporters of flowers, mining, and seafood products, to claim such a refund. Ecuador argued that the VAT refund was not available to any oil exporters, including the State-owned oil company Petroecuador, thus it did not act in contravention to its national treatment obligation. The Occidental tribunal explicitly renounced the need of a competitive relationship or operations in the same business sector to establish that a foreign investor was in like circumstances as others. It held that (…) ‘in like situations’ cannot be interpreted in the narrow sense advanced by Ecuador as 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.62

Rather, the tribunal found that the claimant was in a like situation with other companies, even in other sectors of the economy, and was discriminated against because it could not claim VAT refunds.63 43 Another example of an investment tribunal rejecting the existence of a competitive relationship for a finding of like circumstances is the much discussed NAFTA award in the case Methanex v. United States.64 Methanex, a Canadian methanol producer, had challenged California’s ban on methyl tertiary-butyl ether (MTBE), a gasoline additive containing methanol, while continuing to permit ethanol, another oxygenate with similar effects. Both oxygenates when added to gasoline contribute to a cleaner combustion. 44 Methanex argued that the US ban on MTBE was discriminatory and intended to protect the US ethanol industry. Methanex considered that it was in ‘like cir42

59 Ibid., para. 155. 60 Ibid., para. 154 (‘Although both kinds of companies operate in the same industry and are subject to [sic] same kind of rules, there is a significant difference between a company which opts to buy cotton from the Collection Centres at fixed prices and a company which opts to trade on the free market, whether or not the company is privately-owned or State-owned or whether the company is national or foreign.’). 61 Occidental Exploration and Production Company v. Ecuador, LCIA Case No. UN 3467, Final Award, 1 July 2004. 62 Ibid., para. 173. 63 Ibid., 177. 64 Methanex v. USA (n. 46).

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cumstances’ with US ethanol producers with whom Methanex was in a competitive relationship and who received more favourable treatment. The NAFTA tribunal, however, rejected this view because it found that there 45 were in fact identical comparators, producers of MTBE and methanol, who were in ‘like circumstances’ with Methanex. The Methanex tribunal reasoned (…) to assume that the ethanol industry or a particular ethanol producer is the comparator here would beg that question. Given the object of Article 1102 and the flexibility which the provision provides in its adoption of ‘like circumstances’, it would be as perverse to ignore identical comparators if they were available and to use comparators that were less ‘like’, as it would be perverse to refuse to find and to apply less ‘like’ comparators when no identical comparators existed. The difficulty which Methanex encounters in this regard is that there are comparators which are identical to it.65

The Methanex tribunal adopted the narrow test suggested by the US that one 46 should not rely on a competition-based test where identical comparators are available that are ‘like’ in all respects but for nationality. Thus, it rejected the discrimination claims because it found that Methanex and US ethanol producers were not in like circumstances. Pursuant to the Methanex tribunal [i]t would be a forced application of Article 1102 if a tribunal were to ignore the identical comparator and to try to lever in an, at best, approximate (and arguably inappropriate) comparator. The fact stands – Methanex did not receive less favourable treatment than the identical domestic comparators, producing methanol.66

In particular, the Occidental and Methanex cases demonstrate quite well that 47 the breadth of the scope of likeness is indeed remarkable and may lead to unpredictable outcomes, depending upon whether a tribunal intends to take into account only identical comparators (Methanex), those that are in a competitive relationship (most cases) or, even broader, all those that operate commercially (Occidental).67 The determination of domestic comparators on the basis of investors operat- 48 ing ‘in like circumstances’ or ‘in like situations’ is clearly mandated by the language of NAFTA Article 1102 or BITs containing such language. What is interesting is the fact that also in cases where no such phrases can be found in the applicable national treatment provisions tribunals tend to ascertain whether claimants are ‘in like circumstances’ or ‘in like situations’ with domestic companies. For instance, the tribunal in RFCC v. Morocco found that, although the na- 49 tional treatment clause of the Italy–Morocco BIT did not contain any reference to like situations or circumstances,68 it had to determine whether a foreign and a 65 66 67 68

Ibid., Part IV, Ch. B, para. 17. Methanex v. USA (n. 46) Part IV, Ch. B, para. 19. See also Federico Ortino (n. 6) 344, 355–356. Art. 3(1),(2) of the Italy–Morocco BIT (n. 27) (‘1) Chacune des Parties Contractantes accorde sur son territoire aux investissements et aux revenus des investisseurs de l’autre Partie Contractante un traitement non moins favorable que celui réservé aux investissements et aux revenus des ses propres investisseurs ou aux investissements et aux revenus des investisseurs d’un Etat tiers; 2) Chacune des Parties Contractantes reserve aux investisseurs de l’autre

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national investor where in the ‘same situation’.69 The case concerned the award of a contract to a Moroccan company and not to the Italian claimant. In the tribunal’s view, that decision was objectively justified and thus violated neither the prohibition of unjustified or discriminatory measures nor the national treatment clause of the applicable BIT.70 2. Less Favourable Treatment – Discrimination

The second step for a national treatment claim to be successful is that it can be demonstrated that the foreign investor was treated less favourably than domestic comparators.71 Where treatment is not less favourable or is at least identical, national treatment claims will fail. 51 This was stressed in an obiter dictum by the Methanex tribunal72 which had already found that the Canadian MTBE producer was not in like circumstances with US ethanol producers.73 According to the tribunal, ‘[t]he California ban does not differentiate between foreign investors or investments and various MTBE producers in California or, if it is relevant, methanol feedstock producers in the United States. There is no more or less favourable treatment here. The treatment is uniform, for the ban applies to all MTBE manufacturers.’74 It thus concluded that 50

(…) even assuming that Methanex, as a methanol producer, is deemed to be affected, as a legal and factual matter, under NAFTA and international law, by California’s ban of MTBE, Methanex’s claim under Article 1102 would fail because it did not receive treatment less favourable than United States investors in like circumstances.75

69

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72 73 74 75

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Partie Contractante, pour ce qui est de la gestion, le maintien, l’utilisation, la jouissance ou l’affectation de leurs investissements, un traitement non moins favorable que celui accordé à ses propres investisseurs ou aux investisseurs d’un Etat tiers’). Consortium RFCC v. Morocco (n. 29) para. 53 (‘La principale difficulté réside dans son application et plus spécifiquement dans la nécessité de déterminer si la situation de l’investisseur étranger était identique à celle de l’investisseur national ou à celle de l’investisseur d’un pays tiers avec lequel l’Etat d’accueil a conclu un traité similaire de protection des investissements, afin de pouvoir affirmer que la différence de traitement appliquée par l’Etat d’accueil était ou non justifiée.’). Ibid., para. 75 (‘(...) le Tribunal considère que les motifs retenus par ADM pour attribuer le lot 3A au groupement marocain sont non seulement conformes aux dispositions régissant le concours, mais également admissibles au regard des exigences découlant des articles 2(2) et 3 de l’Accord bilatéral. (...) Dès lors que les offres marocaine et italienne étaient objectivement différentes et que le choix du groupement marocain s’est opéré sur la base de critères objectifs, admissibles au regard des dispositions du concours, on ne voit pas en quoi l’obligation de non discrimination découlant de l’Accord bilatéral aurait été violée.’). Christopher Dugan, Don Wallace, Noah Rubins and Borzu Sabahi, Investor-State Arbitration (Oxford University Press, 2008), 408–411; Andrea Bjorklund, ‘The National Treatment Obligation’ (n. 2) 411, 436–438; Andrea Bjorklund, ‘National Treatment’ (n. 6) 29, 48–56; Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2007) 251–252. Methanex v. USA (n. 46). See above text starting at n. 64. Methanex v. USA (n. 46) Part IV, Ch. B, para. 21. Ibid., Part IV, Ch. B, para. 19.

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V. National Treatment

Also in ADF Group Inc. v. United States76 a NAFTA tribunal rejected a Canadian investor’s national treatment violation claim because it found that the investor was not actually treated in a discriminatory way. The ADF case involved a Canadian steel company’s challenge of US legislation, the Buy America Act, which required contractors using funds provided by the US government to purchase 100 % US-origin products. ADF intended to sell steel for a highway construction project in Virginia, USA. It had further planned to purchase US manufactured steel, transport it to Canada for fabrication in its own factory there, and then send it back to the contractor. This processing would have transformed the steel into a non-US product and thus ineligible for purchase under the Buy America Act. ADF claimed that these provisions favoured US steel manufacturers over non-US ones. The tribunal, however, held that one had to compare the investment of the investor, which it identified as its steel in the United States, and the investments of US investors, which it defined as USorigin steel.77 It found that there was no difference in treatment because both a Canadian and a US investor’s investment in US steel, if subject to transformation in Canada, would lose its US-origin designation.78 Thus, the ADF tribunal rejected the national treatment claim.79 Lack of actual discrimination also led to dismissal of a national treatment claim in the AES v. Hungary case.80 There, an ICSID tribunal concluded that allegedly discriminatory pricing practices of the host State under a Power Purchasing Agreement (PPA) did, in fact, not discriminate. The tribunal relied, however, on its finding in regard to the alleged arbitrary and discriminatory measures claim that the ‘price established for each of the generators was reached using the same methodology. The fact that the price for each generator was different was simply the result of the use of a different starting point of prior returns which was fed into the methodology.’81 The tribunal there concluded that ‘neither its low capacity fees, nor its high energy fees suggest discrimination. Both were the logical result of a uniform methodology that was applied equally to all generators, based on their differing assets and operating cost structures.’82 On that basis it equally rejected the national treatment claim. Investment tribunals have generally affirmed the view that what is required for a finding of a violation of the national treatment standard is a discriminatory effect, not discriminatory intent. Proven intent may be helpful to demonstrate

76 77 78 79 80

ADF Group Inc. v. USA, ICSID Case No. ARB(AF)/00/1 (NAFTA), Award, 9 January 2003. Ibid., para. 155. Ibid., para. 156. Ibid., para. 156. AES Summit Generation Limited and AES-Tisza Erömü Kft v. Hungary, Award, ICSID Case No ARB/07/22, 23 September 2010. 81 Ibid., para. 10.3.47. 82 Ibid., para. 10.3.50.

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discrimination, particularly in case of indirect or de facto discrimination, but it is not a requirement.83 57 There is broad agreement that the national treatment standard prohibits de jure as well as de facto discrimination even though that is often not expressly addressed in IIA provisions. De jure, formal or direct discrimination refers to discriminatory treatment that is openly linked to (foreign) nationality, whereas de facto, material or indirect discrimination relates to treatment that disadvantages foreign investors as a practical matter even though it may be neutral on its face. 58 The NAFTA tribunal in Archer Daniels Midland v. Mexico84 clearly endorsed this view, holding that NAFTA Article 1102 prohibited both direct and indirect discrimination: The national treatment obligation under Article 1102 is an application of the general prohibition of discrimination based on nationality, including both de jure and de facto discrimination. The former refers to measures that on their face treat entities differently, whereas the latter includes measures which are neutral on their face but which result in differential treatment.85

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Also the NAFTA cases of Pope & Talbot v. Canada86 and ADF Group Inc. v. United States87 acknowledged the possibility of de facto discrimination under NAFTA Article 1102. Similarly, non-NAFTA tribunals have confirmed the view that national treatment provisions in BITs include both de jure and de facto discrimination. For instance, the ICSID tribunal in Alpha Projektholding v. Ukraine88 said that the national treatment obligation of the applicable BIT broadly prohibited ‘less favourable’ treatment to foreign as opposed to domestic investors and continued to state that [s]uch discrimination could arise de jure if there is a government measure such as a law or regulation that explicitly discriminates between domestic and foreign investors, or de facto if the measure is not explicitly or inherently discriminatory but discriminates between domestic and foreign investors in the way in which it is applied.89

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A clear case in point where such a form of de facto discrimination led to the finding of a breach of the national treatment standard is Feldman v. Mexico.90 The case involved tax rebates which were withheld from the investor while they were given to its Mexican competitors.91 The tribunal stated: It is clear that the concept of national treatment as embodied in NAFTA and similar agreements is designed to prevent discrimination on the basis of nationality, or ‘by reason of nationality.’ (U.S.

83 See text below at n. 103. 84 Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. Mexico (n. 5). 85 Ibid., para. 193. 86 Pope & Talbot Inc. v. Canada (n. 40) para. 43. 87 ADF Group Inc. v. USA (n. 76) para. 157. 88 Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010. 89 Ibid., para. 426. 90 Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1, Award, 16 December 2002, para. 183; endorsed by Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Pakistan (n. 4) para. 390. 91 Feldman v. Mexico (n. 90) paras. 173–180.

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V. National Treatment Statement of Administrative Action, Article 1102.) However, it is not self-evident (…) that any departure from national treatment must be explicitly shown to be a result of the investor’s nationality. There is no such language in Article 1102. Rather, Article 1102 by its terms suggests that it is sufficient to show less favorable treatment for the foreign investor than for domestic investors in like circumstances.92

Conversely, the absence of factual discrimination proved fatal to the claim in 61 Thunderbird v. Mexico.93 The case involved a US investor which operated a number of gambling facilities in Mexico. The dispute arose when Mexican authorities began to enforce their anti-gambling measures against such operators. The investor argued that these measures were enforced in a discriminatory way. It claimed that its own enterprises were seized and closed by Mexican authorities because certain ‘skill machines’ operated at its facilities were deemed illegal, while domestic investors, operating ‘skill machines’ under essentially identical circumstances, remained open and operating.94 The tribunal concluded that the Mexican enforcement measures did not discriminate in fact and thus did not violate the NAFTA national treatment standard.95 3. Lack of Justification

Under the three-tiered test regularly applied by investment tribunals hearing 62 alleged national treatment violations,96 once like circumstances have been identified and a difference in treatment was established, a finding of a breach of the national treatment standard may still be avoided where the host State can provide an appropriate justification for the different treatment. This is remarkable because national treatment clauses usually do not expressly provide for such a justification possibility.97 This lack of a specific justification possibility in IIAs may be the reason why 63 some tribunals appear to ‘conflate’ the ‘like circumstances’ test with the question whether the government offered a justification for the difference in treatment.98 For instance, in S. D. Myers v. Canada, the tribunal specifically referred to the 64 possibility of environmentally motivated justifications under the heading of a ‘like circumstances’ analysis. It considered (…) that the interpretation of the phrase ‘like circumstances’ in Article 1102 must take into account the general principles that emerge from the legal context of the NAFTA, including both its concern with the environment and the need to avoid trade distortions that are not justified by environmental

92 Feldman v. Mexico (n. 90) para. 181. 93 International Thunderbird Gaming Corp. v. Mexico, UNCITRAL (NAFTA), Award, 26 January 2006. 94 Ibid., para. 171. 95 Ibid., para. 182 (‘[the authorities’] policy and actions in enforcing the Ley Federal de Juegos y Sorteos were directed at both Mexican and non-Mexican gambling operations and (…) they were overall consistent. Accordingly, the Tribunal finds that Thunderbird has not established a breach [sic] the “National Treatment” standard under Article 1102 of the NAFTA.’). 96 See above text at n. 46. 97 Federico Ortino (n. 6) 344, 360. 98 Andrea Bjorklund, ‘National Treatment’ (n. 6) 29, 41.

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Chapter 8: Standards of Protection concerns. The assessment of ‘like circumstances’ must also take into account circumstances that would justify governmental regulations that treat them differently in order to protect the public interest.99

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Similarly, in Pope & Talbot, a NAFTA tribunal stressed when dealing with ‘like circumstances’ that (…) as a first step the treatment accorded a foreign owned investment protected by Article 1102(2) should be compared with that accorded domestic investments in the same business or economic sector. (…) Differences in treatment will presumptively violate Article 1102(2), unless they have a reasonable nexus to rational government policies that (1) do not distinguish, on their face or de facto, between foreign-owned and domestic companies, and (2) do not otherwise unduly undermine the investment liberalizing objectives of NAFTA.100

Because the tribunal accepted valid policy reasons to explain the differences in treatment, it found that the investor’s investments in Canada were not ‘in like circumstances’ with any of the allegedly more favourably treated domestic investments. 67 Again, also outside the NAFTA context, investment tribunals have accepted the idea of implicit justifications of discriminatory measures. In ParkeringsCompagniet AS v. Lithuania,101 an ICSID tribunal made some general considerations on both MFN and national treatment. It clearly expressed the view that discriminatory treatment may be justifiable in specific circumstances when it said that 66

(…) discrimination must be unreasonable or lacking proportionality, for instance, it must be inapposite or excessive to achieve an otherwise legitimate objective of the State. An objective justification may justify differentiated treatments of similar cases. It would be necessary, in each case, to evaluate the exact circumstances and the context.102

E. The Issue of Discriminatory Intent 68

The prevailing view among investment tribunals and commentators appears to be that ‘discriminatory intent’ is not required for a breach of the national treatment obligation.103 This was very clearly expressed in two ICSID cases. In Parkerings-Compagniet AS v. Lithuania,104 the tribunal said with regard to both MFN and national treatment that

99 S. D. Myers v. Canada (n. 34) para. 250. 100 Pope & Talbot Inc v. Canada (n. 40) para. 78 (footnotes omitted). 101 Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007. 102 Ibid., para. 368. 103 Borzu Sabahi, ‘National Treatment – Is Discriminatory Intent Relevant’ in Todd Weiler (ed), Investment Treaty Arbitration and International Law (JurisNet, 2008) 269–297; Christopher Dugan, Don Wallace, Noah Rubins and Borzu Sabahi (n. 71) 411–413; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 183–184; for a more nuanced view see Sylvie Tabet, ‘Beyond the Smoking Gun – Is a Discriminatory Objective Necessary to Find a Breach of National Treatment?’ in Todd Weiler (ed), Investment Treaty Arbitration and International Law (JurisNet, 2008) 299–313. 104 Parkerings-Compagniet AS v. Lithuania (n. 101).

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V. National Treatment [w]hether discrimination is objectionable does not in the opinion of this Tribunal depend on subjective requirements such as the bad faith or the malicious intent of the State (…).105

In the Siemens v. Argentina case

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[t]he Tribunal concurs that intent is not decisive or essential for a finding of discrimination, and that the impact of the measure on the investment would be the determining factor to ascertain whether it had resulted in non-discriminatory treatment.106

That discriminatory intent is not a necessary ingredient for a breach of the na- 70 tional treatment obligation was accepted by numerous other tribunals.107 In the NAFTA case of Feldman v. Mexico, the tribunal reasoned that requiring 71 proof of discriminatory intent would create an almost insurmountable practical obstacle to national treatment claims. It reasoned: More generally, requiring a foreign investor to prove that discrimination is based on his nationality could be an insurmountable burden to the Claimant, as that information may only be available to the government. It would be virtually impossible for any claimant to meet the burden of demonstrating that a government’s motivation for discrimination is nationality rather than some other reason. Also, as the Respondent argues, if the motives for a government’s actions should not be examined, there is effectively no way for the Claimant or this Tribunal to make the subjective determination that the discriminatory action of the government is a result of the Claimant’s nationality, again in the absence of credible evidence from the Respondent of a different motivation. If Article 1102 violations are limited to those where there is explicit (presumably de jure) discrimination against foreigners, e.g., through a law that treats foreign investors and domestic investors differently, it would greatly limit the effectiveness of the national treatment concept in protecting foreign investors.108

In spite of this rather settled jurisprudence, some tribunals still appear to re- 72 quire an element of intent. For instance, in LG&E v. Argentina109 the tribunal seemed to require intent as an element of discrimination. It said: In the context of investment treaties, and the obligation thereunder not to discriminate against foreign investors, a measure is considered discriminatory if the intent of the measure is to discriminate or if the measure has a discriminatory effect. As stated in the ELSI Elettronica Sicula SpA case (United States of America v. Italy), ICJ Reports 1989 RLA 56 at 61-62 (20 July 1989), in order to establish when a measure is discriminatory, there must be (i) an intentional treatment (ii) in favor of a national (iii) against a foreign investor, and (iv) that is not taken under similar circumstances against another national.110

Ultimately, the LG&E tribunal’s finding on intent remains somewhat unclear. 73 It found that the measures in question were indeed discriminatory. However, it could not identify a discriminatory intent.111 While this finding would suggest that under its own standard, requiring discriminatory intent, no violation had oc105 Ibid., para. 368. 106 Siemens A.G. v. Argentina, ICSID Case No. ARB/02/08, Award, 6 February 2007, para. 321. 107 E.g. S. D. Myers v. Canada (n. 34) para. 254; Consortium RFCC v. Morocco (n. 29) para. 74; Occidental Exploration and Production Company v. Ecuador (n. 61) para. 177; International Thunderbird Gaming Corp. v. Mexico (n. 93) para. 177; Alpha Projektholding GmbH v. Ukraine (n. 88) para. 427. 108 Feldman v. Mexico (n. 90) para. 183; endorsed by Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Pakistan (n. 4) para. 390. 109 LG&E Energy Corp. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006. 110 Ibid., para. 146 (footnotes omitted).

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curred, the tribunal ultimately held that Argentina did not only breach the standard of fair and equitable treatment (FET), but also ‘adopted discriminatory measures, causing damage to LG&E.’112 74 Another example of an investment tribunal apparently requiring intent for a violation of national treatment is Genin v. Estonia.113 Though primarily dealing with a claim alleging violation of a BIT provision prohibiting arbitrary or discriminatory treatment, the tribunal also remarked with regard to the national treatment obligation114 that there was no discriminatory treatment because the respondent’s national bank did not target the investor nor treat it intentionally in a discriminatory way.115 75 Also the Methanex award116 suggests that discriminatory intent is required for a breach of national treatment when it stated that in order to sustain its claim under NAFTA Article 1102, (…) Methanex must demonstrate, cumulatively, that California intended to favour domestic investors by discriminating against foreign investors and that Methanex and the domestic investor supposedly being favored by California are in like circumstances.117

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What is relatively uncontroversial is that even if there was discriminatory intent that alone would not be sufficient to establish a violation of national treatment. Rather, actual discrimination is required. This was already stressed by the tribunal in S. D. Myers v. Canada: Intent is important, but protectionist intent is not necessarily decisive on its own. (…) The word ‘treatment’ suggests that practical impact is required to produce a breach of Article 1102, not merely a motive or intent that is in violation of Chapter 11.118

111 Ibid., para. 147 (‘While the Tribunal concludes that based on the evidence presented, Respondent treated the gas-distribution companies in a discriminatory manner, imposing stricter measures on the gas-distribution companies than other public-utility sectors, Claimants have however not proven that these measures targeted Claimants’ investments specifically as foreign investments.’). 112 Ibid., para. 267. 113 Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. Estonia, ICSID Case No. ARB/ 99/2, Award, 25 June 2001. 114 Ibid., para. 368 (‘Article II(3)(b) of the BIT further requires that the signatory governments not impair investment by acting in an arbitrary or discriminatory way. In this regard, the Tribunal notes that international law generally requires that a state should refrain from “discriminatory” treatment of aliens and alien property. Customary international law does not, however, require that a state treat all aliens (and alien property) equally, or that it treat aliens as favourably as nationals. Indeed, “even unjustifiable differentiation may not be actionable.” In the present case, of course, any such discriminatory treatment would not be permitted by Article II(1) of the BIT, which requires treatment of foreign investment on a basis no less favourable than treatment of nationals.’). 115 Ibid., para. 369 (‘In any event, in the opinion of the Tribunal, there is no indication that the Bank of Estonia specifically targeted EIB in a discriminatory way, or treated it less favourably than banks owned by Estonian nationals. Moreover, Claimants have failed to prove that the withdrawal of EIB’s license was done with the intention to harm the Bank or any of the Claimants in this arbitration, or to treat them in a discriminatory way.’). 116 Methanex v. USA (n. 46). 117 Ibid., para. 12, Part IV, Ch. B, p. 6. 118 S. D. Myers v. Canada (n. 34) para. 254.

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F. The Relevance of Trade Law Jurisprudence on National Treatment for Investment Disputes

Since there is a fairly established body of national treatment cases in GATT/WTO law, it is not surprising that investment tribunals have been frequently asked to rely upon such national treatment jurisprudence. However, investment tribunals have disagreed on the relevance of such trade law jurisprudence. While many appear to take it into account, others have taken a principled reserved approach. Indeed, it has been pointed out that already from a purely textual perspective GATT Article III and the typical IIA national treatment provision display a number of crucial differences.119 GATT Article III(1) makes clear that this provision aims at countering protectionism; a purpose that may be inferred but is not explicit in IIAs. GATT Article III speaks of ‘like products’, whereas IIAs may contain references to ‘like circumstances’ or ‘like situations’ and often do not include any such language. Finally, the broad exceptions clause of GATT Article XX, which often mitigates the outcome of strict national treatment obligations, is usually missing in IIAs. It is thus not surprising that investment tribunals have been reluctant to rely on trade law jurisprudence. For instance, the NAFTA tribunal in Pope & Talbot addressed GATT/WTO jurisprudence on national treatment at quite some length, dealing with the Canadian argument that indirect or de facto discrimination could only be found if a measure disproportionately disadvantaged foreign investors.120 It specifically dealt with the Bananas,121 the Asbestos122 and the Beer123 cases decided by GATT and WTO panels as well as the Appellate Body.124 However, in the end the tribunal rejected the proposed disproportionate disadvantage test because it would be inconsistent with the investment objectives of NAFTA; namely, ‘to promote conditions of fair competition and to increase substantially investment opportunities.’125 Also the NAFTA tribunal in Methanex v. United States126 displayed a cautious approach. It stated that [w]hen it comes to interpreting the provisions of Section A of Chapter 11, in particular in the instant case Article 1102, the Tribunal may derive guidance from the way in which a similar phrase in the GATT has been interpreted in the past. Whilst such interpretations cannot be treated by this Tribunal

119 See Jürgen Kurtz, ‘National Treatment, Foreign Investment and Regulatory Autonomy’ (n. 32) 311, 317. 120 Pope & Talbot Inc. v. Canada (n. 40) para. 43. 121 WTO Appellate Body Report, European Communities – Bananas III (US), WT/DS27/AB/R (September 1997). 122 WTO Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R (April 2001). 123 WTO Panel Report, United States – Measures Affecting Alcoholic and Malt Beverages, DS23/R – 39S/206 (March 1992). 124 Pope & Talbot Inc. v. Canada (n. 40) paras. 46–69. 125 Ibid., para. 70. 126 Methanex v. USA (n. 46).

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Nevertheless, it found that trade law principles cannot simply be transferred to investment law.128 In a detailed assessment of whether the foreign investor was in ‘like circumstances’ with the allegedly better treated domestic ones, the Methanex tribunal concluded that the different drafting in NAFTA and GATT, referring to ‘like circumstances’ as opposed to ‘like products’, meant that it was ‘the intent of the drafters to create distinct regimes for trade and investment.’129 This prevented the tribunal from relying on GATT/WTO jurisprudence in determining whether Methanex and its domestic competitors were in like circumstances. 82 The tribunal in Occidental Exploration and Production Co. v. Ecuador130 also considered that reliance on trade law cases would be inappropriate. When assessing whether ‘in like situations’ of the applicable national treatment clause should be interpreted narrowly, therefore referring to investors in the same business sector, the tribunal rejected such a GATT-inspired interpretation. It found that 81

(…) those views are not specifically pertinent to the issue discussed in this case. In fact, the purpose of national treatment in this dispute is the opposite of that under the GATT/WTO, namely it is to avoid exporters being placed at a disadvantage in foreign markets because of the indirect taxes paid in the country of origin, while in GATT/WTO the purpose is to avoid imported products being affected by a distortion of competition with similar domestic products because of taxes and other regulations in the country of destination. In the first situation, no exporter ought to be put in a disadvantageous position as compared to other exporters, while in the second situation the comparison needs to be made with the treatment of the ‘like’ product and not generally. In any event, the reference to ‘in like situations’ used in the Treaty seems to be different from that to ‘like products’ in the GATT/WTO. The ‘situation’ can relate to all exporters that share such condition, while the ‘product’ necessarily relates to competitive and substitutable products.131

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As a result, the Occidental tribunal continued to apply a broad comparison of the relevant investor with all other investors – even in other business sectors.132 It has been suggested that the extremely broad approach to identifying comparators – investors even in different business sectors – resulted from the lack of guidance of an Article III(1) GATT-inspired rationale outlawing protectionism and thus requiring a competitive relationship.133

127 128 129 130 131 132 133

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V. National Treatment

G. Conclusion

One may doubt whether the national treatment standard is indeed ‘the single 84 most important standard of treatment enshrined in international investment agreements’.134 However, it appears quite correct that it is ‘perhaps the most difficult standard to achieve, as it touches upon economically (and politically) sensitive issues.’135 Equally, one may disagree with the assessment of the RFCC v. Morocco tribunal that the content of a national treatment clause would not pose any particular interpretation problems.136 In fact, the application of national treatment has posed considerable difficulties to investment tribunals. Nevertheless, their jurisprudence over the last decade has helped to consolidate a common approach towards national treatment claims in practice. In particular, a three-tiered test has found wide application. According to this 85 test, tribunals first determine whether a foreign investor is in like circumstances/ situations with a national operator, which often means to ascertain a competitive relationship within the same business sector. Secondly, they determine whether there was an actual difference in treatment which is easy in case of de jure differentiations, but may prove difficult in situations of de facto differentiation. Here discriminatory intent, though not required, will add probative value. Finally, investment tribunals regularly assess whether there are objective justifications for any difference in treatment. Since such justifications are often not expressly contained in IIAs, tribunals have tended to ‘conflate’ this issue with the determination whether different actors are in like circumstances. As a result, they may deny like circumstances where different treatment is objectively justified. Compared to the longstanding tradition of national treatment cases in interna- 86 tional trade law, investment law jurisprudence is relatively recent. In spite of disagreement about the relevance of GATT/WTO panel decisions to national treatment in the investment law field, the latter has been inspired by trade law and is rapidly developing its own lines of reasoning.

134 UNCTAD (n. 2) 1. 135 Ibid. 136 Consortium RFCC v. Morocco (n. 29) para. 53 (‘Le contenu de cette disposition qui se rencontre systématiquement dans les traités de protection des investissements ne pose pas de problème d’interprétation particulier.’).

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VI. Transfer of Funds

Carsten Kern A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. The Transfer of Funds in the Framework of Multi- and Supranational Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. IMF Articles of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. OECD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. OECD Draft Multilateral Agreement on Investment (Draft MAI). . 4. WTO/GATT/GATS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Free Movement of Capital and Payments under EU Law . . . . . . . . . . .

11 14 16 18 22 25

C. The Transfer of Funds under Modern International Investment Treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The Scope of Transfer Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Limitations to Free Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Free Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Free Transfer Subject to the Host State’s Laws and Regulations c) Free Transfer with Exemption Clause for Balance of Payments Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Free Transfer Subject to Measures Taken in Accordance with the IMF and/or WTO Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Transfer of Capital in Modern International Investment Treaties and the IMF Articles of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 4. The Transfer of Funds in Modern International Investment Treaties and the Necessity Defence under Customary International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29 31 35 36 38 40 43 45 47

D. Jurisprudence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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E. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013); Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995); Joseph Gold, International Capital Movements under the Law of the International Monetary Fund (International Monetary Fund, 1977); Steffen Hindelang, Free Movement of Capital and Foreign Direct Investment: The Scope of Protection in European Union Law (Oxford University Press, 2009); Abba Kolo, ‘Transfer of Funds: The Interaction between the IMF Articles of Agreement and Modern Investment Treaties: A Comparative Law Perspective’ in Stephan Schill (ed), International Investment Law and Public Law (Oxford University Press, 2010) 345–374; Abba Kolo and Thomas Wälde, ‘Capital Transfer Restrictions under Modern Investment Treaties’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 205–243; Abba Kolo, ‘Investor Protection vs Host State Regulatory Autonomy during Economic Crises’ (2007) 8 JWIT 457–503; Andreas Lowenfeld, International Economic Law (Oxford University Press, 2008); Frederick A. Mann, Legal Aspects of Money (Clarendon Press, 1992); Frederick A. Mann, ‘Money in Public International Law’ (1959 I) 96 RC 7–127; Bernard Meyer, ‘Recognition of Exchange Controls after IMF’ (1953) 62 Yale L. J. 867–910; Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (Juris Publishing, 2006); Milan R. Shuster, The Public International Law of Money (Oxford University Press, 1973); UNCTAD, Transfer of Funds, UNCTAD Series on Issues in International Investment Agreements (United Nations, 2000); Michael Waibel, ‘BIT by BIT: The silent Liberalisation of the Capital Account’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century – Essays in Honour of Christoph Schreuer (Oxford University Press, 2009) 497–518; Thomas Wälde and Abba Kolo, ‘Investor-State

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A. Introduction

Provisions on the transfer of funds are part of the vast majority of modern in- 1 vestment treaties.1 They pertain to a foreign investor’s right to make transfers, to the types of payments covered by this right, to questions of convertibility and applicable exchange rates, and in many cases also to limitations on the free transfer of funds. Transfer clauses are amongst the most important provisions within investment 2 treaties: the transfer of funds is an essential aspect of investments abroad and therefore of fundamental concern to foreign investors when making such investments. As the arbitral tribunal in Continental v. Argentina stated: This type of provision is a standard feature of BITs: the guarantee that a foreign investor shall be able to remit from the investment country the income produced, the reimbursement of any financing received or royalty payment due, and the value of the investment made, plus any accrued capital gain, in case of sale or liquidation, is fundamental to the freedom to make a foreign investment and an essential element of the promotional role of BITs.2

The starting point of an investor’s decision to invest is to generate profit. The 3 right to make transfer of funds might be needed to implement the project, to pay for business expenses (e.g. for services, equipment, loans) or to invest those funds into other business activities. It further ensures that the foreign investor can, after a successful investment, enjoy the financial benefits of his investment, e.g. by repatriating profits, or by distributing funds amongst shareholders residing outside the host State.3 Conversely, in case of a failed investment, the ability to transfer freely allows the investor to exit the host State without restrictions. This explains why restrictions on the transfer of funds can have a negative 4 impact on the economic value of the investment.4 An investor can hardly be considered fully protected unless the relevant treaty permits the transfer of funds, including the conversion and repatriation of funds relating to an investment. An 1 See Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995) 86: ‘Rules regarding capital transfers have manly evolved through bilateral treaty practice, and provisions which require the host State to guarantee the right of transfer of funds related to the investment, both current and capital, may be found in virtually all modern BITs.’ 2 Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, para. 239. 3 See UNCTAD, Transfer of Funds, UNCTAD Series on Issues in International Investment Agreements (United Nations, 2000) 1: ‘(...) a transfer provision ensures at the end of the day, a foreign investor will be able to enjoy the financial benefits of a successful investment.’ 4 See Giorgio Sacerdoti, ‘Bilateral Treaties and Multilateral Instruments on Investment Protection’ (1997) 269 RC 251, 358–359: ‘The provisions on monetary transfers are of the utmost importance for the foreign investor. The possibility of remitting from the investment country both the income produced and the value of the very investment made, plus any capital gain, in case of sale or liquidation is obviously of fundamental importance for any prospective or actual investor abroad.’

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unrestricted right to make such transfers is therefore evidently in the interest of the foreign investor. On the other hand, there can be valid reasons why host States may want to curtail transfers, and in the exercise of their monetary sovereignty under customary international law5 States have always restricted the free flow of funds for various reasons. Such restrictive measures may be taken, for example, in order to address balance of payments problems, to implement anti-corruption measures, to ensure the payment of taxes, or simply to avoid capital flight. Host States may further be inclined to impose barriers against the repatriation of funds not only to shelter their own currency, but also as an incentive for foreign investors to reinvest capital gains deriving from their foreign investment in the host State. Hence, the regulation of the transfer of funds into and out of the host State is of particular importance both to the investor and the host State, a concern which today is usefully addressed in the form of specific capital transfer provisions in modern investment treaties which reconcile the interests of those concerned. The present chapter will therefore, in particular, explore some of the features of such capital transfer provisions in modern international investment treaties. Before turning to investment treaties, however, section B. will provide a brief overview of transfer of funds provisions and foreign exchange regulation under the rules of multi- and supranational agreements, such as the International Monetary Fund (IMF), the Organisation of Economic Co-Operation and Development (OECD), the World Trade Organisation (WTO) and the European Union (EU). Section C. will then highlight some of the standard approaches to capital transfer under international investment treaties (balancing the contrasting interests of investors and host States in this context). It will further explore the interrelation between transfer clauses and the IMF agreement on the one hand and the doctrine of necessity on the other hand. Section D., finally, will give an overview over the current case law of investment tribunals on free transfer clauses. B. The Transfer of Funds in the Framework of Multi- and Supranational Agreements

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There is no rule in general international law on the free movement of funds. As an expression of State sovereignty, international law has always provided a large leeway to States’ monetary sovereignty with respect to fund transfers and convertibility. Thus, nothing in general international law prevents host States from organising their monetary systems according to their requirements and preferences. 5 See Milan R. Schuster, The Public International Law of Money (Oxford University Press, 1973) paras. 1–91; Rudolf Dolzer and Margrete Stevens (n. 1) 85.

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The rules and principles on the transfer of funds which do exist are therefore 12 enshrined in bilateral and multilateral investment treaties (BITs and MITs), as well as in treaties of multi- and supranational organisations, such as the IMF, the OECD, the WTO and the EU. Before turning to transfer clauses under investment treaties, a brief overview 13 shall be given of the transfer of funds provisions developed within the framework of these organisations. 1. IMF Articles of Agreement

The IMF Articles of Agreement6 are a global regime of considerable rele- 14 vance to the international transfers of funds. They were the result of efforts by a number of States to strike a balance between currency stability and mobility of capital by providing an international legal framework that minimises the negative impact of exchange restrictions but at the same time preserves the right of member States to impose restrictions when they suffer balance of payment difficulties. While the IMF Articles generally do not prohibit limitations on capital move- 15 ments, there is a general obligation to avoid restrictions on current payments, except with the approval of the Fund (Article VIII, section 2(a)).7 This obligation contributes to one of the key objectives of the Fund, which is ‘to assist in the establishment of a multilateral system of payments in respect of current transactions’ (Article I(iv)). Temporary derogations may be approved where a member State suffers balance of payment difficulties (Article VIII, section 2(a) and Article VIII, section 3). In addition, Article XIV (‘grandfather clause’), allows member States, for a transitional period, to retain restrictions on current transactions that were in place when they joined the Fund. 2. OECD

The OECD has also engaged in regional liberalisation of cross-border capital 16 flows. Article 2(d) of the OECD Convention commits all member States to the principle of free capital flows, obliging them to ‘maintain and extend the liberalisation of capital movements’. This has been implemented by two legally binding codes that liberalise investments and the transfer of funds between its mem-

6 Amended Articles of Agreement of the International Monetary Fund (1992), 31 ILM 1309. 7 Member States may restrict all capital transfers, cf. Art. VI sec. 3 (‘Control of Capital Transfers’). According to Art. VIII sec. 2(a), on the other hand, member States may not, absent Fund approval, ‘impose restrictions on the making of payments and transfers for current international transactions’ (‘Avoidance of restrictions on current payments’). Hence, the IMF Articles allow restrictions to regulate ‘capital transfers’, as opposed to ‘payments and transfers for current international transactions’ whose restriction is, in principle, not allowed. The distinction between ‘current international transactions’ and ‘capital transfers’ therefore is important. In this context, see Art. XXX(d) defining payments for current transactions. Capital transfers can be defined a contrario. On the distinction between current and capital transfers, see IMF, Balance of Payments Manual (International Monetary Fund, 1993) ch. XV, paras. 295–305.

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ber States: The Code of Liberalisation of Capital Movements, and the Code of Liberalisation of Current Invisible Operations.8 As resolutions of the OECD Council, these Codes are legally binding (Article 5 (a) of the OECD Convention). 17 The first Code, in particular, focuses on the progressive liberalisation of capital movements and liberalises both the making of investments and capital transfers. It applies to outward investment and requires that residents be permitted to transfer funds abroad to make investments. It is, however, subject to certain safeguards. In addition to a national security exception in Article 3, the Code contains a balance of payment clause in Article 7(c), and Article 4 of the Code ensures consistency with the IMF Articles by providing that nothing in the Code shall derogate from obligations under the Articles. 3. OECD Draft Multilateral Agreement on Investment (Draft MAI) 18

The transfer provision in draft Article IV(4.1) of the Draft Multilateral Agreement on Investment (MAI)9 intends to guarantee the free transfer of funds with regard to investment by providing that a member State shall ensure that all payments relating to an investment in its territory of an investor of another Contracting Party may be freely transferred into and out of its territory without delay.10

The scope of transfers covered by this draft article is broad, provided there is a territorial link with the host State. The non-exhaustive list in draft Article IV of transfers covered includes various types of returns, including profits, interest, dividends, capital gains, royalties, fees, and return in kind, as well as contractual payments under a loan agreement, compensation payments, the initial investment, proceeds from liquidation, and even earnings of expatriate employees. Modern free transfer clauses under investment treaties cover a similarly broad range of transfers. 20 The Draft MAI nevertheless also provides for a right of member States to restrict capital transfer in order to promote and protect certain interests, e.g. to protect the right of creditors or to ensure compliance with laws and regulations. Hence, 19

a Contracting Party may delay or prevent a transfer through the equitable, non-discriminatory and good faith application of measures (…) provided that such measures and their application shall not be used as a means of avoiding the Contracting Party’s commitments or obligations under the Agreement.11

8 Both Codes were adopted by the OECD Council on 12 December 1961. 9 OECD, Draft Multilateral Agreement on Investment (Draft MAI), DAFFE/MAI(98)7/REV1, draft consolidated text of 22 April 1998, available at http://www1.oecd.org/daf/mai/pdf/ng/ ng987/r1e.pdf. 10 On draft Art. IV see OECD, The Multilateral Agreement on Investment, Commentary to the Consolidated Text, DAFFE/MAI(98)8/REV1, 22 April 1998, 34 et seq., available at http:// www1.oecd.org/daf/mai/pdf/ng/ng988r1e.pdf. 11 Draft MAI Art. IV(4.6).

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In addition, certain general exceptions as contained in draft Art. VI (Excep- 21 tions and Safeguards) apply.12 4. WTO/GATT/GATS

Exchange restrictions are also recognised under the General Agreement on 22 Tariffs and Trade (GATT) 199413 and the General Agreement on Trade and Services (GATS) 1994.14 Both allow for restrictions in order to meet the requirements of the IMF Articles. According to GATT Art. XV, member States retain the flexibility to impose 23 exchange restrictions consistent with the IMF Articles.15 Therefore, whenever the IMF allows for exchange restrictions, such measures do not amount to a breach of the GATT Agreement. In addition, GATT Art. XXI contains a general security safeguard. Art. XI of GATS provides for the right of IMF member States to impose ex- 24 change restrictions in conformity with the IMF Articles, covering current transactions (GATS Art. XI:1) as well as capital transactions (GATS Art. XI:2). Art. XII of GATS further allows countries to impose restriction on trade in services in the event of serious balance of payments problems or external financial difficulties. 5. Free Movement of Capital and Payments under EU Law

An extensive liberalisation of capital movement has been established at the 25 supranational level. TFEU16 Art. 63 (ex-Art. 56 of the Treaty Establishing the European Commu- 26 nity (TEC)) now provides, that all restrictions on the movement of capital (TFEU Art. 63(1)) and payments (TFEU Art. 63(2)) between member States and between member States and third countries are prohibited. TFEU Art. 63 has direct effect17 and can therefore be invoked by individuals before national authorities.

12 On this provision see ibid., at 40 et seq. 13 General Agreement on Tariffs and Trade 1994 (GATT), 15April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, (1994) 33 ILM 1125. 14 General Agreement on Trade in Services 1994 (GATS), 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1 B, (1994) 33 ILM 46. 15 On GATT Art. XV, see Andrew Mitchell and Elizabeth Sheargold, GATT Art. XV: Exchange Arrangements, in Rüdiger Wolfrum, Peter-Tobias Stoll and Holger Hestermeyer (eds), WTO – Trade in Goods, Max Planck Commentaries on World Trade Law, Vol. 5 (Koninklijke Brill NV, 2010) 353–365. On the relationship between the IMF Articles and the WTO Agreements see Deborah Siegel, ‘Legal Aspects of the IMF/WTO Relationship: The Fund’s Articles of Agreement and the WTO Agreements’ (2002) 96(3) AJ.IL 561, 572 et seq. 16 Treaty on the Functioning of the European Union, consolidated version amended by the Treaty of Lisbon, 13 December 2007 (entered into force 1 December 2009), OJ C 115 of 9 May 2009, 47, 315. 17 ECJ, 14.12.1995, Cases C-163/94, C-165/94 and C-250/94, Sanz de Lera, ECR I–4821, para. 48.

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Just like the instruments mentioned above, however, also the TFEU contains exceptions to the free movement of capital and payment. The main limitation is included in TFEU Article 65 (TEC ex-Article 58), which authorises member States to restrict the free movements of capital and payments for public policy reasons. In addition, as it is the case with all EU fundamental freedoms, the inherent limitation of proportionate application of national regulation in the public interest applies – provided that such regulation is not applied in a discriminatory manner and that the same result cannot be achieved by less restrictive procedures. 28 In conclusion, it can be observed that, despite different approaches to the movement of funds, one common feature in all these multi- and supranational instruments is the right of member States to impose exchange restrictions under certain circumstances. 27

C. The Transfer of Funds under Modern International Investment Treaties 29

Transfer clauses are a common feature of modern bilateral and multilateral investment treaties.18 As already described above, the interest of host States to preserve their monetary sovereignty conflicts with the investor’s interest to use, invest and move his funds freely and without restrictions. As Dolzer and Schreuer have put it: Repatriation of capital, including profits, into the home country or a third country will often be the major business purpose of the investment. The host state will want to administer its currency and its foreign reserves. Large currency transfers into the country and out of the country need to be monitored and controlled in order to protect national policies.(…) Thus, the interests of the foreign investor and those of the host state in the admissibility of foreign transfers will often diverge.19

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To balance these competing interests – a concern of international investment law in general –, different approaches have been adopted in the transfer provisions of international investment treaties. The key issues generally addressed by transfer clauses refer to their scope, e.g. to the types of transfers covered, and the limitations that apply to the transfer obligation. However, ‘no single pattern is dominant’ in the way international investment treaties address this issue.20 1. The Scope of Transfer Provisions

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Transfer of funds provisions first and foremost differ in respect of their scope. The free transfer of funds is usually restricted to certain types of transfers, with the majority of investment treaties including a transfer clause that applies to all funds ‘related to an investment’ or ‘in connection with an investment’. In ad18 Despite the fact that they have yet to acquire a corresponding importance in the adjudication of international investment disputes. 19 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 191 et seq. 20 Ibid., at 192. See also UNCTAD (n. 3) 30: ‘[T]he specific design of these provisions varies from agreement to agreement.’

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dition, transfer clauses often include a rather detailed illustrative21 or exhaustive22 list of the types of transfers covered by this clause.23 Such lists may include profits, interests, dividends, other current income, funds necessary to finance and develop an investment, proceeds of liquidation, management fees, loan payments, royalties or other items.24 Another point of divergence concerns the question whether the clause on the 33 transfer of funds should cover both outward and inward transfers. The majority of treaties cover both directions, whereas some treaties only cover the host State’s obligation to permit outward transfers.25 21 See, for example, Art. 5 of the Netherlands Model BIT (Agreement on Encouragement and Reciprocal Protection of Investments Between [Country] and The Kingdom of The Netherlands, 1997): ‘Each Contracting Party shall guarantee that payments related to an investment may be transferred. The transfers shall be made in a freely convertible currency, without undue restriction or delay. Such transfers include in particular though not exclusively: a) profits, interests, dividends, royalties, fees and other current income; b) funds necessary (i.) for the acquisition of raw or auxiliary materials, semi-fabricated or finished products, or (ii.) for the development of an investment or to replace capital assets in order to safeguard the continuity of an investment; c) additional funds necessary for the development of an investment; d) funds in repayment of loans; e) royalties or fees; f) earnings of natural persons; g) the proceeds of sale or liquidation of the investment; h) payments arising under Article 7.’ 22 See, for example, Art. 7 of the French Model BIT (Draft Agreement between the Government of the Republic of France and the Government of the Republic of [____] on the Reciprocal Promotion and Protection of Investments, 2006): ‘Each Contracting Party, on the territory or in the maritime area of which the investments have been made by nationals or companies of the other Contracting Party, shall guarantee to these nationals and companies the free transfer of: a) interest, dividends, profits and other current income; b) royalties deriving from incorporal rights as defined in Article 1, Paragraph 1, letters (d) and (e); c) repayments of loans which have been regularly contracted; d) value of partial or total liquidation or disposition of the investment, including capital gains on the capital invested; e) compensation for dispossession or loss described in Article 5, Paragraphs 2 and 3. (…).’ 23 UNCTAD (n. 3) 30. 24 Rudolf Dolzer and Margrete Stevens (n. 1) 90 et seq. 25 Rudolf Dolzer and Christoph Schreuer (n. 19) 192 et seq.: ‘A major point of divergence among treaties relates to the question whether the right to transfer funds concerns only the transfer out of the host country or whether it covers inward transfers as well. Most treaties cover both directions, but some treaties only address the duty of the host state to guarantee the right to transfer investments and returns abroad, thus referring only to outward payments. Whenever transfers are allowed in general terms, such as “in relation to investments”, both directions are covered.’ According to UNCTAD (n. 3), there are three different approaches in this respect. The first category of clauses guarantees the outward transfer of funds derived from a protected investment; a second protects the outward transfer of amounts arising from the host State’s performance of other obligations under an agreement; and a third covers inward transfer of amounts to be invested by a foreign investor.

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Most treaties also require that transfers be made in a convertible currency, at the official exchange rate on the date of the transfer and without delay.26 2. Limitations to Free Transfer

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As mentioned before, there is usually a need to balance the diverging interests of host States and investors with regard to the extent of the right to the free transfer of funds. The following section examines some of the different methods used by modern bilateral and multilateral investment treaties regarding limitations applied to the transfer obligation. a) Free Transfer

The first approach is to provide free transfer not constrained by any qualifications. An example is Article 5 of the German Model BIT (2008)27 which simply states that the host State ‘shall guarantee to investors of the other Contracting State the free transfer of payments in connection with an investment’.28 37 An issue that arises in the context of such absolute ‘free transfer’ type clauses is, however, whether there can be certain – exceptional – circumstances in which the host State can nevertheless adopt measures to restrict the transfer of funds, especially when such transfer restrictions are allowed e.g. under the IMF regime or under customary international law.29 36

b) Free Transfer Subject to the Host State’s Laws and Regulations 38

Contrary to the ‘free transfer’ approach, another approach to the transfer of funds taken in investment treaties subjects the right to transfer to the host State’s laws and regulations.30 A more specific type of transfer clause of this category 26 Rudolf Dolzer and Margrete Stevens (n. 1) 94 et seq. See, for example, Art. 7(2) of the US Model BIT (2012) (Treaty between the Government of the United States of America and the Government of [___] concerning the Encouragement and Reciprocal Protection of Investment, 2012): ‘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.’ 27 Treaty between the Federal Republic of Germany and [___] concerning the Encouragement and Reciprocal Protection of Investments, 2008. 28 See also Art. 7(1) of the Indian Model BIT (2003) (Agreement between the Government of the Republic of India and the Government of the Republic of [____] for the Promotion and Protection of Investments, 2003), which provides that the host State ‘shall permit all funds of an investor of the other Contracting Party related to an investment in its territory to be freely transferred, without unreasonable delay and on a non-discriminatory basis’. See also Art. 13(1) and (4) of the Energy Charter Treaty (ECT), 17 December 1994 (entry into force 16 April 1998), (1995) 34 ILM 360, stating that member States ‘shall guarantee the freedom of transfer into and out of its area.’ 29 On this aspect, see below 3. and 4. 30 See, for example, Art. IV(1) of the China–Turkey BIT (1990) (Agreement between the People’s Republic of China and the Republic of Turkey concerning the Reciprocal Promotion and Protection of Investments, 13 November 1990): ‘Each Contracting Party shall permit all the transfers of the following proceeds related to an investment to be made in and out of its territory within the framework of its laws and regulations (…).’Art. XI(1) of the Australia–China BIT (1988) (Agreement between the Government of Australia and the Government of the Peo-

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refers only to certain areas of host State legislation and regulations, such as those on (i) bankruptcy, insolvency, or the protection of the rights of creditors; (ii) issuing, trading, or dealing in securities; (iii) criminal or penal offenses; (iv) financial reporting or record keeping of transfers; (v) ensuring compliance with orders or judgments in judicial or administrative proceedings; (vi) payment of contributions.31 The imposition of these restrictions often has to be ‘equitable’, ‘non-discriminatory’, and in ‘good faith’.32 This approach, which subjects the investor’s right to free transfer to the host 39 State’s laws and regulations, in principle accepts a change in the host State’s laws and regulations at any time, irrespective of economic circumstances or obligations under other international treaties.33 Hence, this kind of transfer clauses protects the investor only against transfer restrictions that violate the host State’s laws and regulations.34 c) Free Transfer with Exemption Clause for Balance of Payments Problems

Under some investment treaties, host States are allowed to impose restrictions 40 on capital movements during balance of payments difficulties.35 In this vein, Article 7 of the French Model BIT (2006)36 provides that

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ple’s Republic of China on the Reciprocal Encouragement and Protection of Investments, 11 July 1988, entry into force 11 July 1988) provides: ‘A Contracting Party shall, when requested, permit, subject to its law and policies, all funds of a national of the other Contracting Party related to an investment (…), to be transferred freely and without undue delay.’ Art. 6 of the China–Denmark BIT (China and Denmark – Agreement concerning the Encouragement and Reciprocal Protection of Investments, 29 April 1985) states: ‘Each Contracting Party shall, subject to the right of each Contracting Party to exercise on a non-discriminatory basis the powers conferred by its laws, allow without delay the transfer of (…).’ See, for example, Art. 7(4) of the US Model BIT (2012) (n. 26): ‘Notwithstanding paragraphs 1 through 3, a 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, futures, options, or derivatives; (c) criminal or penal offenses; (d) financial reporting or record keeping of transfers when necessary to assist law enforcement or financial regulatory authorities; or (e) ensuring compliance with orders or judgments in judicial or administrative proceedings.’ Art. 7(3) of the Norway Model BIT (2007) (Agreement between The Kingdom of Norway and [____] for the Promotion and Protection of Investments, 2007) provides: ‘It is understood that paragraphs 1 and 2 are without prejudice to the equitable, non-discriminatory and good faith application of measures: i. to protect the rights of creditors, ii. relating to or ensuring compliance with laws and regulations (a) on the issuing, trading and dealing in securities, futures and derivatives, (b) concerning reports or records of transfers, or (c) concerning the payment of contributions or penalties, (c) concerning financial security or any other equivalent regarding the prevention and remedying of environmental damage, iii. in connection with criminal offences and orders or judgments in administrative and adjudicatory proceedings.’ Ibid. UNCTAD, International Investor Arrangements: Trends and Emerging Issues (United Nations, 2006) 39. Ibid. There can be further variations within this category, for example ‘self-judging provisions’, which insulate measures taken in view of balance of payments problems from third party scrutiny.

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A similar provision can be found in Art. V(5) of the Colombian Model BIT (2007):37 Notwithstanding the provisions of this Article, each Party, in circumstances of serious difficulties in its balance of payments, or threats thereof, may exercise equitably, on a non-discriminatory manner and in good faith, powers granted under its law to restrict or delay transfers.

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If there is no such express balance of payments provision, as it is usually the case for Swiss, German or US BITs, a State facing severe balance of payment difficulties may, however, still be able to invoke the defence of necessity to justify a temporary derogation from its obligations under the treaty.38 d) Free Transfer Subject to Measures Taken in Accordance with the IMF and/or WTO Agreement

Another type of transfer clause allows for measures taken in accordance with the IMF Articles and/or the WTO Agreement. 44 By way of example, Article 14(7) of the Canadian Model BIT (2004)39 provides that a contracting party ‘may restrict transfers in kind in circumstances where it could otherwise restrict transfers under the WTO Agreement (…).’ 43

3. The Transfer of Capital in Modern International Investment Treaties and the IMF Articles of Agreement

Transfer clauses in most cases do not deal with the relation between the clause and the IMF Articles of Agreement, which, under certain conditions, provide for a right to restrict transfers. In a case where the parties to an international investment treaty are also members of the IMF,40 the question therefore arises how a potential conflict between a transfer clause and the IMF Articles should be resolved. In other words, should the provisions of the investment treaty prevail over the IMF Articles or vice versa? 46 This relationship between transfer clauses and general international law provisions has come up before the investment tribunal in Continental v. Argentina41 where the respondent State contended, inter alia, that notwithstanding the absence of any exceptions in the transfer provision in Article V of the Argentina– 45

36 Draft Agreement between the Government of the Republic of France and the Government of the Republic of [____] on the Reciprocal Promotion and Protection of Investments, 2006. 37 Bilateral Agreement for the Promotion and Protection of Investments between the Republic of Colombia and [____], 2007. 38 On this aspect, see below 4. 39 Agreement Between Canada and [____] for the Promotion and Protection of Investments, 2004. 40 With its 187 member States (as of 1 March 2012), the IMF’s membership is almost universal. 41 Continental Casualty Company v. Argentina (n. 2).

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US BIT,42 it could nonetheless impose restrictions on capital transfer because international treaties like GATT, GATS and IMF in certain circumstances allowed for such imposition.43 Although the tribunal did not decide on this issue – having already found that the transfer in question did not fall within the scope of the transfer clause because it was not a transfer related to the investment –,44 it pointed out that the transfer provision in the Argentina–US BIT could be considered lex specialis in relation to the IMF regime and also more liberal than the IMF regime.45 The reasoning of the tribunal was that the IMF regime distinguishes between current and capital transactions whereas such a distinction – as it is typically the case with transfer clauses – is missing in the transfer provision in the Argentina–US BIT.46 42 Art. V of the Argentina–US BIT (Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment, 14 November 1991 (entry into force 20 October 1994), (1992) 31 ILM 124) provides as follows: ‘1. Each Party shall permit all transfers related to an investment to be made freely and without delay into and out of its territory. Such transfers include: (a) returns; (b) compensation pursuant to Article IV; (c) payments arising out of an investment dispute; (d) payments made under a contract, including amortization of principal and accrued interest payments made pursuant to a loan agreement directly related to an investment; (e) proceeds from the sale or liquidation of all or any part of an investment; and (f) additional contributions to capital for the maintenance or development of an investment. 2. Except as provided in Article IV paragraph 1, transfers shall be made in a freely usable currency at the prevailing market rate of exchange on the date of transfer with respect to spot transactions in the currency to be transferred. The free transfer shall take place in accordance with the procedures established by each Party; such procedures shall not impair the rights set forth in this Treaty. 3. Notwithstanding the provisions of paragraphs 1 and 2, either Party may maintain laws and regulations (a) requiring reports of currency transfer; and (b) imposing income taxes by such means as a withholding tax applicable to dividends or other transfers. Furthermore, either Party may protect the rights of creditors, or ensure the satisfaction of judgments in adjudicatory proceedings, through the equitable, nondiscriminatory and good faith application of its law.’ 43 Continental Casualty Company v. Argentina (n. 2) para. 238. 44 Ibid., para. 241. 45 Ibid., para. 244. 46 Ibid., paras. 243–244. See also Peter Muchlinski, Multinational Enterprises and the Law (Oxford University Press, 2007) 691, stating that ‘should the BIT provide for a greater freedom of transfer for the investor than the IMF Articles of Agreement, it is arguable that the terms of the BIT should prevail, as these represent a specialized regime of investor protection that is more elaborate than the IMF regime on the transfer of funds and capital’. In a similar vein Abba Kolo, ‘Transfer of Funds: The Interaction between the IMF Articles of Agreement and Modern Investment Treaties: A Comparative Law Perspective’ in Stephan Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010) 345, 363, 365 et seq., arguing that ‘it is only reasonable to interpret the absence of balance-of-payments or Fund-related provisions in an investment treaty as indicative of the contracting parties’ intention to adopt a more expansive or liberal regime on the transfer of funds, the more so if the contraction parties are also Members of the Fund. (…) [M]odern investment treaties are lex specialis because they provide for more specific rights and obligations, remedies and dispute settlement mechanisms than many other treaties, such as the Fund Agreement. This interpretation is in accord with the object and purpose of an investment treaty read in its context. The main purpose of such treaties is the mutual promotion and protection of foreign investment; and (…) the ability of the investor to repatriate funds is essential to the promotion of foreign investment. Thus, to subordinate the right to repatriate funds guaranteed under such treaties to the freedom of the host state to impose restrictions under the Fund Agreement

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4. The Transfer of Funds in Modern International Investment Treaties and the Necessity Defence under Customary International Law

As we have seen above,47 there is a category of transfer provisions (‘free transfer’ clauses) which provide free transfer not constrained by any qualifications, and which consequently also contain no explicit recognition of the host State’s right to curtail transfer rights when faced with balance of payments problems. 48 Therefore the question remains to what extent a host State is bound by its legal obligation to comply with the unconstrained free transfer provision of an investment treaty in the face of economic crisis. 49 In the past years, in particular the emergency measures adopted by Argentina in reaction to its economic and financial crisis have been challenged by investors in several investment arbitrations, alleging violations of Argentina’s investment treaty obligations. 50 According to recent Argentine ICSID cases,48 however, the host State is entitled to invoke the necessity defence under customary international law, as codified in Article 25 of the ILC Draft Articles on State Responsibility.49 Hence, the absence of an explicit exception to the free transfer obligation under the investment treaty does not prevent a host State from invoking, on the basis of customary international law, necessity as a basis to derogate from its obligation under the investment treaty.50 47

47 48

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would undermine or render void the investor’s right to transfer funds. That would frustrate the legitimate expectations of the foreign investor who might have relied on the credible commitments of the host state, encapsulated in the BIT, in making the investment. Therefore, it is also more equitable to apply the specific provisions of the investment treaty rather than the Fund agreement.’ See above C.2.a). CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005; LG&E v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006; Enron Corporation and Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007; Sempra Energy International v. Argentina, ICSID Case No. ARB/ 02/16), Award, 28 September 2007; Metalpar S.A. and Buen Aire S.A. v. Argentina, ICSID Case No. ARB/03/5, Award, 6 June 2008; Continental Casualty Company v. Argentina (n. 2). International Law Commission, Draft Articles on the Responsibility of States for Internationally Wrongful Acts, Report of the ILC on the Work of its Fifty-Third Session, UN GAOR, 56th Sess, Supp No. 10, pp. 43, UN Doc. A/56/10 (2001) (ILC Draft Articles on State Responsibility). Art. 25 (‘Necessity’) provides: ‘1. Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a) is the only way for the State to safeguard an essential interest against a grave and imminent peril; and (b) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole. 2. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if: (a) the international obligation in question excludes the possibility of invoking necessity; or (b) the State has contributed to the situation of necessity.’ In the event, however, that the relevant investment treaty itself contains an emergency clause, such as Art. XI of the Argentina–US BIT (n. 42) (‘non-precluded measures provision’), necessity may only be invoked in case the emergency exception fails, see Sempra v. Argentina, ICSID Case No. ARB/02/16, Decision on Annulment, 19 June 2010, para. 176: ‘The question whether a state of necessity justifies exoneration from state responsibility will become an is-

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However, in order to rely successfully on necessity, i.e. in order to exclude 51 liability, certain criteria have to be fulfilled: an essential interest of the host State must be threatened by a grave and imminent peril,51 the adopted measures must be the only possible way to protect this interest, and the host State must not have contributed to the occurrence of the situation of necessity.52 Short of a self-judging provision in the relevant transfer clause, the arbitral 52 tribunal will usually have the power to examine the measures taken by the host State in order to determine whether the requirements of necessity under customary international law have been met.53 In case of a self-judging clause the tribunal might still be called upon to decide whether the host State’s concerns indeed relate to the question of necessity and therefore are beyond review. However, even if an economic situation under which transfer restrictions are 53 imposed amounts to a situation of necessity, the host State is not exonerated from compensating those affected by its invocation of necessity. This is so because international law recognises necessity as precluding only the wrongfulness of an act not in conformity with an international obligation, without prejudice to the question of compensation for any material loss caused by the act in question.54 The host State’s obligation to pay compensation for the material loss caused to the investor therefore remains unaffected.

51

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sue only where liability is not already precluded under Article XI of the BIT. As a general rule, a treaty will take precedence over customary international law.’ See also Continental Casualty Company v. Argentina (n. 2) para. 162: ‘The Tribunal will deal with the arguments based on Art. XI first, both because Argentina raises it as its first defense, and also because the application of Art. XI in the present case (if warranted) may be such as to render superfluous a detailed examination of the defense of necessity under general international law applied to the particular facts of the present dispute.’ An ‘essential interest’ of the host State is not limited to situations relating to the very survival of the State such as a military invasions, but also includes threats to its economic, ecological, or other vital interests; see ILC Draft Articles on State Responsibility, with Commentaries, Report of the ILC on the Work of its Fifty-Third Session, UN GAOR, 56th Sess, Supp No. 10, pp. 59, UN Doc. A/56/10 (2001), Art. 25, para. 14. See also Continental Casualty Company v. Argentina (n. 2) para. 166; Sempra v. Argentina (n. 48) para. 374. On the requirements of ILC Draft Art. 25 in general see James Crawford, The International Law Commission's Articles on State Responsibility: Introduction, Text and Commentaries (Cambridge University Press, 2002) 178 et seq. On the necessity defence in the context of investment arbitration see August Reinisch, ‘Necessity in Investment Arbitration’ in (2010) 41 NYIL 137–158; Michael Waibel, ‘Two Worlds of Necessity in ICSID Arbitration: CMS & LG&E’ (2007) 20 Leiden J. Int’l L. 637–648; August Reinisch, ‘Necessity in International Investment Arbitration – An Unnecessary Split of Opinions in Recent ICSID Cases? Comments on CMS v. Argentina and LG&E v. Argentina’ (2007) 8 JWIT 191–214; Abba Kolo, ‘Investor Protection vs Host State Regulatory Autonomy during Economic Crises’ (2007) 8 JWIT 457– 503; Stephan Schill, ‘International Investment Law and the Host State’s Power to Handle Economic Crises’ (2007) 24 J. Int’l Arbitration 256–286. On the necessity defense in the context of exchange restriction measures see Abba Kolo and Thomas Wälde, ‘Capital Transfer Restrictions under Modern Investment Treaties’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 205, 217 et seq. Enron v. Argentina (n. 48) para. 339. See Art. 27(b) of the ILC Draft Articles on State Responsibility. See also Enron v. Argentina (n. 48) para. 302; CMS Gas Transmission Co v. Argentina (n. 48) para. 383 et seq.

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D. Jurisprudence 54

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Despite the importance of transfer of funds provisions in international investment treaties for both investors and host States, jurisprudence on this standard of protection has been relatively scarce and only very few awards have entered into a discussion specifically on such a provision. In Gruslin v. Malaysia55 the foreign investor challenged Malaysia’s exchange restrictions imposed in the midst of the East Asian financial crisis. The tribunal, however, declared that it lacked jurisdiction on other, prior grounds. In the case Genin v. Estonia56 the claimants alleged that the revocation of a banking licence amounted to a violation of various standards of protection in the Estonia–US BIT,57 among them the free transfer clause in Article IV(1). The tribunal did not find a violation of the BIT,58 and it did not engage in an analysis of the transfer clause. In CMS Gas Transmission Co v. Argentine Republic59 the claimant alleged that the host State had restricted the transfer of funds, thereby violating the free transfer provision of the Argentina–US BIT. The claimant later dropped this part of his claim, though. The case of Joy Mining v. Egypt60 essentially concerned the question whether the claimant was entitled to the release of bank guarantees for the adequate performance of equipment supplied by the claimant. The claimant contended, inter alia, that the retention of the bank guarantees constituted a violation of the free transfer obligation of the Egypt–UK BIT.61 The tribunal, however, found no prima facie case for the alleged violations of the BIT’s substantive standards and did therefore not enter into a discussion of the free transfer obligation.62

55 Gruslin v. Malaysia, ICSID Case No. ARB/99/3, Award, 27 November 2000. 56 Alex Genin, Eastern Credit Limited, Inc and A.S. Baltoil v. Estonia, ICSID Case No. ARB/ 99/2, Award, 25 June 2001. 57 Treaty between the Government of the United States of America and the Government of the Republic of Estonia for the Encouragement and Reciprocal Protection of Investment, 19 April 1994 (entry into force 16 February 1997). 58 Ibid., para. 373. 59 CMS Gas Transmission Co v. Argentina, Decision on Objections to Jurisdiction, 17 July 2003, para. 32. 60 Joy Mining Machinery Limited v. Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction, 6 August 2004. 61 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Arab Republic of Egypt for the Promotion and Protection of Investments, 11 June 1975 (entry into force 24 February 1976). 62 Ibid., para. 78: ‘In the present case the situation is rendered somewhat simpler by the fact that a bank guarantee is clearly a commercial element of the Contract. The Claimant’s arguments to the effect that the non-release of the guarantee constitutes a violation of the Treaty are difficult to accept. In fact, the argument is not settled. It is hardly possible to expropriate a contingent liability. Although normally a specific finding to this effect would pertain to the merits, in this case not even the prima facie test would be met. The same holds true in respect of the argument concerning the free transfer of funds and fair and equitable treatment and full protection and security.’

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In Pan American v. Argentina63 the claim was based, inter alia, on the trans- 59 fer provision contained in Article V of the US-Argentina BIT, but the case did not reach the merits stage.64 In Biwater Gauff v. Tanzania65 the claimant alleged an infringement of the 60 free transfer obligation under Article 6 of the Tanzania–UK BIT.66 The claimant argued that he had been unable to transfer his investment by means of the sale of his shareholding because ‘the value of that shareholding has been nullified’ by host State measures.67 The tribunal found no violation of Article 6 of the BIT stating that this provision ‘is not a guarantee that the investor will have funds to transfer’.68 In Metalpar v. Argentina69 the claimants maintained a violation of the transfer 61 of funds provision included in the Argentina–Chile BIT.70 According to the respondent, there was no such violation since, even during the worst part of the crisis, investors were always able to make transfers, although for a period of time authorization from the Central Bank was required.71

The tribunal denied the claim, concluding that the claimants,

62

who knew the regulations on this matter well, as indicated in the file, did not comply with the established procedure, which consisted of requesting authorization from the Central Bank.72

In Continental v. Argentina73 the claimant challenged several measures taken 63 by the host State as a response to its financial crisis. The claimant contended that the host State’s restrictions on transfers out of its territory,74 adopted as a response to the crisis, prevented the claimant from repatriating his funds, thereby breaching the free transfer provision provided by Article V of the Argentina–US BIT.75 The tribunal dismissed almost all substantive claims,76 including the one 63 Pan American Energy LLC and BP Argentina Exploration Company v. Argentina, ICSID Case No. ARB/03/13, Decision on Preliminary Objections, 27 July 2006. 64 After a settlement had been agreed between the parties the proceedings were discontinued at the parties’ request. On August 20, 2008 the tribunal issued an order taking note of the discontinuance pursuant to ICSID Arbitration Rule 43(1). 65 Biwater Gauff (Tanzania) Ltd. v. Tanzania, ICSID Case No. ARB/05/22, Award, 24 July 2008. 66 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United Republic of Tanzania for the Promotion and Protection of Investments, 7 January 1994 (entry into force 2 August 1996). 67 Ibid., para. 732. 68 Ibid., para. 735. 69 Metalpar S.A. and Buen Aire S.A. v. Argentina, ICSID Case No. ARB/03/5, Award, 6 June 2008. 70 Tratado entre la República Argentina y la República de Chile sobre Promoción y Protección Recíproca de Inversiones, 2 August 1991. 71 Ibid., para. 176. 72 Ibid., para. 179. 73 Continental Casualty Company v. Argentina (n. 2). 74 Ibid., para. 237. 75 For Art. V of the Argentina–US BIT (n. 42). 76 The only claims upheld by the tribunal referred to treasury notes (‘LETEs’) held by claimant’s subsidiary, cf. Continental Casualty Company v. Argentina (n. 2) para. 320.

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based on the free transfer clause. In its decision, the tribunal found that the transfer at stake did not represent a ‘transfer related to an investment’ as required by Article V(1) of the BIT.77 In addition, with regard to the relationship between multilateral instruments, such as the IMF Articles of Agreement, the tribunal went on to state that the BIT’s transfer provision ‘may be considered lex specialis in respect of the IMF regime’.78 The tribunal also found that Argentina was exempted from responsibility according to the non-precluded measures provision in Article XI of the Argentina–US BIT.79 E. Conclusion 64

This brief overview shows that despite so far relatively scarce jurisprudence the concern transfer clauses in international investment treaties are intended to address – the balance between the interests of host States and investors – is real. In a world characterised by, on the one hand, ever-closer global economic interaction and cooperation, and, on the other hand, recurring economic and financial insecurity, it can only be expected that in the years to come these clauses will increasingly be put to the test, both in practice, and, ultimately, before tribunals. It will be interesting to observe to which degree the various transfer clauses, on their own or as further interpreted by investment tribunals will thereby be able to fulfil their balancing function.

77 Continental Casualty Company v. Argentina (n. 2) paras. 239–242. See also already above (n. 44). 78 Ibid., para. 244. See also already above (n. 45). 79 Art. XI of the Argentina–US BIT (n. 42) provides as follows: ‘This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential security interests.’

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VII. Umbrella Clause

Anthony Sinclair A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Umbrella Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Other Similar Provisions That are Not Umbrella Clauses . . . . . . . . . . .

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B. Overview of Arbitral Practice Concerning Umbrella Clause Claims. . . . 1. Framing the Debate: the Early SGS Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Continuing Divisions in Arbitral Practice on the Effect of the Umbrella Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Decisions Confirming the Effect of Umbrella Clauses . . . . . . . . . . . b) Decisions Doubting or Declining to give Effect to an Umbrella Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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C. Analysing the Debate on the Effect of the Umbrella Clause . . . . . . . . . . . . . 1. The Presumed Intentions of the Contracting Parties . . . . . . . . . . . . . . . . . 2. The Separation between International and Domestic Legal Orders a) The Existence of the Protected Obligation . . . . . . . . . . . . . . . . . . . . . . . . b) The Question of Non-Observance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Concern that the Umbrella Clause might render Superfluous Other Treaty Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Whether the Umbrella Clause provides Protection Only from ‘Governmental’ Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. The Impact of Contractually Agreed Dispute Settlement Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Conclusions on the Impact of an Exclusive Choice of Contractual Forum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Decisions in which Tribunals have declined Jurisdiction . . . (2) Decisions in which Tribunals have stayed the Proceedings (3) Decisions in which Tribunals have proceeded to Merits . . . . b) Analysis of the Question of Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Analysis of the Question of Admissibility and the Philippines’ Solution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. The Disputed Scope of the Umbrella Clause . . . . . . . . . . . . . . . . . . . . . . . . . a) The Nature of the Protected Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) ‘Governmental’ or ‘Commercial’ Obligations . . . . . . . . . . . . . . . (2) Contracts, Unilateral and General Undertakings. . . . . . . . . . . . b) The Existence of an Obligation of the Host State . . . . . . . . . . . . . . . . . c) The Existence of an Obligation Owed to the Claimant Investor

24 25 45 55 56 66 67 76 94 96 113 119 120 121 126 130 132 147 151 152 166 175 185

D. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

Literature: Walid Ben Hamida, ‘La Clause Relative au Respect des Engagements dans les Traités d’Investissement’ in Charles Leben (ed), Contentieux Arbitral Transnational Relatif à l’Investissement International: Nouveaux Développements (Pedone, 2006); James Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24 Arb. Int’l 351–374; Emmanuel Gaillard, ‘Investment Treaty Arbitration and Jurisdiction Over Contract Claims – the SGS Cases Considered’ in Todd Weiler (ed), International Investment Law and Arbitration: Leading cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005) 325–346; Judith Gill, Matt Gearing and Gemma Birt, ‘Contractual Claims and Bilateral Investment Treaties: A Comparative Review of the SGS Cases’ (2004) 21 J. Int’l Arb. 397–412; Stephan Schill, ‘Enabling Private Ordering, Function, Scope and Effect of Umbrella Clauses in International Investment Treaties’ (2009) 18 Minn. J. Int’l L. 1– 97; Christoph Schreuer, ‘Travelling the BIT Route: Of Waiting Periods, Umbrella Clauses and Forks in the Road’ (2004) 5 JWIT 231–256; Anthony Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’ (2004) 4 Arb. Int’l 411–434; Anthony Sinclair

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A. Introduction 1

This chapter considers arbitral practice and doctrine concerning umbrella clause claims. It addresses the two main areas of debate: the fundamental question of the effect of the ‘so-called umbrella clause’, and the clause’s scope of application. Part A. identifies what is meant by an umbrella clause. Part B. provides an overview of the arbitral practice on the umbrella clause, focusing on the meanings given (or not given) to umbrella clauses in the decisions to date. Part C. contains an analysis of the particular features of the debate on the effect of the umbrella clause. Part D. summarises the status of the debate and contains a brief outlook on the major outstanding issues. 1. Umbrella Clauses

2

Umbrella clauses are a concise and simply worded treaty provision. Whilst there are a number of variants on the standard form, the following model examples are readily recognisable as umbrella clauses: –

–

–

–

–

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Article 2 of the United Kingdom Model BIT: ‘[e]ach 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 II(2) of the 1984 and the 1987 United States Model BITs: ‘[e]ach Party shall observe any obligation it may have entered into with regard to investments’. Article 8 of the 1991 Germany Model BIT: ‘[e]ach Contracting Party shall observe any obligation it has assumed with regard to investments in its territory by nationals or companies of the other Contracting Party’. Article 10 of the Switzerland Model BIT: ‘[e]ach Contracting Party shall observe any obligation it has assumed with regard to investments in its territory by investors of the other Contracting Party’. Article 3(4) of the Netherlands Model BIT: ‘[e]ach Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals of the other Contracting Party’.

A typical umbrella clause is mandatory and apparently clear in its intended effect. On a plain reading, the clause creates a reciprocal international law obligation owed by and between contracting States requiring them to observe such obligations that they may enter into with investors of the other contracting State or with regard to the investments of such investors, and sometimes both. Coupled with an investor-State dispute settlement mechanism, umbrella clauses apparently afford a direct remedy in international law to foreign investors in respect of their investment-backed State contracts and other obligations that a

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State may have entered into with them or with regard to their investments. As shall be seen, however, the scope and effect of the umbrella clause continue to trouble and divide both arbitral tribunals and commentators. 2. Other Similar Provisions That are Not Umbrella Clauses

Variations in wording from treaty to treaty can yield subtle and sometimes 4 radical differences in scope and effect. Such differences in drafting of treaties are to be presumed to have been intended in order to bring about different effects and should be carefully observed.1 It is possible to find many provisions in treaties that appear deceptively similar to an umbrella clause but on closer inspection may not have the same effect and should not be described as such. For example, Article 10 of the Austria–Poland BIT provides that: A Contracting Party shall, subject to its law, do all in its power to ensure that a written undertaking given by a competent authority to a national of the other Contracting Party with regard to an investment is respected (emphasis added).

This provision appears to call upon the contracting parties merely to exercise 5 their best endeavours to ensure undertakings are met, and does not, in terms, create an obligation that State authorities observe relevant ‘undertakings’. Different again is Article 2(4) of Italy–Jordan BIT, which provides that: Each Contracting Party shall create and maintain in its territory a legal framework apt to guarantee to investors the continuity of legal treatment, including the compliance, in good faith, of all undertakings assumed with regard to each specific investor (emphasis added).

The language implies a commitment to provide a system of tolerably settled 6 norms, and independent institutions and tribunals to give effect to such norms, for the protection of investors, rather than an obligation to observe commitments per se. In Salini v. Jordan, this provision was found to be ‘appreciably different’ from the language of umbrella clauses and held not to have any effect akin to an umbrella clause.2 1 Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 50. Cf. El Paso Energy International Company v. Argentina, ICSID Case No. ARB/03/15, Decision on Jurisdiction, 27 April 2006 and Pan American Energy LLC and BP Argentina Exploration Company v. Argentina, ICSID Case No. ARB/03/13, Decision on Jurisdiction, 27 July 2006, in which the similarly composed tribunals took the following contrary view: ‘Umbrella clauses are not always drafted in the same manner, and some decisions insist on the variations in the drafting to explain different analyses. This Tribunal is not convinced that the clauses analysed so far really should receive different interpretations’: El Paso v. Argentina, para. 70; Pan American v. Argentina, para. 99. For a criticism of this approach see John P. Gaffney and James L. Loftis, ‘The “Effective Ordinary Meaning” of BITs and the Jurisdiction of TreatyBased Tribunals to Hear Contract Claims’ (2007) 8 JWIT 5–67; and Craig Miles, ‘Where’s My Umbrella? An “Ordinary Meaning” Approach to Answering Three Key Questions That Have Emerged from the “Umbrella Clause” Debate,’ in Todd J. Grierson Weiler, Investment Treaty Arbitration and International Law (JurisNet, 2008) 7 concluding that ‘Tribunals have applied at least five different versions of the Umbrella Clauses in recent cases’. 2 Salini Costruttori S.p.A. and Italstrade S.p.A. v. Jordan, ICSID Case No. ARB/02/13, Decision on Jurisdiction, 9 November 2004, paras. 126–127, and Noble Ventures v. Romania (n. 1) para. 57 concurring.

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Umbrella clauses are also distinct from so-called ‘preservation of rights’ clauses, which clarify that investment contracts ‘prevail’ over treaty obligations insofar as they stipulate treatment that is more favourable than that accorded by the treaty.3 Some commentators have suggested that the effect of these provisions is to create a positive treaty obligation on the part of States to observe contractual commitments, indistinguishable from an umbrella clause.4 The wording of these clauses, however, does not indicate that they are intended to impose a distinct obligation upon the host State enforceable through treaty arbitration, or at all. The tribunal in Yaung Chi Oo Trading v. Myanmar held that a provision of this kind merely preserves the sphere of legal application for the rights and obligations found in separate legal instruments, but does not create any enforceable treaty obligation to observe the terms of that instrument.5 The tribunal in the SGS v. Philippines was equally doubtful, remarking that ‘the phrase “shall prevail over”, used in relation to other commitments, may not have the effect of incorporating those commitments into a BIT’.6 It is clear that this particular category of treaty provision is distinct from an umbrella clause and does not create an enforceable treaty right to the observance of the obligations in State contracts. B. Overview of Arbitral Practice Concerning Umbrella Clause Claims

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Part B. looks at arbitral practice on the fundamental question, namely the effect of the umbrella clause. In order to frame the debate, in section 1. there is an overview of the leading decisions, the early SGS cases against Pakistan and Philippines, which addressed in detail for the first time the scope and effect of the umbrella clause. Section 2. summarises the subsequent decisions – the progeny of the Pakistan and Philippines cases – and the divisions that still characterise the current state of the law. 1. Framing the Debate: the Early SGS Cases

9

A few relatively early decisions, in the time frame of modern treaty arbitration, offered obiter dicta remarks,7 or considered but swiftly dismissed, 8 umbrel3 See UNCTAD, Bilateral Investment Treaties in the Mid-1990s (UN, 1998) 87 and examples therein. 4 E.g., Patrick Juilliard, ‘Le Reseau Francais des Conventions Bilaterales d’Investissments: À la Recherche d’un Droit Perdu?’ (1987) 13 DPCI 9, 16. 5 Yaung Chi Oo Trading Pte Ltd v. Myanmar, ASEAN Case No. ARB/01/1, Award, 31 March 2003, paras. 79–82, considering Article 12(1) of the 1998 Framework Agreement on the ASEAN Investment Area. 6 SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision on Jurisdiction, 29 January 2004, para. 114, fn. 46. 7 Nykomb Synergetics Technology Holding AB v. Latvia, SCC, Award, 16 December 2003, section 5; Waste Management, Inc. v. Mexico II, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004, para. 73; Consortium Groupement L.E.S.I.-DIPENTA v. Algeria, ICSID Case No. ARB/ 03/8, Award, 10 January 2005, p. 27, para. 25(ii).

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la clause claims and, consequently, did not construe or significantly contribute to our understanding of the provision. Fedax v. Venezuela is occasionally cited as the first decision to apply an umbrella clause on the merits. In fact the parties settled this aspect of their dispute, and the award contains no discussion of the clause’s effect.9 Fedax cannot truly be said to mark the modern emergence of umbrella clause claims. The meaning and effect of the umbrella clause received a detailed treatment 10 for the first time by separate ICSID tribunals in two widely-cited decisions: SGS v. Pakistan,10 and SGS v. Philippines.11 These decisions have framed the debate as to the effect of the umbrella clause and continue to inspire and divide tribunals and commentators alike. SGS v. Pakistan, which was rendered first, discussed the effect of a claim 11 brought under Article 11 of the Pakistan–Switzerland BIT. Article 11 provided that each Contracting Party ‘shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the other Contracting Party’. The tribunal analysed this clause as if it might be an umbrella clause, however, the undertaking to ‘constantly guarantee the observance’ invites argument that it entails something different from a directive ‘to observe’ or ‘to respect’ commitments entered into with foreign investors. At least one subsequent tribunal expressed the view that the promise to ‘constantly guarantee the observance’ of commitments might have been intended to create a different effect, such as to create ‘an international obligation of result for each Party to be fulfilled through appropriate means at the municipal level but without necessarily elevating municipal law obligations to international ones’.12 The tribunal in the SGS v. Philippines case described the clause as having ‘arguably similar language’13 to the umbrella clause in the Philippines–Switzerland BIT, implying 8 Link-Trading Joint Stock Company v. Department for Customs Control of Republic of Moldova, UNCITRAL, Decision on Jurisdiction, 16 February 2001, Award, 18 April 2002, paras. 61, 86; MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Chile, ICSID Case No. ARB/01/7, Award, 25 May 2004, para. 188; Gustav F. W. Hamester GmbH & Co KG v. Ghana, ICSID Case No. ARB/07/24, Award, 18 June 2010, para. 347; Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 424. 9 Fedax N.V. v. Venezuela, ICSID Case No. ARB/96/3, Award, 9 March 1998, paras. 25, 29. Similarly, IBM World Trade Corporation v. Ecuador, ICSID Case No. ARB/02/10, which was settled, with the settlement embodied in an award yet no pronouncement by the tribunal on the substance of the umbrella clause: Decision on Jurisdiction, 22 December 2003; Award, 22 July 2004 (unpublished). An umbrella clause claim was upheld in Duke Energy Electroquil Partners & Electroquil S.A. v. Ecuador, ICSID Case No. ARB/04/15, Award, 18 August 2008, paras. 317–325. The case turned on its particular facts, including Ecuador’s express acceptance by Presidential Decree that certain contractual obligations were obligations of the State and that these fell within the scope of jurisdiction under the BIT: para. 322. 10 SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003. 11 SGS v. Philippines (n. 6). 12 Noble Ventures v. Romania (n. 1) para. 58; cf. SGS Société Générale de Surveillance S.A. v. Paraguay, ICSID Case No. ARB/07/29, Decision on Jurisdiction, 12 February 2010, para. 169, fn. 95, stating that the tribunal would have found the clause in the Pakistan case to be an umbrella clause.

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that the wording in the Pakistan–Switzerland BIT might be sufficiently different to call for a different construction. One of the arbitrators in the SGS v. Pakistan case itself subsequently emphasised that a ‘properly worded clause could convert breaches of contract, ordinarily considered to fall within the municipal legal order, into breaches of a BIT’.14 If indeed the SGS v. Pakistan tribunal was grappling with a different type of clause, its decision should fall outside the pool of ‘authorities’ that have discussed the meaning of the umbrella clause. However, the parties and the tribunal in SGS v. Pakistan approached the issue on the basis that Article 11 might have the effect, as properly understood, of an umbrella clause and the present analysis approaches the decision on that same basis. Moreover, as shall be seen, at least one later tribunal, in the SGS v. Paraguay case, had no difficulty in concluding that an identically worded clause was an ‘umbrella clause’. 12 SGS v. Pakistan concerned an alleged breach of a Pre-Shipment Inspection Agreement (PSI Agreement) entered into between SGS, an airport and customs services company, and the Government of Pakistan. When a dispute arose, the claimant asserted that an alleged breach of the PSI Agreement also amounted to a breach of Article 11 of the BIT, because: through the juridical medium of Article 11 of the BIT, SGS’s claims grounded on alleged violation of the PSI Agreement have been transmuted or ‘elevated’ into claims grounded on alleged breach of the BIT, specifically Article 11 thereof.15

13

Taking what it described as a ‘prudential’ approach to interpretation,16 the tribunal rejected the suggestion that a breach of a State contract could, through the operation of the clause, be ‘transmuted or “elevated” into claims grounded on alleged breach of the BIT’.17 First, as a textual matter, the tribunal noted that Article 11 did not in so many words declare that breaches of contract ‘are automatically “elevated” to the level of breaches of international treaty law’.18 The tribunal denied that the words of Article 11 were sufficient to create ‘a new international law obligation on the part of the Contracting Party, where clearly there was none before’.19 Secondly, the tribunal suggested that the proposed legal effect attributed to the umbrella clause by the claimant would render superfluous the other substantive protections of the BIT.20 Thirdly, the tribunal refused to accept that the umbrella clause could supersede jurisdiction agreements inserted in contracts between the investor and the State, which it understood the umbrella

13 SGS v. Philippines (n. 6) paras. 97, 119. 14 J. Christopher Thomas, ‘Umbrella Clauses: Where Do Matters Stand?’, Presentation, 23rd AAA/ICC/ICSID Joint Colloquium on International Arbitration, Washington D.C., 17 November 2006. 15 SGS v. Pakistan, Decision on Jurisdiction, 6 August 2003, para. 158. 16 Ibid., paras. 164, 171. 17 Ibid., para. 158. 18 Ibid., para. 166. 19 Ibid. 20 Ibid.

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clause would do.21 Fourthly but also of considerable concern to the tribunal was the fear that to give effect to the claimant’s view of the umbrella clause raised the possibility of opening the ‘floodgates’, exposing States to unexpected and expansive international responsibility. The tribunal thought ‘[a]s a matter of textuality therefore, the scope of Article 11 of the BIT, while consisting in its entirety of only one sentence, appears susceptible of almost indefinite expansion’.22 Clearly, the arbitrators recoiled from giving any substantial effect to a clause that, in their minds, would otherwise result in ‘an unlimited number of State contracts’ or other undertakings of myriad State entities and subdivisions being incorporated into a treaty by reference such that ‘any alleged violation of those contracts and other instruments would be treated as a breach of the BIT’.23 The tribunal concluded that the legal consequences of the claimant’s con- 14 struction were ‘so far-reaching in scope, and so automatic and unqualified and sweeping in their operation, so burdensome in their potential impact upon a Contracting Party’,24 that the claimant must produce compelling positive evidence that such was indeed the Contracting Parties’ intention.25 Unpersuaded, the Pakistan tribunal concluded: we do not find a convincing basis for accepting the Claimant’s contention that Article 11 of the BIT has had the effect of entitling a Contracting Party’s investor, like SGS, in the face of a valid forum selection contract clause, to ‘elevate’ its claims grounded solely in a contract with another Contracting Party, like the PSI Agreement, to claims grounded on the BIT, and accordingly to bring such contract claims to this tribunal for resolution and decision.26

The tribunal was evidently mindful that it had interpreted away much, if not 15 all, of the substantive legal effect of Article 11, because it attempted to pre-empt criticism on this basis by suggesting that ‘confirmation in a treaty that a Contracting Party is bound under and pursuant to a contract, or a statute or other municipal law’ is not ‘devoid of appreciable normative value’.27 The tribunal added that in exceptional circumstances: a violation of certain provisions of a State contract with an investor of another State might constitute a violation of a treaty provision (like Article 11 of the BIT) enjoining a Contracting Party constantly to guarantee the observance of contracts with investors of another Contracting Party.28

Examples of such exceptional circumstances, the tribunal ventured, might be 16 a host State’s efforts to frustrate an arbitration clause having previously agreed to arbitrate disputes, or its refusal to appear in an arbitration proceeding. 21 22 23 24 25

Ibid. Ibid. Ibid., para. 168. Ibid., para. 167. This approach appears to have reversed the burden of proof, arguing that the burden was on Pakistan to establish that a meaning was intended that was different from the ordinary meaning of the words used in Article 11 (see Craig Miles, n. 1), but the tribunal had already taken the view that the ordinary meaning of the text was not clear. 26 SGS v. Pakistan (n. 15) para. 165. 27 Ibid., para. 172. 28 Ibid.

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SGS v. Philippines ascribes to an umbrella clause a strikingly different meaning, in direct contradiction of the Pakistan ruling. This case concerned a government contract for pre-shipment ‘Customs Inspection Services’ (CISS Agreement). The claims arose out of an alleged failure on the part of the Philippines to pay approximately USD 140 million it was said to owe to the claimant under the CISS Agreement. 18 Like in the Pakistan case, the Philippines tribunal accepted that it had jurisdiction to hear claims for breach of Article X(2) of the Philippines–Switzerland BIT, which requires that contracting parties observe ‘any obligation it has assumed with regard to specific investments’. Unlike the earlier decision, however, the Philippines tribunal insisted that the object and purpose of the BIT required that the umbrella clause be found to have an effective meaning. 19 First, on a simple textual analysis, the Philippines tribunal’s ‘provisional conclusion’ was that Article X(2) ‘means what it says’.29 Secondly, the tribunal was influenced by the context in which the umbrella clause arose, and the object and purpose of the treaty. The tribunal considered that given that the BIT was intended to achieve ‘the promotion and reciprocal protection of investment (…) [i]t is legitimate to resolve uncertainties in this interpretation so as to favour the protection of covered investments’.30 The Philippines tribunal emphasised, in particular, the value to investors of an international law remedy in respect of obligations that may be governed by the internal law of the host State: 17

It is a conceivable function of a provision such as Article X(2) of the Swiss–Philippines BIT to provide assurances to foreign investors with regard to the performance of obligations assumed by the host State under its own law with regard to specific investments – in effect, to help secure the rule of law in relation to investment protection. In the Tribunal’s view, this is the proper interpretation of Article X(2).31

In the event that a contracting party entered into binding commitments towards investments, the tribunal’s view was that a subsequent breach of those commitments could give rise to a treaty claim for violation of Article X(2), on the basis that ‘they are incorporated and brought within the framework of the BIT by Article X(2)’.32 The tribunal accordingly concluded that ‘Article X(2) makes it a breach of the BIT for the host State to fail to observe binding commitments, including contractual commitments, which it has assumed with regard to specific investments’.33 21 The Philippines tribunal did not immediately proceed to the merits phase of the claim for breach of the umbrella clause for reasons of admissibility, since it found that amounts due under the CISS Agreement and the parties legal rights and obligations thereto were, in the first instance, to be referred to the courts of Makati or Manila pursuant to the exclusive jurisdiction clause in the CISS 20

29 30 31 32 33

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SGS v. Philippines (n. 6) para. 128. Ibid., para. 116. Ibid., para. 126. Ibid., para. 117. Ibid., para. 128.

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Agreement. Determination of amounts contractually owing did not ‘become a treaty matter’ in the sense that the prior existence of an obligation to which the umbrella clause might attach, and the necessary forensic and legal investigation into the amounts owing under Philippine law pursuant to that obligation, were not questions that themselves engaged the application of the treaty’s provisions or international law generally. Accordingly, the tribunal held by a majority that, until such time as ‘the question of the Respondent’s obligation to pay is clarified a decision by this tribunal on SGS’s claims to payment would be premature’.34 An umbrella clause claim is a treaty cause of action but the tribunal consid- 22 ered that it has as its ‘essential basis’ an underlying obligation, typically a contractual one, created and sustained by a municipal law. In the circumstances, the tribunal considered that it would be consistent with the principles governing the distinction between contractual and treaty claims, articulated in the Decision on Annulment in Vivendi v. Argentina, not to proceed with the umbrella clause claim but rather, to ‘give effect to any valid choice of forum clause in the contract’.35 Some perceive similarities in the outcomes of the Pakistan and the Philip- 23 pines cases, however, their analysis is very different. The Philippines tribunal ascribed to the umbrella clause in question a substantial legal effect. The Pakistan tribunal did not. Although the Philippines case settled, the proceedings had by this time been restarted,36 with it still open to the tribunal to render a final award on the merits of the umbrella clause claim. 2. Continuing Divisions in Arbitral Practice on the Effect of the Umbrella Clause

The two early SGS decisions continue to polarise the umbrella clause debate, 24 both in the discussions of the growing number of tribunals to have considered umbrella clause claims and in the commentaries. The decided cases in which tribunals have considered umbrella clauses, and their contribution to understanding on the effect of these particular provision, are discussed below, grouped first into decisions confirming the effect of the umbrella clause, even if not ultimately applying it in the particular circumstances, and secondly, those decisions which have disavowed or doubted its effect.

34 Ibid., para. 155. The dissenting arbitrator considered a stay of the proceedings inappropriate: Declaration of Antonio Crivellaro, 29 January 2004, paras. 2–7, 11. 35 Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/97/3, Decision on Annulment, 3 July 2002, para. 98. It is not fully explained in SGS v. Philippines (n. 6) why the tribunal also stayed the claimant’s claims for violation of the obligation to ensure fair and equitable treatment. 36 SGS v. Philippines, ICSID Case No. ARB/02/6, Order of the Tribunal on Further Proceedings, 17 December 2007.

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a) Decisions Confirming the Effect of Umbrella Clauses

A tribunal upheld an umbrella clause claim on the merits for the first time in CMS v. Argentina.37 The finding on the umbrella clause was later annulled,38 however, the ad hoc committee did not criticise the tribunal’s conclusions as to the umbrella clause’s substantive effect, but only that the tribunal had over-extended the scope of the provision, as discussed further in Part C. below. 26 The clause in question, Article II(2)(c) of the Argentina–United States BIT, provides that ‘[e]ach Party shall observe any obligation it may have entered into with regard to investments’. The dispute concerned alleged obligations found in a licence to transmit and distribute natural gas. Two provisions of the licence were characterised as ‘stabilisation clauses’. These provisions were found to amount to a guarantee on the part of the Argentine government that it would not interfere with the tariff regime for gas transmission and that it would not unilaterally amend the terms of the licence. The tribunal ruled, on the basis of these licence terms and in the light of applicable regulations, that Argentina had entered into commitments with regard to the claimant that it would not freeze the tariff regime for gas distribution, or apply price controls, and would not unilaterally alter the basic rules governing the operation of the licence.39 The tribunal added that these were commitments of a public and not merely commercial nature, and that they had been violated through the exercise of Argentina’s sovereign power. On that basis, the tribunal held that Argentina was in breach of Article II(2)(c) ‘to the extent that legal and contractual obligations pertinent to the investment have been breached’.40 Thus, the umbrella clause gave rise to an international remedy in respect of violations of domestic law obligations entered into by Argentina towards the claimant and its investment. 27 The next decision to rule on the merits of an umbrella clause claim, Eureko v. Poland,41 contained a more elaborate exposition on the scope and effect of an umbrella clause. The decision concerned Article 3.5 of the Netherlands–Poland BIT, which provides that each Contracting Party ‘shall observe any obligations it may have entered into with regard to investments of investors of the other Contracting Party’. The central finding was the determination that Poland had, through its State treasury, entered into a binding commitment with the claimant that it would hold an initial public offering of shares in the State insurance company, PZU, in the course of which the claimant – which already owned 30 per cent of the shares in PZU – would be entitled to acquire a majority stake.42 The government and State treasury, however, changed their strategy, with the Coun25

37 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005. 38 CMS v. Argentina, Decision on Annulment, 25 September 2007, para. 87. 39 CMS v. Argentina (n. 37) paras. 134, 302–303. 40 Ibid., para. 303. 41 Eureko B.V. v. Poland, Ad Hoc, Partial Award, 19 August 2005. 42 Ibid., para. 157.

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cil of Ministers resolving that ‘it was essential for the State Treasury to maintain control’ over PZU. By a majority, the tribunal found that this reversal was ‘politically motivated’, ‘discriminatory’, in breach of the undertakings given to the claimant, and thereby in breach of Article 3.5 of the BIT.43 The tribunal explained that the plain meaning of this provision ‘is not obscure. The phrase “shall observe” is imperative and categorical’.44 The tribunal supported its conclusion by reference to the ‘provenance’ of the umbrella clause in the body of international investment law.45 The tribunal in Eureko also cast doubt on the interpretative approach to the umbrella clause taken by the tribunal in SGS v. Pakistan, preferring instead the SGS v. Philippines tribunal’s analysis.46 The tribunal insisted that the umbrella clause must be given effect, and that effect must be something different from or additional to the other investment protection standards set out in the treaty.47 The dissenting arbitrator in Eureko rejected the majority’s conclusion that 28 Poland had entered into a binding commitment to which the umbrella clause might apply. He criticised this aspect of the award, in particular, for insufficient treatment of the ‘basic rules applicable under Polish law’, describing it as an exercise in interpretation ‘sans loi’.48 In addition, the arbitrator disputed the substantive effect attributed to the umbrella clause by the majority,49 believing it to be ‘a potentially dangerous precedent capable of producing negative effects on the further development of foreign capital participation in privatisations of Stateowned companies’.50 Noble Ventures v. Romania is also an endorsement for umbrella clause claims, 29 although the tribunal did not in fact find that the clause had been breached. The umbrella clause in question, in the Romania–United States BIT, provides that ‘[e]ach Party shall observe any obligation it may have entered into with regard to investments’. The tribunal observed that the wording of the clause in question was ‘general and straightforward’, in contrast to the provisions discussed in the SGS v. Pakistan and Salini v. Jordan cases.51 The claim failed on the merits not for any doubt or confusion as to the effect of the clause, but rather, because the tribunal found on the facts that Romania had not breached any of the obligations it had assumed towards the claimant.52 Nevertheless, the tribunal helpfully ex-

43 Ibid., paras. 191, 208, 219, 242, 250. 44 Ibid., para. 246. 45 Ibid., para. 251 citing Anthony C. Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’ (2004) 4 Arb. Int’l 411–434. 46 Ibid., para. 257. 47 Ibid., para. 249. 48 Dissenting Opinion of Arbitrator Rajski, 19 August 2005, para. 5. See also Zachary Douglas, ‘Nothing if Not Critical for Investment Treaty Arbitration: Occidental, Eureko and Methanex’ (2006) 22(1) Arb. Int’l 27, 40. 49 Ibid., paras. 4, 11. 50 Ibid., para. 11. 51 Noble Ventures v. Romania (n. 1) para. 60. 52 Ibid., para. 158.

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plained that in its view, an umbrella clause renders municipal law obligations ‘directly cognizable in international law’,53 and that by its application: (…) the host state may incur international responsibility by reason of a breach of its contractual obligations towards the private investor of the other Party, the breach of contract being thus ‘internationalized’, i.e. assimilated to a breach of a treaty.54

The tribunal insisted that ‘the principle of effectiveness (effet utile)’ required that the umbrella clause must create an obligation ‘beyond those specified in other provisions of the BIT itself’.55 The tribunal concluded that the umbrella clause was intended to provide the investor with an ‘internationally secured legal remedy in respect of investment contracts that it has entered into with the host State’,56 endorsing the view that the umbrella clause is an intentional departure from the general separation of State obligations under municipal and under international law.57 31 In LG&E v. Argentina,58 the tribunal accepted that Argentina violated Article II(2)(c) of the Argentina–United States BIT. Argentina was found to have assumed certain legal obligations with regard to investments and foreign investors participating in its gas distribution sector and, subsequently, to have repudiated these without compensation. Unlike preceding cases, the underlying commitments did not arise out of a State contract. Rather, the tribunal found that guarantees, set forth in the Gas Law and its implementing regulations, and subsequently included in promotional material for a privatisation targeted at foreign investors, generated legal obligations falling within the scope of the umbrella clause. According to the tribunal: 30

[t]hese laws and regulations became obligations within the meaning of Article II(2)(c), by virtue of targeting foreign investors and applying specifically to their investments, that gave rise to liability under the umbrella clause.59

32

Abrogation of these commitments gave rise to a violation of Article II(2)(c) of the BIT,60 which the tribunal held: creates a requirement for the host State to meet its obligations towards foreign investors, including those that derive from a contract. Hence such obligations receive extra protection by virtue of their consideration under the bilateral treaty.61

53 54 55 56 57 58

Ibid., para. 53. Ibid., para. 54. Ibid., paras. 50–51. Ibid., para. 52. Ibid., paras. 55, 173. LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006. 59 Ibid., para. 175. 60 Ibid. 61 Ibid., para. 170.

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In Enron v. Argentina,62 Argentina was again found to have violated the um- 33 brella clause in Article II(2)(c) of the Argentina–United States BIT. The award was later annulled on grounds unrelated to the present discussion. In the award, Argentina was found to have reneged on obligations contained in certain contracts and arising out of unilateral undertakings expressed in its energy sector laws and regulations.63 The tribunal confirmed that Article II(2)(c) covered both these contractual and unilateral undertakings.64 These obligations were ‘not observed’ as a matter of Argentinean law.65 In Siemens v. Argentina, a claim was advanced under Article 7(2) of the Ar- 34 gentina–Germany BIT, which provides that ‘each Contracting Party shall observe any other obligation it has assumed with regard to investments by nationals or companies of the other Contracting Party in its territory’.66 The claim was rejected due to the absence of an obligation owed to the claimant,67 as discussed further below, but in obiter remarks the tribunal accepted that: Article 7(2) has the meaning that its terms express, namely, that failure to meet obligations undertaken by one of the Treaty parties in respect to any particular investment is converted by this clause into a breach of the Treaty.68

Sempra v. Argentina closely followed the analysis in CMS, Enron, and 35 LG&E.69 Sempra held interests in certain Argentinean companies operating in the gas transmission and distribution sector.70 These companies held licences for the distribution and sale of gas to customers in the Argentine Republic. The tribunal held that by legislative acts and in the terms of the gas distribution licences Argentina had assumed certain obligations in relation to Sempra’s investment falling within the scope of protection of an umbrella clause.71 These were held to be obligations of Argentina entered into with the claimant and its investment.72 The tribunal determined that Argentina had breached these commitments as a matter of Argentinean law and concluded that Argentina was therefore also internationally responsible for violations of the BIT, and specifically the umbrella clause.73 A later decision to annul the award did not focus on this aspect of the case. 62 Enron Corporation and Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007. 63 Ibid., paras. 102–103, 127, 136, 151. 64 Ibid., para. 274. 65 Ibid., para. 231. 66 Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007. 67 Ibid., paras. 81, 204. 68 Ibid., para. 204. 69 Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007. 70 Ibid., para. 83. 71 Ibid., para. 313. 72 Ibid., para. 312. 73 Ibid., paras. 309–310. In a further decision arising out of the Argentine economic crisis, an umbrella clause claim, invoked by operation of the MFN treatment clause in the Argentina– France BIT, was upheld in: EDF International S.A., SAUR International S.A. and León Partic-

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BIVAC v. Paraguay concerned a claim in respect of unpaid invoices under a contract with the Ministry of Finance of Paraguay for the provision of technical services for pre-shipment inspection of imports into Paraguay. The claim was brought under the Netherlands–Paraguay BIT, Article 3(4) of which provides: ‘[e]ach Contracting Party shall observe any obligation it may have entered into with regard to investments of the other Contracting Party’. The claimant alleged that Article 3(4) had been breached by the respondent’s failure to make payments that were undisputed and due under the contract. The tribunal upheld jurisdiction in respect of those claims. First, the words ‘any obligation’ were ‘without apparent limitation’, and certainly broad enough to encompass commitments contained in the contract.74 Secondly, the words of Article 3(4) had to be interpreted in such a way as to give them some meaning and practical effect, separate from the other provisions of the treaty. On that basis, and in the light of the natural and ordinary meaning of the language, the tribunal concluded that it had jurisdiction over claims arising from or produced directly in relation to the contract.75 37 This clear ruling on the effect of the umbrella clause was not, however, the end of the matter. Article 9 of the contract provided that disputes should be submitted to the exclusive jurisdiction of the courts of Asunción. The tribunal took the position that ‘[a]ssuming that Article 3(4) does import the obligations under the Contract into the BIT’ then it must have imported all of Paraguay’s obligations including to ensure the courts of Asunción were available to resolve disputes, in accordance with Article 9. For the tribunal, this raised doubt as to its authority to hear the claims. Given that Article 9 of the contract was concluded after the BIT, and assuming the parties to the contract to have knowledge as to the content of the BIT, the tribunal considered that it was open to the parties to have included a provision in Article 9 carving out possible umbrella clause claims. The tribunal took the failure to do so to be an indication that the parties to the contract intended the exclusive jurisdiction clause ‘to be absolute and without exception’.76 The tribunal held that the umbrella clause does not mean a claimant is ‘free to pick and choose those parts of the Contract that they may wish to incorporate’ and to ignore others.77 To allow otherwise would ‘seriously and negatively undermine contractual autonomy’.78 Counter arguments based on the separation of contract and treaty claims were dismissed ‘as being entirely artificial’ since, according to the tribunal, ‘the reality’ is that to determine an umbrella clause claim, a treaty tribunal must interpret and apply the underlying 36

74 75 76 77 78

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ipaciones Argentinas S.A. v. Argentina, ICSID Case No. ARB/03/23, Award, 11 June 2012, para. 929 et seq. Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. Paraguay, ICSID Case No. ARB/07/9, Decision on Jurisdiction, 29 May 2009, para. 141. Ibid., para. 142. Ibid., para. 146. Ibid., para. 148. Ibid.

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contract.79 The tribunal concluded that the fundamental basis of the claim could only be the contract, and that accordingly, the umbrella clause claim was inadmissible. The proper forum for the resolution of the contractual claim that had been raised, albeit under Article 3(4) of the BIT, was the courts of Asunción. The tribunal left open for the next phase of the proceedings the question whether the consequence of this ruling was that the claims should be dismissed, or whether the proceedings might be stayed, as in SGS v. Philippines, although the tribunal indicated serious doubt as to the latter course.80 Toto Costruzioni Generali v. Lebanon bears similarities in outcome and ap- 38 proach to the BIVAC case, yet nevertheless confirms that the umbrella clause might give rise to a treaty remedy in respect of a breach of a State contract. The dispute concerned non-performance of a contract between Toto and the Conseil Executif de Grands Projects (the CEGP) and its successor, the Council for Development and Reconstruction (the CDR). The claimant invoked Article 9(2) of the BIT, which provides: ‘[e]ach Contracting Party shall observe any other obligation it has assumed with regard to investments in its territory by investors of the other Contracting Party’. The tribunal was satisfied that the contract would have fallen within the scope of Article 9(2), given that CEGP and CDR were public entities for which the respondent State was responsible.81 The tribunal was also prepared to accept that the umbrella clause might provide a remedy in respect of breach of State contracts. Ultimately, however, the tribunal ruled that it did not have jurisdiction to determine the claims since the contract provided that disputes should be referred to the Lebanese courts. The tribunal’s assessment was that [a]lthough Article 9.2 of the Treaty may be used as a mechanism for the enforcement of claims, it does not elevate pure contractual claims into treaty claims. The contractual claims remain based upon the contract; they are governed by the law of the contract and may be affected by the other provisions of the contract.82

For the tribunal, the consequence of the contract containing an exclusive ju- 39 risdiction in favour of the Lebanese courts was that the tribunal lacked jurisdiction to determine what it called the ‘contractual claims’ advanced under Article 9(2) of the BIT.83 Factually similar to the two earlier SGS cases, and the BIVAC case, SGS v. 40 Paraguay concerned a claim under Article 11 of the Paraguay–Switzerland BIT,84 which provides that ‘[e]ither Contracting Party shall constantly guarantee the observance of commitments it has entered into with respect to the invest79 Ibid., para. 149. 80 Ibid. 81 Toto Costruzioni Generali S.p.A. v. Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, 11 September 2009, para. 190. 82 Ibid., para. 202. 83 Ibid. Judge Schwebel, appointed to fill a gap on the tribunal at a late stage of proceedings, issued a brief opinion casting doubt on this finding: Concurring Opinion, 24 May 2012. 84 SGS v. Paraguay (n. 12).

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ments of other investors of the Contracting Party’. The claim sought to uphold and enforce the financial obligations of Paraguay under a long-term agreement between SGS and the Ministry of Finance to provide pre-shipment customs inspection services. The contract provided that disputes deriving from or in connection with the agreement should be submitted to the courts of Asunción and resolved according to Paraguayan law. 41 The tribunal ruled that the contract was a ‘commitment’ falling with the scope of Article 11 and as such, it had jurisdiction to hear the claim. It denied that the term commitment in Article 11 only referred to commitments of a certain nature. Rather, it held that ‘[t]he obligation has no limitations on its face – it apparently applies to all such commitments, whether established by contract or by law, unilaterally or bilaterally, etc’.85 42 Jurisdiction was not displaced by the existence of the dispute settlement clause in the contract and nor were the claims rendered inadmissible. The tribunal held that it was consistent with the intentions of the contracting parties to the treaty to allow the claimant to advance its claim under the umbrella clause, notwithstanding the jurisdiction clause in the contract, since: [t]he State parties to the BIT intended to provide this Treaty protection in addition to whatever rights the investor could negotiate for itself in a contract or could find under domestic law, and they gave the investor the option to enforce it, including through arbitrations such as this one.86

The tribunal thought it would defeat the purpose of the umbrella clause if it could not rule on a claim without the contractual aspects of the dispute having first been referred to the contractually chosen forum.87 44 Turning to the merits of the umbrella clause claim, the tribunal rejected the contention that the umbrella clause may only be breached by conduct involving the exercise of sovereign power.88 Breach of contract is a failure to observe commitments, the tribunal held, regardless of whether the State has also abused its sovereign authority.89 The tribunal concluded that ‘we see no basis on the face of the clause to believe that it should mean anything other than what it says – that the State is obliged to guarantee the observance of its commitments with respect to the investments of the other State party’s investors’.90 Accordingly, proof that Paraguay had failed to observe its commitments by failing to make payments due, without lawful justification for failing to do so, led to the umbrella clause claim being upheld. 43

85 86 87 88 89 90

Decision on Jurisdiction, 12 February 2010, para. 167. Ibid., para. 176; and Award, 10 February 2012, para. 71. Award, 10 February 2012, paras. 101, 104. Ibid., para. 89. Ibid., para. 91. Decision on Jurisdiction, 12 February 2010, para. 168; Award, 10 February 2012, para. 72.

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b) Decisions Doubting or Declining to give Effect to an Umbrella Clause

In upholding a breach of an umbrella clause, the tribunal in Sempra v. Ar- 45 gentina extolled that ‘[v]arious recent decisions have dealt with the meaning and extent of the “umbrella clause”, and the mystery surrounding the matter seems to be gradually lessening’.91 As the following discussion reveals, that statement was rather hopeful. The sceptical view of the umbrella clause continues to be voiced by many tribunals, besides the tribunal in the initial Pakistan case. Joy Mining v. Egypt contains highly sceptical remarks about the effect of the 46 alleged umbrella clause in the Egypt–United Kingdom BIT.92 In that case, the tribunal denied that the umbrella clause had any substantive effect independent of a violation of the BIT’s other rights and obligations or, in an apparent non sequitur, a breach of contract of sufficient ‘magnitude’. The tribunal opined that: [i]n this context, it could not be held that an umbrella clause inserted in the Treaty, and not very prominently, could have the effect of transforming all contract disputes into investment disputes under the Treaty, unless of course there would be a clear violation of the Treaty rights and obligations or a violation of contract rights of such a magnitude as to trigger the Treaty protection, which is not the case. The connection between the Contract and the Treaty is the missing link that prevents any such effect.93

Salini v. Jordan also casts doubt on the effect of the umbrella clause as posit- 47 ed in SGS v. Philippines, for example. However, as already discussed, the treaty in question contained a very differently worded provision, which could not be compared with an umbrella clause as properly understood. The tribunal, rightly, gave the clause a quite different effect. In contrast, El Paso v. Argentina and Pan American v. Argentina squarely ad- 48 dressed the same umbrella clause applied in CMS, LG&E, Enron and Sempra and also considered in Azurix. The decisions, issued by tribunals with two common members, are materially identical on this point. Both decisions reject the unqualified suggestion that the clause in the Argentina–United States BIT creates an international law obligation to observe investment-related State contracts or commitments arising under municipal law in the manner pleaded by the claimants or adopted in other cases. Each decision endorses the sceptical approach of the tribunal in SGS v. Pakistan. The umbrella clause claims related to Argentina’s alleged failure to observe 49 arrangements governing the claimants’ energy sector investments set forth in the applicable general regulatory frameworks and confirmed by contracts and licences.94 The conclusions of the El Paso and Pan American tribunals on the ef-

91 Award, 28 September 2007, para. 309. 92 Joy Mining Machinery Ltd v. Egypt, ICSID Case No. ARB/03/11, Award, 6 August 2004. 93 Ibid., para. 81 (emphasis added). This aspect of the Award is necessarily affected by the tribunal’s prior finding that the dispute did not even concern an investment. The comments on the umbrella clause are obiter. 94 El Paso v. Argentina (n. 1) paras. 26, 29.

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fect of the umbrella clause are foreshadowed by the manner in which the tribunals introduced the issue: the question for the Tribunal is whether Article II(2)(c) of the U.S.–Argentina BIT is an umbrella clause whose effect would be, according to the Claimants, to transform all contractual undertakings into international law obligations and, accordingly, to turn breaches of the slightest such obligations by the Respondent into breaches of the BIT.95

50

It is clear that the El Paso and Pan American tribunals, like that in SGS v. Pakistan, were influenced by a fear that there were few, if any, limits to the scope of the umbrella clause. This was especially so given the tribunal’s concern that the clause referred to obligations generally, and not only contractual obligations: if one considers that it elevates contract claims to the status of treaty claims, it should result as an unavoidable consequence that all claims based on any commitment in legislative or administrative or other unilateral acts of the State or one of its entities or subdivisions are to be considered as treaty claims.96

The tribunals’ view that the umbrella clause might attach to ‘any legal obligation of a State and not only of any contractual obligation with respect to investment (…) whatever the source of the obligation’97 evidently gave rise to strong antipathy to other arguments as to the effect of the umbrella clause. Both tribunals rejected the interpretation of the umbrella clause given by the SGS v. Philippines tribunal, finding the arguments put forward by the tribunal in SGS v. Pakistan ‘more than conclusive’.98 The tribunals doubted the interpretative approach of the Philippines tribunal for ‘favouring one party over another’99 and being unbalanced,100 emphasising that ‘a balanced interpretation is needed, taking into account both State sovereignty and the State’s responsibility to create an adapted and evolutionary framework for the development of economic activities, and the necessity to protect foreign investment and its continuing flow’.101 52 Similar to the view of the SGS v. Pakistan tribunal, the El Paso and Pan American tribunals were also convinced that ‘if any violation of any commitment of the State is a violation of the Treaty, this renders useless all substantive standards of protection of the Treaty’.102 The tribunals rejected the possibility that the clause was intended to provide a remedy in respect of ‘mere’ contractual breaches and saw no need for one, since ‘it is more than likely that the foreign investor will have managed to insert a dispute settlement mechanism into the contract’.103 In investment matters, the tribunals asserted that a State contract is 51

95 96 97 98 99 100 101 102 103

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Ibid., para. 67 (emphasis added); and see Pan American v. Argentina (n. 1) para. 96. Ibid., paras. 71, 77; Pan American v. Argentina (n. 1) para. 101. Ibid., para. 76; Pan American v. Argentina (n. 1) para. 105. Ibid., para. 71. Hakeem Seriki, ‘Umbrella Clauses and Investment Treaty Arbitration: All Encompassing or a Respite for Sovereign States and State Entities’ (2007) J. Bus. L. 570, 573. El Paso v. Argentina (n. 1) para. 70. Ibid. Ibid., paras. 73, 76; Pan American v. Argentina (n. 1) paras. 102, 105. Ibid., para. 77; Pan American v. Argentina (n. 1) para. 106.

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likely to refer to ICSID or international commercial arbitration anyway. Disagreeing with the tribunal in Noble Ventures, the tribunals thought that the foreign party would already have access to an ‘internationally secured legal remedy’,104 and no additional remedy was intended, or if the transaction was merely commercial, it would fall within the jurisdiction of the local courts, and in the tribunals’ opinion, no ‘internationally secured remedy’ would be justified.105 The tribunal considered that one of the ‘far-reaching consequences’ of a 53 broad interpretation of the umbrella clause would be the destruction of ‘the distinction between national legal orders and the international legal order’.106 The tribunal doubted that the contracting parties had intended to create potential international responsibility of a State for breach of a contract governed by domestic law. At best, the El Paso and Pan American tribunals considered that the umbrella 54 clause was intended to safeguard ‘additional investment protections contractually agreed by the State as a sovereign’,107 without articulating what these might be, and only in respect of conduct that would otherwise violate the standards of the treaty.108 In other words, the tribunals found little or no additional substantive effect for the umbrella clause in the Argentina–United States BIT.109 C. Analysing the Debate on the Effect of the Umbrella Clause

Part C. analyses the current state of the law on umbrella clause claims, includ- 55 ing the various objections that have been raised to its asserted effect. Section 1. addresses arguments based on the presumed intentions of the contracting parties. Section 2. analyses the concern that to give a broad effect to the umbrella clause would be destructive of the distinction between domestic and international legal orders. Section 3. considers the argument that to give effect to the umbrella clause would risk rendering other treaty provisions superfluous. Section 4. considers the question of whether the umbrella clause may only be triggered by breaches of a governmental nature. Section 5. considers the problematic interaction of the umbrella clause with contractually agreed dispute settlement proce-

104 105 106 107 108

Ibid. Ibid. Ibid., para. 82, and see Pan American v. Argentina (n. 1) para. 111. Ibid., paras. 81–82. Ibid., para. 84. The umbrella clause claim ultimately was dismissed on the merits on grounds that El Paso did not have any basis for a claim in its own right: Award, 31 October 2011, paras. 533, 538. 109 Emmanuel Gaillard, ‘A Black Year for ICSID’ (2007) TDM 1–9; David Foster, ‘Umbrella Clauses: A Retreat from the Philippines?’ (2006) 4 Int’l Arb. L. Rev. 100, 107 suggesting that the residual meaning ascribed to the clause was ‘arbitrary’. An interpretation that would render a treaty provision ineffective or meaningless is not likely to be the correct one and should be avoided: Robert Jennings and Arthur Watts (eds), Oppenheim’s International Law (Longman, 1992) 1280.

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dures. Lastly, section 6. considers the scope of application of the umbrella clause, and the floodgates fears this issue has generated. 1. The Presumed Intentions of the Contracting Parties

In SGS v. Pakistan, the tribunal could not accept that the contracting parties to the Pakistan–Switzerland BIT had intended Article 11 of that treaty to create a new international obligation in respect of municipal obligations ‘where clearly there was none before’.110 The tribunal in Joy Mining v. Egypt could not accept that such a brief and unobtrusive treaty provision could have been intended to have the effect of creating a treaty remedy in respect of breach of investmentbacked State contracts.111 The philosophy of the El Paso and Pan American decisions also appears to rule out the possibility that States might agree as a general matter to afford to each other’s investors, both large and small irrespective of their bargaining strength and ability to negotiate for themselves contractual safeguards, access to an independent and depoliticised dispute settlement mechanism for questions concerning a State’s failure to observe obligations entered into with the foreign party or with respect to its investment. 57 The difficulty with the positions taken by these tribunals is that they seem unprepared to accept the words of the umbrella clause at face value and the possibility that the very intention of the contracting parties was to create an international remedy in respect of violation of a State contract.112 State sovereignty necessarily admits the possibility that States may so agree to bind themselves and permit international institutions and processes to scrutinise and even intervene in their domestic affairs and confirms their capacity to do so.113 At least one State has offered contemporaneous confirmation that this was indeed its intention in negotiating umbrella clauses in its treaties.114 In addition, if the ‘broad’ or ‘generic claims clause’ is conceded to allow investors to submit to a treaty-based tribunal true contractual disputes related to investments,115 this assumption underlying the restrictive interpretation of umbrella clauses – namely that States did not intend to create a jurisdiction to determine investment-related 56

110 SGS v. Pakistan (n. 15) para. 166. 111 Joy Mining v. Egypt (n. 92) para. 81. 112 See Stanley D. Metzger, ‘Multilateral Conventions for the Protection of Private Foreign Investment’ (1960) 9 J. Pub. L. 133, 137; Ignaz Seidl-Hohenveldern, ‘The Abs-Shawcross Draft Convention to Protect Private Foreign Investment: Comments on the Round Table’ (1961) 10 J. Pub. L. 100, 104–105. 113 Anne-Marie Slaughter, ‘Sovereignty and Power in a Networked World Order’ (2004) 40 Stan. J. Int’l L. 283, 286. 114 ‘Interpretation of Article 11 of the Bilateral Investment Treaty between Switzerland and Pakistan in Light of Decision of the Tribunal on Objections to Jurisdiction of ICSID in Case No. ARB/01/13 SGS Société Générale de Surveillance S.A. versus Islamic Republic of Pakistan’, Note under Cover of Letter from Swiss Government to ICSID Deputy Secretary-General, 1 October 2003, (2004) 19 Mealey’s Int’l. Arb. Rep. E-1. 115 Anthony Sinclair, ‘Bridging the Contract/Treaty Divide’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (Oxford University Press, 2009) 92.

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State contract disputes – is yet further undermined.116 Yet, whilst these tribunals acknowledged that States might so agree, they were not convinced that by the wording of the clauses in question, they had. Evidence of the origins of the umbrella clause, including the stated intentions 58 of drafters involved in producing the first formulations of the umbrella clause and the contemporaneous commentaries of scholars and practitioners, suggests that the better view is that the clause as originally devised was intended to achieve two definite objectives.117 The first was the creation of an international law obligation breach which would give rise to international responsibility. The second was to establish an international law dispute settlement procedure to enforce this obligation. What is qualitatively different about the umbrella clause from a simple contractual claim is the coming together in a single legal device of these two elements. The evidence suggests that the umbrella clause had been intended effectively 59 to ensure that State contracts (and other ‘obligations’ of the host State) are lifted out of the domain of the host State’s legal system so that, at least, the obligation to perform such obligations is not governed exclusively by the proper law (typically the host State’s law) and therefore vulnerable to unilateral variation or termination. The clause may have been originally conceived to remedy some of the inadequacies of purely contractual investment protection techniques. The effectiveness of contractual provisions designed to insulate investors from sovereign power and to ensure that an arbitration tribunal would apply international legal principles to disputes cannot be assured if the contract remains subject to local law and thus local legislative and executive power. Prevailing doctrine at the time of the umbrella clause’s inception held that a host State could not give an effective promise in an investment contract that it would not change laws affecting the transaction; in many countries that is still the case. Moreover, the law of the host State would very often govern such contracts, given relative negotiating strengths and doctrine at the time that all State contracts must be ‘based on the municipal law of some country’.118 The conclusion that a State’s international responsibility could be invoked when a State merely breached a contract with a foreign investor, without proof of some further internationally wrongful element, such as a refusal to adjudicate claims locally or unilateral repudiation of contrac116 SGS v. Paraguay (n. 12) paras. 129, 183; cf. El Paso v. Argentina (n. 1) para. 84; Pan American v. Argentina (n. 1) para. 109 in which the tribunals used the generic offer of jurisdiction over ‘investment agreements’ in Article VII(1)(a) of the treaty to conclude that the umbrella clause did not give rise to the possibility of treaty claims in respect of other types of State contract disputes. This aspect of the reasoning not to give effect to the umbrella clause seems to be based on the view that claims under Article VII(1)(a) would themselves already ‘elevate’ contractual claims stemming from an ‘investment agreement’ to the level of ‘treaty claims’. However, umbrella clause claims and claims under the generic dispute settlement clause are qualitatively different and should not be confused. 117 Anthony Sinclair (n. 45). 118 Payment of Various Serbian Loans Issued in France (France v. Serbia), PCIJ Judgment of 12 July 1929, (1929) PCIJ (Ser. A) No. 20, 41.

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tual rights and obligations through legislative intervention, had some advocates but was never well supported and was ultimately not sustainable.119 Theories that argued that certain types of ‘investment agreements’ or ‘economic development agreements’ could be ‘internationalised’ or equated with treaties in order to attract the treaty law principle pacta sunt servanda were only ever marginally successful in a handful of concession contract arbitrations in the 1960s and 1970s.120 Such arguments were theoretically unsatisfactory, not least because they lacked the essential mutuality of international law rights and obligations.121 In time it was accepted that rules of international law might be chosen to apply to an investment agreement,122 but this did not necessarily mean that breach of that agreement invoked the State’s international responsibility;123 amongst the few to suggest otherwise was the sole arbitrator in Texaco v. Libya.124 60 Other commentators have drawn analogies between the operation of the umbrella clause and the effect of intangibility or stabilisation clauses found in some State contracts.125 However, the umbrella clause resolves at least one major con119 See e.g., International Law Commission (F.V. García-Amador, Rapporteur), Report of the International Law Commission on the work of its eleventh session, 20 April to 26 June 1959, UN Doc.A/4169; Robert Y. Jennings, ‘State Contracts in International Law’ (1961) 37 BYIL 156–182; Louis B. Sohn and Richard R. Baxter, ‘Responsibility of States for Injuries to the Economic Interests of Aliens’ (1961) 55 AJIL 545–584, Article 12(1); Arghyrios A. Fatouros, Government Guarantees to Foreign Investors (Columbia University Press, 1962) 273–275; Chittharanjan F. Amerasinghe, ‘State Breaches of Contracts with Aliens and International Law’ (1964) 58 AJIL 881, 891–97l; Ahmed El Kosheri and Tarek F. Riad, ‘The Law Governing a New Generation of Petroleum Agreements: Changes in the Arbitration Process’ (1986) 1 ICSID Rev.–FILJ 257– 288; George Delaume, ‘The Proper Law of State Contracts and the Lex Mercatoria: A Reappraisal’ (1988) 3 ICSID Rev.–FILJ 79–106; Frederick A. Mann, ‘British Treaties for the Promotion and Protection of Investments’ (1981) 52 BYIL 242, 246. 120 E.g., Saudi Arabia v. Arabian American Oil Company, ad hoc, Award, 23 August 1958 (1963) 27 ILR 117; Texaco Overseas Petroleum Company and California Asiatic Oil Company v. Libya, ad hoc, Award, 19 January 1977 (1979) 53 ILR 389, para. 45; Revere Copper v. OPIC (1978) 17 ILM 1321, paras. 36–44. 121 Robert Jennings (n. 119) 156; Louis Sohn and Richard Baxter (n. 119) 566–574; Prosper Weil, ‘The State, The Foreign Investor and International Law: The No Longer Stormy Relationship of a Ménage à Trois’ (2000) 15 ICSID Rev.–FILJ 401, 403; Chittharanjan F. Amerasinghe, Local Remedies in International Law (Cambridge University Press, 2004) 128; cf. Alfred Verdross, ‘The Status of Foreign Private Interests Stemming From Economic Development Agreements with Arbitration Clauses’ (1958) 12 ZaöRV 635–651; Maurice Bourquin, ‘Arbitration and Economic Development Agreements’ (1960) Bus. Law. 860– 872. 122 Resolution of the Institut de Droit International, 11 September 1979, Articles 1, 2 (1979) II Annuaire 192. 123 Gunther Jaenicke, ‘Consequences of a Breach of an Investment Agreement Governed by International Law, by General Principles of Law, or by Domestic Law of the Host State’ in Detlev C. Dicke (ed), Foreign Investment in the Present and a New International Economic Order (Fribourg University Press, 1987) 177, 179. 124 Award, 19 January 1977, n. 118; and for a more recent pronouncement in favour of internationalisation of State contracts, see e.g., Delphine Nougayrède, ‘Binding States: A Commentary on State Contracts and Investment Treaties’ (2005) 6 Bus. L. Int’l 373–395. 125 Esa Paasivirta, ‘The Energy Charter Treaty and Investment Contracts: Towards Security of Contracts’ in Thomas W. Wälde, The Energy Charter Treaty, An East-West Gateway For Investment and Trade (Kluwer, 1996) 349, 359.

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ceptual difficulty with the stabilisation clause. As explained, it has never been unambiguously accepted that by a simple contractual clause a State can fetter its sovereign right to legislate and so renounce public responsibilities.126 Many have persuasively argued that at best a suitably drafted stabilisation clause, which purports to freeze the applicable legal regime,127 might give rise to a special right to compensation in the event of its breach128 or, exceptionally, a degree of insulation from repudiation or expropriation but only for a limited period.129 Yet with an umbrella clause, where stabilising commitments exist in a State contract, it is arguable that investors might benefit from an international law obligation that attracts the principle pacta sunt servanda and the maxim that a State cannot invoke its own law or constitutional requirements to avoid its international obligations.130 The umbrella clause can thereby help secure a stabilising effect. Contemporaneous evidence from the 1950s shows that the umbrella clause 61 was therefore devised in order to avoid the possibility that observance of the obligations a host State entered into with investors or with respect to their investments could be subject exclusively to the host State’s power and therefore open to unilateral change by the host State government. It was hoped that this result could be achieved by supplementing an investor’s contract and whatever contractual safeguards it may contain with the additional protection of a treaty obligation between the State of the investor and the host State. The umbrella treaty provision therefore lends an additional degree of stability to the terms of an investment contract, not by changing those terms, but by ensuring that such commitments that exist are intangible under threat of violating a treaty. Com126 See e.g., Bernard Audit, Transnational Arbitration and State Contracts: Findings and Prospects (The Hague Academy of International Law, 1988) 23, 77; Timothy B. Hansen, ‘The Legal Effect Given Stabilization Clauses in Economic Development Agreements’ (1988) 28 Va. J. Int’l L. 1015–1042; Wolfgang Peter, Arbitration and Renegotiation of International Investment Agreements: A Study with Particular Reference to Means of Conflict Avoidance Under Natural Resources Investment Agreements (Kluwer, 1995) 49; Thomas W. Wälde and George Ndi, ‘Stabilizing International Investment Commitments: International Law versus Contract Interpretation’ (1996) 31 Tex. Int’l L. J. 215–267; Christopher T. Curtis, ‘The Legal Security of Economic Development Agreements’ (1988) 29 Harv. Int’l L. J. 317, 346; Margarita Coale, ‘Stabilisation Clauses in International Petroleum Transactions’ (2003) 30 Denv. J. of Int’l L. & Pol’y 217–237. 127 Clauses in modern long-term contracts more frequently seek to establish a mechanism to maintain the ‘financial equilibrium’ of a project, or create enforceable mechanisms for renegotiation: Peter D. Cameron, Stabilisation in Investment Contracts and Changes of Rules in Host Countries: Tools for Oil and Gas Investors, Report for the Association of International Petroleum Negotiations (AIPN, 2006). 128 Eduardo J. de Aréchaga, ‘International Law in the Past Third of a Century’ (1978-I) 159 RC 307–309. 129 Kuwait v. American Independent Oil Company, ad hoc, Award, 24 March 1982 (1984) 66 ILR 518 and see e.g., Martin Hunter and Anthony C. Sinclair, ‘Aminoil Revisited: Reflections on a Story of Changing Circumstances’ in Todd J. Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005) 347–382. 130 Vienna Convention on the Law of Treaties, Articles 26–27.

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mentators, such as Weil and Shihata, agree that the umbrella clause achieves a form of internationalisation of State contracts.131 62 The second underlying objective behind the inception of the umbrella clause was to provide an international remedy for a host State’s breach of its obligations owed to investors of another contracting party. Breach of a State contract, which in turns breaches an umbrella clause, would invoke the offending State’s international responsibility and, in principle, might justify a claim for restitution of the investor’s contractual rights although in practice an award of damages is more likely. The umbrella clause therefore seems to have been intended to add to investors’ contractually agreed or local remedies by presenting the opportunity through treaty arbitration to obtain international law redress for breach of a State contract. This was achieved through the language of the treaty provision itself coupled with a watertight treaty dispute settlement clause. The crucial significance of an effective international dispute settlement provision as part of the protection afforded by the umbrella clause was emphasised in the 1963 Report of the Committee on International Trade and Investment of the American Bar Association to the United States State Department (the ABA Report) commenting on Article 2 of the OECD Draft Convention on the Protection of Foreign Property of 1962: What the Convention would do in respect of State undertakings to aliens would be to provide a remedy for their enforcement. (…) it would provide for giving effect in an international forum to acquired rights arising from State contracts, and in this way it would ensure the application of an international standard where under international law that standard should be applied.132

SGS v. Philippines and the cases that have followed it are consistent with this philosophy, especially insofar as they confirm that the umbrella clause can ‘help secure the rule of law in relation to investment protection’.133 The value to investors of an international dispute settlement procedure to protect contractual rights was also acknowledged Noble Ventures. The tribunal emphasised the role of the umbrella clause in ensuring that the investor could avail itself of an ‘internationally secured legal remedy’ in respect of breaches of investment-related State contracts.134 64 The above conclusions on the intended legal effect of the umbrella clause, derived from historical research into the origins of the umbrella clause,135 were 63

131 Prosper Weil, ‘Problèmes relatifs aux contrats passés entre un etat et un particulier’ (1969III) 128 RC 102, 130; Ibrahim F.I. Shihata, ‘Applicable Law in International Arbitration: Specific Aspects in the Case of the Involvement of States Parties’ in Ibrahim F.I. Shihata and James D. Wolfensohn (eds), The World Bank in a Changing World: Selected Essays and Lectures, vol. 2 (Brill, 1995) 595–603. 132 Report by the Committee on International Trade and Investment of the Section of International and Comparative Law of the American Bar Association, The Protection of Private Property Invested Abroad (American Bar Association, published privately, 1963) 95–96. 133 SGS v. Philippines (n. 6) para. 126. 134 Noble Ventures v. Romania (n. 1) para. 52. 135 Anthony Sinclair (n. 45).

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noted in Eureko. v. Poland,136 and have found the support of practitioners and commentators. Referring to this research, Gaillard has written: An historical examination of the origins of the observance of undertakings clauses shows in the clearest manner that the intention of States negotiating and drafting such clauses is to permit a breach of contract to be effectively characterised as the breach of an international obligation by the host State.137

Of course, the presumed intentions of contracting parties and treaty drafters 65 are secondary to the task of interpreting the text of the umbrella clause. The first duty of any arbitral tribunal called upon to determine an umbrella clause claim is simply to strive to interpret the words and apply them.138 In contrast, the policymotivated approaches of the tribunals in SGS v. Pakistan, El Paso, and Pan American, in particular, pay little attention to the accepted maxim in investment arbitration that a treaty provision ‘is not to be construed restrictively, nor, as a matter of fact, broadly or liberally. It is to be construed in a way which leads to find out and to respect the common will of the parties’.139 There is little textual interpretation at all in these decisions. Others, such as the tribunal in SGS v. Paraguay, have rightly declined to adopt the respondent States’ submissions as to the putative ‘true meaning’ of the umbrella clause in the light of ‘the plain language of the umbrella clause that is before us’.140 However, the plain and natural meaning of the words of an umbrella clause, coupled with a historical appreciation of the drafters’ intentions, should dispel lingering suggestions that the meaning of the umbrella clause is ‘obscure’,141 and confirm that it ‘means what it says’.142

136 Eureko v. Poland (n. 41) para. 251. 137 Emmanuel Gaillard, ‘Investment Treaty Arbitration and Jurisdiction Over Contract Claims – the SGS Cases Considered’ in Todd J. Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Investment Treaties and Customary International Law (Cameron May, 2005) 325, 345. 138 See Competence of the General Assembly in the Admission of a State to the United Nations, in which the Advisory Opinion of the ICJ included the observation that ‘the first duty of a tribunal which is called upon to interpret and apply the provisions of a treaty, is to endeavour to give effect to them in the context in which they occur. If the relevant words in their natural and ordinary meaning make sense in their context, that is an end of the matter’: Opinion on the Competence of the General Assembly in the Admission of a State to the United Nations, ICJ Rep. 1950, 4, 8; also International Law Commission (Humphrey Waldock, Special Rapporteur), Third Report on the Law of Treaties (1964) 2 YBILC 5, 56 (UN Doc. A/CN. 4/167 and Add.1–3): ‘the text must be presumed to be the authentic expression of the parties; and in consequence the starting point of interpretation is the elucidation of the meaning of the text, not to investigate ab initio into the intentions of the parties’. 139 Amco Asia Corporation, Pan American Development Ltd. and P.T. Amco Indonesia v. Indonesia, ICSID Case No. ARB/81/1, Decision on Jurisdiction, 25 September 1983 (1984) 23 ILM 351, 359. 140 Decision on Jurisdiction, 12 February 2010, para. 168. 141 Eureko v. Poland (n. 41) para. 246. 142 SGS v. Philippines (n. 6) para. 128.

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2. The Separation between International and Domestic Legal Orders 66

Certain tribunals have reacted negatively to umbrella clause claims on grounds that treaty claims in respect of commercial contracts governed by municipal law would be ‘quite destructive of the distinction between national legal orders and the international legal order’.143 A simple answer to this concern might be that the umbrella clause provision was intended to be a progressive development on the position under customary international law.144 Closer analysis also casts doubt on its basic premise. As shall be seen, there is a clear and distinct role in the analysis of an umbrella clause claim for both international law and any applicable national law. This is evident both in establishing the existence of the protected obligation and in analysing whether there has been any wrongful non-observance. a) The Existence of the Protected Obligation

A legally binding and enforceable obligation owed by the host State is inherent in the term ‘obligation’, which has been described as the ‘operative term’ of the umbrella clause.145 Investment treaties typically do not define the terms ‘obligation’, ‘commitment’, or ‘undertaking’, nor typically do they specify the applicable legal rules by which to determine their existence or content. The issues of what obligations are protected by the umbrella clause and how they may be identified have arisen frequently in those cases in which tribunals have acknowledged the effect of the umbrella clause. 68 In SGS v. Philippines it was held that the umbrella clause only applied in respect of binding commitments, including contractual commitments, which the State had assumed with regard to specific investments.146 The existence of such commitments was ‘a matter for determination under the applicable law, normally the law of the host state’.147 For the most part, other tribunals have also followed this approach. For instance, in Enron v. Argentina, the tribunal found that ‘[t]hrough the Gas Law and its implementing legislation, the Respondent assumed “obligations with regard to investments”’, which amount to ‘obligations’ arising as a matter of Argentinean law.148 The tribunal in Burlington v. Ecuador agreed that ‘an obligation does not exist in a vacuum. It is subject to a governing law. Although the notion of obligation is used in an international treaty, the court or tribunal interpreting the treaty may have to look to municipal law to give it content’.149 67

143 El Paso v. Argentina (n. 1) para. 82; Pan American v. Argentina (n. 1) para. 110; Hamester v. Ghana (n. 8) para. 349. 144 Noble Ventures v. Romania (n. 1) para. 55. 145 Burlington Resources v. Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, para. 214. 146 SGS v. Philippines (n. 6) para. 128. 147 Ibid., para. 117. 148 Enron v. Argentina (n. 62) para. 275. 149 Burlington Resources v. Ecuador (n. 145) para. 214.

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Other tribunals have suggested a broader approach in determining the exis- 69 tence of a protected obligation. In Eureko v. Poland, the tribunal interpreted various agreements governed by Polish law to which the State treasury was a party and found that, by these agreements, Poland had itself entered into a binding commitment to hold an initial public offering of shares in the State insurance company, PZU in which the claimant would have an opportunity to acquire a majority stake.150 The dissenting arbitrator disputed the majority’s analysis of Polish law, insisting that the proper conclusion was that the State treasury had not assumed any obligation of result binding upon and enforceable against the State under Polish law, including indirectly by bringing an umbrella clause claim.151 The dissenting arbitrator added that mere non-enforceable expectations on the part of the investor should not attract the protection of the umbrella clause.152 The majority of the tribunal was convinced that there was an obligation and it bound the Polish State. Yet the majority went further and opined that even if the result under Polish law were otherwise, the tribunal was an international tribunal, applying an international legal standard to which international law applied. Under international law, it was clear that the obligations of a State’s treasury were obligations of its State.153 The dissenting arbitrator described this analysis as an exercise in interpretation ‘sans loi’.154 In this last respect, at least, the majority decision in Eureko on the application of the umbrella clause has been subject to criticism,155 since if the majority had been of the opinion that there was no obligation under Polish law, all other things being equal, the natural consequence should have been to find that the umbrella clause was not invoked. LG&E v. Argentina is another case in which the tribunal held that in order to 70 determine whether there was an obligation to which the umbrella clause might apply, it was necessary to decide whether certain representations in Argentine legislation, and repeated in tender documentation, created not merely obligations under Argentine law but ‘international obligations with respect to LG&E and its investment’.156 It held that they were, and their abrogation breached the umbrella clause in the Argentine–United States BIT.157 In other cases tribunals have applied the putative proper law to determine the 71 existence of an obligation to which the umbrella clause applies, and found that no such obligation exists,158 or that it may not be enforced as between the parties to the treaty proceeding.159 An ad hoc committee annulled the award in CMS v. 150 151 152 153 154 155 156 157 158

Eureko v. Poland (n. 41) para. 157. Dissenting Opinion of Arbitrator Rajski, 19 August 2005, para. 4. Ibid., para. 7. Eureko v. Poland (n. 41) para. 247. Dissenting Opinion of Arbitrator Rajski, 19 August 2005, para. 5. Zachary Douglas (n. 48). LG&E v. Argentina (n. 58) para. 174 (emphasis added). Ibid., para. 175. Link-Trading v. Department for Customs Control of Moldova, Award, 18 April 2002, paras. 76–86.

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Argentina on the ground that the tribunal had failed to state reasons for the finding that there had been a breach of the umbrella clause. The committee held that the tribunal had not supplied reasons for its conclusion that CMS could bring an umbrella clause claim in respect of obligations in a licence to which it was not a party.160 The committee emphasised that the obligations protected by the umbrella clause are only legal obligations, arising between the obligor and the obligee, so identified as a matter of the applicable law.161 72 The predominant approach in arbitral practice is for tribunals to investigate whether an obligation exists to which the umbrella clause might apply as a matter of the law applicable to that putative obligation. This is the better view, and indeed it has always been understood that umbrella clauses attach to existing legal obligations, which necessarily arise under an applicable system of law; they do not create new ones where none already existed. The ABA commentary on the OECD Draft Convention concluded that the umbrella clause would only ‘mirror’ and ‘affirm what already exists’ and ‘would not create obligations where none arose under the applicable law’.162 The philosophy behind the umbrella clause was to give security to those obligations that States do in fact choose to enter into with foreign investors: [g]overnments are not required to contract away the power of eminent domain, or for that matter to assume binding commitments of any nature. The Convention would be designed merely to give effect to whatever commitments they do accept and to protect aliens in the enjoyment of acquired rights.163

73

It is clear from the term ‘obligation’ that what is covered by the umbrella clause are legally enforceable rights and obligations,164 and that mere policy statements or declarations of intention would not be covered, even if they might give rise to ‘legitimate expectations’. Moreover, such obligations must be preexisting independently of the relevant investment treaty;165 they are not summoned into existence by the application of the umbrella clause itself. There is nothing in principle which would exclude obligations arising under either national or international law, although generally speaking, general international law has few appropriate or developed rules of form or substance for determining when and how, as a matter of law, a State enters into a commitment or gives a legal undertaking towards a private, foreign investor.166 159 Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006, para. 384; Siemens v. Argentina (n. 66) paras. 81, 204. 160 CMS v. Argentina, Decision on Annulment, 25 September 2007, para. 97. 161 Ibid., para. 90. 162 ABA Report (n. 132) 95–96 (emphasis added). 163 Ibid (emphasis added). 164 SGS v. Philippines (n. 6) para. 126; CMS v. Argentina (n. 160) para. 89. 165 Some treaties make this point expressly. The Belarus–Republic of Korea BIT creates, in Article 10, an obligation to ‘observe any other obligation’ the host State may have entered into with regard to the investments of an investor of the other State. 166 Cf. Aegean Sea Continental Shelf case (Greece v. Turkey), Judgment, 19 December 1978, ICJ Rep. 1978, 3, 39, 44, para. 107; Nuclear Tests case (Australia v. France), Judgment, ICJ

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Some commentators contend that umbrella clauses apply only to other inter- 74 national law obligations entered into between the Contracting Parties, albeit relating to investments. Whilst it is clear that the provision can cover other international obligations provided they would specifically relate to the investment,167 special international agreements relating to specific investments are relatively uncommon,168 and so, quite apart from the absence of any textual support for such a restrictive reading, it is unlikely that obligations of this nature constitute the entire class of obligations to which the umbrella clause was intended to apply. Nor would such a limited interpretation satisfy the effectiveness test, for it adds nothing to the existing state of international law; international obligations are already binding upon States.169 In summary, the proper law of the putative obligation is relevant to confirm 75 the existence and content of that obligation. This will often be the law of the host State, made relevant in the context of a treaty claim by implication in the term ‘obligation’. Tribunals must nevertheless be prepared to act as check against a host State’s attempts to frustrate claims simply by denying the existence of an obligation to which the umbrella clause may attach, particularly by manipulating its law-making processes to that end. Tribunals have confirmed that their power of scrutiny properly extends to ensuring that a host State may not evade treaty jurisdiction by wrongfully asserting illegality or nullity of the alleged obligation under its internal law.170 b) The Question of Non-Observance

Exceptionally, a BIT may expressly stipulate the laws that govern the merits 76 of an umbrella clause claim. The Austria–Armenia BIT clarifies that disputes arising under the umbrella clause: shall be decided, absent other agreement, in accordance with the law of the Contracting Party, in whose territory the dispute arose, the law governing the authorization or agreement and such rules of international law as may be applicable.

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169 170

Rep. 1974, 253; Heathrow Airport User Charges case (USA v. UK), Award, (1994) 88 AJIL 712, 738; Iron Rhine Railway case (Belgium v. Netherlands), PCA, Award, 24 March 2005, para. 156. See e.g., Georg Schwarzenberger, ‘The Abs-Shawcross Draft Convention on Investment Abroad: a Critical Commentary’ (1960) 9 J. Pub. L. 147–171; Glen Gallins, ‘Bilateral Investment Protection Treaties’ (1984) 2 JERL 77, 84. UNCTAD (n. 3) 56 suggesting that the umbrella clause ‘could also apply to undertakings by the two contracting parties concerning investment’. SGS v. Philippines (n. 6) para. 118; Franziska Tschofen, ‘Multilateral Approaches to the Treatment of Foreign Investment’ (1992) 7 ICSID Rev.–FILJ 384, 418; Walid Ben Hamida, ‘La Clause Relative au Respect des Engagements dans les Traites d’Investissement’ in Charles Leben (ed), Contentieux Arbitral Transnational Relatif à l’Investissement International: Nouveaux Développements (Pedone, 2006); cf. SGS v. Pakistan (n. 15) para. 166, fn. 23. Noble Ventures v. Romania (n. 1) para. 51. E.g., IBM v. Ecuador, Decision on Jurisdiction, 22 December 2003, paras. 13, 17 and see Vienna Convention on the Law of Treaties 1969, Article 27.

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The Australia–Mexico BIT and Denmark–India BIT are further examples to similar effect. Each clarifies how the umbrella clause is to be applied by providing that ‘disputes arising from such obligations shall be settled under the terms of the contract underlying the obligation’.171 The ‘terms of contracts’ would presumably include any express choice of law clause, but also raises questions as to the application of any contractually agreed dispute settlement procedures, discussed in section 5. below. 78 Even in the absence of specific wording, again, there is as a general matter a role for both national and international legal orders in assessing whether there has been a breach of an umbrella clause. Tribunals have elaborated on this interplay of legal orders and the proper role of an international tribunal. The Philippines tribunal explained that an umbrella clause does not alter the law primarily applicable to the underlying protected obligation: ‘it does not convert the issue of the extent or content of such obligations into an issue of international law’.172 These remain matters for their proper law, with the umbrella clause addressing the performance of obligations ‘once they are ascertained’.173 79 The El Paso tribunal said the reasoning of the tribunal in SGS v. Philippines was ‘contradictory’,174 insofar as the umbrella clause exists in a treaty, yet the interpretative exercise involves the application of the proper law of the covered obligation. However, there is no contradiction. Notwithstanding that the umbrella clause involves the application of international law, the existence and content of the underlying protected obligations, commitments or undertakings must be identified. This can only be done by reference to their proper law. Neither the treaty nor international law generally may substitute for the applicable law of the contract on such questions.175 The CMS committee later confirmed this approach, stating that: ‘the effect of the umbrella clause is not to transform the obligation which is relied on into something else; the content of the obligation is unaffected, as is its proper law’.176 80 Tribunals that have upheld umbrella clause claims have consistently referred to the proper law of the protected obligation as the primary source of guidance on the question of ‘non-observance’. In Enron v. Argentina the tribunal determined that the relevant commitments had been breached as a matter of the applicable Argentinean law, only subsequently confirming this analysis by reference to principles of international law.177 Similarly, in LG&E v. Argentina, the tribunal explained that it would apply Argentinean law to the merits of the dispute 77

171 E.g., Australia–Mexico BIT, Article 9; Denmark–India BIT, Article 2(4). 172 SGS v. Philippines (n. 6) para. 128; Judith Gill, Matthew Gearing and Gemma Birt, ‘Contractual Claims and Bilateral Investment Treaties: A Comparative Review of the SGS Cases’ (2004) 21 J. Int’l Arb. 397, 407–408. 173 Ibid., para. 126. 174 El Paso v. Argentina (n. 1) para. 76. 175 SGS v. Philippines (n. 6) para. 127. 176 CMS v. Argentina (n. 160) para. 95(c). 177 Enron v. Argentina (n. 62) paras. 231, 275–276.

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– in addition to the terms of the relevant BIT and general international law – ‘in view of its relevance for determining the Argentine Republic’s liability (…)’.178 There was a detailed analysis of whether the State had any defences to the nonpayment of invoices in the SGS v. Paraguay case on grounds of the claimant’s own breach. This involved analysis both of the terms of the contract in question and rules existing in the applicable Paraguayan law.179 The umbrella clause is however a treaty claim, ultimately governed by inter- 81 national law. In Noble Ventures v. Romania, the tribunal noted that an umbrella clause renders municipal law obligations ‘directly cognizable in international law’.180 The tribunal observed that ‘an umbrella clause, when included in a bilateral investment treaty, introduces an exception to the general separation of State obligations under municipal and international law’.181 This does not substitute the existing proper law of a contract or other obligation, although it does imply that international law has a controlling effect on the merits of the claim. Tribunals have also been careful to spell out the limits of the role of interna- 82 tional law. In MTD v. Chile the tribunal rejected an argument that the contracts were fully ‘internationalised’ by operation of the umbrella clause in the Chile– Denmark BIT. Chilean law was the law chosen to govern the agreement in question, and continued to apply to determine the scope of the parties’ obligations and whether any of these had been breached.182 Although the umbrella clause claim was not upheld in Azurix v. Argentina, the tribunal helpfully explained that in determining umbrella clause claims, both municipal and international legal orders had ‘a role to play’,183 with international law exercising a controlling function. The tribunal stated that: (…) the law of Argentina should be helpful in the carrying out of the Tribunal’s inquiry into the alleged breaches of the Concession Agreement to which Argentina’s law applies, but it is only an element of the inquiry because of the treaty nature of the claims under consideration.184

Similarly, in Sempra v. Argentina, the tribunal explained that when determin- 83 ing an umbrella clause claim, the relevance of domestic law is not consigned to ‘the determination of factual questions’.185 Both international law and domestic law ‘have a role to perform in the resolution of the dispute’.186 The licences were governed by Argentinean law and interpreted pursuant to that law,187 with the tribunal concluding that, as a matter of Argentinean law, Argentina had violated the terms of the licences.188 178 179 180 181 182 183 184 185 186 187 188

LG&E v. Argentina (n. 58) para. 82. Award, 10 February 2012, paras. 119–121, 129–132, 146–149, 152. Award, 12 October 2005, para. 53. Ibid., paras. 55, 173. MTD v. Chile (n. 8) para. 187; Decision on Annulment, 21 March 2007, para. 73. Azurix v. Argentina (n. 159) para. 66. Ibid., para. 68. Sempra v. Argentina (n. 69) para. 235. Ibid., para. 236. Ibid., paras. 235, 241 et seq. Ibid.

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Turning to the commentaries, there is a lack of precision in some of the writings on the umbrella clause and its effect, particularly when considering the relationship between the treaty obligation itself, and the underlying contractual or other obligation and its proper law. Weil spoke of the umbrella clause ‘transforming’ contractual rights into treaty obligations.189 Shihata described the effect of the umbrella clause as ‘elevating’ a contractual undertaking into an international law obligation.190 Drafters of the unfinalised Multilateral Agreement on Investment (MAI) suggested that the umbrella clause would ‘in effect, amend investor-state agreements’.191 According to one UNCTAD publication, the umbrella clause ‘might possibly alter the legal regime’ of a State contract ‘and make the agreement subject to the rules of international law’.192 The salient question underlying these somewhat vague statements is by reference to what applicable law is the merits of an umbrella clause claim to be determined.193 85 There are commentators who argue that a tribunal should not consider the question of performance of the relevant underlying obligation by reference to its proper law.194 Rather, it is asserted that since the umbrella clause is a treaty claim, ‘only international public law is applicable to them’.195 A further rationale for this conclusion is that applying the law of the host State to the merits of an umbrella clause claim, even though it concerns a State contract governed by local law, would be at odds with the stabilisation function of the umbrella clause. Zolia argues that the effect of the umbrella clause is that ‘contractual commitments are to be respected even if internal [proper] law allows their nonexecution’,196 concluding therefore that international law should apply to the substantive question whether the umbrella clause has been violated, if necessary to the exclusion, of the governing law of the contract or obligation.197 Without going so far as to disapply the proper law, other commentators have said that an 84

189 Prosper Weil (n. 121) 130, suggesting that the provision: ‘fait de l’obligation d’exécuter le contrat une obligation internationale à la charge de l’Etat contractant envers l’Etat national du contractant. L’intervention du traité de couveture transforme les obligations contractuelles en obligations internationals’ (emphasis added). 190 Ibrahim F.I. Shihata, ‘Applicable Law in International Arbitration: Specific Aspects in the Case of the Involvement of States Parties’ in Ibrahim F.I. Shihata and James D. Wolfensohn (eds), The World Bank in a Changing World: Selected Essays and Lectures, vol. 2 (Brill, 1995) 595. 191 Report of the Drafting Group Concerning the Protection of Investor Rights Arising from Other Agreements, DAFFE/MAI/DG1(96)REV1, 18 March 1996, available at http:// www1.oecd.org/daf/mai/pdf/dg1/dg1961r1e.pdf. 192 UNCTAD (n. 3) 56 (emphasis added). 193 Esa Paasivirta (n. 125) 349, 359; Stanimir A. Alexandrov, ‘Breaches of Contract and Breaches of Treaty: The Jurisdiction of Treaty-based Arbitration Tribunals to Decide Breach of Contract Claims in SGS v. Pakistan and SGS v. Philippines’ (2004) 5 JWIT 555, 556. 194 Vlad Zolia, ‘Effect and Purpose of “Umbrella Clauses” in Bilateral Investment Treaties: Unresolved Issues’ (2005) 5 TDM 22, fn. 86, 24; Bjørn Kunoy, ‘Singing in the Rain – Developments in the Interpretation of Umbrella Clauses’ (2006) 7 JWIT 275, 292. 195 Ibid., at 47. 196 Ibid., at 19. 197 Ibid., at 43.

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alleged breach of an umbrella clause is ‘a subject-matter that is altogether different from evaluating a domestic contract under domestic law’.198 On the other hand, there is no reason to believe that the umbrella clause oper- 86 ates as a choice of law clause to alter the applicable law of a State contract.199 As the American Bar Association concluded in its commentary on the OECD Draft Convention, the umbrella clause does ‘not turn private contracts into treaties’ or transform a contract governed by the law of a host State into an obligation governed by international law.200 The majority of cases that have applied an umbrella clause recognise that 87 whilst it is a treaty claim, ultimately governed by public international law, the proper law of any underlying contractual obligation is also fundamental to a proper analysis of the claim. The consensus, summarised by Crawford, is that whilst it may provide a basis for a treaty claim, ‘the umbrella clause does not change the proper law of the contract or its legal incidents’.201 Rather than transforming the provisions of a State contract into an international obligation, the umbrella clause makes the observance of such provisions, so identified according to their proper law, an obligation under the treaty.202 The legality of conduct applying the governing law of the protected obligation is therefore central to the question of non-observance. The El Paso and Pan American tribunals said this interplay of international 88 and national law was ‘quite strange’,203 but plainly national law may be relevant in the context of a treaty claim simply because the treaty ‘makes it relevant, e.g. by incorporating the standard of compliance with internal law as the applicable international standard or as an aspect of it’.204 By its very object, the umbrella clause itself makes the proper law of the covered obligation relevant.205 It fol198 Thomas Wälde and Kaj Hobér, ‘The First Energy Charter Treaty Case (Award December 2003)’ (2005) 22 J. Int’l Arb. 83–103. 199 Pierre Mayer, ‘La neutralisation du pouvoir normatif de l’Etat en matière de contrats d’Etat’ (1986) 113 JDI 5, 36–37; Ben Hamida (n. 168). 200 ABA Report (n. 132) 95–96. 201 James Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24 Arb. Int’l 351– 374, cited with approval in Toto v. Lebanon (n. 81) para. 200. 202 United Nations Centre of Transnational Corporations, Bilateral Investment Treaties (Graham & Trotman, 1988) 55–56 (emphasis original). 203 El Paso v. Argentina (n. 1) para. 76. 204 ILC, Articles on Responsibility of States for Internationally Wrongful Acts, adopted in Annual Report of the International Law Commission on its Fifty-third Session (23 April‑1 June and 2 July‑10 August 2001), A/56/10, ch. IV, and endorsed by the UN General Assembly by Resolution 56/83 of 12 December 2001, reprinted with a commentary in James Crawford, The International Law Commission’s Articles on State Responsibility (Cambridge University Press, 2002) 90, para. 7, containing commentary to Article 3 and e.g., Payment of Various Serbian Loans Issued in France (n. 118); Case Concerning the Payment in Gold of Brazilian Loans Issued in France, Judgment of 12 July 1929, (1929) PCIJ (Ser. A) No. 21; PanevezysSaldutiskis Railway Case, (1939) PCIJ (Series A/B) No. 76; Lighthouses Case, (1934) PCIJ (Series A/B) No. 62, 19–23; Lighthouses in Crete and Samos Case, (1937) PCIJ (Series A/B) No. 71; Lighthouses Arbitration between France and Greece, Award, 24 July 1956, (1956) 12 RIAA 155; 23 ILR 659; Robert Jennings and Arthur Watts (n. 109) 927, fn. 5; Clarence W. Jenks, The Prospects of International Adjudication (Stevens, 1964) 547 et seq.

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lows that a tribunal seized of an umbrella clause claim is competent to consider and make determinations on the parties’ rights and obligations in an underlying contract and in the light of the proper law because the treaty requires it.206 Absent an exclusive jurisdiction clause in the contract, as to which the law, discussed in section 5. below, is still divided, there is no obstacle to a treaty-based tribunal from making determinations as to the parties’ respective rights and obligations under the contract, and no justification for asserting that there must first be a determination by a local court or tribunal that there has been a breach of the underlying contract. The international tribunal is competent to consider and apply the proper law, and in doing so, obliged to strive to apply the law in the same manner as the relevant national courts.207 89 The consequence of this incorporation of the contractual legal order is that a treaty-based tribunal may be called upon to consider and potentially apply terms in the underlying contract or applicable legal order giving rise to objections to jurisdiction or admissibility, defences on the merits, set-off, or stipulating the extent and availability of certain remedies.208 It is an open question whether an umbrella clause claim might open the door to host State counterclaims.209 90 It is implicit that only wrongful non-observance will breach the umbrella clause. Wholly innocent or justified non-performance on the part of the host State – for instance, as a result of the claimant’s prior breach, some other defect under the applicable law, or as part of the exercise of a State’s police powers210 – should not breach the umbrella clause.211 Like any other treaty obligation, non205 Stanimir Alexandrov (n. 193) 562. 206 Cf. Link-Trading v. Department for Customs Control of Moldova (n. 158) para. 61 in which the tribunal (wrongly) stated that it was ‘not competent to determine whether the contractual provisions have been respected by the parties thereto, since said contracts create civil law relations and are governed by their own specific arbitration agreements between the parties thereto’. 207 Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7, Decision on Annulment, 5 June 2007, para. 96 discussing Case concerning the Payment in Gold of Brazilian Federal Loans Contracted in France, (1929) PCIJ (Ser. A) No. 21, 27–28; Case Concerning the Payment of Various Serbian Loans Issued in France (n. 118) 36; and see Case concerning Elettronica Sicula S.p.A. (USA v. Italy), Award of ICJ Chamber, 20 July 1989, ICJ Rep. 1989, 15, 51, para. 73, and 74, para. 124. 208 E.g., Nykomb v. Latvia (n. 7) section 5.2; also ILC Articles, Commentary to Article 20, in James Crawford (n. 204) 165 confirming that in determining the international legal consequences of an internationally wrongful act, a tribunal might take into account any consequences of wrongfulness that might have been contractually agreed. It is an open question whether an umbrella clause claim might succeed in respect of an underlying contractual violation that would otherwise be time-barred, just as the umbrella clause does not create new obligations where none would otherwise exist, nor should it restore them, but cf. SGS v. Paraguay, ICSID Case No. ARB/07/29, Award, 10 February 2012, para. 166, permitting an umbrella clause claim to proceed given that the BIT at issue did not contain a limitation period. 209 See e.g., Hege E. Veenstra-Kjos, ‘Counterclaims by Host States in Investment Dispute Arbitration “Without Privity”’ in Philippe Kahn and Thomas Wälde (eds), New Aspects of International Investment Law (Martinus Nijhoff, 2007) 597; Gustavo Laborde, ‘The Case for Host State Claims in Investment Arbitration’ (2010) 1 J. Int. Disp. Settlement 97. 210 See also ABA Report (n. 132) 93.

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observance of an umbrella clause obligation may be excused at the international level too, for instance on grounds of necessity or fundamental change of circumstances (the rebus sic stantibus concept).212 Thus, Weil was arguable incorrect when he opined that the effect of the umbrella clause was that: any non-performance of the contract, even if it is legal under the national law of the contracting State, gives rise to the international liability of the latter vis-à-vis the national State of the co-contracting party.213

The analysis is more complex in the case of change in law. A sovereign may 91 ordinarily make and unmake its laws without transgressing any obligation governed by local law entered into with a foreign investor, absent a specific stabilising provision or other binding commitment that would insulate the investor from such effects. Thus, if an investor has entered into a State contract with the host State governed by local law, a subsequent legislative enactment might legitimately vary the terms of the host State’s obligations and, potentially, not give rise to any failure to observe an obligation in violation of an umbrella clause. All things being equal, conduct lawful under the proper law of the obligation is unlikely to involve a failure to observe a breach of an umbrella clause. However, it is not incapable of being so.214 In the absence of other specific wording, international law ultimately governs 92 the merits of an umbrella clause claim and controls any reference to the law of the host State or any other applicable law. International law characterises whether a State’s acts are lawful or not as a matter of international law and there is, ‘no exception for cases where rules of international law require a State to conform to the provisions of its internal law’.215 In analysing an umbrella clause claim, it is and must be international law that determines the scope and limits of any reference to internal law.216 211 E.g., MTD v. Chile (n. 8) para. 188; Link-Trading v. Department for Customs Control of Moldova (n. 156) paras. 76–86. 212 In LG&E v. Argentina (n. 58) paras. 263–265 the tribunal accepted that the financial crisis gave rise to conditions of necessity warranting temporary suspension of obligations, and thus, temporary reprieve from the consequences of a treaty violation. Commentators have consistently accepted that the umbrella clause does not create an absolute obligation: Ignaz Seidl-Hohenveldern (n. 112) 104; Hartley Shawcross, ‘The Problems of Foreign Investment in International Law’ (1961-I) 102 RC 335–393; Giorgio Sacerdoti, ‘State Contracts and International Law: A Reappraisal’ (1986-7) 7 Ital. YIL 26–49; Gunther Jaenicke (n. 123) 190; ABA Report (n. 132) 93–95; Abba Kolo and Thomas W. Wälde, ‘Renegotiation and Contract Adaptation in International Investment Projects: Applicable Legal Principles and Industry Practices’ (2000) 1 JWIT 5, 40. 213 Prosper Weil (n. 121) 130. 214 E.g., Stephen M. Schwebel, ‘On Whether the Breach by a State of a Contract with an Alien is a Breach of International Law’ in Pierluigi Lamberti Zanardi et al. (eds), International Law at the Time of its Codification: Essays in Honour of Roberto Ago (Giuffre, 1987) 401, 431. 215 ILC Articles, Commentary to Article 3, para. 7 in James Crawford (n. 204) 89. See also Reparations for Injuries Suffered in the Service of the United Nations, ICJ, Advisory Opinion, ICJ Rep. 1949, 174, 180: ‘[a]s the claim is based on the breach of an international obligation on the part of the Member held responsible (…) the Member cannot contend that this obligation is governed by municipal law’.

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International law ultimately governs the merits of umbrella clause claims,217 thereby lending additional security to any specific stabilisation or intangibility clauses the State may have agreed, and providing protection against any attempt to extinguish its obligations by manipulation of its own laws. Any reference to national law must be taken to mean only the legitimate pronouncements of the competent judicial authorities as to which the international tribunal must be entitled to decide.218 Thus, it should follow that in specific instances an umbrella clause claim may be upheld in respect of a failure to observe a State contract governed by the host State’s law, even if a local court would be bound to decide otherwise. 3. The Concern that the Umbrella Clause might render Superfluous Other Treaty Provisions

A shared concern in the SGS v. Pakistan, El Paso and Pan American cases was that the legal effect sought for the umbrella clause would render superfluous the other substantive provisions of the BIT is also unconvincing. This argument bolstered the tribunals’ conclusion not to uphold the effect of the umbrella clause as asserted, or to acknowledge only a very limited effect. 95 This criticism is superficial. In advancing this argument, these tribunals did not seek to elaborate on how the umbrella clause might render redundant other treaty provisions. The argument does not differentiate, for instance, between expropriation claims and the other substantive provisions of the BIT, including standards of national and MFN treatment, obligations to ensure transfers of capital and income, and fair and equitable treatment, each of which are manifestly distinct substantive obligations that cannot be subsumed in a breach of contract claim.219 94

4. Whether the Umbrella Clause provides Protection Only from ‘Governmental’ Conduct 96

It is widely advocated that the application of the umbrella clause should be limited to conduct on the part of the host State that is governmental in nature.220 This view derives from a broader assertion that for a breach of a treaty provision 216 217 218 219

Ibid., para. 8. Frederick Mann (n. 119) 245–246. ILC Articles (n. 204) Article 3. Eureko v. Poland (n. 41) para. 258. Christoph H. Schreuer, ‘Travelling the BIT Route: Of Waiting Periods, Umbrella Clauses and Forks in the Road’ (2004) 5 JWIT 249, 253. 220 Pierre Mayer (n. 199) 5; Gunther Jaenicke (n. 123) 190; Thomas Wälde and Todd Weiler, ‘Investment Arbitration under the Energy Charter Treaty in the light of new NAFTA Precedents: Towards a Global Code of Conduct for Economic Regulation’ in Gabrielle Kaufmann-Kohler (ed), Investment Treaties and Arbitration (Swiss Arbitration Association, 2002) 175, 185, 202; Richard Happ, ‘Dispute Settlement under the Energy Charter Treaty’ (2002) 45 GYIL 331, 344 et seq.; Charles Leben, ‘L’évolution de la notion de contrat d’Etat – Les Etats dans le contentieux économique international’ (2003) Rev. Arb. 629; 634 et seq.; Thomas Wälde and Kaj Hobér (n. 198) 83.

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to arise there must be wrongful conduct of a government nature, since this is the type of conduct investment treaties were conceived of to address.221 By inserting an umbrella clause in their treaties, it is argued that States have agreed only to curb their sovereign power to breach or unilaterally vary State contracts – powers that many States from time to time have claimed in accordance with their own legal systems and domestic legal theories.222 Thus, it is argued, only breaches of obligations involving the abusive exercise of sovereign power can give rise to a breach of the umbrella clause. Conversely, it is asserted that ‘merely commercial’ breaches of obligations cannot. Commercial conduct, it is argued, may well breach the underlying obligation, but would not itself breach a treaty’s umbrella clause. In essence, those who ascribe to this view ask for an implied ‘governmental’ limitation upon the application of the umbrella clause.223 Several arbitral decisions have touched upon the question, yet evidence from 97 arbitral practice of support for an implied governmental threshold is, at best, mixed. The SGS v. Philippines tribunal couched its remarks in terms of preservation of the rule of law for investments in the host State generally,224 without regard to categories or degrees of breach. Indeed, the rule of law would require redress for both governmental and commercial breaches. There was nothing inherently ‘governmental’ about the Philippines’ bare refusal to pay sums alleged to be due under a contract. The tribunal even questioned whether a ‘governmental’ element is essential to all treaty claims.225 SGS v. Philippines therefore rejects any implicit condition that the umbrella clause can only be breached by governmental conduct. Other tribunals, including Eureko v. Poland, Noble Ventures v. Romania, Duke 98 Energy v. Ecuador, BIVAC v. Paraguay and Burlington Resources v. Ecuador expressed support for the view that a simple breach of contractual obligations could amount to a violation of the umbrella clause.226 In SGS v. Paraguay, the tribunal expressly declined ‘to import into [the umbrella clause] the non-textual limitations that Respondent proposed’.227 Specifically, the tribunal rejected the submission that the umbrella clause may be breached ‘only through actions that 221 Thomas Wälde and Todd Weiler (n. 220) 174–175. 222 E.g., Leo T. Kissam and Edmond K. Leach, ‘Sovereign Expropriation of Property and Abrogation of Concession Contracts’ (1959) 28 Fordham L. Rev. 177, 198; and see generally Alan W. Mewett, ‘The Theory of Government Contracts’ (1949) 5 McGill L. J. 222–246; John D.B. Mitchell, The Contract of Public Authorities (Stevens, 1954); Colin C. Turpin, Government Procurement and Contracts (Longman, 1989) 242 et seq. 223 Richard Happ (n. 220) 344 et seq.; Thomas Wälde and Todd Weiler (n. 220) 175, 185, 202. 224 SGS v. Philippines (n. 6) para. 126. 225 Ibid. Cf. Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Pakistan, ICSID Case No. ARB/ 03/29, Decision on Jurisdiction, 14 November 2005, para. 183 and fn. 72; Impregilo S.p.A. v. Pakistan, ICSID Case No. ARB/02/2, Decision on Jurisdiction, 22 April 2005, para. 260. 226 Eureko v. Poland (n. 41) para. 244; Noble Ventures v. Romania (n. 1) para. 61; Duke Energy v. Ecuador (n. 9) para. 320; BIVAC v. Paraguay (n. 74) para. 141; Burlington Resources Inc. v. Ecuador, ICSID Case No. ARB/08/5, Decision on Jurisdiction, 2 June 2010, para. 190. 227 Decision on Jurisdiction, 12 February 2010, para. 168.

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a commercial counterparty cannot take, through abuses of state power, or through exertions of government influence’.228 The tribunal expressed doubt that there could even be a bright line distinction between governmental and ‘ordinary commercial’ breach of contract, especially in the context of a contract concluded directly with a State organ.229 Against this, there are decisions that support implying a governmental limitation to the umbrella clause. The jurisdictional decision in Impregilo v. Pakistan stressed that for the claimant to have a treaty remedy it must identify an exercise of governmental authority or puissance publique going beyond that which an ordinary co-contractor could adopt.230 The tribunal in Joy Mining also suggested that it is a basic general distinction that State interference with the operation of a contract would amount to be a breach of international law whereas an ordinary commercial breach of a State contract would not.231 In CMS v. Argentina, the tribunal agreed with Argentina that the umbrella clause would not be breached in every case of contractual non-performance. The tribunal considered that for there to be a breach of the umbrella clause, the host State must have deployed its sovereign or governmental power in disregarding or violating its prior commitments. The violations complained of by the claimant were held unequivocally to involve the exercise of puissance publique, therefore the issue of how to distinguish purely ‘commercial’ breaches by a State from socalled ‘governmental’ breaches did not arise.232 The decision to annul this aspect of the award did not turn on this point of interpretation.233 Statements favouring a governmental qualification also exist in the El Paso and Pan American decisions. The tribunals rejected the view that ‘any violation’ of a State contract or commitment entered into with regard to an investment could give rise to a treaty claim, ‘whatever the seriousness of the breach’.234 The tribunals proceeded on the basis that ‘it is essentially from the State as a sovereign that the foreign investors have to be protected’.235 Yet the awards seem internally inconsistent on this point, since apparently a major factor influencing the interpretation of the umbrella clause in these cases was an aversion to the very possibility that it could ‘turn breaches of the slightest such obligations by the Respondent into breaches of the BIT’.236 Finally, the Sempra tribunal claimed that there was a growing consensus that only governmental breaches of investment-related contracts would amount to a violation of the umbrella clause.237 The tribunal insisted that: 228 229 230 231 232 233 234

Ibid. Ibid., para. 135. Impregilo v. Pakistan (n. 225) para. 260. Joy Mining v. Egypt (n. 92) para. 72. CMS v. Argentina (n. 37) para. 301. CMS v. Argentina (n. 160). El Paso v. Argentina (n. 1) paras. 71, 76; and see Pan American v. Argentina (n. 1) para. 105. 235 Ibid., para. 80 (emphasis added); Pan American v. Argentina (n. 1) para. 108. 236 Ibid., paras. 67, 77.

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VII. Umbrella Clause The decisions dealing with the issue of the umbrella clause and the role of contracts in a Treaty context have all distinguished breaches of contract from Treaty breaches on the basis of whether the breach has arisen from the conduct of an ordinary contract party, or rather involves a kind of conduct that only a sovereign State function or power could effect.238

That appears to be an overstatement of the true position and is supported, in the text of the award itself, only by reference to Impregilo.239 In the circumstances, the Sempra tribunal did not need to decide whether a ‘non-governmental’ breach of an obligation would amount to a violation of the umbrella clause, since the measures in question were ‘not (…) mere ordinary contractual breaches of a commercial nature’.240 The alleged emerging consensus in favour of an implied governmental limitation does not bear out on analysis. The cases to date do contain several positive statements in favour of a requisite governmental element for there to be a breach of an umbrella clause but, as already seen, SGS v. Philippines and SGS v. Paraguay adopt the opposite position. There is no clear preponderance of arbitral authority in support of a ‘governmental’ limitation, and there are strong statements in favour of the opposite approach. There are also many commentators who deny any legal basis to impose a ‘governmental’ qualification on the effect of a plainly worded umbrella clause.241 The way therefore remains open for a future tribunal to prefer one approach or the other. Quite apart from the fact that there is no justification for the limitation in the plain text of the umbrella clause, for the reasons set out below it is suggested that the better view is that the law does not include, or warrant implying, any governmental limitation into the scope or effect of the umbrella clause. First, it is a weak argument in support of an implied governmental limitation to assert a mere belief that investment treaties are intended solely to regulate the manner in which States act as States. Yet from this, it is thought to follow that 237 Sempra v. Argentina (n. 69) para. 309. See also EDF International v. Argentina (n. 73) para. 941. 238 Ibid., para. 310. 239 Ibid. 240 Ibid., para. 311. Although the award was subsequently annulled, the tribunal’s reasoning on the umbrella clause was not called into question: Decision on Annulment, 29 June 2010. 241 E.g., R. Scott Gudgeon, ‘Arbitration Provisions of US Bilateral Investment Treaties’ in Seymour Rubin and Richard Nelson, International Investment Disputes: Avoidance and Settlement (West Publishing, 1985) 41–58; R. Scott Gudgeon, ‘United States Bilateral Investment Treaties: Comment on their Origin, Purposes and General Treatment Standards’ (1986) 11 Intl Tax & Bus L. 105, 126; Joachim Karl, ‘The Promotion and Protection of German Foreign Investment Abroad’ (1996) 11 ICSID Rev.–FILJ 1, 23; UNCTC, Bilateral Investment Treaties (UNCTC, 1998) 39; Guillermo A. Alvarez and William W. Park, ‘The New Face of Investment Arbitration’ (2003) 28 Yale J. Int’l L. 365, fn 87; Emmanuel Gaillard, ‘L’arbitrage sur le fondement des traits de protection des investissements’ (2003) Rev. Arb. 868– 878; UNCTAD, State Contracts (UNCTAD, 2004) 19; Christoph Schreuer (n. 219); Stanimir Alexandrov (n. 193) 564–566; Hein-Jürgen Schramke, ‘The Interpretation of Umbrella Clauses in Bilateral Investment Treaties’ (May, 2007) TDM 1, 22; Prosper Weil (n. 121) 130; Guido S. Tawil, ‘The Distinction between Contract Claims and Treaty Claims: An Overview’ in Albert Jan van den Berg (ed), ICCA Congress Series No. 13 (Montreal, 2006) 545.

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the umbrella clause can be concerned only with the nature of a State’s acts in its capacity as a State, not in any commercial capacity. The argument must be wrong. There is nothing inherent in investment treaties generally to require one to conclude that States could not have intended the umbrella clause to extend to commercial non-performance of State contracts. It is a tautology to construe the effect of the umbrella clause from a prior conclusion, not based in evidence, as to what it must have been ‘intended’ or ‘designed’ to do. Even in SGS v. Pakistan, the tribunal considered that nothing in principle prevented two States from agreeing to apply an umbrella clause to all contractual disputes: The Tribunal is not saying that States may not agree with each other in a BIT that henceforth, all breaches of each State’s contracts with investors of the other State are forthwith converted into and to be treated as breaches of the BIT.242

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Secondly, the historical evidence in fact suggests that the umbrella clause was intended not merely to restate the customary international law position that expropriation of contractual rights as well as uncompensated repudiation or breach of a State contract, where the breach is discriminatory or motivated by non-commercial considerations, can amount to an internationally wrongful act,243 but rather, to go beyond it. Commenting on one of the earliest iterations of the umbrella clause, Seidl-Hohenveldern insisted that while there may be doubt as to the protection of private rights arising out of State contracts in customary international law, the very purpose of the umbrella clause proposed in the AbsShawcross Draft Convention was ‘to dispel whatever doubts may possibly exist as to whether a unilateral violation of a concession contract is an international wrong’.244 Reviewing early British treaty practice, Mann also argued that the umbrella clause was a progressive provision, the effect of which was to provide additional protection for State contracts, beyond the protection of investors provided by customary international law:245 This is a provision of particular importance in that it protects the investor against any interference with his contractual rights, whether it results from a mere breach of contract or a legislative or administrative act, and independently of the question whether or not such interference amounts to expropriation. The variation of the terms of a contract or license by legislative measures, the termination of the contract or the failure to perform any of its terms, for instance, by non-payment, the dissolution of the local company with which the investor may have contracted and the transfer of its assets (with or without the liabilities) – these and similar acts the treaties render wrongful.246

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This view is shared by Vandevelde, one of the leading commentators on US BITs. He has explained that under the umbrella clause, ‘a party’s breach of an investment agreement with an investor becomes a breach of the BIT’.247 In Dolz242 SGS v. Pakistan (n. 15) para. 173 (emphasis added). 243 E.g., Stephen M. Schwebel, ‘International Protection of Contractual Arrangements’ (1959) ASIL Proc. 266–280; Stephen Schwebel (n. 214) 401; Stephen M. Schwebel, International Arbitration: Three Salient Problems (Grotius, 1987) 111; American Law Institute, Restatement (Third) Foreign Relations Law of the United States (1987) para. 712. 244 Ignaz Seidl-Hohenveldern (n. 112) 104–105 (emphasis added). 245 Frederick Mann (n. 119) 249–250. 246 Ibid., at 246.

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er and Stevens’ review of BIT practice, umbrella clause protection is described as offering protection ‘against any interference which might be caused by either a simple breach of contract or by administrative or legislative acts’.248 Thirdly, the implied limitation is also contrary to the principle of effective- 109 ness.249 Investment treaties already provide remedies in respect of expropriatory, arbitrary, discriminatory or unfair and inequitable treatment, whether such conduct is directed towards a State contract or otherwise. That the scope of the umbrella clause is potentially wider than these other provisions, albeit in the context of an existing State commitment, is no reason to require a restrictive interpretation, not found in the text, which would eliminate much of the distinctive substantive effect of the umbrella clause.250 Fourthly, the proposed distinction is fraught with practical difficulty. Analo- 110 gies may be brought to bear to determine what is governmental and what is commercial – the issue arises in other spheres of international law, notably in respect of sovereign immunity. These may assist to some extent in identifying the issues.251 But such analysis is problematically subjective, being influenced by one’s cultural, political and economic preferences, and therefore susceptible of great inconsistency. What is considered to be within the sovereign’s domain can vary considerably from State to State.252 It is also difficult to differentiate between sovereign and commercial conduct where a State organ is a direct party to the contract. Tribunals have confessed to difficulty in knowing where or how to draw the line.253 The distinction appears so unworkable, in fact, that one can legitimately wonder whether it was the intention of the original drafters to adopt it. The most likely answer is that it was not. Finally, on closer analysis it is an explicit yet misguided fear, for many arbi- 111 trators and commentators, that motivates their call for a ‘governmental’ conduct limitation. That fear is the magnitude of potential umbrella clause claims that may be brought against States if the umbrella clause were applied without additional limits.254 The members of the El Paso tribunal openly doubted whether

247 Kenneth J. Vandevelde, United States Investment Treaties: Policy and Practice (Kluwer, 1992) 78 (emphasis added). 248 Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff, 1995) 81–82 (emphasis added). 249 See e.g., Cayuga Indians Claims, American and British Claims Arbitration Tribunal, Award, 22 January 1926, (1926) 20 AJIL 574, 587: ‘A clause must be interpreted as to give it a meaning rather than so as to deprive it of meaning’; Asian Agricultural Products Ltd v. Sri Lanka, ICSID Case No. 87/3, Award, 27 June 1990, para. 40, ‘rule E’. The tribunal in Noble Ventures v. Romania (n. 1) expressly observed that any interpretation of the umbrella clause must take into account ‘the principle of effectiveness (effet utile)’, Award, 12 October 2005, para. 50. 250 Prosper Weil (n. 121) 130; Christoph Schreuer (n. 219) 250–251; Vlad Zolia (n. 194) 35. 251 Thomas W. Wälde, ‘The Umbrella Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases’ (2005) 6 JWIT 183–236. 252 Cf. James Crawford (n. 204) 101. 253 SGS v. Paraguay (n. 12) para. 135. 254 Cf. SGS v. Pakistan, Decision on Jurisdiction, paras 167–168; Thomas Wälde (n. 251) 191.

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claimants would show restraint in advancing claims,255 and insisted that it fell to tribunals to set limits to prevent abuse. The case for an implied governmental limitation is thus, in large measure, a reaction to the availability and efficacy of modern investor-State arbitration. On this line of reasoning, there is a perceived need to bring some ‘political realism’ to the interpretation of the umbrella clause.256 112 It is true that when an investor’s only remedy lay with diplomatic protection, a political and diplomatic filtering process inevitably limited the claims that the investor’s government would choose to espouse. It is also true that direct recourse arbitration frees investors to choose to prosecute their claims without the further assistance or consent of their own States, and without exhausting local remedies. And it is desirable that treaty dispute settlement procedures are not abused. However, the decision to commence arbitral proceedings against the State in which one has an investment is more complex than simply to ascertain the technical existence of a remedy. It is also the case that investor-State arbitration proceedings are not cheap to conduct; it is unlikely that claimants will spend large amounts in fees on trivial claims. There is nothing unique to the umbrella clause that lends itself to abuse by way of trivial claims. There can also be trivial invocations of other treaty standards. The risk that some investors might attempt to misuse the umbrella clause provision does not mean they would be successful and does not justify reading into the umbrella clause a sovereign/ commercial distinction that is not there in the text. Finally, it is highly doubtful that the substance of an investor’s rights should be construed in the light of procedural advancements in the way it may enforce those rights. It is also the case that concerns as to a possible flood of umbrella clause claims, such as they are, could be alleviated by closer attention to the proper scope of obligations to which the umbrella clause applies, discussed in section 6. below. 5. The Impact of Contractually Agreed Dispute Settlement Procedures 113

The umbrella clause gives rise to a problem of apparently overlapping claims to jurisdiction: on the one hand, jurisdiction conferred by treaty to decide treaty claims; on the other, the contractually chosen jurisdiction for disputes arising out of the underlying State obligation.257 It was this apparent conflict that contribut255 El Paso v. Argentina (n. 1) para. 82. 256 Thomas Wälde and George Ndi (n. 126) 255. 257 On the problem generally, see e.g., Ole Spiermann, ‘Individual Rights, State Interests and the Power to Waive ICSID Jurisdiction under Bilateral Investment Treaties’ (2004) 20 Arb. Int’l 179–211; Bernardo M. Cremades and David J.A. Cairns, ‘Contract and Treaty Claims and Choice of Forum in Foreign Investment Disputes’ in Norbert Horn and Stefan Kröll (eds), Arbitrating Foreign Investment Disputes – Procedural and Substantive Legal Aspects (Kluwer, 2004) 325–351; Christoph Schreuer (n. 219) 231; Stanimir Alexandrov (n. 193) 561–562; Antonio Crivellaro, ‘Consolidation of Arbitral and Court Proceedings in Investment Disputes’ (2005) 4 LPICT 371–420; Yuval Shany, ‘Contract Claims vs. Treaty Claims: Mapping Conflicts between ICSID Decisions on Multisourced Investment Claims’ (2005) 99 AJIL 835–851; Emmanuel Gaillard (n. 137) 325; Anne K. Hoffmann, ‘The Investor’s

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ed to the SGS v. Pakistan tribunal declining to give effect to the umbrella clause. On the one hand, the tribunal insisted that its jurisdiction to decide treaty claims, including inter alia breach of the umbrella clause, was not ‘to any degree (…) shared’ with the tribunal chosen by the parties under the State contract in question, and that the ICSID tribunal’s decision was not dependent upon that arbitrator’s findings.258 Applying the differentiation between contract and treaty claims articulated by the ad hoc committee in the Vivendi case,259 which has become known as the ‘Vivendi principle’, the tribunal held that it was itself competent to ‘consider all facts relevant to the determination of the BIT causes of action, including facts relating to the terms of the PSI Agreement’.260 Nevertheless, the tribunal declined to embark upon such investigations in relation to the umbrella clause claim. The tribunal rejected the legal effect of the umbrella clause advocated by the claimant because it would necessarily ‘supersede and set at naught all otherwise valid non-ICSID forum selection clauses in all earlier agreements between Swiss investors and the Respondent.’261 In other words, the tribunal could not accept that the investor would enjoy a unilateral right of election between contractually agreed or treaty dispute settlement mechanisms, and thereby avoid the contractually specified forum.262 The tribunal therefore rejected the proposed legal effect of the umbrella clause ‘in the face of a valid forum selection contract clause’.263 The El Paso and Pan American tribunals were also concerned to maintain the 114 distinction between contractually agreed and treaty-based legal orders, with this again affecting the interpretation of the umbrella clause. One of the reasons the tribunals gave for declining to give effect to the umbrella clause was that it was thought that such a remedy was unnecessary, since State contracts will invariably contain their own negotiated dispute settlement mechanism.264 Very often this will be a reference to ICSID or international commercial arbitration. This perspective contributed to the tribunals declining to find that the umbrella clause created an overarching internationally secured remedy.

258 259 260 261 262 263 264

Right to Waive Access to Protection under a Bilateral Investment Treaty’ (2007) 22 ICSID Rev.–FILJ 69–94; Jacomijn J. van Haersolte-van Hof and Anne K. Hoffmann, ‘The Relationship between International Tribunals and Domestic Courts’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 984–1005, 962; James Crawford (n. 201); Jeffrey Hertzfeld and Barton Legum, ‘Pre-Dispute Waivers of Investment Treaty Arbitration: A Practical Approach’ in Kaj Hobér, Annette Magnusson and Marie Öhrström (eds), Between East and West: Essays in Honour of Ulf Franke (Juris, 2010) 183–194. SGS v. Pakistan (n. 15) para. 155. Vivendi v. Argentina, Decision on Annulment, 3 July 2002, paras. 101–102. SGS v. Pakistan (n. 15) para. 186. Ibid., para. 161. Ibid., para. 168. Ibid, para. 165. El Paso v. Argentina (n. 1) para. 77, and see Pan American v. Argentina (n. 1) para. 106.

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Only a small minority of treaties provide any direct guidance on the question of competing claims to jurisdiction. Article 13 of the India–Switzerland BIT provides as follows: Each Contracting Party shall observe any obligation it may have entered into with regard to an investment of an investor of the other Contracting Party. In relation to such obligations dispute resolution under Article 9 of this Agreement shall however only be applicable in the absence of normal judicial remedies being available.

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The second sentence seems to regulate treaty and local jurisdiction to decide claims in respect of host State obligations, with preference given to local judicial procedures. Only if normal judicial procedures are unavailable should claims under the umbrella clause be heard. The Denmark–India BIT and Germany–India BIT are more direct, each providing: Each Contracting Party shall observe any obligation it has assumed with regard to investments in its territory by investors of the other Contracting Party, with disputes arising from such obligations being only redressed under the terms of the contracts underlying the obligations.

The Australia–Mexico BIT also provides that ‘disputes arising from such obligations shall be settled under the terms of the contract underlying the obligation’.265 This language seems to limit the scope of a treaty-based tribunal to hear umbrella clause claims to those circumstances in which an underlying State contract lacks any agreed dispute settlement mechanism. 118 In the absence of such wording, tribunals have struggled to mediate between these apparently conflicting dispute settlement arrangements. The existence of an exclusive choice of forum clause in the underlying obligation has been a vexed problem even for those tribunals that have acknowledged the effect of the umbrella clause. However, as shall be seen, it should not be determinative of the effect to be given to the umbrella clause. This must be so, since not all umbrella clause claims arise out of State contracts, and not all State contracts contain exclusive jurisdiction clauses. 117

a) Conclusions on the Impact of an Exclusive Choice of Contractual Forum 119

The tribunals that have acknowledged the effect of the umbrella clause have come to different conclusions on the impact of an exclusive jurisdiction clause in the underlying contract; some have declined jurisdiction, some have suggested a stay of proceedings is appropriate pending resolution of the contractual aspects of the dispute in the chosen forum; others have simply proceeded to the merits. These different approaches are discussed next. (1) Decisions in which Tribunals have declined Jurisdiction

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The decision on jurisdiction in Toto Costruzioni Generali v. Lebanon confirms that the umbrella clause might give rise to a treaty remedy in respect of a breach of a State contract. However, the tribunal ruled that it did not have juris265 E.g., Australia–Mexico BIT, Article 9; see also Denmark–India BIT, Article 2(4).

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diction to determine the claims since the contract provided that disputes should be referred to the exclusive jurisdiction of the Lebanese courts.266 The tribunal explained that the umbrella clause claim remained governed by the terms of the underlying contract and was susceptible to those terms.267 (2) Decisions in which Tribunals have stayed the Proceedings

The decision on jurisdiction in SGS v. Philippines gained some notoriety inso- 121 far as the tribunal accepted that the umbrella clause ‘means what it says’ and confirmed its jurisdiction yet by a majority declined to proceed to the merits of the claim, at least at that time, because the underlying State contract contained an exclusive reference to the courts of Makati or Manila. The tribunal was concerned not to undermine the utility of exclusive jurisdiction agreements in contractual relations, 268 and did not believe that States would have intended generic investment protection agreements in investment treaties to have such an effect. At the same time, the tribunal did not consider it plausible that the ‘general language in BITs dealing with all investment disputes should be limited because in some investment contracts the parties stipulate exclusively for different dispute settlement arrangements’.269 The tribunal considered the contractual jurisdiction clause to be the lex specialis, in contrast to the generic offer to submit disputes to arbitration in the BIT and, given its exclusivity, that it should therefore have priority over treaty arrangements.270 Accordingly, the tribunal concluded that it would be premature to rule on the treaty claim until such time as ‘the question of the Respondent’s obligation to pay is clarified’ by the chosen courts,271 staying its proceedings on grounds that the claims were inadmissible.272 The tribunal explained that the umbrella clause did not override the exclusive jurisdiction clause in the contract, nor did it permit a party to a contract to claim on that contract (even via the treaty) without itself first complying with it.273 Crivellaro, dissenting, disagreed that the two dispute settlement arrangements 122 – one under the treaty, the other specified in the contract – must be mutually exclusive.274 To his mind, a BIT does not override the dispute settlement procedures in the State contract, but provides an alternative to them. He also consid-

266 Toto v. Lebanon (n. 81). Judge Schwebel, appointed to fill a gap on the tribunal at a late stage of proceedings, issued a brief opinion casting doubt on this finding: Concurring Opinion, 24 May 2012. 267 Ibid., para. 202. 268 SGS v. Philippines (n. 6) para. 134. 269 Ibid., para. 134. 270 Ibid., paras. 139–143. 271 Ibid., para. 155. 272 Ibid., paras. 154, 169, 175; also Jan Paulsson, ‘Jurisdiction and Admissibility’ in Gerald Aksen, Karl-Heinz Böckstiegel, Michael J. Mustill, Paolo M. Patocchi, Anne Marie Whitesell (eds), Liber Amoricum in Honour of Robert Briner, Global Reflections on International Law, Commerce and Dispute Resolution (ICC Publishing, 2005) 601–617. 273 Ibid., paras. 143, 154. 274 Ibid.

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ered the treaty jurisdiction, once crystallised by the investor’s request for arbitration, to be both more specific as it concerned a specific dispute and the lex posteriori.275 He would have allowed the claimant to select amongst those options, with questions concerning the extent and performance of obligations under the contract ‘fully admissible’ before the treaty tribunal without first being processed by the contractually chosen courts.276 In his view, the stay of the proceedings was therefore inappropriate.277 123 It was only three years later that the tribunal held that the open issues, mostly relating to quantum, had been sufficiently clarified for the benefit of the parties and the tribunal through the work of an audit commission such that it was possible to resume the BIT proceedings.278 The dispute settled shortly thereafter, without a final award on the merits. 124 In the BIVAC case, the tribunal ruled that, in principle, the umbrella clause in the applicable BIT gave rise to a potential treaty remedy for breach of a State contract. However, as already seen, the tribunal was troubled by the presence in the relevant contract of an exclusive choice of jurisdiction in favour of the courts of Asunción. The tribunal considered that the effect of the umbrella clause must be to invite consideration of whether the host State had complied with all of its obligations under the contract, including the obligation to submit to the jurisdiction of the specified courts. Moreover, since the contract was concluded after the BIT, and the parties had not carved out from their dispute settlement arrangements possible umbrella clause claims, the tribunal inferred that parties intended the reference to the courts of Asunción ‘to be absolute and without exception’.279 In its Decision on Jurisdiction, the tribunal concluded that the claim under the umbrella clause was inadmissible because the claimants had failed to refer the dispute first to the courts of Asunción. The tribunal joined to the merits the question whether the result of the decision on inadmissibility should be the dismissal of the umbrella clause claim on the merits, or whether it should follow the Philippines approach and stay proceedings on grounds of inadmissibility.280 Whilst the tribunal indicated that it preferred the former conclusion, what is clear is that the tribunal believed, at least at that time, that it was not entitled or appropriate to proceed to the merits. In a further Decision on Objections to Jurisdiction, the tribunal ruled that ‘a continued stay of proceedings is the appropriate way forward’, with the parties periodically reporting to the tribunal on the status of any reference to the local courts.281

275 276 277 278 279 280 281

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Bosh International v. Ukraine favours the Philippines and BIVAC approach to 125 applicable contractual dispute settlement procedures. Although the tribunal had already decided that the umbrella clause did not apply to the contract in question, it expressed the view that in any event the claimants would have been obliged first to refer their dispute to the contractually chosen courts.282 In the event that those courts determined that the claimants’ rights had been validly extinguished, the tribunal would have declined to find that they had any remaining rights that they could properly assert under the umbrella clause.283 (3) Decisions in which Tribunals have proceeded to Merits

There are also awards upholding umbrella clause claims that reject the Philip- 126 pines and BIVAC approach. In Eureko v. Poland,284 the respondent argued that the investor’s claims were inadmissible because they stemmed from a contract that contained a clause referring disputes to the exclusive jurisdiction of the competent ‘Polish public court’.285 The respondent also argued that international law generally required that the extent of the State’s contractual obligations and any allegation of breach first had to be determined before the forum selected in the contract before an investment treaty tribunal could determine whether the State had breached its treaty obligations. The tribunal rejected these arguments, relying on the characterisation of contract and treaty claims advanced by the Vivendi ad hoc committee. The tribunal explained that the ‘fundamental basis’ of the umbrella clause claim is the treaty, as it lays down an independent standard by which the conduct of the parties may be judged. A treaty-based tribunal is mandated to adjudicate treaty claims and the exclusive jurisdiction clause in the contract should not prevent it from doing so.286 The tribunal in SGS v. Paraguay likewise proceeded to the merits in the face 127 of an exclusive jurisdiction clause in the relevant contract. First, with regard to jurisdiction the tribunal concluded that the ‘well established’ distinction between treaty and contract claims disposed of Paraguay’s objection that the tribunal could not exercise jurisdiction in respect of the umbrella clause claim because the contract referred disputes to the courts of Asunción.287 Applying a strict separation of legal categories, the tribunal explained that an umbrella clause claim is, by definition, a treaty claim and, as such, treaty jurisdiction cannot be displaced by a term of a contract.288 The tribunal considered this conclusion to be wholly consistent with the statement on the distinction between contract and treaty claims by the ad hoc committee in Vivendi. The tribunal further explained 282 Bosh International v. Ukraine, ICSID Case No. ARB/08/11, Award, 25 October 2012, paras. 251–252. 283 Ibid, para. 259. 284 Eureko v. Poland (n. 41) para 112. 285 Ibid., para. 92. 286 Ibid., paras. 112–113. 287 SGS v. Paraguay (n. 12) para. 128. 288 Ibid.

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that, in its view, the essential basis of an umbrella clause claim is in fact a breach of a treaty obligation to abide by commitments, contractual or otherwise, and cannot be said to be merely a breach of contract. 289 The tribunal thus disposed of the differentiated approach the Vivendi ad hoc committee proposed where the ‘essential’ or ‘fundamental’ basis of a breach of treaty is in substance a breach of contract. 128 Having upheld its jurisdiction, the tribunal declined to adopt the approach in SGS v. Philippines and stay its proceedings until such time as the contractual aspects of the dispute had been decided in the contractually chosen forum. The tribunal’s overarching concern was that to do so would place it at risk of failing to carry out its mandate.290 In the tribunal’s view it was the intention of the contracting parties to the BIT to provide, through the umbrella clause, protection over and above whatever rights an investor could negotiate for itself in its contract or could find under domestic law. The tribunal thought it would defeat that intention if tribunals would decline to determine umbrella clause claims based on those very contractual terms. The tribunal explained that the existence of umbrella clause jurisdiction does not extinguish the contractual forum selection clause; the two co-exist, with the umbrella clause merely supplementing the contract with an option for the investor of an alternative treaty remedy.291 The tribunal also considered that a stay was inappropriate since the treaty claims required it to determine issues going beyond the four corners of the contract. 129 The tribunal rejected reading any implied waiver of umbrella clause protection into investment agreements simply by the inclusion of a forum selection clause.292 The tribunal disagreed with BIVAC, stating that it should not be readily assumed that treaty rights have been waived. If a waiver were to be intended by an agreement concluded later in time, that intention should be express and categorical.293 The tribunal endorsed the view of the tribunal in Aguas del Tunari v. Bolivia294 that the mere designation of an alternative forum in a contract is insufficient to amount to a waiver of treaty protection.295 b) Analysis of the Question of Jurisdiction 130

Almost without exception, the decided cases confirm that a treaty tribunal’s jurisdiction is unaffected by a contractual jurisdiction clause. One exception is the Toto v. Lebanon case, which declined to hear claims arising under an umbrella clause because of a clause in the relevant contract referring disputes to the exclusive jurisdiction of the Lebanese courts. The BIVAC tribunal also thought that 289 Ibid., paras. 138, 142. 290 Ibid., para. 172. 291 Ibid., para. 182; Award, 10 February 2012, para. 107; also SGS v. Philippines, Declaration of Antonio Crivellaro, 29 January 2004, para. 4. 292 SGS v. Paraguay (n. 12) para. 177. 293 Ibid., para. 178. 294 Aguas del Tunari S.A. v. Bolivia, Decision on Jurisdiction, 21 October 2005, para. 115. 295 SGS v. Paraguay (n. 12) paras. 179–180.

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the incompatibility of dispute settlement arrangements might have jurisdictional consequences. However, the weight of authority is against this conclusion. Most tribunals consistently apply the Vivendi principle and confirm their ju- 131 risdiction on grounds that the umbrella clause claim concerns an independent international law standard.296 The Philippines tribunal explained that ‘unless otherwise expressly provided, treaty jurisdiction is not abrogated by contract’.297 Most umbrella clauses do not express such terms. However, given that some States do expressly specify exceptions to treaty jurisdiction for umbrella clause claims (noted above), this reinforces the argument that in the absence of an express exclusion, the investor should indeed enjoy a choice to proceed under treaty or contract. Neither the mere fact that the same events might give rise to different claims grounded in different legal orders, nor the existence of a jurisdiction agreement in the relevant contract, should derogate from, or be inferred to amount to a waiver of, a tribunal’s jurisdiction conferred by treaty. c) Analysis of the Question of Admissibility and the Philippines’ Solution

Assuming treaty jurisdiction is properly established, the problem tribunals 132 have grappled with is how to reconcile or do justice to these two apparently conflicting jurisdiction agreements: the exclusive jurisdiction clause in the relevant State contract, and the jurisdiction agreement formed under the auspices of the investment treaty when a claimant submits its request for arbitration. Maxims based on which agreement is the more specific, or which is the later in time, can be wielded in support of either provision; moreover, it is doubtful whether such principles should apply at all to instruments subsisting in different legal orders.298 Instead of trying to reconcile the two fora, the Philippines tribunal tried to 133 give effect to both.299 International authority recognises that while the jurisdiction of an international court or tribunal may be properly seized, exceptionally it is not obliged to exercise it in every instance. The International Court of Justice has on separate occasions confirmed that it may stay its proceedings if it is ‘satisfied (…) that to adjudicate on the merits of an application would be inconsistent with its judicial function, it should refuse to do so’,300 but only if it is ‘confronted with a clause which it considers sufficiently clear to prevent the possibility of a negative conflict of jurisdiction involving the danger of a denial of justice’.301 It was accordingly open to the Philippines tribunal to rule, as a question of admissibility, that in all the circumstances it was incompatible with its judi296 SGS v. Pakistan (n. 15) paras. 147, 155; SGS v. Philippines (n. 6) paras. 158, 163 citing Vivendi v. Argentina (n. 259) para. 112; see also Stanimir Alexandrov (n. 193) 562–564. 297 SGS v. Philippines (n. 6) para. 154. 298 Ibid., para. 142; and see Christoph Schreuer (n. 219) 281. 299 Ibid., paras. 138, 155. 300 Northern Cameroons case, ICJ Judgment, ICJ Rep. 1963, 15, 37, and see Leo Gross, ‘Limitations on the Judicial Function’ (1964) 58 AJIL 415, 424; Mox Plant case, ITLOS, Tribunal Order No. 3 of 24 June 2003 of the PCA tribunal, (2003) 42 ILM 1187, para. 28.

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cial function to decide the claims at that time.302 The tribunal did so because it did not believe that the jurisdiction conferred by the BIT was intended ‘to override or replace, the actually negotiated investment arrangements made between the investor and the host State’.303 Crawford, one of the arbitrators in the Philippines case, has explained that whilst it may provide a basis for a treaty claim, ‘the umbrella clause does not change the proper law of the contract or its legal incidents, including provisions for dispute settlement’.304 134 Some commentators favour the Philippines solution on grounds that it affords tribunals flexibility, allowing for the possibility of a reference to the chosen forum, whilst preserving the power ultimately to issue an award on the treaty claim.305 Other commentators say the solution is in accord with tribunals’ ‘general duty to act judicially’, and potentially ‘a very efficient way of coordinating parallel or multiple proceedings’.306 135 There are, however, a number of difficulties with the stay. First, given the prevalence of exclusive jurisdiction clauses in State contracts, the Philippines decision risks rendering the umbrella clause otiose. Following the Philippines solution, the umbrella clause becomes no longer a provision that adds to the protection of investors but rather, one which forces claimants to submit their disputes first to local or other agreed courts or tribunals. For this reason, commentators have criticised the majority decision for being ‘an indirect affirmation of the doctrine of exhaustion of local remedies’.307 Gaillard, counsel to the claimant in the Philippines case, describes the tribunal’s conclusion as an ‘impossible situation’ because the two instruments are contradictory.308 He criticises the tribunal for simultaneously accepting jurisdiction over the umbrella clause claims but staying the proceedings, thereby asserting ‘jurisdiction over an empty shell and depriving the BIT dispute resolution provision of any meaning’.309 136 Moreover, there is some support in the older commentaries for the view that the umbrella clause was indeed intended to create an additional jurisdictional option, albeit originally for the investor’s home State.310 It is also true that um301 Case Concerning the Factory at Chorzów, Jurisdiction, (1927) PCIJ (Series A) No. 9, 29, 30. 302 Ibrahim F.I. Shihata, The Power of the International Court to Determine its Own Jurisdiction (Martinus Nijhoff, 1965) 233–236. 303 SGS v. Philippines (n. 6) para. 141. 304 James Crawford (n. 201). 305 SGS v. Philippines (n. 6) para. 155; see also John Gaffney and James Loftis (n. 1) 29. 306 Kaj Hobér, ‘Parallel Arbitration Proceedings: Duties of Arbitrators – Some Reflections and Ideas’, paper presented at the ICC Institute of World Business Law, 24th Annual Meeting addressing Parallel State and Arbitral Procedures in International Arbitration, held in Paris, 15 November 2004, 16–17. 307 Richard H. Kreindler, ‘Arbitral Forum Shopping’, paper presented at the ICC Institute of World Business Law, 24th Annual Meeting addressing Parallel State and Arbitral Procedures in International Arbitration, held in Paris, 15 November 2004, 52; Christoph Schreuer (n. 219) 11. 308 Emmanuel Gaillard (n. 137) 334. 309 Ibid.; also Stanimir Alexandrov (n. 193) 575, fn. 119. 310 Anthony Sinclair (n. 45).

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brella treaty protection as first conceived was to be drafted in conjunction with a particular contractual framework, so inconsistency would presumably be avoided. Nevertheless, in early advice on the subject, it was said that the language of the umbrella treaty sought to eliminate any possibility that the respondent State might argue that the treaty claim ought to be resolved by the contractually chosen forum.311 Schwarzenberger noted as well, as far back as 1960, that the wording of the umbrella clause ‘make[s] it unnecessary for a national first to seek justice on the levels of the municipal law of a capital-importing state (or a state granting a concession) or the law specifically provided for under a particular public contract’.312 Modern support for this conclusion exists in the views of the dissenting arbitrator in the Philippines case, and the subsequent tribunal in SGS v. Paraguay. Both insisted that the effect of the investment treaty is not to ‘override’ existing contractual dispute settlement arrangements, but rather, to confer on the investor another option.313 These decisions deny that there is any requirement that a disputed contract first be adjudicated upon by a local judge before an international tribunal may pass on an umbrella clause claim in respect of its breach. Secondly, without express guidance from the tribunal, the Philippines solu- 137 tion creates uncertainty as to how long the stay should be maintained, what precise events might bring it to an end, and the weight to be given to any determinations of the chosen courts or tribunal.314 As a practical matter, the outcome is unsatisfactory for both claimants and respondents. For the claimant, it is forestalled in potentially obtaining an international remedy; for the respondent, long drawn-out investment disputes can have a negative impact on the host State’s investment credibility.315 Thirdly, it also presents difficulty where the dispute before the treaty tribunal 138 presents claims or involves elements going beyond mere issues of contract. A piecemeal approach is unlikely to be satisfactory, but at the same time, it is at odds with the Vivendi principle to stay other treaty claims besides the umbrella clause because of a contractual choice of forum. Finally, for many commentators, a stay is wholly inconsistent with the fact 139 that as a matter of strict characterisation, an umbrella clause is fundamentally a claim for breach of treaty.316 This question as to the proper characterisation of an umbrella clause claim is in fact at the heart of the problem and on this, the cases are sharply divided. 311 Ibid. 312 Georg Schwarzenberger (n. 167) 155. 313 The existence of separate potential jurisdictional arrangements arising out of the same facts is not ‘pathological’: Bayindir v. Pakistan (n. 225) paras. 166–167; see also Emmanuel Gaillard (n. 137) 345; Emmanuel Gaillard, ‘Vivendi and Bilateral Investment Treaty Arbitration’ (2003) 229 NYLJ 3–6. 314 See also Impregilo v. Pakistan (n. 225) paras. 289–290. 315 Bernardo M. Cremades, ‘Disputes arising out of Foreign Direct Investment in Latin America: A New Look at the Calvo Doctrine and other Jurisdictional Issues’ (2004) 59 Disp. Res. J. 78, 84.

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The ad hoc committee in Vivendi famously ruled that a contractual jurisdiction clause cannot impinge on treaty claims properly characterised as such.317 The ‘Vivendi principle’ affirms that where the ‘fundamental basis of the claim’ is a breach of treaty laying down an independent standard by which to judge the respondent’s conduct, no term in any related State contract should deny the jurisdiction of a tribunal established under that treaty to determine those claims.318 A long line of decisions now exists applying this well-established rule. 141 On the other hand, the ad hoc committee stated that: ‘in a case where the essential basis of a claim brought before an international tribunal is a breach of contract, the tribunal will give effect to any valid choice of forum clause in the contract’.319 In support for this last proposition, the Vivendi committee cited Woodruff, a decision of Umpire Barge of the American–Venezuelan Mixed Commission.320 The Commission in Woodruff had held that it lacked jurisdiction to hear claims for breach of a contract because the contract contained a clause emphatically referring disputes to the laws and tribunals of Venezuela. The jurisdiction clause could not preclude Woodruff’s government (as opposed to Woodruff himself) from exercising its own rights of diplomatic protection insofar as the dispute was in substance not only a claim for breach of contract but also a breach of international law.321 But Woodruff’s contractual claims were dismissed since ‘by the very agreement that is the fundamental basis of the claim, it was withdrawn from the jurisdiction of this Commission’.322 Underpinning the decision was a desire to uphold the efficacy of contractually agreed dispute settlement procedures.323 142 Applying Woodruff the tribunals in both SGS v. Philippines and BIVAC v. Paraguay both thought that the fundamental basis of an umbrella clause claim is, in substance, a breach of contract. Indeed, the BIVAC tribunal asserted that it would be ‘entirely artificial’ to suggest otherwise, since an umbrella clause claim turns on the interpretation and application of the underlying contract.324 Others concur, emphasising the need to look to the substance of the claim,325 although given that treaty protections are not typically violated by evidence of a 140

316 Ian Laird, ‘A Distinction without a Difference? An Examination of the Concepts of Admissibility and Jurisdiction in Salini v. Jordan and Methanex v. USA’ in Todd J. Weiler (ed), International Investment Law and Arbitration (Cameron May, 2005) 201–222. 317 Vivendi v. Argentina (n. 259) para. 103. 318 Ibid., paras. 101–102. 319 Ibid., para. 98, observing in a footnote ‘unless the treaty in question otherwise provides’ (emphasis added). 320 Woodruff case, (1903) 9 RIAA 213, 222, cited in Vivendi (n. 35) paras. 98–99. 321 Ibid. 322 Ibid., at 223. 323 Ibid., at 222. 324 BIVAC v. Paraguay (n. 74) para. 149. 325 C.I. Suarez Anzorena, ‘Vivendi v. Argentina: on the Admissibility of Requests for Partial Annulment and the Ground of a Manifest Excess of Powers’ in Emmanuel Gaillard and Yas Banifatemi (eds), Annulment of ICSID Awards – The IAI Series on International Arbitration (Juris, 2004).

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breach of a State contract, the only treaty claim, if any at all, that ought properly to have as its ‘fundamental basis’ a breach of contract is an umbrella clause claim. Other cases take the wholly opposite view. As already seen, the majority in 143 Eureko v. Poland thought that the ‘fundamental basis’ of the umbrella clause claim is the treaty, as it lays down an independent standard by which the conduct of the parties may be judged.326 The SGS v. Paraguay tribunal also focused on the legal nature of the claim before it, ruling that the essential basis of the claim could be nothing other than a breach of treaty. The characterisation of claims expressed in these last two cases finds support from Amerasinghe, for instance: The general proposition that, where a state performs an act which is prohibited by a treaty to which it is a party, it will be responsible for a breach of international law to the other party or parties to the treaty requires no substantiation. In accordance with the same principle, an act which constitutes a breach of contract would be a breach of international law, if it is an act which that state is under an obligation not to commit by virtue of a treaty to which it and the national state of the alien are parties.327

In other words, a breach of State contract only breaches the treaty because the 144 treaty itself has established an independent international law obligation to observe the terms of State contracts. The Paraguay tribunal explained that it was tasked to rule on the respondent’s international responsibility for breach of a specific treaty obligation, not merely to decide whether it was liable for breach of contract. Although some may consider the distinction ‘artificial’, it is clear that a claim for breach of an umbrella clause is a treaty claim properly defined. It is not breach of the underlying contract per se that engages the host State’s international responsibility, it is breach of an ‘additional element’, namely the additional promise contained in the treaty to observe such obligations.328 The umbrella clause thus has some content independent from the underlying contract. Not only do the two obligations exist on a different legal plane, there is also a potential controlling role for international law with umbrella clause claims that is not present with mere questions of contract. Although the law awaits further clarification, with strength to the arguments 145 on both sides, there is some logic in concluding that the ‘fundamental basis’ of an umbrella clause claim is truly a breach of treaty, not a breach of contract, and ought not to be affected by a conflicting exclusive jurisdiction agreement in the underlying investment contract. An approach based on strict legal categories also has the advantage of certainty. The alternative, based on an assessment of the relevant facts and their relation to any putative contractual or treaty claim, may be a challenging undertaking in a complex case, especially early in a proceeding, is inherently subjective, and may be prone to inconsistent results. 326 Eureko v. Poland (n. 41) paras. 112–113. 327 Chittharanjan F. Amerasinghe, ‘State Breaches of Contracts with Aliens and International Law’ (1964) 58 AJIL 881, 910–912 (emphasis added); and ILC Articles (n. 204) Article 4, Commentary, para. 6; Article 12, Commentary, paras. 9–10. 328 Robert Jennings and Arthur Watts (n. 109) 927.

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Applying the Eureko and Paraguay approach would still leave scope for the Woodruff principle. It would still follow that where a claim was characterised as a breach of contract – perhaps advanced under the so-called broad or generic dispute settlement clauses found in some treaties329 – then the tribunal would be right to defer to the contractually agreed forum, but not otherwise. 6. The Disputed Scope of the Umbrella Clause

The umbrella clause debate is strongly influenced by perceptions as to the proper scope of the umbrella clause: as the scope of potential umbrella clause claims is perceived to expand, whether such perceptions are justified or not, hostility to the clause’s putative effect also seems to grow. The approach to the umbrella clause of some of the more sceptical tribunals – SGS v. Pakistan, El Paso and Pan American – is clearly influenced by their view of its potential scope of application.330 148 Concern as to the scope of the umbrella clause has generated on the one hand, doubts as regards the fundamental question of the clause’s effect. On the other hand, it has led to tribunals and commentators seeking to read into umbrella clauses limitations or conditions that would circumscribe their effect. This section seeks to address these concerns by elucidating the proper scope of the umbrella clause. It focuses on three fields of inquiry. 149 The first, discussed in section a) below, concerns the juridical nature of the ‘commitments’, ‘obligations’, or ‘undertakings’ protected by an umbrella clause. Issues arise as to whether protected obligations may include commercial contracts, or only obligations of a governmental nature. Another question is whether the scope of obligations ‘entered into’ with investors necessarily implies only specific bilateral or contractual arrangements, or whether undertakings of a general or unilateral nature might also be covered. 150 The second field of inquiry, discussed in section b) is determination of whether the host State has itself assumed an obligation. There is some dispute as to how to determine whether a State has entered into an obligation or commitment to which the umbrella clause attaches. Finally, section c) addresses the contentious matter of whether umbrella clause claims may be brought by parent investors or shareholders that are not the direct counterparty to a particular undertaking, or whether only the signatories or parties to the obligation in question are entitled to claim. 147

a) The Nature of the Protected Obligation 151

Umbrella clauses seldom define the ‘obligations’, ‘commitments’, or ‘undertakings’ they are intended to protect. In the absence of guidance, the view that umbrella clauses might attach to a great pool of legal obligations of a State, 329 Anthony Sinclair (n. 115). 330 E.g., El Paso v. Argentina (n. 1) para. 76; Pan American v. Argentina (n. 1) para. 105.

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whether governmental or commercial, contractual or unilateral in nature, and whatever their source,331 evidently gives rise to strong antipathy to the plain language of the umbrella clause and its apparently intended effect. Thus, the scope of obligations of the host State to which the umbrella clause may apply is a matter deserving of detailed attention. (1) ‘Governmental’ or ‘Commercial’ Obligations

One interpretative limitation frequently proposed for the scope ratione mate- 152 riae of the umbrella clause is that it does or should only apply to obligations entered into by the host State in a governmental or sovereign capacity. According to this theory, private law or commercial commitments should not be protected, one justification being that so-called ‘commercial contracts’ concluded by a State with a foreign investor were allegedly not within the contemplation of the original drafters of the umbrella clause.332 A further justification put forward is that inclusion of commercial contracts could ‘give rise to unintended and farreaching consequences, with the state being held to account for the contractual performance of entities over which it has little or no practical control’.333 Certain tribunals have favoured this implied limitation. For example, the con- 153 cern that the umbrella clause might be ‘susceptible of almost indefinite expansion’334 seems to have motivated the SGS v. Pakistan tribunal’s conclusion that the umbrella clause could not have the effect that ‘any alleged violation’ of State contracts or other commitments should be treated as a breach of the BIT.335 The tribunals in El Paso and Pan American also declined to give any substantial effect to an umbrella clause, in part as a consequence of their view of the potential scope of claims it might generate. The tribunals each denied that an investment treaty extends at all to the dealings of the host State ‘as merchant’, preferring instead a distinction between ‘governmental’ and ‘commercial’ obligations.336 The tribunals concluded that the umbrella clause might ‘cover additional investment protections contractually agreed by the State as a sovereign – such as a stabilization clause – inserted into an investment agreement’,337 but would not apply to investment-backed State contracts deemed to be ‘merely commercial’. On the other hand, there is a line of decisions emphatically rejecting any im- 154 plied governmental limitation to the scope of obligations protected by the umbrella clause. In Eureko v. Poland, the tribunal stated that the scope of obligations protected by the umbrella clause is ‘capacious’, and encompasses ‘not only obligations of a certain type’ but ‘all’ obligations entered into with regard to in331 332 333 334 335 336

Ibid. Thomas Wälde (n. 251). David Foster (n. 109). SGS v. Pakistan (n. 15) para. 166. Ibid., para. 168. El Paso v. Argentina (n. 1) paras. 78, 81; and see Pan American v. Argentina (n. 1) para. 108; also David Foster (n. 109) 106. 337 Ibid., para. 81.

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155

156

157

158

159

vestments of investors of the other contracting party.338 The tribunal said it was ‘irrelevant’ that Polish law characterised the contracts in question as of a purely civil law character,339 and did not accept that the umbrella clause only applied to obligations of a governmental or sovereign nature. The tribunal in Noble Ventures did not accept that the umbrella clause did not apply to commercial matters. The tribunal rightly added that ‘there is no common understanding in international law of what constitutes a governmental or public act’.340 In CMS v. Argentina the commitments in question were considered to be public in nature, and not merely commercial, although the tribunal opined that the umbrella clause could afford protection to both public and private law instruments.341 In Siemens v. Argentina, the tribunal held that there was no basis to find any distinction between governmental obligations, such as so-called ‘investment agreements’, that might fall within the scope of the umbrella clause, and other obligations including ‘commercial’ agreements and concessions, which would not. The broad definition of ‘investment’, coupled with the reference in the umbrella clause to ‘any obligations’, would in the tribunal’s view ‘cover any binding commitment entered into by Argentina in respect of such investment’.342 In SGS v. Paraguay also, the tribunal expressly declined ‘to import into [the umbrella clause] the non-textual limitations that Respondent proposed’.343 It did not accept that the umbrella clause excluded commercial contracts or conversely, that it only applied to undertakings assumed in a sovereign capacity.344 The tribunal confessed to difficulty in knowing how it might even classify a long-term contract concluded with a government ministry. It is also unclear that the original intention behind the umbrella clause was to stabilise only governmental commitments. It is true that the projects that motivated Lauterpacht, Abs, Shawcross and others were large concession agreements concerning natural resources, utilities or infrastructure, and these are commonly assumed to have a sovereign juridical character. Discussing the umbrella clause in the OECD Draft Convention, Brower raised the possibility that the provision’s scope ratione materiae was intended to be limited so as only: to apply specifically to large-scale investment and concession contracts – in the making of which the state is deliberately ‘exercising its sovereignty’ – and thus it might be argued that the ordinary commercial contract is an implied exception to the general rule set forth in Article 2.345

338 339 340 341 342 343 344 345

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To the contrary, however, Lauterpacht expressly considered it beneficial to the foreign parties for the way to remain open for their governments to take up even relatively minor – and presumably commercial – disputes arising between the parties to the settlement agreement ‘in case overall considerations of Governmental and Company policy should require this course of action’.346 Moreover, there is nothing to indicate a governmental limitation ratione materiae was intended either in the text of the OECD Draft or the Abs–Shawcross Draft. Nevertheless, more recent commentaries continue to argue that the umbrella clause should only protect State contracts concluded de iure imperii, as opposed to merely commercial obligations.347 Against this, there are commentators who maintain that there is no basis to add a governmental qualification to the scope of the umbrella clause that is not evident in the text.348 The latter view is the better one, in the absence of words to the contrary in the particular treaty at hand. First, there is no language requiring that obligations must be ‘governmental’, ‘sovereign’ or ‘non-commercial’ in common umbrella clauses. Secondly, the proposed limitation appears at odds with the object and purpose of promoting and protecting investments abroad since it creates uncertainty as to the application of the treaty to purely commercial or quasi-commercial ventures, or investment in complex industries which depend on a range of commercial arrangements with the State.349 Thirdly, the distinction between the sovereign or commercial nature of an underlying obligation gives rise to numerous practical and theoretical difficulties, especially in times of deregulation and denationalisation. The activities of the modern regulatory State are myriad and vary as the political, social and economic needs of each society vary. It is difficult to predict in advance whether a particular State undertaking involves acts de jure gestionis or acts de jure imperii. Shawcross himself had considered the act on the part of the State of concluding a contract with a foreign investor an exercise of sovereign authority, distinguishable only in degree, not kind, from the conclusion of a treaty.350 Some argue that ‘commercial’ obligations or commitments involve the ‘procurement of equipment and services’, but these types of transactions may not even qualify as investments, hence the application of the umbrella clause would be moot.351 Many

346 347

348 349 350

Investors Abroad – Problems and Solutions in International Business in 1975 (Matthew Bender, 1976) 93, 105, fn. 27. See Elihu Lauterpacht, ‘Anglo-Iranian Oil Company Limited Persian Settlement – Note’, 12 March 1954, at 9; ‘Treaties of Protection – Note’, New Draft, 17 April 1957, at 6–7, cited in Anthony Sinclair (n. 45); and see Frederick Mann (n. 119) 246. Thomas W. Wälde, ‘International Investment under the 1994 Energy Charter Treaty – Legal Negotiating and Policy Implications for International Investments within Western and Commonwealth of Independent States/Eastern European Countries’ (1995) 29 JWT 49–72; Richard Happ (n. 220) 331; Thomas Wälde and Todd Weiler (n. 220) 202. E.g., Christoph Schreuer (n. 219) 255; Craig Miles (n. 1). Craig Miles (n. 1). Hartley Shawcross (n. 212) 351.

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investment projects also exhibit both public and private characteristics, defeating efforts at neat characterisation. 164 Fourthly, whether a particular activity or function is regarded as governmental or private can vary depending on the particular political and constitutional balance of each host State and is reduced to a matter of legislative choice.352 With this dichotomy, there is a risk that the same type of transaction might be treated as governmental in the context of one contracting party, but commercial in another. 165 With the uncertainty inherent in an elusive distinction between governmental and commercial obligations, it is suggested that the proposed distinction is unlikely to have been intended by contracting parties and there is no basis to imply one when interpreting the scope of application ratione materiae of the umbrella clause. (2) Contracts, Unilateral and General Undertakings

Since the inception of the umbrella clause, commentators have consistently understood and remarked that the nature of the relevant protected obligations would include obligations ‘embodied in a contract or in a concession’.353 This has been confirmed in arbitral practice354 and supported by the weight of commentary. 167 Where questions have arisen is whether covered obligations or commitments might include unilateral undertakings, of various forms, and whether they must be specific, directed towards a particular investment, or may be general. A unilateral undertaking towards a specific investment might take the form of a decree, licence, permit or approval, targeted regulation, or State guarantees of the performance of a local State counterparty.355 General undertakings might conceivably arise from statements of governmental intent, or generally applicable regulation or legislation. 168 Some of the earliest commentators (and drafters) believed that protected obligations could go beyond State contracts. Commenting on the scope of ‘undertakings’ protected by the umbrella clause in the OECD Draft Convention, Lauterpacht considered that: ‘“undertakings” appears to be a concept wider than that of “contract” in the technical sense of the word’.356 The Notes and Comments to 166

351 Cf. Joy Mining v. Egypt (n. 92). 352 E.g., Christine Chinkin, ‘A Critique of the Public/Private Dimension’ (1999) 10 EJIL 387– 395. 353 Notes and Comments to Article 2 of the OECD Draft Convention, para 3(a). 354 SGS v. Pakistan (n. 15) para. 166; SGS v. Philippines (n. 6) para. 121; Noble Ventures v. Romania (n. 1) para. 51; Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, para. 297; BIVAC v. Paraguay (n. 74) para. 147; SGS v. Paraguay (n. 12) para. 168. 355 Walid Ben Hamida (n. 168) 14. 356 Elihu Lauterpacht, ‘Drafting of Conventions for the Protection of Investment’ in The Encouragement and Protection of Investment in Developing Countries, (1962) 3 ICLQ Suppl. Pub. 18, 29.

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the OECD Draft confirm that it was intended that protected undertakings might include ‘consensual’ bargains to which the host State is party as well as its ‘unilateral engagements’.357 The same view exists in relation to the language of modern BITs. According to one UNCTAD study, the common umbrella clause is broad enough to cover all kinds of obligations, explicit or implied, contractual or non-contractual, undertaken with regard to investment generally.358 There is arbitral support for the application of the umbrella clause to unilateral commitments too. The SGS v. Philippines tribunal accepted that the umbrella clause in the Philippines–Switzerland BIT was capable of protecting obligations besides contractual ones.359 The Enron tribunal held that the phrase ‘any obligation’ refers to obligations ‘regardless of their nature’, including both contractual obligations ‘as well as obligations assumed through law or regulation’.360 The tribunals in Noble Energy v. Ecuador and Total v. Argentina both also affirm that a State may undertake international obligations through a variety of acts, including legislation and unilateral statements.361 Generalisations are only so helpful, however. Treaties occasionally expressly 169 clarify the scope of the umbrella clause. Some treaties refer only to ‘written obligations’,362 obligations assumed by way of ‘agreement’ with investors of the other contracting party,363 ‘contractual obligations’,364 or obligations entered into with regard to ‘approved’ investments or investors.365 Other treaties only apply to commitments, and sometimes ‘particular commitments’ entered into with ‘specific’ investors or with respect to ‘specific’ investments, thereby presumably excluding a State’s general commitments.366 The SGS v. Philippines tribunal did not exclude the possibility that an umbrella clause of this last type might protect unilateral commitments, but did identify a need for a particular qualifying connection between the commitment and the investment. In its words, the host State must have assumed a legal obligation ‘vis-à-vis the specific investment – not as a matter of the application of some legal obligation of a general character’.367

357 358 359 360 361 362

363 364 365 366 367

Notes and Comments to Article 2, para 3(a). UNCTAD (n. 3) 56. SGS v. Philippines (n. 6) para. 115. Enron v. Argentina (n. 62) para. 274. Noble Energy v. Ecuador, ICSID Case No. ARB/05/12, Decision on Jurisdiction, 5 March 2008, para. 157; Total v. Argentina, ICSID Case No. ARB/04/01, Decision on Liability, 27 December 2010, para. 131. E.g., Austria–Chile BIT, Article 11; Belgium and Luxembourg–Mexico BIT, Article 9. The consensus seems to be that, in the absence of specific wording, a covered obligation need not be recorded in writing, provided its existence may be established by other means: Frederick Mann (n. 119) 246; cf. Thomas Wälde and Todd Weiler (n. 220) 203. E.g., Germany–Bangladesh BIT, Article 7(2). Austrian Model BIT, Article 7(2). Malaysia–UAE BIT, Article 13(3) and see UNCTAD (n. 3) 54, 56 and Table III.6. ASEAN, Article III; Philippines–UK BIT, Article VII; Greece–Mexico BIT, Article 19; and see Walid Ben Hamida, para. 11. SGS v. Philippines (n. 6) para. 121 (emphasis added); also Al-Bahloul v. Tajikistan, SCC Case No. V (064/2008), Partial Award on Jurisdiction and Liability, 2 September 2009.

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Even with the language of more common umbrella clauses, whilst a unilateral undertaking might be protected, it is clear that there are limits implicit in the terms ‘obligation’, ‘entered into’ and ‘with regard to’. As already discussed, the umbrella clause only applies to existing obligations, the word ‘obligation’ implying a relationship of a legal character, arising under a system of law.368 The Philippines tribunal emphasised that the umbrella clause would only protect undertakings of a binding legal nature; it would ‘not convert non-binding domestic blandishments into binding international obligations.’369 171 The words ‘entered into’ may also limit the scope of the umbrella clause. Some commentators argue that the phrase ‘entered into’ implies an element of mutuality, to the exclusion of unilateral commitments,370 and that ‘it would require an innovative reading of these words to conclude that a state can “enter into” legislation, or other unilateral representations’.371 However, in and of themselves the words ‘entered into’ are not conclusive that unilateral commitments may not be covered; the words ‘entered into’ might be equated with ‘undertaken’ or ‘assumed’. The approach of tribunals in practice is not necessarily to exclude unilateral undertakings from the scope of the umbrella clause, but rather, only to admit them in very specific factual circumstances. For instance, the tribunal in Noble Ventures held that the reference to obligations ‘entered into’ with regard to investments indicates that ‘specific commitments are referred to and not general commitments, for example by way of legislative acts’.372 The ad hoc committee in CMS held that legal obligations ‘entered into’ normally denote consensual obligations arising as between the obligor and the obligee, so identified as a matter of the applicable law.373 A statement of governmental intent, or a commitment of the host State existing in a general law, are not readily thought of as obligations entered into with any particular foreign investor. In either case, what is called for is a specific connection between the obligation and the investor or investment, rather than a blanket denial of coverage for unilateral commitments. 172 Equally, the words entered into ‘with regard to’374 or ‘with respect to’375 the investors or investments of investors have the potential to impose a limit on the scope of the umbrella clause. The commentary to Article 2 of the OECD Draft clarified that these words call for a substantive connection: undertakings ‘must relate to the property concerned; it is not sufficient if the link is incidental’.376 The Commentary indicated that such a link would exist either: (1) if the ‘form or 170

368 369 370 371 372 373 374 375 376

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specific terms’ of the commitment identify either the property concerned or the recipient of the commitment; or (2) if it can be ‘proved or presumed’ that the foreign national ‘acted in reliance on it’, even if the commitment is expressed in general terms.377 The Eureko tribunal held that these words mean that for the umbrella clause 173 ‘to be applicable the State must have assumed a legal obligation vis-à-vis the specific investment’.378 The tribunal in Enron v. Argentina also noted that ‘“[o]bligations” covered by the “umbrella clause” are nevertheless limited by their object: “with regard to investments”’.379 In other words, there must be a sufficient link between the particular commitment, even if unilateral in nature, and a particular investor or investment. An umbrella clause claim was upheld in LG&E v. Argentina based on failure to observe provisions of the Argentine Gas Law and its implementing regulations.380 The tribunal was satisfied that these were obligations, and albeit unilateral, they were entered into ‘with regard to’ the claimant, due to the manner in which specific provisions had been emphasised in an offering memorandum aimed at inducing foreign investors to enter the market.381 The tribunal held that LG&E invested in reliance upon the representations set out in the prospectus material and the applicable laws. Although the laws and regulations were themselves general in nature, their terms were restated and specifically addressed to the claimant in the offering memorandum addressed to the claimant.382 Thus, there are limits to the scope ratione materiae of an umbrella clause. 174 One of the concerns of the SGS v. Pakistan tribunal, justifying its restrictive interpretation of the umbrella clause, was that the clause was ‘susceptible of almost indefinite expansion’.383 This conclusion was arguably affected by insufficient attention to the limits to the scope of the umbrella clause inherent in the words ‘obligation’, ‘entered into’ and ‘with regard to (…) investments’. Having noted the limitations to the scope of the umbrella clause, the SGS v. Philippines tribunal observed that its effect ‘is very far from elevating to the international level all “the municipal legislative or administrative or other unilateral measures of a Contracting Party”.’384 To acknowledge these conditions goes some way to dispelling the fears of those who would not give effect to an umbrella clause because of fears of unrestricted floods of investment treaty claims. 377 Cf. OECD Draft Convention, Notes and Comments to Article 2, para 3(a)(i), (ii) (emphasis in original). See also by analogy, W. Michael Reisman and Mahnoush H. Arsanjani, ‘The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes’ (2004) 19 ICSID Rev.–FILJ 328, 343. 378 Eureko v. Poland (n. 41) para. 256. 379 Enron v. Argentina (n. 62) para. 274 (footnotes omitted, emphasis in original). 380 LG&E v. Argentina (n. 58) para. 172. 381 Ibid., para. 175. 382 Ibid., para. 174 (footnote omitted). 383 SGS v. Pakistan (n. 15) para. 166. 384 SGS v. Philippines (n. 6) para. 121 (emphasis added), disagreeing with SGS v. Pakistan (n. 15) para. 166.

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b) The Existence of an Obligation of the Host State 175

Misconception and disagreement as to the range of obligations that would fall within the meaning of an obligation the host State has itself entered into with an investor or investment has also tainted the analysis of the effect of the umbrella clause. One reason why the SGS v. Pakistan tribunal declined to give effect to the umbrella clause is because of its view of the extent of the commitments it would impact: the ‘commitments’ subject matter of Article 11 may, without imposing excessive violence on the text itself, be commitments of the State itself as a legal person, or of any office, entity or subdivision (local government units) or legal representative thereof whose acts are, under the law on state responsibility, attributable to the State itself.385

Some treaties clarify this point, for instance, by identifying the agencies that may enter into an obligation in the name of the host State or the manner in which an obligation may be concluded. Article 11 of the Australia–Chile BIT, for example, covers only ‘written undertakings given by a competent authority’.386 Such guidance is the exception. Sometimes the conclusion may be reached as a matter of construction. Where a treaty refers to an obligation of a ‘party’ in an umbrella clause, yet for certain purposes the treaty contains a definition of a ‘State enterprise’, it may be possible to infer that contracts concluded with State enterprises should not be equated with obligations of the State party to which the umbrella clause might apply. That was the conclusion in Bosh International v. Ukraine,387 which concerned a contract concluded by the Taras Shevchenko National University of Kiev, and it was corroborated by the finding that the university’s conduct could not be attributable to Ukraine.388 In the absence of clear assistance from the language of the clause, the principal disagreement is whether obligations of the host State are obligations of persons or entities for whom the State would be responsible applying international law rules of attribution, or whether the umbrella clause only covers obligations binding upon the State itself, applying the proper law applicable to the putative obligation. 177 There is faint support for the former approach in the cases. As already seen in the passage just quoted, it was this approach that affected the analysis of the umbrella clause in the SGS v. Pakistan case. The tribunal in Nykomb v. Latvia did not decide the point, but appeared ready to find that an obligation concluded by a State enterprise could be an obligation of the State of Latvia under the law of State responsibility.389 In Eureko v. Poland, the tribunal did find that an obligation of the Polish State treasury was an obligation of Poland, applying international law rules, even though the evidence suggested that Poland was not re176

385 Ibid. 386 E.g., Austria–Chile BIT, Article 11; also Australia–Poland BIT, Article 10; Walid Ben Hamida (n. 168) 25 et seq. 387 Bosh International v. Ukraine (n. 282) para. 245. 388 Ibid., para. 246. 389 Nykomb v. Latvia (n. 7) 37, section 4.3.3(c); and see Thomas Wälde and Kaj Hobér (n. 198).

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sponsible for the obligations of the State treasury as a matter of Polish law. A majority of the tribunal rejected any reliance on Polish law to the effect that obligations of the State treasury were not obligations of the State.390 The tribunal considered that this submission ‘flies in the face of well recognized rules and principles of international law’.391 On the basis that it was ‘an international arbitral tribunal constituted under the Treaty’, the tribunal applied international law rules of attribution, specifically that the State is responsible for the conduct of State organs,392 in deciding that the obligations of the State treasury fell within the scope of the umbrella clause.393 The tribunal in Noble Ventures v. Romania also applied rules of attribution to determine the scope of the umbrella clause, determining that obligations of the Romanian State Ownership Fund (SOF) and its successor, APAPS, were obligations Romania had entered into for the purpose of an umbrella clause claim. In doing so, the tribunal took guidance from Article 5 of the International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts (the ILC Articles).394 Toto v. Lebanon appears to follow a similar approach. The tribunal was of a view that a certain contract would have been covered by the umbrella clause, under an approach applying the ILC Articles, despite the contract having been entered into by separate legal entities and not Lebanon itself.395 Bosh International is clearly in favour of applying rules of attribution to de- 178 termine the subject matter scope of the umbrella clause. The tribunal ruled that the term ‘Party’ in the umbrella clause refers to any situation where the Party is acting qua State. This means that where the conduct of entities can be attributed to the Parties (under, for instance, Articles 4, 5 or 8 of the ILC Articles on State Responsibility), such entities are considered to be ‘the Party’ for the purposes of Article II(3)(c).396

The tribunal declined to find that the umbrella clause applied to a contract 179 concluded by a State university on grounds that, applying the international law of State responsibility, ‘the conduct of the University is not attributable to Ukraine’.397 Other tribunals reject this broader approach and hold that the objects of the 180 umbrella clause are to be identified in accordance with their proper law, which is a distinct process from applying international law rules of attribution. In Nagel v. Czech Republic,398 the tribunal dismissed Nagel’s claim in part because whilst a 390 391 392 393 394 395 396 397 398

Eureko v. Poland (n. 41) para. 134. Ibid., para. 125. ILC Articles, Article 4, Commentary, para. 6 in James Crawford (n. 204) 87. Eureko v. Poland (n. 41) paras. 126–128. Noble Ventures v. Romania (n. 1) paras. 85–86. On the facts, the relevant obligation was held not to have been breached, hence there was no breach of the umbrella clause: para. 158. Decision on Jurisdiction, 11 September 2009, para. 190. The claim did not proceed to the merits due to the tribunal’s analysis of the impact of the jurisdiction clause in the contract. Bosh International v. Ukraine (n. 282) para. 246. Ibid., paras. 246, 249. As noted in Nick Gallus, ‘An Umbrella Just For Two? BIT Obligations Observance Clauses and the Parties to a Contract’ (2008) 24(1) Arb. Int’l 157, 162.

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State-owned enterprise was a party to a contract with the investor, the Czech Republic itself was not. The State enterprise was ‘a separate legal person whose legal undertakings did not as such engage the responsibility of [the Czech Republic]’.399 181 In Impregilo v. Pakistan, the claimant argued that the tribunal had jurisdiction in respect of certain allegations of breach of contract and an umbrella clause claim by operation of the most favoured nation provision in Article 3 of the Pakistan–Switzerland BIT. The tribunal held that ‘given that the Contracts were concluded by Impregilo with WAPDA, and not with Pakistan’ and that WAPDA was a separate legal entity distinct from the Republic of Pakistan, Impregilo’s attempts to invoke an umbrella clause claim were futile. The contracts in question were not obligations to which Pakistan was a party.400 The tribunal emphasised that there is a ‘clear distinction’ between on the one hand, responsibility of a State for the conduct of its entities that violates international law, and on the other, liability for breach of a contract concluded by a State entity for which the State may not itself be responsible. The tribunal insisted that ‘the international law rules on State responsibility and attribution apply to the former, but not the latter’.401 This conclusion was supported by the wording of the umbrella clause, which the tribunal said confirms that ‘the scope of application of this provision is limited to disputes between the entities or persons concerned’.402 The tribunals in Azurix v. Argentina and EDF v. Romania also declined to find that an umbrella clause applied in circumstances where the relevant obligation was not concluded with the State itself.403 182 Those in support of the former approach, involving the application of rules of attribution to determine whether the State has entered into an obligation with a foreign investor, argue that since the umbrella clause is an international obligation contained in a treaty its scope and content must be construed applying international rules. Mann preferred this analysis, arguing that the host State, for the purpose of identifying host State ‘obligations’, must ‘comprise instrumentalities, even if they are separate legal entities, as well as companies of which it is the sole shareholder’.404 Other commentators support this conclusion on grounds that otherwise a State would all too easily avoid its international obligations by interposing a State-controlled corporate entity between it and the foreign investor.405 These commentators call for coherence through the application of the same rules of attribution to the identification of protected obligations as to ques399 Nagel v. Czech Republic, SCC Case 49/2002, Final Award (2003), para. 162, also para. 165. 400 Impregilo. v. Pakistan (n. 222) para. 223. 401 Ibid., para. 210; and see Vivendi v. Argentina (n. 259) para. 96; Salini v. Jordan (n. 2) para. 157; Hamester v. Ghana (n. 8) para. 347. 402 Ibid., para. 211. 403 Azurix. v. Argentina (n. 159) para. 384, in which, moreover, the claimant was itself not a party to the relevant agreement; EDF (Services) Ltd v. Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, para. 317. 404 Frederick Mann (n. 119) 246. 405 E.g., Thomas Wälde (n. 251) 191; Hein-Jürgen Schramke (n. 241) 24; Nick Gallus (n. 398).

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tions of breach. Schramke, for instance, said that ‘[a] formalistic approach which is only geared to the formal legal status of an entity under municipal law would (…) allow a state to circumvent the effects of an umbrella clause by creating or using separate entities as vehicles for that purpose’.406 These arguments rest on the fallacy that there is some a priori list of obliga- 183 tions to which the umbrella clause must apply. To the contrary, it may be presumed that a State has at least the same freedom to organise its commercial activities as private persons, and so decide that for certain activities it will create an enterprise possessing separate personality and, as an initial presumption, enjoy the normal legal consequences of that form.407 It is not realistic to conclude – as the tribunals in SGS v. Pakistan, El Paso and Pan American evidently did – that by agreeing to an umbrella clause a State is to be presumed to commit itself to comply with local legal obligations of separate entities.408 Long-standing support exists for the conclusion that the umbrella clause applies only to the obligations that States themselves choose to assume vis-à-vis investors or their investments.409 Reliance on international law rules of attribution to determine the scope of a 184 primary obligation is also misconceived. It is certainly true that to establish a host State’s responsibility for breach of an umbrella clause, it is necessary to identify the conduct of an entity that is attributable to the State according to principles of State responsibility.410 Questions of breach of primary international law obligations invoke the secondary rules of international law concerning State responsibility for breach of obligations, of which rules of attribution form an integral part.411 However, identifying the content of the primary obligation – including the obligations, commitments or undertakings entered into by the host State that the umbrella clause is intended to protect – is a different analysis. Secondary rules cannot dictate the scope of a primary obligation and do not address inherently internal law concepts concerning formation of legal obligations and identification of the parties bound by them. Although investment arbitration fre406 Hein-Jürgen Schramke (n. 241) 21. 407 E.g., First National City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 626-27 (1983); C. Czarnikow Limited v. Centrala HandIu Zagranicznego Rolimpex, [1979] A.C. 351; I Congreso del Partido, [1983] 1 A.C. 244, 258; La Générale des Carrières et des Mines v. F.G. Hemisphere Associates LLC, [2012] UKPC 27, para. 28. 408 Ahmed S. El-Kosheri, ‘Parallel State and Arbitral Procedures in International Arbitration’ (unpublished paper presented at the ICC Institute of World Business Law 24th Annual Meeting, Paris, 15 November 2004) at 13. 409 ABA Report (n. 132) 95–96 (emphasis added). 410 It is even the case that the act of a State entity concluding a contract may be attributable to its State for the purposes of assessing whether such conduct breached a primary obligation: EnCana Corporation v. Ecuador, UNCITRAL, LCIA Case No. UN3481, Award, 3 February 2006, para. 154; cf. Nick Gallus (n. 398) 167–168 seeking to rely upon EnCana as support for applying rules of attribution in determining the scope of obligations to which the umbrella clause applies, yet this confuses the role of primary and secondary rules of State responsibility. 411 James Crawford, ‘Revising the Draft Articles on State Responsibility’ (1999) 10 EJIL 435, 436.

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quently exhibits parallel features of both contractual liability and international responsibility, these remain conceptually distinct issues. A coherent understanding of the umbrella clause therefore requires that the existence of a legal obligation assumed by the host State be determined by reference to the putative proper law of that obligation,412 which is a distinct process from applying the secondary international law rules of State responsibility pertaining to attribution,413 and only then turn to questions of breach. This approach would tend to limit the population of host State obligations to which the umbrella clause may apply. c) The Existence of an Obligation Owed to the Claimant Investor

A further question of scope concerns the parties who may invoke an umbrella clause. The answer to this question has the potential to have a bearing on a tribunal’s disposition as to the umbrella clause’s intended effect. 186 Again, the specific wording of the umbrella clause in question ought to point to a conclusion.414 At its more narrow, umbrella clauses may refer only to obligations entered into in writing or with approved investments.415 Such language imposes certain limits to the persons who might seek to enforce an obligation through the umbrella clause. However, most umbrella clauses are broader, referring variously to obligations entered into ‘with regard to investors’, ‘with regard to investments’, and sometimes as in the case of the Energy Charter Treaty, ‘entered into with an investor or an investment of an investor’. This wording is open to some interpretation and here arbitral practice and doctrine is again split. The wording of more common umbrella clauses, at first glance, does not seem to call for the application of traditional notions of privity of contract. Many commentators concur. Discussing the umbrella clause in the Energy Charter Treaty, the Energy Charter Secretariat’s Readers’ Guide asserts that: 185

This provision covers any contract that a host country has concluded with a subsidiary of the foreign investor in the host country, or a contract between the host country and the parent company of the subsidiary.416

412 SGS v. Philippines (n. 6) para. 117. For an explanation of the conditions on which a State will be found to be party to an obligation as a matter of English law, see e.g., La Générale des Carrières et des Mines v. F.G. Hemisphere Associates LLC, [2012] UKPC 27 and Lawrence Collins (ed), Dicey, Morris and Collins’ The Conflict of Laws, vol. 2 (Sweet & Maxwell, 2006) paras. 33–162. 413 See also Impregilo v. Pakistan (n. 225) para. 210: ‘a clear distinction exists between responsibility of a State for the conduct of an entity that violates international law (e.g. a breach of Treaty), and the responsibility of a State for the conduct of an entity that breaches a municipal law contract (i.e. Impregilo’s Contract Claims). (…) the international law rules on State responsibility and attribution apply to the former, but not the latter’; Salini v. Jordan (n. 2) para. 157: ‘the rules of attribution governing responsibility for the performance of contract obligations may differ from those governing responsibility for the performance of BIT obligations’; EDF v. Romania (n. 403) para. 318: ‘(…) the attribution to Respondent of [certain state entities’] acts and conduct does not render the State directly bound by [their contracts] for purposes of the umbrella clause’. 414 Walid Ben Hamida (n. 168) 33–37. 415 E.g., Philippines–Switzerland BIT, Article X(2); Austria–Slovenia BIT, Article 9; ASEAN, Article III(3).

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Wälde expressed the view of umbrella clauses generally that there is ‘little if 187 any serious disagreement that the clause was intended to cover, and should be read to cover, contracts between foreign investors (including their domestic subsidiaries) and states relating to an investment.’417 Nevertheless, a number of tribunals have declined to permit the parent com- 188 pany of a local subsidiary to bring a claim in its own name under the umbrella clause in respect of obligations entered into by the State with the subsidiary, even when considering a broadly worded clause.418 This was the conclusion of the tribunals in Azurix and Siemens, for instance.419 The issue was referred to an ad hoc committee in CMS v. Argentina. The committee’s starting point was that ‘obligations’ arise as between the obligor and the obligee, so identified as a matter of the applicable law.420 The performance of obligations also ‘occurs with regard to, and as between, obligor and obligee’.421 The alleged obligation arose as a matter of Argentinean law, yet the claimant was not party to the relevant agreement and not entitled to invoke and enforce obligations arising out of it and owed to its subsidiary. Nothing in the treaty, or the umbrella clause in particular, could alter this position: The effect of the umbrella clause is not to transform the obligation which is relied on into something else; the content of the obligation is unaffected, as is its proper law. If this is so, it would appear that the parties to the obligation (i.e., the persons bound by it and entitled to rely on it) are likewise not changed by reason of the umbrella clause.422

In finding that CMS could bring a claim, the committee considered that the 189 tribunal had failed to state its reasons and left a lacuna, which made it ‘impossible for the reader to follow the reasoning on this point’.423 The tribunal’s finding that Argentina had violated the umbrella clause was therefore annulled.424 The issue was discussed at length in Hamester v. Ghana.425 The case con- 190 cerned a joint venture agreement concluded between the claimant and ‘Cocobod’, a State entity having separate legal personality under Ghanaian law. The 416 Energy Charter Treaty Secretariat, The Energy Charter Treaty: A Reader’s Guide (Energy Secretariat, 2002) 26; also Esa Paasivirta (n. 125) 349. 417 Thomas W. Wälde, ‘The “Umbrella” (or Sanctity of Contract/Pacta sunt Servanda) Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases’ (2003) 1(5) OGEL 1, 35 (emphasis added). 418 In Continental Casualty v. Argentina (n. 354), the claimant sought to introduce as a party to the proceedings its subsidiary company in order to rectify this difficulty. This request was denied on procedural grounds: para. 99. See also BG Group plc v. Argentina, UNCITRAL, Award, 24 December 2007, para. 363 finding that the claimant did not have standing in respect of a certain licence in which it alleged an indirect interest, and thus could not bring an umbrella clause claim in respect of its breach. 419 Azurix v. Argentina (n. 159) para. 384; Siemens v. Argentina, Award, 17 January 2007, para. 204. 420 CMS v. Argentina (n. 160) para. 90. 421 Ibid., para. 95(b). 422 Ibid., para. 95(c) (emphasis in original). 423 Ibid., para. 97. 424 Ibid., paras. 97–98. 425 Hamester v. Ghana, ICSID Case No. ARB/08/24, Award, 18 June 2010, para. 347.

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claimant argued that breach of the agreement was a breach of the clause in the applicable treaty which provided that ‘[e]ach Contracting Party shall observe any other obligation it has assumed with regard to its investments in its territory by nationals or companies of the other Contracting Party’. The tribunal was not persuaded that an umbrella clause claim against the Republic of Ghana could arise from the terms of a contract Ghana had not itself signed, on grounds of lack of privity: Applying the actual words of Article 9(2) of the BIT, the contractual obligations which the Claimant seeks to impose upon the ROG were not ‘assumed by it’. The JVA was signed by Hamester and Cocobod, with no implication of the ROG. The ROG was not named as a party, and did not sign the contract. There has been no suggestion that the ROG was intended to be a party thereto (and indeed there may well have been reasons why it was not a party thereto). Having considered carefully all relevant circumstances, the Tribunal concludes as follows: (i)

(ii)

If the municipal law obligations which were negotiated between the parties to the JVA, and assumed by Cocobod in this case, are to be taken as obligations assumed by the State to Hamester, this would – in effect – completely transform their nature, extent, and governing law. The Tribunal considers that nothing in Article 9(2) of the BIT here would justify this. Put the other way, given the wording of Article 9(2) of this BIT, the Tribunal concludes that the Contracting States did not intend to so transform domestic law contractual obligations concluded by separate entities. Given that the umbrella clause in this BIT is specifically delimited by reference to obligations that have been ‘assumed by the State,’ the Tribunal sees no basis to ignore these words, and to extend the ambit of the provision to contractual obligations assumed by other separate entities. (…)

In these circumstances, the contractual commitments of Cocobod, being a separate entity from the State, cannot be considered as elevated – and transformed in nature – by Article 9(2) of the BIT, into treaty commitments of the State itself. It follows that a violation by Cocobod – if such a violation had been found – could not have constituted a violation of the BIT.426

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In Burlington v. Ecuador the question was whether an umbrella clause applied to contracts between Ecuador and a company in which Burlington indirectly held shares. The tribunal echoed the analysis of the ad hoc committee in CMS v. Argentina: The word ‘obligation’ is thus the operative term of the umbrella clause. The Treaty does not define ‘obligation’. The Parties agree – and rightly so – that the clause refers to legal obligations. This is of little assistance, however, to resolve the question of privity. To answer this question, the Tribunal relies primarily on two elements which in its view inform the ordinary meaning of ‘obligation’. First, in its ordinary meaning, the obligation of one subject is generally seen in correlation with the right of another. Or, differently worded, someone’s breach of an obligation corresponds to the breach of another's right. An obligation entails a party bound by it and another one benefiting from it, in other words, entails an obligor and an obligee. Second, an obligation does not exist in a vacuum. It is subject to a governing law. Although the notion of obligation is used in an international treaty, the court or tribunal interpreting the treaty may have to look to municipal law to give it content.427

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Following an analysis of the text of the umbrella clause in question and a review of arbitral practice, the tribunal held that:

426 Ibid., paras. 347–348. 427 Burlington Resources v. Ecuador (n. 145) para. 214.

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VII. Umbrella Clause (...) it is certain that the majority of the ICSID cases[sic] law supports the Tribunal’s conclusion that the protection granted under the umbrella clause requires privity between the investor and the host State.428

The tribunal, by a majority, dismissed the umbrella clause claim on grounds 193 that there was no obligation to which it could apply for reason of lack of privity. There are sound reasons to respect rules of privity of contract. First, an obli- 194 gation is a legal relationship involving privity as between an obligor (debtor) and an obligee (creditor). It is the law applicable to the putative ‘obligation’ which defines the content, scope and parties to the undertaking. Secondly, the identity of one’s counterparty is a matter of party autonomy deserving of respect. A contract may have been negotiated in a particular context with specific parties in mind.429 Thirdly, shareholders cannot typically enforce the contracts of their companies under domestic legal systems; it is not obvious that a shareholder should be able to enforce a company’s contractual rights though a BIT. Finally, an approach that adheres to principles of privity is consistent with the conventional view that the umbrella clause would merely mirror existing obligations arising under their own proper law. The common reasoning in these cases was that since the respective claimants 195 could not, in their own name, enforce the obligations owed to their subsidiaries pursuant to the proper law, they could not do so by invoking an umbrella clause. Here there is a tension between the proper law approach and a plain reading of the words of the treaty since this approach seems to equate obligations ‘entered into with regard to investments’ to obligations ‘entered into with’ claimant investors. The CMS committee acknowledged this interpretative problem. However, the CMS award had not been issued on the basis that the words ‘entered into with regard to’ investments might create a right of standing on the part of parent companies to invoke obligations to which they were not strictly a party.430 Although its analysis is couched in more narrow terms, the CMS annulment does not rule out that this may be an appropriate construction of the clause. The tribunal in Burlington Resources v. Ecuador said that ‘no general rule’ should be extrapolated from the CMS annulment decision on this point.431 In its further Decision on Liability, however, the tribunal ruled that the words ‘entered into’ only reinforce the requirement of privity.432 According to the tribunal the phrase ‘with regard to investments’ narrows the scope of obligations to which the umbrella clause relates – the obligations must relate to investments – but does not dispense with the requirement of a pre-existing underlying obligation.433 This 428 429 430 431

Ibid., para. 233. David Foster (n. 109) 108. Ibid., paras. 92, 94, 96. Burlington Resources v. Ecuador (n. 226) para. 195, 199, joining the question of privity to the merits. 432 Burlington Resources v. Ecuador (n. 145) para. 214. 433 Ibid., para. 216. Orrego Vicuña dissented, on grounds that the majority’s analysis was inconsistent with the fact that investment treaties such as the one at issue typically extend their

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conclusion has some attraction. There must be an obligation in the first place for it to then be qualified as ‘with regard to’ an investment. The phrase ‘with regard to’ is not obviously intended to create a fresh legal obligation as between claimant investor and host State where there was none to begin with.434 Other tribunals have permitted claims brought by claimants outside the strict bounds of privity. In both LG&E v. Argentina and EDF International v. Argentina, the respective tribunals considered that the clause in question required only an obligation entered into ‘with regard to’ the claimants’ investment, not an obligation entered into with the claimants as such.435 The Sempra tribunal held that the claimant could pursue an umbrella clause claim in respect of commitments contained in licences to which its subsidiaries were party on grounds that these licences were ‘the ultimate expression’ of a consolidated investment project, taken as a whole, with the claimant at its apex. There was also evidence that the particular structure, channelled through tiers of holding companies and held by Argentine subsidiaries, had been called for under the applicable law and regulations.436 196 The decisions are clearly split on this point. The terms of the particular umbrella clause may assist in some cases. Even with the most common wording, there is strength to the argument that the words ‘with regard to’ mean what they say and are not the same as ‘with’. Given that an investment may sometimes be a local company, it is certainly arguable that a State contract with that company may be an obligation assumed with regard to an investment of an investor, and that the investor should be able to enforce it by way of the umbrella clause. The object and purpose of promoting and protecting investment might support this conclusion too, given that very often investors are required to incorporate a local company to hold valuable concessions, licences or other rights. The breadth of common dispute settlement provisions would also support the conclusion that investors may bring umbrella clause claims in respect of obligations to which they are not a direct party. 197 On the other hand there are sound reasons to respect rules of privity of contract. First, the identity of one’s counterparty is a matter of party autonomy deserving of respect. A contract may have been negotiated in a particular context with specific parties in mind.437 It would undermine party autonomy to allow non-parties to enforce such obligations through the mechanism of an umbrella clause. Secondly, shareholders cannot typically enforce the contracts of their companies under domestic legal systems; it is not obvious that a shareholder should be able to enforce a company’s contractual rights though an umbrella

434 435 436 437

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protection to indirect investments. He did not see why the scope of the umbrella clause should be different: Dissenting Opinion, 14 December 2012, para. 8. Ibid., para. 217. CMS v. Argentina (n. 160) para. 172; EDF International v. Argentina (n. 73) para. 930. Sempra v. Argentina (n. 69) para. 312. This analysis was not addressed in the subsequent annulment proceedings. David Foster (n. 109) 108.

Anthony Sinclair

VII. Umbrella Clause

clause in a BIT. Finally, an approach that adheres to principles of privity is consistent with the conventional view that the umbrella clause would merely mirror existing obligations arising under their own proper law. In either case, whilst the law remains unsettled in this respect, it is clear that 198 the scope of the umbrella clause is not so open-ended as some fear. Even tribunals that have favoured giving a full effect to the umbrella clause have upheld the limits inherent in the text in respect of the existence of an underlying obligation and identification of the parties thereto. Much of the reluctance amongst certain tribunals to acknowledge the effect of the umbrella clause might evaporate with a more rigorous treatment of the legal principles that determine and delimit the class of obligations that may attract the protection of the umbrella clause. D. Conclusions

It is possible to draw the following conclusions from the foregoing analysis of arbitral practice and doctrine. First, the fundamental question as to the effect of the umbrella clause has been largely resolved; it ‘means what it says’. There is scant merit in seeking to interpret the umbrella clause by reference to what tribunals presume the contracting parties must have intended. The umbrella clause should be interpreted like any other treaty provision in accordance with standard rules of interpretation. Tribunals that have doubted the effect of the umbrella clause have failed to supply any convincing alternative meaning for the provision. Secondly, dissenting opinions on the effect of the umbrella clause tend to be heavily influenced by exaggerated fears as to the clause’s scope of application. It is likely that the concerns of the dissenters would be ameliorated by closer attention to the inherent limits to the clause’s scope of application, which arise by reference to its terms (‘obligation’, ‘entered into’) but also the applicable law. There is no sound reason to read any non-textual limitations into the nature of the obligations protected by the umbrella clause. Thirdly, the existence of an obligation of the host State falling within the scope of the umbrella clause, and allegations that the host State has failed to observe an obligation, are matters to be determined primarily by reference to the proper law of the putative obligation. The umbrella clause only applies to preexisting obligations; it does not create new ones. It is misconceived to argue that the umbrella clause invites the application of international law rules on attribution to identify the existence of an obligation of the host State. Fourthly, international law controls the reference to the proper law and may, in exceptional cases, operate to exclude manipulative host State efforts to deny the existence of an obligation validly concluded and otherwise in force, but it does not transform the nature of the bargain. The umbrella clause should only insulate a State contract governed by the law of the host State from change in

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law to the extent that a proper construction of the contract leads to the conclusion that the parties intended to exclude such changes, or to the extent that the change in law would otherwise breach international law. Only wrongful non-observance will breach the umbrella clause. Fifthly, the majority of tribunals have required the claimant investor to be party to the State contract it seeks to protect by way of an umbrella clause claim. This conclusion is justified under the terms of some treaties, but may not fully accord with treaties that refer to obligations entered into ‘with regard to’ an investment of an investor. Here, there is a counter argument that a foreign investor ought to be able to bring an umbrella clause claim in respect of a State contract signed by a subsidiary that constitutes its investment. Sixthly, there is nothing in the terms of a standard umbrella clause from which to conclude that a violation should only be triggered by a breach of a State contract involving the exercise of governmental power. Whilst arbitral practice is mixed, there is a well-supported view that any breach should give rise to a violation of the umbrella clause. Indeed, a bright line distinction between governmental and commercial breach on the part of a State contractual partner is not so easily drawn. Finally, the law is unsettled as to the impact of an exclusive choice of jurisdiction clause in the underlying contract on a tribunal’s jurisdiction or competence to decide an umbrella clause claim. Tribunals have sought to explain the interaction of such a clause by reference to a test whether the fundamental basis of the claim is a breach of treaty, or breach of contract. If any treaty claim is to trigger this test, it is an umbrella clause claim, but even then there are doubts as to whether this conclusion is correct. The SGS v. Philippines solution of a stay of proceedings pending a reference to the chosen forum raises both theoretical and practical difficulties, potentially undermining the effect of the umbrella clause. An umbrella clause claim is by definition, a treaty claim, turning on an additional promise, expressed in a treaty, on the part of the host State to observe obligations. What is clear is that the debate about the umbrella clause has moved on.438 Umbrella clause claims are no longer seen as an anathema, conceived of only in the minds of claimants’ counsel in the modern era of investor-State arbitration. In fact, the device has a long and well-documented history. Umbrella clause claims are a commonly invoked device to seek the observance of contracts and other forms of undertakings that a host State may have entered into in the context of seeking to attract inward investment.

438 Anthony Sinclair, ‘The Umbrella Clause Debate’ in Andrea K. Bjorklund, Ian Laird and Sergey Ripinsky (eds), Investment Treaty Law: Current Issues Volume III (BIICL, 2009) 273.

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Ursula Kriebaum A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Protected Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

C. What is an Expropriation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Treaty Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Different Forms of Expropriatory Measures and their Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Direct Expropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Indirect Expropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) De facto Expropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Creeping Expropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Measures Tantamount to Expropriation and Measures Having Equivalent Effect to Expropriation. . . . . . . . . . . . . . . . . . . . . . . . 3. Severity and Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Partial Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Expropriatory Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Police Powers and Legitimate Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Legitimate Expectations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. The Requirement of an Official Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. Beneficiary of the Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. Consequences of Expropriation for the Title to the Property. . . . . . . .

14 14

70 79 118 126 149 174 187 200 213

D. Conditions for the Lawfulness of an Expropriation. . . . . . . . . . . . . . . . . . . . . . . 1. Public Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Non-Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Due-Process and Judicial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

216 218 225 248 257

28 29 31 31 44 50

E. Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258

Literature: George H. Aldrich, ‘What Constitutes a Compensable Taking of Property? The Decisions of the Iran–United States Claims Tribunal’ (1994) 88 AJIL 585–610; Charles N. Brower and Jason D. Brueschke, The Iran-United States Claims Tribunal (Martinus Nijhoff, 1998); Ian Brownlie, ‘Legal Status of Natural Resources in International Law (Some Aspects)’ (1979) 162 RC 245–317; Ian Brownlie, Principles of Public International Law (Oxford University Press, 2003); John P. Bullington, ‘Problems of International Law in the Mexican Constitution of 1917’ (1927) 21 AJIL 685–705; Jorge Castaneda, ‘La Charte des Droits et Devoirs Économiques des États, Note Sur Son Processus D’élaboration’ (1974) 20 AFDI 31– 56; George C. Christie, ‘What Constitutes a Taking of Property under International Law?’ (1962) 38 BYIL 305–338; Paul E. Comeaux and N. Stephan Kinsella, Protecting Foreign Investment Under International Law, Legal Aspects of Political Risk (Oceana Publications, 1997); James Crawford, The International Law Commission’s Draft Articles on State Responsibility: Introduction, Text and Commentaries (Cambridge University Press, 2002); Bernardo M. Cremades and David J. A. Cairns, ‘The Brave New World of Global Arbitration’ (2002) 3 JWI 173–209; Yoram Dinstein, ‘Deprivation of Property of Foreigners under International Law’ in Nisuke Ando, Edward McWhinney and Rüdiger Wolfrum (eds), Liber Amicorum Judge Shigeru Oda (Brill, 2002) 849–869; Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995); Rudolf Dolzer, Eigentum, Enteignung 1 This contribution is based, in part, on a legal opinion written jointly with Christoph H. Schreuer and is current as of May 2012.

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Chapter 8: Standards of Protection und Entschädigung im geltenden Völkerrecht (Springer, 1985); Rudolf Dolzer, ‘Indirect Expropriation of Alien Property’ (1986) 1 ICSID Rev.–FILJ 41–65; Rudolf Dolzer, ‘Grenzen nationaler Steuerhoheit im völkerrechtlichen Investitionsschutz’ in Klaus Grupp and Ulrich Hufeld (eds), Recht – Kultur – Finanzen, Festschrift für Reinhard Mußgnug zum 70. Geburtstag am 26. Oktober 2005, (Müller, 2005) 189–294; Rudolf Dolzer, ‘Indirect Expropriations: New Developments?’ (2003) 11 NYU Env. L. J. 65–93; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008); Martin Domke, ‘Foreign Nationalisations, Some Aspects of Contemporary International Law’ (1961) 55 AJIL 585–616; Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 151–289; Zachary Douglas, ‘Nothing if Not Critical for Investment Treaty Arbitration: Occidental, Eureko and Methanex’ (2006) 22 Arb. Int’l 27–51; Zachary Douglas, International Law of Investment Claims, (Cambridge University Press, 2009); Joshua Elcombe, ‘Regulatory powers vs. investment protection under NAFTA’s Chapter 1110: Metalclad, Methanex, and Glamis Gold’ (2010) 68 U. Toronto Fac. L. Rev. 71–98; Gerald Fitzmaurice, ‘The Juridical Clauses of the Peace Treaties’ (1943-II) 73 RC 259–367; L. Yves Fortier and Stephen L. Drymer, ‘Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor’ (2004) 19 ICSID Rev.–FILJ 293–327; Gérard Fouilloux, La Nationalisation et le Droit International Public (Librairie Générale de droit et de Jurisprudence, 1962); Francisco V. Garcia-Amador, ‘ILC Fourth Report on State Responsibility, Responsibility of the State for Injuries Caused in its Territory to the Person or Property of Aliens – Measures Affecting Acquired Rights’ (1959) 2 YBILC 1–37; Green H. Hackworth, Digest of International Law, vol. 3 (U.S. Government Printing Office, 1942) 655– 665; John H. Herz, ‘Expropriation of Foreign Property’ (1941) 35 AJIL 243–262; Rosalyn Higgins, Conflict of interests; international law in a divided world (Dufour Editions, 1965); Rosalyn Higgins, ‘The Taking of Property by the State: Recent Developments in International Law’ (1982) 176 RC 259–392; Kaj Hobér, Investment Arbitration in Eastern Europe (JurisNet, 2007); John E. Huerta, ‘Peruvian Nationalization and the Peruvian–American Compensation Agreements’ (1977) 10 NYU JILP 1–63; Robert Jennings and Arthur Watts, Oppenheim’s International Law, vol. 1 (Oxford University Press, 1992); Ursula Kriebaum, Eigentumsschutz im Völkerrecht, Eine vergleichende Untersuchung zum internationalen Investitionsrecht sowie zum Menschenrechtsschutz (Duncker & Humblot, 2008); Ursula Kriebaum, ‘Illegal Investments’ in Christian Klausegger, Peter Klein, Florian Kremslehner, Alexander Petsche and Nikolaus Pitkowitz (eds), Austrian Yearbook on International Arbitration (Manz, 2010) 307– 335; Ursula Kriebaum, ‘Partial Expropriation’ (2007) 8 JWIT 69–84; Ursula Kriebaum, ‘Regulatory Takings: Balancing the Interests of the Investor and the State’ (2007) 8 JWIT 717–744; Wolfgang Kühn and Ulrike Wiegel, ‘The Application of International Law and Treaty Provisions by Arbitrators’ (2003) 4 JWI 451–472; Richard B. Lillich, ‘The Current Status of the Law of State Responsibility for Injuries to Aliens’ in Richard B. Lillich (ed), International Law of State Responsibility for Injuries to Aliens (University Press of Virginia, 1983) 1–60; Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Kluwer Law International, 2009); Yves Nouvel, ‘Les mesures équivalent à une expropriation dans la pratique récente des tribunaux arbitraux’ (2002) 106 RGDIP 79–102; Francisco Orrego Vicuña, ‘Regulatory Authority and Legitimate Expectations: Balancing the Rights of the State and the Individual under International Law in a Global Society’ (2003) 5 Int’l L. Forum 188–197; Matti Pellonpää, ‘Compensable Claims before the Tribunal: Expropriation Claims’ in Richard B. Lillich and Daniel B. Magraw (eds), The Iran–United States Claims Tribunal: Its Contribution to the Law of State Responsibility (Brill, 1998) 185–266; Matti Pellonpää and Malgosia Fitzmaurice, ‘Taking of Property in the Practice of the Iran–United States Claims Tribunal’ (1988) 19 NYIL 53–178; Markus Perkams, ‘The Concept of Indirect Expropriation in Comparative Public Law – Searching for Light in the Dark’ in Stephan W. Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010)

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VIII. Expropriation 107–150; W. Michael Reisman and Robert D. Sloane, ‘Indirect Expropriation and its Valuation in the BIT Generation’ (2003) 74 BYIL 115–150; W. Michael Reisman and Mahnoush H. Arsanjani, ‘The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes’ (2004) 19 ICSID Rev.–FILJ 328–343; August Reinisch, ‘Expropriation’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 407–458; August Reinisch, ‘Legality of Expropriation’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 171–204; Noah Rubins, ‘Must the Victorious Investor-Claimant Relinquish Title to Expropriated Property’ (2003) 4 JWI 481–491; Giorgio Sacerdoti, ‘Bilateral Treaties and Multilateral Instruments on Investment Protection’ (1979) 269 RC 251–460; Gary H. Sampliner, ‘Arbitration of Expropriation Cases Under U.S. Investment Treaties – A Threat to Democracy or the Dog That Didn’t Bark?’ (2003) 18 ICSID Rev.–FILJ 1–43; Christoph Schreuer and Ursula Kriebaum, ‘The Concept of Property in Human Rights Law and International Investment Law’ in Stephan Breitenmoser, Bernhard Ehrenzeller, Marco Sassoli, Walter Stoffel and Beatrice Wagner Pfeifer (eds), Liber Amicorum Luzius Wildhaber, Human Rights Democracy and the Rule of Law (Nomos, 2007) 743–762; Nico J. Schrijver, Sovereignty Over Natural Resources: Balancing Rights and Duties (Cambridge University Press, 1997); Georg Schwarzenberger, ‘The Abs–Shawcross Draft Convention on Investments Abroad: A Critical Commentary’ (1960) 9 J. Pub. L. 147–160; Alfred Siwy, ‘Indirect Expropriation and the Legitimate Expectations of the Investor’ in Christian Klausegger, Peter Klein, Florian Kremslehner, Alexander Petsche, Nikolaus Pitkowitz, Jenny Power, Irene Welser and Gerold Zeiler (eds), Austrian Arbitration Yearbook (Beck, Stämpfli & Manz, 2007) 355–377; Ignaz Seidl-Hohenveldern, International Economic Law (Kluwer Law International, 1999); Malcolm Shaw, International Law (Cambridge University Press, 2003); Elizabeth Snodgrass, ‘Protecting Investor’s Legitimate Expectations: Recognizing and Delimiting a General Principle’ (2006) 21 ICSID Rev.–FILJ 1–58; Louis B. Sohn and Richard Reeve Baxter, ‘Responsibility of States for Injuries to the Economic Interests of Aliens’ (1961) 55 AJIL 545–584; Wil D. Verwey and Nico J. Schrijver, ‘The Taking of Foreign Property under International Law: A New Legal Perspective?’ (1984) 15 NYIL 3–96; Thomas W. Wälde, ‘A Requiem for the “New International Economic Order”, The Rise and Fall of Paradigms in International Economic Law and a Post-Mortem with Timeless Significance’ in Gerhard Hafner and Ignaz SeidlHohenveldern (eds), Liber Amicorum Professor Ignaz Seidl-Hohenveldern, in Honour of His 80th Birthday (Martinus Nijhoff, 1998) 771–803; Thomas W. Wälde and Abba Kolo, ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law’ (2001) 50 ICLQ 811–848; Todd Weiler, ‘Methanex Corp. v. U.S.A. Turning the Page on NAFTA Chapter Eleven?’ (2005) 6 JWIT 903–920; Burns H. Weston, ‘“Constructive Takings” under International Law: A Modest Foray into the Problem of “Creeping Expropriation”’ (1975) 16 Va. J. Int’l L. 103–175; Burns H. Weston, ‘The Charter of Economic Rights and Duties of States and the Deprivation of Foreign-Owned Wealth’ (1981) 75 AJIL 437–475; Gillian White, Nationalisation of Foreign Property (Stevens, 1961); Lester H. Woolsey, ‘The Expropriation of Oil Properties by Mexico’ (1938) 32 AJIL 519–526; Catherine YannacaSmall, ‘“Indirect Expropriation” and the “Right to Regulate” in International Investment Law’ in Catherine Yannaca-Small, International Investment Law: A Changing Landscape (OECD, 2005) 43–72.

A. Introduction

The protection of property of foreigners has various roots in international law. 1 For a long time it was governed to a large extent by the customary international law rules on the treatment of aliens and by treaties of friendship, commerce and Ursula Kriebaum

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navigation.2 Since the second half of the twentieth century, bilateral and regional investment treaties, special chapters in free trade agreements and human rights treaties have contained norms regulating expropriation. 2 The expropriation of foreign property was never prohibited but linked to certain conditions (public purpose/non-discrimination/compensation) which had to be fulfilled for its legality.3 The general assumption was that any expropriation of foreign property without compensation would lead to an unjustified wealth transfer from the investor’s home State to the expropriating State. Compensation became the clearing mechanism between two principles of international law: the permanent sovereignty over territory and natural resources and the respect of acquired rights of foreigners.4 3 The large scale nationalisations in the aftermath of the 1917 revolutions in the Soviet Union and Mexico as well as the decolonisation process, led to an increasing hostility towards foreign investment and to an erosion of the standard of the required compensation.5 Capital exporting countries claimed that the Hull formula (adequate, prompt, effective compensation) reflected the customary legal provision on the issue.6 Developing States and communist countries challenged this standard and argued that only appropriate but not full compensation would be due.7 The United Nations General Assembly (UNGA) resolutions in the 1960s and 1970s reflect this development.8 These resolutions culminated in the adoption of a Charter of Economic Rights and Duties of States in 1974 by 2 For a historical perspective of the public international law norms on the protection of property see e.g. Richard B. Lillich, ‘The Current Status of the Law of State Responsibility for Injuries to Aliens’ in Richard B. Lillich (ed), International Law of State Responsibility for Injuries to Aliens (University Press of Virginia, 1983) 1 et seq.; Wil D. Verwey and Nico J. Schrijver, ‘The Taking of Foreign Property under International Law: A New Legal Perspective?’ (1984) 15 NYIL 3–96, 4 et seq. 3 See e.g. Robert Jennings and Arthur Watts, Oppenheim’s International Law, vol. 1 (Oxford University Press, 1992) 919 et seq. 4 See e.g. Nico J. Schrijver, Sovereignty Over Natural Resources: Balancing Rights and Duties (Cambridge University Press, 1997); Francisco V. Garcia-Amador, ‘ILC Fourth Report on State Responsibility, Responsibility of the State for Injuries Caused in its Territory to the Person or Property of Aliens – Measures Affecting Acquired Rights’ (1959) 2 YBILC 1–37, 1; Robert Jennings and Arthur Watts (n. 3) 915. 5 See e.g. Gérard Fouilloux, La Nationalisation et le Droit International Public (Librairie Générale de droit et de Jurisprudence, 1962); Green H. Hackworth, Digest of International Law, vol. 3 (U.S. Government Printing Office, 1942) 655–665; John P. Bullington, ‘Problems of International Law in the Mexican Constitution of 1917’ (1927) 21 AJIL 685–705; Lester H. Woolsey, ‘The Expropriation of Oil Properties by Mexico’ (1938) 32 AJIL 519–526; John H. Herz, ‘Expropriation of Foreign Property’ (1941) 35 AJIL 243–262, 256 et seq.; Gillian White, Nationalisation of Foreign Property (Stevens, 1961); Martin Domke, ‘Foreign Nationalisations, Some Aspects of Contemporary International Law’ (1961) 55 AJIL 585–616; John E. Huerta, ‘Peruvian Nationalization and the Peruvian–American Compensation Agreements’ (1977) 10 NYU JILP 1–63. 6 Note from Secretary of State Hull of 22 August 1938 to the Mexican Foreign Minister Eduardo Hay: ‘(…) The Government of the United States merely adverts to a self-evident fact when it notes that the applicable precedents and recognized authorities on international law support its declaration that, under every rule of law and equity, no government is entitled to expropriate private property, for whatever purpose, without provision for prompt, adequate and effective payment therefore. (…)’ Reprinted in Green H. Hackworth (n. 5) 658 et seq.

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majority.9 This charter provided that compensation is governed by national law; therefore national courts or tribunals should decide disputes regarding the requirement and amount of compensation in case of an expropriation. Capital exporting countries either voted against this resolution or abstained. Triggered by the steadily growing uncertainty of the customary rules of international law, States increasingly started to conclude treaties on the protection of investment in the second half of the 20th century. This phenomenon was further accelerated by the fact that following the debt crisis in the 1980s, many developing countries changed their policy towards foreign investment and strived to create an investment friendly climate.10 Most of these primarily bilateral treaties contain express guarantees against uncompensated expropriation and provide that fair market value should be the amount of compensation due in case of an expropriation. In this way, treaty law incorporated the standard prevalent in classical public international law and reflected in the Hull formula. Whereas the question of the amount of compensation due in the case of an expropriation dominated the debate throughout the twentieth century, the focus of controversy has since changed. Currently the question of what constitutes a compensable taking is at the centre of the discussion.11 In international investment law the duty to compensate is linked to the incident of an expropriation. The essential question, therefore, is not whether an expropriation was lawful or unlawful but whether or not it has occurred. The circumstance of the expropriation alone attracts the obligation to compensate. To find out whether an expropriation has occurred, tribunals have to establish first that the right which allegedly has been expropriated was protected by international law, especially by the property protection clause of a relevant invest7 For a critical assessment of the communist position see e.g. Ignaz Seidl-Hohenveldern, ‘Communist Theories on Confiscation and Expropriation. Critical Comments’ (1958) 7 Am. J. Comp. L. 541–571. 8 See e.g. Wil D. Verwey and Nico J. Schrijver (n. 2) 3, 27 et seq.; Resolution on Permanent Sovereignty over Natural Resources UNGA Res. 1803 (XVII), 14 December 1962; Resolution on Permanent Sovereignty over Natural Resources, UNGA Res. 3171 (XXVIII), 17 December 1973; Declaration of the Establishment of a New International Economic Order (on the occasion of the Special Session on a New International Economic Order), UNGA Res. 3201, 1 May 1974. 9 Charter of Economic Rights and Duties of States, UNGA Res. 3281 (XXIX), 12 December 1974. See e.g. Jorge Castaneda, ‘La Charte des Droits et Devoirs Èconomiques des États, Note Sur Son Processus D’élaboration’ (1974) 20 AFDI 31–56; Ian Brownlie, ‘Legal Status of Natural Resources in International Law (Some Aspects)’ (1979) 162 RC 245–317, 255 et seq.; Burns H. Weston, ‘The Charter of Economic Rights and Duties of States and the Deprivation of Foreign-Owned Wealth’ (1981) 75 AJIL 437–475; Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Springer, 1985) 24 et seq. 10 Thomas W. Wälde, ‘A Requiem for the “New International Economic Order”, The Rise and Fall of Paradigms in International Economic Law and a Post-Mortem with Timeless Significance’ in Gerhard Hafner and Ignaz Seidl-Hohenveldern (eds), Liber Amicorum Professor Ignaz Seidl-Hohenveldern, in Honour of His 80th Birthday (Martinus Nijhoff, 1998) 771–803. 11 Rudolf Dolzer, ‘Indirect Expropriations: New Developments?’ (2003) 11 NYU Env. L. J. 65– 93, 65.

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ment treaty.12 Second, tribunals have to examine whether the interference did indeed amount to an expropriation. Once an expropriation is established full compensation is due. If the interference did not amount to an expropriation there is no right to compensation. Therefore, the question whether an expropriation can be established is of decisive importance. This leads to an ‘all or nothing’ decision.13 8 Up to the 1950s cases arising from uncompensated expropriations dominated international investment law. More recently, arbitral tribunals have been increasingly reluctant to accept the existence of an expropriation. Also there has been controversy about the requirements of an expropriation. As a consequence expropriation clauses have been overshadowed by other treaty standards like fair and equitable clauses. B. Protected Interests 9

Treaty language is practically unanimous. Bilateral investment treaties (BITs) as well as regional investment protection treaties and investment chapters in free trade agreements (FTAs) all speak of investments as the protected interest in their clauses on expropriation.14 Most BITs contain broad definitions of ‘investment’.15 Similarly broad definitions of ‘investment’ are contained in regional multilateral treaties such as the Energy Charter Treaty (ECT)16 and the North American Free Trade Agreement (NAFTA).17 It is these definitions of invest12 Christoph Schreuer and Ursula Kriebaum, ‘The Concept of Property in Human Rights Law and International Investment Law’ in Stephan Breitenmoser, Bernhard Ehrenzeller, Marco Sassòli, Walter Stoffel and Beatrice Wagner Pfeifer (eds), Liber Amicorum Luzius Wildhaber, Human Rights Democracy and the Rule of Law (Nomos, 2007) 743–762. 13 See Ursula Kriebaum, ‘Regulatory Takings: Balancing the Interests of the Investor and the State’ (2007) 8 JWIT 717–744. 14 See e.g. Art. 5 of the Agreement on Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic, 29 April 1991 (entry into force 1 October 1992): ‘Neither Contracting Party shall take any measures depriving, directly or indirectly, investors of the other Contracting Party of their investment unless the following conditions are complied with: (...)’ (emphasis added). Art. VI(1) of the Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment, 14 November 1991 (entry into force 20 October 1994): ‘Investments shall not be expropriated or nationalized either directly or indirectly through measures tantamount to expropriation or nationalization (“expropriation”) except: (…)’ (emphasis added). Art. 1110 of the North American Free Trade Agreement (NAFTA), 17 December 1992 (entry into force 1 January 1994): ‘No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (“expropriation”), except (…)’; (emphasis added). On the concept of property in investment law see e.g. Christoph Schreuer and Ursula Kriebaum (n. 12) 743–762; Ursula Kriebaum, Eigentumsschutz im Völkerrecht, Eine vergleichende Untersuchung zum internationalen Investitionsrecht sowie zum Menschenrechtsschutz (Duncker & Humblot, 2008) 63–174. 15 On the notion of investment see contribution of Jan Asmus Bischoff and Richard Happ, ‘The Notion of Investment’, ch. 6.II.A., 495–544. 16 ECT Art. 1.

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ment that are relevant to the issue of expropriation, not the often differing concepts attributed to Article 25 of the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention). BITs sometimes include the condition ‘in accordance with host State law’ in 10 their definitions of the term ‘investment’. Host States have argued that this meant that the concept of ‘investment’, and hence the reach of the protection under the treaty, had to be determined by reference to their own domestic law. Tribunals have rejected this approach. They have held that the reference to the host State’s domestic law concerned not the definition of the term ‘investment’ but solely the legality of the investment.18 The tribunal in Salini v. Morocco said in this respect: This provision [the required compliance with the laws and regulations of the host state] refers to the validity of the investment and not to its definition. More specifically, it seeks to prevent the Bilateral Treaty from protecting investments that should not be protected because they would be illegal.19

This means that the object of protection remains determined, in principle, by 11 international standards as determined by international law, especially the applicable treaties. At the same time the existence of an investment will often be conditioned by the validity of an act, especially a contract, governed by the local law. The nature/existence and scope of property rights as such, are governed by the law of the State in which the claimant alleges to have an investment.20 For instance, if the investment consists of the acquisition of shares in a company, the investment will only exist if the purchase of the shares is valid. The validity of the purchase is governed by the applicable domestic law. This is reflected in some BITs which state after their definition of ‘invest- 12 ments’ that ‘[t]he meaning and scope of the assets mentioned above shall be de17 NAFTA Art. 1139. 18 Christoph Schreuer and Ursula Kriebaum (n. 12) 743–762; Ursula Kriebaum, ‘Illegal Investments’ in Christian Klausegger, Peter Klein, Florian Kremslehner, Alexandre Petsche, Nikolaus Pitkowitz, Jenny Power, Irene Welser and Gerold Zeiler (eds), Austrian Yearbook on International Arbitration (Beck, Stämpfli & Manz, 2010) 307–335. 19 Salini Costruttori S.p.A and Italstrade S.p.A. v. Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2003, (2003) 42 ILM 609, para. 46. See also Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, para. 83 et seq.; PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Turkey, ICSID Case No. ARB/02/5, Decision on Jurisdiction, 4 June 2004, paras. 109, 116–120; Yaung Chi Oo Trading Pte. Ltd. v. Myanmar, ICSID Case No. ARB/01/1, Final Award, 31 March 2003, (2003) 42 ILM 540, paras. 53–62; Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, (2005) 44 ILM 721, paras. 126–131; Bayindir Insaat Turizm Ticarat Ve Sanayi A.S. v. Pakistan, ICSID Case No. ARB/03/29, Decision on Jurisdiction, 14 November 2005, paras. 105–110; Aguas del Tunari S.A. v. Bolivia, ICSID Case No. ARB/02/3, Decision on Jurisdiction, 21 October 2005, paras. 139–155; Saluka Investments B.V. v. Czech Republic, UNCITRAL (NAFTA), Partial Award, 17 March 2006, paras. 183, 202–221. 20 Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 151–289, 206–207; Zachary Douglas, ‘Nothing if Not Critical for Investment Treaty Arbitration: Occidental, Eureko and Methanex’ (2006) 22 Arb. Int’l 27–51, 27; Zachary Douglas, International Law of Investment Claims, (Cambridge University Press, 2009) 52–72.

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termined by the laws and regulations of the Party in whose territory the investment was made.’21 The tribunal in Gas Natural found that this provision merely concerned the modalities of the exercise of rights and not the basic question of whether the assets in question were part of the ‘investments’ protected by the BIT. It said: The rights appertaining to shareholders under the law pursuant to which the corporation is organized are, as the second paragraph of Article I(2) states, subject to the law of Argentina. That law would determine, for example, how shareholders’ meetings are convened, how directors are elected, what accounts must be maintained, etc. But the shares themselves, when held by a national of a party to the Treaty, clearly constitute an ‘investment’ as defined in the Treaty.22

13

Therefore, it is international law which defines what types of assets are an investment and therefore potentially the subject of an expropriation and it is the local law which is decisive for the decision on the existence and scope of a type of right in rem mentioned in the definition of investment.23 C. What is an Expropriation? 1. Treaty Law

14

International documents dealing with the protection of foreign investment invariably include provisions on direct as well as indirect expropriations and measures equivalent or tantamount to expropriation. This includes private codification attempts such as the Abs–Shawcross Draft Convention,24 the Draft Convention on the International Responsibility of States for Injuries to Aliens by Professors Sohn and Baxter25 and the Restatement (Third) of the Foreign Relations Law of the United States.26 It also includes documents prepared by international 21 Art. I(2) of the Acuerdo Para la Promoción y la Protectión Reciproca de Inversiones Entre el Reino de España y la Republica Argentina. 22 Gas Natural SDG, S.A. v. Argentina, ICSID Case No. ARB/03/10, Decision on Jurisdiction, 17 June 2005, para. 34. 23 Zachary Douglas, International Law of Investment Claims (n. 20) 72; Ursula Kriebaum (n. 14) 56–65. 24 The Abs–Shawcross Draft Convention on Investment Abroad of 1959 contained the following language in its Article III: ‘No Party shall take any measures against nationals of another Party to deprive them directly or indirectly of their property except (...)’ See UNCTAD, International Investment Instruments: A Compendium, vol. V, Regional Integration, Bilateral and Non-governmental Instruments (United Nations Publications, 2000) 396. 25 Louis B. Sohn and Richard Reeve Baxter, ‘Responsibility of States for Injuries to the Economic Interests of Aliens’ (1961) 55 AJIL 545–584, 553. Art. 10 of the Draft Convention contains the following language: ‘3. (a) A “taking of property” includes not only an outright taking of property but also any such unreasonable interference with the use, enjoyment, or disposal of property as to justify an inference that the owner thereof will not be able to use, enjoy, or dispose of the property within a reasonable period of time after the inception of such interference. (b) A “taking of the use of property” includes not only an outright taking of use but also any unreasonable interference with the use or enjoyment of property for a limited period of time.’ 26 Restatement (Third) of the Foreign Relations Law of the United States, vol. 2 (American Law Institute Publishers, 1986) 196, 200 ‘§ 712 A State is responsible under international law for injury resulting from: (1) a taking by the state of the property of a national of another state

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organisations such as the Organisation for Economic Co-operation and Development (OECD) Draft Convention on the Protection of Foreign Property of 1967,27 the draft for a United Nations Code of Conduct on Transnational Corporations,28 the World Bank Guidelines on the Treatment of Foreign Direct Investment29 and the OECD Draft Negotiating Text for a Multilateral Agreement on Investment.30 Treaties in force that deal with the protection of investments typically contain 15 provisions on expropriation that include direct as well as indirect expropriations, measures having equivalent effect or measures tantamount to expropriation. This is true for most bilateral investment treaties.31 Existing BITs typically re- 16 fer to direct as well as indirect expropriation. Sometimes the latter are described as measures tantamount to expropriation or as measures having equivalent effect. A frequently invoked BIT, the treaty between Argentina and the United States, states: Investments shall not be expropriated or nationalized either directly or indirectly through measures tantamount to expropriation or nationalization (‘expropriation’), except: (…).32

27

28

29

30

31 32

(...)’ Comment g. on this provision explains: ‘Subsection (1) applies not only to avowed expropriations in which the government formally takes title to property, but also to other actions of the government that have the effect of “taking” the property, in whole or in large part, outright or in stages (“creeping expropriation”).’ The OECD Draft Convention on the Protection of Foreign Property of 1967 contained the following provision in its Art. 3 entitled ‘Taking of Property’: ‘No Party shall take any measures depriving, directly or indirectly, of his property a national of another Party unless the following conditions are complied with (...)’. See UNCTAD, International Investment Instruments: A Compendium, vol. II, Regional Instruments (United Nations Publications, 1996) 114. The United Nations Code of Conduct on Transnational Corporations in its 1983 version contained the following language: ‘In the exercise of their sovereignty, States have the right to nationalize or expropriate foreign-owned property in their territory. Any such taking of property whether direct or indirect, consistent with international law, must be (...)’ See UNCTAD, International Investment Instruments: A Compendium; vol. I, Multilateral Instruments (United Nations Publications, 1996) 161, 174. The Guidelines on the Treatment of Foreign Direct Investment, adopted by the Development Committee of the Board of Governors of the International Monetary Fund and the World Bank in 1992, provide as follows in their sec. IV dealing with ‘Expropriation and Unilateral Alterations or Termination of Contracts’: ‘1. A State may not expropriate or otherwise take in whole or in part a foreign private investment in its territory, or take measures which have similar effects, except (...)’ See UNCTAD (n. 28) 247, 252. The OECD Draft Negotiating Text for a Multilateral Agreement on Investment of 1998 contained the following text in its sec. on investment protection: ‘2.1. A Contracting Party shall not expropriate or nationalise directly or indirectly an investment in its territory of an investor of another Contracting Party or take any measure or measures having equivalent effect (hereinafter referred to as “expropriation”) except (...)’ See UNCTAD, International Investment Instruments: A Compendium, vol. IV, Multilateral and Regional Instruments (United Nations Publications, 2000) 107, 148. Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff, 1995) 99. Art. IV(1) of the Treaty between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment (n. 14).

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The BIT between Korea and Tajikistan similarly provides: Investments of investors of one Contracting Party shall not be nationalized, expropriated or otherwise subjected to any other measure having an effect equivalent to nationalization or expropriation (…).33

18

This practice is also reflected in model treaties.34 The 2012 US Model Treaty provides in Article 6(1) that: [n]either Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (‘expropriation’), except: (…).35

19

The Model Treaty of China states that: Neither Contracting Party shall expropriate, nationalize or take other similar measures (hereinafter referred to as ‘expropriation’) (…) unless the following conditions are met: (…).36

20

According to the German Model Treaty [i]nvestments by investors of either Contracting State shall not directly or indirectly be expropriated, nationalized or subjected to any other measure the effects of which would be tantamount to expropriation or nationalization (…) except (…).37

21

The Model Treaty used by the United Kingdom provides that [i]nvestments of nationals or companies of either Contracting Party shall not be nationalized, expropriated or subjected to measures having effect equivalent to nationalization or expropriation (…) except (…).38

22

The same holds true for investment chapters in regional treaties. In the North American Free Trade Agreement of 1992 the issue is addressed in Article 1110 entitled ‘Expropriation and Compensation’. The article is introduced by the following words: 1. No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (‘expropriation’), except: (...).39

33 Art. 5(1) of the Agreement between the Government of the Republic of Korea and the Government of the Republic of Tadjikistan on the Promotion and Protection of Investments, 14 July 1995 (entry into force 13 August 1995). 34 The 2012 U.S. Model Bilateral Investment Treaty, Treaty between the Government of the United States of America and the Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment is available at http://www.ustr.gov/sites/default/ files/BIT%20text%20for%20ACIEP%20Meeting.pdf; all other model treaties cited in this paragraph are reproduced in Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 352 et seq. 35 For the specification contained in Annex B to the 2004 Model BIT, Treaty between the Government of the United States of America and the Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment see below. 36 Art. 4(1) of the Chinese Model BIT 1997, Agreement between The Government of the People’s Republic of China and the Government of … on the Promotion and Protection of Investments. 37 Art. 4(2) of the German Model Treaty – 2008, Treaty between the Federal Republic of Germany and … Concerning the Encouragement and Reciprocal Protection of Investments. 38 Art. 5(1) of the United Kingdom Model BIT 2005, Draft Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of [Country] for the Promotion and Protection of Investments. 39 (1993) 32 ILM 641.

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The provision on expropriation in the Energy Charter Treaty (ECT) similarly 23 extends to measures having an effect equivalent to expropriation. Article 13(1) of the ECT provides: (1) Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as ‘Expropriation’) except where such Expropriation is: (…).40

Most treaties do not go beyond a broad generic reference to indirect expropri- 24 ation or measures equivalent or tantamount to expropriation. The reason is the great variety of possible measures, amounting to an indirect or de facto taking of foreign-owned property, which defies any more specific description.41 The wording ‘measures having effect equivalent to’ provides a hint as to how 25 to interpret the interference clauses.42 It points specifically to the effect of the measure as criterion for the characterisation of such a measure. The 2004 and 2012 Model BITs of the US and the 2004 Model BIT of Cana- 26 da43 as well as BITs and investment chapters in FTAs concluded by these two countries in recent years point to a new direction. They specify how to determine the existence of an indirect expropriation in their annexes. Furthermore, 40 (1995) 34 ILM 381, 391. 41 Rudolf Dolzer and Margrete Stevens (n. 31) 99 (footnote omitted); UNCTAD, Series on Issues in International Investment Agreements: Taking of Property (United Nations, 2000) 41. 42 See e.g. Art. 6(1) of the Agreement between the Government of the United Kingdom and Northern Ireland and the Government of Ukraine for the Promotion and Reciprocal Protection of Investments, 10 February 1993: ‘(…) shall not be (…) subjected to measures having effect equivalent to nationalisation or expropriation (…)’. For further examples see Ursula Kriebaum (n. 14) 261. 43 Agreement between Canada and … for the Promotion and Protection of Investments – Foreign Investment Promotion and Protection Agreements (FIPA): ‘Article 13 Expropriation 1. Neither Party shall nationalize or expropriate a covered investment either directly, or indirectly through measures having an effect equivalent to nationalization or expropriation (hereinafter referred to as “expropriation”), except for (…). Annex B.13(1) Expropriation The Parties confirm their shared understanding that a) Indirect expropriation results from a measure or series of measures of a Party that have an effect equivalent to direct expropriation without formal transfer of title or outright seizure; b) The determination of whether a measure or series of measures of a Party constitute an indirect expropriation requires a case-by-case, fact-based inquiry that considers, among other factors: i) the economic impact of the measure or series of measures, although the sole fact that a measure or series of measures of a Party has an adverse effect on the economic value of an investment does not establish that an indirect expropriation has occurred; ii) the extent to which the measure or series of measures interfere with distinct, reasonable investment-backed expectations; and iii) the character of the measure or series of measures; c) Except in rare circumstances, such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation.’, available at http://www.dfait-maeci.gc.ca/tna-nac/documents/2004-FIPA-model-en.pdf.

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the clauses in these annexes state that regulatory interferences are generally not considered to be expropriations. 27 Annex B to the 2004 and 2012 US Model Treaties adds the following specification: (a)

(b)

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: (i) 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; (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (iii) the character of the government action. 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.44

2. Different Forms of Expropriatory Measures and their Characteristics 28

The terminology used to designate measures of property deprivation varies considerably in treaties for the protection of foreign investment and in the literature on the subject. Beside the most commonly used ‘expropriation’ and ‘nationalisation’, other expressions like ‘dispossession’, ‘taking’, ‘deprivation’, ‘privation’, ‘confiscation’, ‘requisition’ or ‘sequestration’ are also employed.45 With regard to de facto deprivations of property, the most commonly applied terms are ‘indirect expropriation’ and ‘de facto expropriation’, but ‘constructive expropriation’ and ‘wealth deprivation’ have also been used to describe this phenomenon. ‘Creeping expropriation’ and ‘regulatory taking’ characterise special forms of indirect expropriations.46 a) Direct Expropriations

29

Direct or formal expropriations are characterised by a forcible deprivation of property by means of administrative or legal measures: (…) the direct one [expropriation], understood as the forcible appropriation by the State of the tangible or intangible property of individuals by means of administrative or legislative action.47

44 Available at http://www.state.gov/documents/organization/38710.pdf; http://www.ustr.gov/ sites/default/files/BIT%20text%20for%20ACIEP%20Meeting.pdf. 45 Ian Brownlie, Principles of Public International Law (Oxford University Press, 2003) 508; Yoram Dinstein, ‘Deprivation of Property of Foreigners under International Law’ in Nisuke Ando, Edward McWhinney and Rüdiger Wolfrum (eds), Liber Amicorum Judge Shigeru Oda (Brill, 2002) 849–869, 853 et seq.; Rudolf Dolzer and Margrete Stevens (n. 31) 98; Rosalyn Higgins, ‘The Taking of Property by the State: Recent Developments in International Law’ (1982) 176 RC 259–392, 261; Burns H. Weston, ‘“Constructive Takings” under International Law: A Modest Foray into the Problem of “Creeping Expropriation”’ (1975) 16 Va. J. Int’l L. 103–175, 111 et seq.; Francisco V. Garcia-Amador (n. 4) 1, 10 et seq.; Wil D. Verwey and Nico J. Schrijver (n. 2) 3, 4 offer a quantitative analysis of the employment of the different terms. 46 For an analysis of the slightly different meanings of these designations as well as further references see Burns H. Weston (n. 45) 103; Ursula Kriebaum (n. 14) 227–228.

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Therefore, the transfer of title is the decisive criterion to distinguish a direct 30 expropriation from an indirect one. Direct expropriation requires, in addition to the transfer of title, that the owner is deprived of the possibility to make use of the investment which is in nearly all of the cases, a side effect of the title transfer. Today most of the investment protection treaties contain a clause specifying fair market value as the required amount of compensation. b) Indirect Expropriations (1) Introduction

Direct and explicit expropriations or nationalisations have become relatively 31 rare. The negative effect of such a step on the host State’s investment climate has made it unwise to openly seize foreign-owned property. At the same time, the significance of indirect forms of expropriation or measures having an equivalent effect has increased. The UNCTAD study on ‘Taking of Property’ has described this development in the following terms: It is not the physical invasion of property that characterizes nationalizations or expropriations that has assumed importance, but the erosion of rights associated with ownership by State interferences. So, methods have been developed to address this issue.48

In the case of an indirect expropriation the investor retains ownership of the 32 investment but loses the ability to exercise the economic benefits arising therefrom. An indirect expropriation leaves the title untouched but deprives the investor of the possibility to utilise the investment in a commercially meaningful way. Today it is generally accepted that certain types of measures affecting foreign property will be considered an expropriation even though the owner retains the formal title. The abundant scholarly writings on the issue of expropriation of foreign- 33 owned property seem to agree that a large variety of indirect interference with

47 LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 187. For recent examples see e.g. Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18 and Ron Fuchs v. Georgia, ICSID Case No. ARB/07/15, Award, 3 March 2010, para. 387; Burlington Resources Inc. v. Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, para. 538. 48 UNCTAD (n. 41) 20.

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the investors’ economic interests are included in this concept.49 Already fifty years ago Professor Christie wrote: (...) interference with an alien’s property may amount to expropriation even when no explicit attempt is made to affect the legal title to the property, and even though the respondent State may specifically disclaim any such intention. (...) There are several well-known international cases in which it has been recognized that property rights may be so interfered with that it may be said that to all intents and purposes those property rights have been expropriated even though the State in question has not purported to expropriate.50

34

More recently Kühn and Wiegel wrote: Protection from expropriation without compensation not only refers to ‘traditional’ expropriation – that is transfer of rights by means of a decisive administrative act, thus a physical take-over of the property – but also to ‘de facto expropriations’. ‘De facto expropriations’, ‘creeping expropriation’ or ‘indirect expropriations’ are all actions that are equivalent to a formal deprivation of property rights, effectively neutralizing the benefit of the foreign investor and thus destroying the economic value of the investment, for example if the State deprives the investor of its own rights to use, let or sell its property due to a change of law.51

35

Indirect takings of this kind have been described in the UNCTAD study on ‘Taking of Property’ in these words: (...) some measures short of physical takings may amount to takings in that they result in the effective loss of management, use or control, or a significant depreciation of the value, of the assets of a foreign investor (...).52

36

There is rich international judicial practice dealing with indirect expropriation, measures having equivalent effect and measures tantamount to expropriation. That practice demonstrates that international courts and tribunals have held a large variety of measures to amount to indirect expropriations. The common feature of all these instances of indirect expropriation is that the investor has been deprived of the economic benefits of its investment while retaining formal title to it.

49 See e.g. Burns H. Weston (n. 45) 103–175; Rudolf Dolzer, ‘Indirect Expropriation of Alien Property’ (1986) 1 ICSID Rev.–FILJ 41–65; Giorgio Sacerdoti, ‘Bilateral Treaties and Multilateral Instruments on Investment Protection’ (1979) 269 RC 251–460, 382 et seq.; Paul E. Comeaux and N. Stephan Kinsella, Protecting Foreign Investment Under International Law, Legal Aspects of Political Risk (Oceana, 1997) 12–15; Rudolf Dolzer (n. 11) 65–93; Bernardo M. Cremades and David J. A. Cairns, ‘The Brave New World of Global Arbitration’ (2002) 3 JWI 173–209, 194 et seq.; W. Michael Reisman and Robert D. Sloane, ‘Indirect Expropriation and its Valuation in the BIT Generation’ (2003) 74 BYIL 115–150; Gary H. Sampliner, ‘Arbitration of Expropriation Cases Under U.S. Investment Treaties – A Threat to Democracy or the Dog That Didn’t Bark?’ (2003) 18 ICSID Rev.–FILJ 1–43, 5–11; Ursula Kriebaum (n. 14) 253 et seq.; Markus Perkams, ‘The Concept of Indirect Expropriation in Comparative Public Law – Searching for Light in the Dark’ in Stephan W. Schill (ed), International Investment Law and Comparative Public Law (Oxford University Press, 2010) 107–150. 50 George C. Christie, ‘What Constitutes a Taking of Property under International Law?’ (1962) 38 BYIL 305–338, 309, 310. 51 Wolfgang Kühn and Ulrike Wiegel, ‘The Application of International Law and Treaty Provisions by Arbitrators’ (2003) 4 JWI 451–472, 464. 52 UNCTAD (n. 41) 4.

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Even before the introduction of pertinent treaty provisions, international 37 courts and tribunals have treated indirect takings and equivalent measures in the same way as direct expropriations.53 Recent awards in investment arbitration cases are unanimous on the wide 38 reach of provisions in BITs and other treaties dealing with expropriations and measures having equivalent or similar effect. The awards of Lauder v. Czech Republic and CME v. Czech Republic concerned the same facts. They can serve as examples for tribunals both recognising the concept of indirect expropriation while arriving at different conclusions on the issue of the existence of an expropriation in the particular case. In CME v. Czech Republic54 the claimant complained about interference in its 39 contract rights by a regulatory authority, the Media Council. The interference had created a legal situation that enabled the investor’s local partner to terminate the contract on which the investment depended. The tribunal said: The Respondent’s view that the Media Council’s actions did not deprive the Claimant of its worth, as there has been no physical taking of the property by the State or because the original Licence (...) always has been held by the original Licensee and kept untouched, is irrelevant. What was touched and indeed destroyed was the Claimant’s and its predecessor’s investment as protected by the Treaty. What was destroyed was the commercial value of the investment (...) by reason of coercion exerted by the Media Council (...).55

More generally, with respect to de facto or indirect expropriations the CME 40 tribunal said: The expropriation claim is sustained despite the fact that the Media Council did not expropriate CME by express measures of expropriation. De facto expropriations or indirect expropriations, i.e. measures that do not involve an overt taking but that effectively neutralize the benefit of the property of the foreign owner, are subject to expropriation claims. This is undisputed under international law (...).56

Lauder v. The Czech Republic57 concerned the same facts. The tribunal said 41 with respect to indirect expropriation: The concept of indirect (or ‘de facto’, or ‘creeping’) expropriation is not clearly defined. Indirect expropriation or nationalization is a measure that does not involve an overt taking, but that effectively neutralizes the enjoyment of the property. It is generally accepted that a wide variety of measures are susceptible to lead to indirect expropriation, and each case is therefore to be decided on the basis of its attending circumstances.58

53 Certain German Interests in Polish Upper Silesia (Germany v. Poland), Judgment, 25 May 1926, PCIJ Ser. A, No. 7 (1927), 44; Biloune and Marine Drive Complex Ltd. v. Ghana Investments Centre and the Government of Ghana, UNCITRAL, Award on Jurisdiction and Liability, 27 October 1989, 95 ILR 183, 209; Starrett Housing Corporation, Starrett Systems Inc, Starrett Housing International Inc. v. Iran, Bank Markazi Iran, Bank Omran, Bank Mellat, Interlocutory Award, 19 December 1983, 4 Iran–US CTR 122, 154. 54 CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001, 9 ICSID Rep. 121. 55 Ibid., para. 591. 56 Ibid., para. 604, citing Sacerdoti, the German Interests in Polish Upper Silesia case and Southern Pacific Properties v. Egypt, ICSID Case No. ARB/84/3. 57 Ronald S. Lauder v. Czech Republic, UNCITRAL, Award, 3 September 2001, 9 ICSID Rep. 66.

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Therefore, it is undisputed that the expropriation clauses in investment protection treaties in general include indirect expropriations in their various forms. Arbitral tribunals have held a wide variety of steps affecting or destroying the investment’s commercial value, taken by the host States’ authorities, to constitute indirect expropriations or equivalent measures. The practice on indirect expropriation is well summarised by Reisman and Sloane: In short, international tribunals, jurists, and scholars have consistently appreciated that states may accomplish expropriation in ways other than by formal decree; indeed, often in ways that may seek to cloak expropriatory conduct with a veneer of legitimacy. For this reason, tribunals have increasingly accepted that expropriation must be analyzed in consequential rather than formal terms. What matters is the effect of governmental conduct – whether malfeasance, misfeasance or nonfeasance, or some combination of the three – on foreign property rights or control over an investment, not whether the state promulgates a formal decree or otherwise expressly proclaims its intent to expropriate. For purposes of state responsibility and the obligation to make adequate reparation, international law does not distinguish indirect from direct expropriations.59

43

However, what is disputed is when an indirect expropriation materialises and how to draw the line between interferences not amounting to an indirect expropriation and compensable takings. (2) De facto Expropriations

Tribunals often do not strictly differentiate between the different types of indirect expropriation. However, two forms of indirect expropriation are particularly difficult to establish: creeping expropriations and regulatory takings. 45 Indirect expropriations can either occur through an instantaneous taking (de facto expropriations) or in a creeping form. Both forms leave the property title intact but deprive the owner of the possibility to make use of its property. The expropriation can occur either through a physical taking, an administrative measure or through a regulatory activity of a State. 46 The Certain German Interests in Polish Upper Silesia case60 provides an example of a case where the formal expropriation of the Chorzów Factory also constituted an instantaneous de facto expropriation of the patents and contracts of a different company ‘Bayerische’. The latter company merely had rights of management in the expropriated factory and the Polish authorities never purported to expropriate these rights. 47 Bayindir v. Pakistan61 concerned a contract between a foreign investor and the Pakistan National Highway Authority (NHA) about the construction of a motorway. The respondent had not only terminated the contract but had also expelled the claimant. The tribunal in its decision on jurisdiction held that not only 44

58 Ibid., para. 200. Referred to with approval in BG Group Plc v. Argentina, UNCITRAL, Award, 24 December 2007, para. 264. 59 W. Michael Reisman and Robert D. Sloane (n. 49) 115, 121. 60 Certain German Interests in Polish Upper Silesia (n. 53) 44. 61 Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Pakistan (n. 19).

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regulatory action but also factual interference might amount to an expropriation. The tribunal said: (...) expropriation can take place also where the measure is not technically a regulatory act. As it has been consistently held in investment cases, expropriation may arise out of a simple interference by the host State in the investor’s rights with the effect of depriving the investor – totally or to a significant extent – of its investment (...).62

In LG&E v. Argentina63 the tribunal also referred to the concept of indirect 48 expropriation and distinguished between de facto expropriations involving individual action and creeping expropriations occurring in a gradual form. It said: 188. Generally, the expression ‘equivalent to expropriation’ or ‘tantamount to expropriation’ found in most bilateral treaties, may refer both, to the so-called ‘creeping expropriation’ and to the de facto expropriation. Their common point rests in the fact that the host State’s actions or conduct do not involve ‘overt taking’ but the taking occurs when governmental measures have ‘effectively neutralize[d] the benefit of property of the foreign owner.’ Ownership or enjoyment can be said to be ‘neutralized’ where a party no longer is in control of the investment, or where it cannot direct the day-today operations of the investment. As to the differences, it is usual to say that indirect expropriation may show itself in a gradual or growing form – creeping expropriation – or through a sole and unique action, or through actions being quite close in time or simultaneous – de facto expropriation.64

Instantaneous de facto expropriations are less difficult to identify than creep- 49 ing expropriations since the interfering measures occur at a single point in time. (3) Creeping Expropriations

An expropriation does not necessarily take place all at once. Rather, it may 50 take place incrementally or step by step. Creeping expropriation has been recognised in international practice for some time. There are a considerable number of international documents that refer to creeping expropriation. The OECD Draft Convention on the Protection of Foreign Property of 1967 51 contained the following provision in its Article 3 entitled ‘Taking of Property’: No Party shall take any measures depriving, directly or indirectly, of his property a national of another Party unless the following conditions are complied with (...).65

The notes and comments on that provision contain the following language:

52

(...) Article 3 is meant to cover “creeping nationalisation”, recently practised by certain States. Under it, measures otherwise lawful are applied in such a way as to deprive ultimately the alien of the enjoyment or value of his property, without any specific act being identifiable as outright deprivation.66

The 1986 Restatement (Third) of the Foreign Relations Law of the United 53 States67 states: 62 63 64 65 66 67

Ibid., para. 255. LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina (n. 47). Ibid., para. 188 (footnotes omitted). (1968) 7 ILM 117, 124. Ibid., at 125, 126. Restatement (Third) of the Foreign Relations Law of the United States, vol. 2 (n. 26).

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Chapter 8: Standards of Protection § 712 State Responsibility for Economic Injury to Nationals of Other States A State is responsible under international law for injury resulting from: (1) a taking by the state of the property of a national of another state (...).68

54

Comment g. on this provision explains: Subsection (1) applies not only to avowed expropriations in which the government formally takes title to property, but also to other actions of the government that have the effect of ‘taking’ the property, in whole or in large part, outright or in stages (‘creeping expropriation’).69

55

Creeping expropriation takes place through a series of actions, none of which might qualify as an expropriation by itself, but the aggregate effect of which is to destroy the value of the investment.70 UNCTAD’s 2003 World Investment Report describes this phenomenon in the following terms: Indirect takings include creeping expropriations, involving an incremental but cumulative encroachment on one or more of the range of recognized ownership rights until the measures involved lead to the effective negation of the owner’s interest in the property.71

56

The UNCTAD study on ‘Taking of Property’ has described the term creeping expropriation in the following words: This may be defined as the slow and incremental encroachment on one or more of the ownership rights of a foreign investor that diminishes the value of its investment. The legal title to the property remains vested in the foreign investor but the investor’s rights of use of the property are diminished as a result of the interference by the State.72

57

Professor Reisman and R.D. Sloane, in their article on indirect expropriation,73 write: Discrete acts, analyzed in isolation rather than in the context of the overall flow of events, may, whether legal or not in themselves, seem innocuous vis-à-vis a potential expropriation. Some may not be expropriatory in themselves. Only in retrospect will it become evident that those acts comprised part of an accretion of deleterious acts and omissions, which in the aggregate expropriated the foreign investor’s property rights.74 (...) Because of their gradual and cumulative nature, creeping expropriations also render it problematic, perhaps even arbitrary, to identify a single interference (or failure to act where a duty requires it) as the ‘moment of expropriation’.75

58

The Iran–US Claims Tribunal has also recognised the significance of expropriatory measures that take place step by step. In Phillips Petroleum v. Iran76 the authorities of Iran had taken a number of steps against the claimant. These included announcements of a forthcoming nationalisation of the oil industry, a significant reduction of production rates, replacement of the management by direc68 Ibid., at 196. 69 Ibid., at 200. 70 See especially Burns H. Weston (n. 45) 103, 109, 148–151; Rosalyn Higgins (n. 45) 259, 353; Paul E. Comeaux and N. Stephan Kinsella (n. 49) 8–9. 71 UNCTAD, World Investment Report (United Nations, 2003) 110. 72 UNCTAD (n. 41) 11, 12. 73 W. Michael Reisman and Robert D. Sloane (n. 49) 115–150. 74 Ibid., at 123, 124 (footnote omitted). 75 Ibid., at 125. 76 Phillips Petroleum Co. Iran v. Iran, The National Iranian Oil Company, 29 June 1989, 21 Iran–US CTR 79.

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tors appointed by the Iranian authorities and nullification of the joint venture agreement.77 The tribunal said: 100. The conclusion that the Claimant was deprived of its property by conduct attributable to the Government of Iran, including NIOC, rests on a series of concrete actions rather than any particular formal decree, as the formal acts merely ratified and legitimized the existing state of affairs. (…) in circumstances where the taking is through a chain of events, the taking will not necessarily be found to have occurred at the time of either the first or the last such event, but rather when the interference has deprived the Claimant of fundamental rights of ownership and such deprivation is ‘not merely ephemeral’, or when it becomes an ‘irreversible deprivation’.78

Arbitral practice confirms that incremental steps leading to a de facto dispos- 59 session are to be treated as measures equivalent to expropriation.79 In Biloune v. Ghana80 the authorities had issued a stop work order, had subjected the investment to intrusive financial scrutiny, had demolished part of the project and had arrested and expelled the investor. The tribunal said: What is clear is that the conjunction of the stop work order, the demolition, the summons, the arrest, the detention, the requirement of filing assets declaration forms, and the deportation of Mr Biloune without possibility of re-entry had the effect of causing the irreparable cessation of work on the project.81 (…) The Tribunal therefore holds that the Government of Ghana, by its acts and omissions culminating with Mr Biloune’s deportation, constructively expropriated MDCL’s assets, and Mr Biloune’s interest therein.82

In Spyridon Roussalis v. Romania83 the tribunal referred to Biloune with ap- 60 proval and said: Expropriation may occur in the absence of a single decisive act that implies a taking of property. It could result from a series of acts and/or omissions that, in sum, result in a deprivation of property

77 Ibid., paras. 90–96. 78 Ibid., paras. 100, 101. 79 See e.g. S.A.R.L. Benvenuti & Bonfant v. Congo, ICSID Case No. ARB/77/2, Award, 8 August 1980, 1 ICSID Rep. 330; Liberian Eastern Timber Corporation (LETCO) v. Liberia, ICSID Case No. ARB/83/2, Award, 31 March 1986, 2 ICSID Rep. 343, 367 and the analysis by W. Michael Reisman and Robert D. Sloane (n. 49) 115, 125, 126; Tradex Hellas S.A. v. Albania, ICSID Case No. ARB/94/2, Award, 29 April 1999, 5 ICSID Rep. 70, para. 191; Compañía del Desarrollo de Santa Elena, S. A. v. Costa Rica, ICSID Case No. ARB/96/1, Award, 17 February 2000, 5 ICSID Rep. 153, para. 76; Pope & Talbot Inc. v. Canada, UNCITRAL (NAFTA), Interim Award (on Merits), 26 June 2000, 7 ICSID Rep. 69, para. 99; Técnicas Medioambientales Tecmed, S.A. v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, (2004) 43 ILM 133, para. 114; Fireman’s Fund Insurance Company v. Mexico, ICSID Case No. ARB(AF)/02/1, Award, 17 July 2006, para. 176(i). Referred to in Corn Products International, Inc. v. Mexico, ICSID Case No. ARB(AF)/04/1, Decision on Responsibility, 15 January 2008, para. 87; Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 7.5.31; Biwater Gauff (Tanzania) Ltd. v. Tanzania, Case No. ARB/05/22, Award, 24 July 2008, paras. 452, 455, 488, 791, 814; EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, para. 308; Impregilo S.p.A. v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, para. 283. 80 Biloune and Marine Drive Complex Ltd. v. Ghana Investments Centre and the Government of Ghana (n. 53) 183. 81 Ibid., at 209. 82 Ibid., at 210. 83 Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Award, 7 December 2011, para. 329.

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The tribunal denied the existence of an expropriation on the specific facts of the case.84 62 Generation Ukraine v. Ukraine85 concerned a construction project for an office building. The main complaint was the failure by the Kyiv City State Administration to issue the necessary lease agreements. The claimant contended that this refusal was the culmination of a series of other prejudicial acts amounting to a creeping expropriation.86 The tribunal although denying the expropriation on the specific facts of the case approved the concept: 61

20.22 Creeping expropriation is a form of indirect expropriation with a distinctive temporal quality in the sense that it encapsulates the situation whereby a series of acts attributable to the State over a period of time culminate in the expropriatory taking of such property.87

63

In his dissenting opinion in Waste Management88 arbitrator Keith Highet aptly described a creeping expropriation in the following terms: (…) a ‘creeping’ expropriation is comprised of a number of elements, none of which can – separately – constitute the international wrong. These constituent elements include non-payment, non-reimbursement, cancellation, denial of judicial access, actual practice to exclude, non-conforming treatment, inconsistent legal blocks, and so forth. (…) 18. A nationalization or expropriation – in particular a ‘creeping expropriation’ comprised of numerous components – must logically be more than the mere sum of its parts (…).89

64

Siemens v. Argentina90 concerned a project for the provision of an integral service for the implementation of an immigration control, personal identification and electoral information system. After the project’s start, Argentina had taken a number of adverse measures, including postponements and suspensions of the profitable activities, fruitless renegotiations and ultimately the cancellation of the project. The claimant successfully invoked the provision in the applicable 84 85 86 87

Ibid., paras. 363, 522–526. Generation Ukraine Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003. Ibid., at 20.21. Ibid., at 20.22 (emphasis in original). The tribunal in Generation Ukraine rejected the claim of a creeping expropriation because the investment did not yet exist at the relevant time and hence could not be expropriated. In addition, the tribunal came to the conclusion that the conduct of the administration did not come close to creating a ‘persistent or irreparable obstacle to the Claimant’s use, enjoyment or disposal of its investment.’ (paras. 20.26, 20.27, 20.32). Referred to with approval in Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, para. 700. In this case the tribunal found that a creeping expropriation had occurred (para. 708). 88 Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/98/2, Award, 2 June 2000, 5 ICSID Rep. 443 (Keith Highet, dissenting at 462). 89 Ibid., paras. 17, 18. 90 Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007.

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BIT protecting investors against uncompensated expropriations. The tribunal described creeping expropriation in the following terms: By definition, creeping expropriation refers to a process, to steps that eventually have the effect of an expropriation. If the process stops before it reaches that point, then expropriation would not occur. This does not necessarily mean that no adverse effects would have occurred. Obviously, each step must have an adverse effect but by itself may not be significant or considered an illegal act. The last step in a creeping expropriation that tilts the balance is similar to the straw that breaks the camel’s back. The preceding straws may not have had a perceptible effect but are part of the process that led to the break.91

The practice on creeping expropriation has been described by Reisman and 65 Sloane in the following terms: A creeping expropriation therefore denotes, in the paradigmatic case, an expropriation accomplished by a cumulative series of regulatory acts or omissions over a prolonged period of time, no one of which can necessarily be identified as the decisive event that deprived the foreign national of the value of its investment. Moreover, they may be interspersed with entirely lawful state regulatory actions. By definition, then, creeping expropriations lack the vividness and transparency not only of formal expropriations, but also of many regulatory or otherwise indirect expropriations, which may be identified more closely with a few discrete events. The gradual and sometimes furtive nature of the acts and omissions that culminate in a creeping expropriation tends to obscure what tribunals ordinarily denominate the ‘moment of expropriation’.92

The concept of creeping expropriation has its counterpart in the general law 66 of State responsibility. The Articles on Responsibility of States for Internationally Wrongful Acts adopted by the International Law Commission (ILC) at its fifty-third session in 2001 state in Article 15: ARTICLE 15: Breach consisting of a composite act (1) The breach of an international obligation by a State through a series of actions or omissions defined in aggregate as wrongful, occurs when the action or omission occurs which, taken with the other actions or omissions, is sufficient to constitute the wrongful act.93

The ILC’s commentary on this provision states that

67

Paragraph 1 of article 15 defines the time at which a composite act ‘occurs’ as the time at which the last action or omission occurs which, taken with the other actions or omissions, is sufficient to constitute the wrongful act, without it necessarily having to be the last of the series.94

It follows from all the above authorities that the concept of creeping expropri- 68 ation is well established in international law. In looking at these discrete steps that are detrimental to an investment, it is 69 appropriate not to consider them in isolation but to examine their aggregate effect. What matters is not whether any one of the steps can be identified as expropriatory, but whether their combined outcome leads to economic consequences that are tantamount to an expropriation.

91 Ibid., para. 263. 92 W. Michael Reisman and Robert D. Sloane (n. 49) 115, 128. 93 James Crawford, The International Law Commission’s Draft Articles on State Responsibility: Introduction, Text and Commentaries (Cambridge University Press, 2002) 141. 94 Ibid., at 143.

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(4) Measures Tantamount to Expropriation and Measures Having Equivalent Effect to Expropriation

Treaties in force often not only protect against uncompensated direct or indirect expropriation but add clauses such as: ‘measures having equivalent effect to expropriation’,95 ‘measures having similar effects’,96 ‘any other measures the effects of which would be tantamount to expropriation’,97 ‘measures tantamount to expropriation’98.99 71 These provisions refer to indirect expropriation and do not widen the scope of application of the expropriation clause by adding yet a new type of interference. The text of the BIT between the US and Azerbaijan is an example where the wording of the treaty confirms such an interpretation: 70

1. Neither Party shall expropriate or nationalize a covered investment either directly or indirectly through measures tantamount to expropriation or nationalization (‘expropriation’) (…).100

72

Today it is common ground in judicial practice that these provisions merely specify forms of expropriation and do not create an additional type of interference.101

95 See e.g. Art. 7 of the Bilateral Investment Treaty between the Government of the Hashemite Kingdom of Jordan and the Government of the Republic of Singapore, 16 May 2004 (entry into force 22 August 2005); Art. 13 of the Energy Charter Treaty (Annex 1 to the Final Act of the European Energy Charter Treaty Conference, 17 December 1994, (1995) 34 ILM 381): ‘(1) Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as ‘Expropriation’) except where such Expropriation is: (...)’ (emphasis added). 96 See e.g. Art. VI of the Agreement between the Government of the Kingdom of Norway and the Government of the Republic of Hungary on the Promotion and Reciprocal Protection of Investments, 8 April 1991 (entry into force 4 December 1992). 97 See e.g. Art. 4 of the Treaty between the Kingdom of Thailand and the Federal Republic of Germany Concerning the Encouragement and Reciprocal Protection of Investments, 13 December 1961 (entry into force 10 April 1965). 98 See e.g. Art. III of the Treaty between the Government of the United States of America and the Government of the Republic of Honduras Concerning the Encouragement and Reciprocal Protection of Investment, 1 July 1995 (entry into force 11 July 2001); Art. 1110 of the NAFTA: ‘No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (‘expropriation’), except (…) (emphasis added). 99 See also Giorgio Sacerdoti (n. 49) 251, 255, 385 et seq.; Yves Nouvel, ‘Les mesures équivalent à une expropriation dans la pratique récente des tribunaux arbitraux’ (2002) 106 RGDIP 79–102; Ursula Kriebaum (n. 14) 276–280. 100 Treaty between the Government of the United States of America and the Government of the Republic of Azerbaijan Concerning the Encouragement and Reciprocal Protection of Investment, 1 August 1997 (emphasis added). 101 See e.g. Pope & Talbot v. Canada (n. 79) paras. 96, 104; S.D. Myers, Inc. v. Canada, UNCITRAL (NAFTA), First Partial Award, 13 November 2000, 8 ICSID Rep. 18, para. 285; Marvin Roy Feldman Karpa v. Mexico, ICSID Case No. ARB(AF)/99/1, Award, 16 December 2002, 7 ICSID Rep. 341, para. 100; Técnicas Medioambientales Tecmed, S.A. v. Mexico (n. 79) 134, para. 114.

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S.D. Myers v. Canada102 concerned an export ban by Canada of polychlori- 73 nated biphenyl (PCB) waste to the United States for remediation. One of the claims was that this amounted to a measure tantamount to expropriation under Article 1110 of the NAFTA. The tribunal said: The primary meaning of the word ‘tantamount’ given by the Oxford English Dictionary is ‘equivalent’. Both words require a tribunal to look at the substance of what has occurred and not only at form. A tribunal should not be deterred by technical or facial considerations from reaching a conclusion that an expropriation or conduct tantamount to an expropriation has occurred. It must look at the real interests involved and the purpose and effect of the government measure.103

In the particular case, the tribunal found that while there was a breach of the 74 fair and equitable standard under Article 1105 of the NAFTA, there was no measure tantamount to expropriation since the measure had only been temporary.104 The tribunal in Feldman v. Mexico105 also confirmed the equivalence of indi- 75 rect expropriations and measures having equivalent effect: The Tribunal deems the scope of both expressions to be functionally equivalent.106

The same is true for Telenor v. Hungary107 where the tribunal confirmed that 76 these additional clauses only add to the clarification of what is meant by indirect expropriation rather than expanding the scope of application of the expropriation clauses: Phrases such as ‘equivalent to expropriation’ and ‘tantamount to expropriation’ do not expand the concept of expropriation and are usually taken to indicate that the BIT covers indirect as well as direct expropriation, thus looking at the substance of the measures in question rather than the label attached to them by government, and the same is true of ‘measures having a similar effect’, (…).108

Only the tribunal in Waste Management v. Mexico109 regarded the phrase ‘or 77 take a measure tantamount to nationalization or expropriation’ as an enlargement of the concept of indirect expropriation: Evidently the phrase ‘take a measure tantamount to nationalization or expropriation of such an investment’ in Article 1110(1) was intended to add to the meaning of the prohibition, over and above the reference to indirect expropriation.110

The case law referred to by Waste Management cannot confirm this interpre- 78 tation. Subsequent tribunals did not follow this approach. However, the use of these expressions is an indicator that the ‘effect’ of a measure interfering with property rights is an essential criterion for the identification of an indirect expropriation.111 102 103 104 105 106 107

S.D. Myers Inc. v. Canada (n. 101). Ibid., para. 285. Ibid., para. 287. Marvin Roy Feldman Karpa v. Mexico (n. 101) 341. Ibid., para. 100. Telenor Mobile Communications AS v. Hungary, ICSID Case No. ARB/04/15, Award, 13 September 2006. 108 Ibid., para. 63 (footnote omitted). 109 Waste Management, Inc. v. Mexico (n. 88). 110 Ibid., para. 144.

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3. Severity and Duration

Different approaches are used by arbitral tribunals to decide whether an indirect expropriation has occurred. However, there is unanimity among the tribunals that the interference with property rights has to reach a certain intensity to amount to an expropriation. Once this requirement is fulfilled, tribunals are split on the issue whether the severity alone triggers the existence of an expropriation or whether additional requirements linked to the purpose of the measure have to be fulfilled. 80 Therefore, the severity of the economic impact is a key question when it comes to deciding whether an indirect expropriation has occurred or a measure tantamount to expropriation has been taken.112 The interference has to be substantial i.e. to deprive the investor of all or most of the benefits of the investment permanently or for a substantial period of time. 81 Section 712 of the 1986 Restatement (Third) of the Foreign Relations Law of the United States dealing with expropriation113 is accompanied by the following comment g.: 79

Subsection (1) applies not only to avowed expropriations in which the government formally takes title to property, but also to other actions of the government that have the effect of ‘taking’ the property, in whole or in large part (...).114

82

There is broad consensus in academic writings that the intensity and duration of the economic deprivation is a crucial factor in identifying an indirect expropriation or equivalent measure.115 Professor Dolzer writes: No one will seriously doubt that the severity of the impact upon the legal status, and the practical impact on the owner’s ability to use and enjoy his property, will be a central factor in determining whether a regulatory measure effects a taking.116

83

Arbitral tribunals have consistently looked at the degree and duration of deprivations to determine whether an expropriation has occurred. The Iran–US Claims Tribunal has also adopted the approach of looking at the severity of the deprivation in order to determine whether an indirect expropriation has occurred. In Starrett Housing v. Iran117 the tribunal found that the appointment of a

111 112 113 114

Ursula Kriebaum (n. 14) 279, 280. Rudolf Dolzer and Margrete Stevens (n. 31) 100; Ursula Kriebaum (n. 14) 307–334. Restatement (Third) of the Foreign Relations Law of the United States (n. 26) 196. Ibid., at 200 (emphasis added). See also Annex B para. 4(a)(i) of the 2012 U.S. Model Bilateral Investment Treaty, Treaty between the Government of the United States of America and the Government of [Country] Concerning the Encouragement and Reciprocal Promotion of Investment (n. 34) which explains that whether action constitutes an indirect expropriation is determined, among other factors, by ‘the economic impact of the government action’. 115 George H. Aldrich, ‘What Constitutes a Compensable Taking of Property? The Decisions of the Iran–United States Claims Tribunal’ (1994) 88 AJIL 585–610, 588, 593, 609; Rudolf Dolzer (n. 49) 41, 48–49; Gary H. Sampliner (n. 49) 1, 11–13; Thomas Wälde and Abba Kolo, ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law’ (2001) 50 ICLQ 811–848, 837, 838; Burns H. Weston (n. 45) 103, 119, 120. 116 Rudolf Dolzer (n. 11) 65, 79.

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‘temporary manager’ by the authorities of Iran amounted to an expropriation. The decisive criterion was whether the State did (…) interfere with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated.118

In the Tippetts case119 the tribunal did not regard the government appointment 84 of an Iranian manager as such an expropriation. Rather, the consequences of the actions of the government-appointed manager in interfering with the owners’ property rights constituted a taking of property: While assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government (…) such a conclusion is warranted whenever events demonstrate that the owner was deprived of fundamental rights of ownership and it appears that this deprivation is not merely ephemeral.120

Therefore, the decisive criterion for the existence of an expropriation is a 85 quantitative one. This criterion is of central importance in the practice of tribunals. Currently, there is ample authority for the proposition that an expropriation only exists, if a deprivation is sufficiently substantial.121 It is essential for an expropriation that the capability to make use of the investment in an economic sense is destroyed or greatly diminished. Conversely, the investor need not be

117 Starrett Housing Corporation, Starrett Systems Inc., Starrett Housing International Inc. v. Iran, Bank Markazi Iran, Bank Omran, Bank Mellat (n. 53) 122. 118 Ibid., at 154. See also George H. Aldrich (n. 115) 585, 588. Referred to with approval by Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina (n. 79) para. 7.5.34. 119 Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, the Government of Iran, Civil Aviation Organization, Plan and Budget Organization, Iranian Air Force, Ministry of Defence, Bank Melli,, Bank Sakhteman, Mercantile Bank of Iran and Holland, Iran–US Claims Tribunal, 22 June 1984, 6 Iran–US CTR 219. 120 Ibid., at 225. 121 See e.g. Metalclad Corporation v. Mexico, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000, para. 103; Pope & Talbot v. Canada (n. 79) para. 102; CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para. 262; Telenor Mobile Communications AS v. Hungary (n. 107) paras. 64–65; Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina (n. 79) paras. 7.5.11, 7.5.17, 7.5.24– 7.5.30; Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 284; Merrill & Ring Forestry L.P. v. Canada, UNCITRAL (NAFTA), Award, 31 March 2010, para. 145; Suez, Sociedad General de Aguas de Barcelona S.A. and Interagua Servicios Integrales de Agua S.A. v. Argentina, ICSID Case No. ARB/03/17, Decision on Liability, 30 July 2010, para. 123; Chemtura Corporation v. Canada, UNCITRAL (NAFTA), Award, 2 August 2010, paras. 244–249; AES Summit Generation Limited and AES-Tisza Erömü Kft. v. Hungary, ICSID Case No. ARB/07/22, Award, 23 September 2010, para. 14.3.1; Alpha Projektholding GmbH. v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 408; Total S.A. v. Argentina, ICSID Case No. ARB/04/01, Decision on Liability, 27 December 2010, para. 195; El Paso Energy International Company v. Argentina, ICSID Case No. ARB/03/15, Award, 31 October 2011, paras. 233, 244–256; Spyridon Roussalis v. Romania (n. 83) paras. 328, 354; Bosh International, Inc and B&P Ltd v. Ukraine, ICSID Case No. ARB/08/11, Award, 25 October 2012, para. 218; Burlington Resources Inc. v. Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, paras. 397, 456. Ursula Kriebaum (n. 14) 297–325.

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deprived of its physical property, as long as it is deprived of the economic benefits of the investment. A simple loss of value is not sufficient.122 86 Although tribunals always require a substantial impact of the interference on the investment, the terminology used is by no means uniform as the following examples show: – – – – – – – – – –

‘prevented RJA from exercising effective control over the use or disposition of a substantial portion of its property from operating the property’;123 ‘can interfere to such an extent that these rights are rendered so useless’;124 ‘deprived of all utility’;125 ‘to deprive (…) or has made those rights practically useless’;126 ‘sufficiently restrictive to support a conclusion that the property has been “taken” (…) expropriation requires a “substantial deprivation”’;127 ‘has the effect of depriving in whole or in significant part’;128 ‘lasting removal of the ability to make use of its economic rights’;129 ‘effectively neutralize the benefit of the property of the foreign owner’;130 ‘radically (…) deprives those assets and rights of any real substance’;131 ‘eroded investor’s rights to an extent that is violative’;132

122 See Ursula Kriebaum (n. 13) 717, 731; Ursula Kriebaum (n. 14) 322–324. 123 In the Matter of Revere Copper & Brass Inc. v. Overseas Private Investment Corporation, Award, 24 August 1978, 56 ILR 258, 290 (emphasis added). 124 Starrett Housing Corporation, Starrett Systems Inc., Starrett Housing International Inc. v. Iran, Bank Markazi Iran, Bank Omran, Bank Mellat (n. 53) 122, 154. 125 Antoine Goetz and Others v. Burundi, ICSID Case No. ARB/95/3, Award, 10 February 1999, (2004) 6 ICSID Rep. 5, para. 124 (emphasis added). 126 Compañía del Desarrollo de Santa Elena S.A. v. Costa Rica (n. 79) 153, paras. 77, 78. 127 Pope & Talbot Inc. v. Canada (n. 79) 69, para. 102; similar GAMI Investments, Inc. v. Mexico, UNCITRAL (NAFTA), Award, 15 November 2004, para. 126; CMS Gas Transmission Company v. Argentina (n. 121) also requires a ‘substantial deprivation’ (para. 262); Occidental Exploration and Production Company v. Ecuador, UNCITRAL, LCIA Case No. UN 3467, Final Award, 1 July 2004, 12 ICSID Rep. 59, para. 89 stresses that the requirements of this broad definition are not fulfilled if the tribunal would examine a narower one the finding of expropriation would be even more unlikely (emphasis added). 128 Metalclad Corporation v. Mexico (n. 121) para. 103; also mentioned by the tribunal in CME Czech Republic B.V. v. Czech Republic (n. 54) para. 606. The Occidental tribunal (Occidental Exploration and Production Company v. Ecuador (n. 127) para. 87) refers to this standard as broad definition of expropriation. The same is true for the tribunal in EnCana Corporation v. Ecuador, UNCITRAL, LCIA Case No. UN 3481, Award, 3 February 2006, 12 ICSID Rep. 427, para. 177 (emphasis added). 129 S.D. Myers, Inc. v. Canada (n. 101) para. 283 (emphasis added). 130 CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Award, 13 September 2001, 9 ICSID Rep. 121, para. 604; Ronald S. Lauder v. Czech Republic (n. 57) 66, para. 200, the tribunal in CME Czech Republic B.V. v. Czech Republic uses ‘enjoyment’ instead of ‘benefit’; Occidental Exploration and Production Company v. Ecuador (n. 127) 59, para. 84; CMS Gas Transmission Company v. Argentina (n. 121) para. 262; LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina (n. 47) para. 188 (emphasis added). 131 Técnicas Medioambientales Tecmed S.A. v. Mexico (n. 79), 10 ICSID Rep. 134, para. 102 (emphasis added). 132 Generation Ukraine Inc. v. Ukraine (n. 85), 10 ICSID Rep. 240, para. 20.26 (emphasis added).

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– – –

– –

–

–

‘persistent or irreparable obstacle to use, enjoyment or disposal of its investment’133 ‘priver totalement ou en grande partie’;134 ‘avoir des effets substantiels d’une intensité certaine qui réduisent et/ou font disparaître à un point tel qu’ils rendent la détention des ces droits inutile’;135 ‘effect of depriving the investor – totally or to a significant extent’.136 ‘(…) at all times had the control and use of its property (…). The loss of benefits or expectations is not a sufficient criterion for an expropriation, even if it is a necessary one’;137 ‘without a permanent, severe deprivation of LG&E’s rights with regard to its investment, or almost complete deprivation of the value of LG&E’s investment, the Tribunal concludes that these circumstances do not constitute expropriation.’138 ‘(…) were radically deprived of the economic use and enjoyment of their investment, the benefits of which (…) had been effectively neutralised and rendered useless’.139

Despite the variations in terminology all tribunals ask for a substantial, lasting 87 deprivation of the economic value, use or enjoyment of the investment. The tribunal in Chemtura140 observed that the decision in regards to what qualifies as a substantial deprivation is ‘a fact-sensitive exercise to be conducted in the light of the circumstances of each case’ and that it would make little sense to state a percentage or a threshold that would have to be met for a deprivation to be ‘substantial’ as such modus operandi may not always be appropriate.141

As for the duration, international law does not provide a fixed time frame. 88 The tribunal in Middle East Cement held that the deprivation of rights granted under a licence for four months amounted to an expropriation. The tribunal in Wena142 considered the exclusion from the management of a hotel for twelve 133 Ibid., para. 20.32 (emphasis added). 134 Consortium R.F.C.C. v. Morocco, ICSID Case No. ARB/00/6, Award, 22 December 2003, para. 64 (emphasis added). 135 Ibid., para. 69 (emphasis added). 136 Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Pakistan (n. 19) para. 255 (emphasis added). 137 Waste Management, Inc. v. Mexico (n. 88) para. 159 (emphasis added). 138 LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina (n. 47) para. 200. 139 Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina (n. 79) para. 7.5.34 (emphasis added). 140 Chemtura Corporation v. Canada (n. 121). 141 Ibid., para. 249. 142 Wena Hotels Limited. v. Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, 6 ICSID Rep. 89, para. 99 (footnotes omitted): ‘Putting aside various other improper actions, allowing an entity (over which Egypt could exert effective control) to seize and illegally possess the hotels for nearly a year is more that an ephemeral interference “in the use of that property or with the enjoyment of its benefits”.’

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months as sufficient whereas the tribunal in S.D. Myers143 considered an 18 months ban on export as not long enough. The Iran–US Claims Tribunal considered in Phelps Dodge Corp. v. Iran144 that a deprivation of the management of a company for five years with no perspective of change amounts to an expropriation. 89 Therefore, as stated by the tribunal in Azurix:145 Unfortunately, there is no mathematical formula to reach a mechanical result. How much time is needed must be judged by the specific circumstances of each case.146

Concerning an interference lasting for several years it can be assumed that the time requirement of a not merely ephemeral interference is fulfilled. 91 Some tribunals have relied on a positive and a negative requirement for the severity of the interference. The tribunal in BG Group Plc v. Argentina147 said in this regard: 90

268. The Tribunal notes that a State may exercise its sovereign power in issuing regulatory measures affecting private property for the benefit of the public welfare. Compensation for expropriation is required if the measure adopted by the State is ‘irreversible and permanent and if the assets or rights subject to such measure have been affected in such a way that ‘(…) any form of exploitation thereof (…) has disappeared (…).’ Conversely, a measure does not qualify as equivalent to expropriation if the ‘investment continues to operate, even if profits are diminished’.148

92

In a number of cases the tribunals determined that the effect of adverse government action was not sufficiently severe or sufficiently permanent to amount to an expropriation.149 This was especially so if the State did not interfere with 143 S.D. Myers, Inc. v. Canada (n. 101) 18, para. 284 (footnotes omitted): ‘In this case the closure of the border was temporary. SDMI’s venture into the Canadian market was postponed for approximately eighteen months. Mr. Dana Myers testified that this delay had the effect of eliminating SDMI’s competitive advantage. This may have significance in assessing the compensation to be awarded in relation to CANADA’s violations of Art. 1102 and 1105, but it does not support the proposition on the facts of this case that the measure should be characterized as an expropriation within the terms of Art. 1110.’ 144 Phelps Dodge International Corp. v. Iran, Award No. 217-99-2, 19 March 1986, 10 Iran–US CTR 121. 145 Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006. 146 Ibid., para. 313. 147 BG Group Plc v. Argentina (n. 58). 148 Ibid., para. 268 citing: Técnicas Medioambientales Tecmed S.A. v. Mexico (n. 79) para. 116; LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina (n. 47) para. 191 and Pope & Talbot v. Canada (n. 79) 69, paras. 101–102 (italics in original). 149 See e.g. Spyridon Roussalis v. Romania (n. 83) paras. 354–359; White Industries Australia Limited v. India, UNCITRAL (Australia–India BIT), Award, 30 November 2011, para. 12.3.6; El Paso Energy International Company v. Argentina (n. 121) paras. 245–256, 299; Sergej Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. Mongolia, UNCITRAL (Mongolia–Russia BIT), Award, 28 April 2011, paras. 331–336; Total S.A. v. Argentina (n. 121) paras. 195–199; AES Summit Generation Limited and AES-Tisza Erömü Kft. v. Hungary (n. 121) paras. 14.3.1–14.3.4; Chemtura Corporation v. Canada (n. 121) paras. 244–247, 259, 264, 265, 267; Suez, Sociedad General de Aguas de Barcelona S.A., and Interagua Servicios Integrales de Agua S.A. v. Argentina (n. 121) paras. 123–129, 134; Suez, Sociedad General de Aguas de Barcelona S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/03/19, Decision on Liability, 30 July 2010, paras. 134, 140, 145; Merrill & Ring Forestry L.P. v. Canada (n. 121) paras. 145, 152; Toto Costruzioni Gen-

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the management and control of the investment and the investment remained operational as the following examples show: in Archer Daniels Midland Company v. Mexico150 the claimant was affected by a tax on soft drinks and syrups. The tribunal accepted that taxation was in principle capable of amounting to expropriatory action. The tribunal found that the severity of the interference is the decisive criterion in deciding whether an indirect expropriation had occurred. It said: 240. The test on which other Tribunals and doctrine have agreed – and on which the Claimants’[sic] rely – is the ‘effects test.’ Judicial practice indicates that the severity of the economic impact is the decisive criterion in deciding whether an indirect expropriation or a measure tantamount to expropriation has taken place. An expropriation occurs if the interference is substantial and deprives the investor of all or most of the benefits of the investment. There is a broad consensus in academic writings that the intensity and duration of the economic deprivation is the crucial factor in identifying an indirect expropriation or equivalent measure.

The tribunal held that either loss of control over the investment or a substan- 93 tial loss of the economic value of the investment is required for an expropriation to occur: 242. Notwithstanding the fact that previous cases are not identical, and that certain considerations and decisions have not been uniform, a common principle may be extracted: only loss of control over the investment or substantial loss of its economic value may amount to an indirect expropriation. 244. As to the intensity of the measure, a first indication is whether the investor lost control of the investment by losing rights of ownership or management, even if the legal title was not disturbed. (…) 246. An alternative criterion regarding intensity is whether the host State measure affects most of the investment’s economic value or renders useless the most economically optimal use of it.

erali S.p.A. v. Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, 11 September 2009, paras. 183–186; Glamis Gold, Ltd v. USA, UNCITRAL (NAFTA), Award, 8 June 2009, para. 536; National Grid plc v. Argentina, UNCITRAL (Argentina–United Kingdom BIT), Award, 3 November 2008, para. 154; Metalpar S.A. and Buen Aire S.A. v. Argentina, ICSID Case No. ARB/03/5, Award, 6 June 2008, paras. 173, 174; Corn Products International Inc. v. Mexico (n. 79) paras. 82, 87, 91–94; BG Group Plc v. Argentina (n. 58) paras. 268–272; Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. Mexico, ICSID Case No. ARB(AF)/04/5 (NAFTA), Award, 21 November 2007, paras. 240, 244–252; Sempra Energy International v. Argentina (n. 121) paras. 285, 286; Tokios Tokelės v. Ukraine (n. 19) paras. 120–122; Enron Creditors Recovery Corporation and Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007, paras. 245, 246; Eastern Sugar B.V. v. Czech Republic, SCC Case No. 088/2004, Award, 27 March 2007, para. 210; PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Turkey (n. 19) paras. 278–280; LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina (n. 47) paras. 189–191, 198–200; Telenor Mobile Communications A.S. v. Hungary (n. 107) paras. 79–80; Azurix Corp. v. Argentina (n. 145) para. 322; Iurii Bogdanov, Agurdino-Invest Ltd. and Agurdino-Chimia JSC v. Moldova, SCC Arb. No. V (114/2009), Award, 22 September 2005, para. 4.2.5; CMS Gas Transmission Company v. Argentina (n. 121) paras. 262, 263; Occidental Exploration and Production Company v. Ecuador (n. 127) para. 89; Nycomb Synergetics Technology Holding AB v. Latvia, Arbitration Institute of the Stockholm Chamber of Commerce (ECT), Award, 16 December 2003, para. 4.3.1; Pope & Talbot v. Canada (n. 79) 69, paras. 96, 102; S.D. Myers, Inc. v. Canada (n. 101) para. 283. 150 Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. Mexico (n. 149).

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The tribunal in El Paso151 went even further and considered loss of control rather than a mere loss of value as the decisive element for the existence of an expropriation. It said: 245. (…) It is generally accepted that the decisive element in an indirect expropriation is the ‘loss of control’ of a foreign investment, in the absence of any physical taking. (…) 248. (…) the tribunal considered that the measures adopted by the State did not deprive the investor of control over its investment and therefore concluded that there was no expropriation. 249. In the Tribunal’s view, a mere loss in value of the investment, even if important, is not an indirect expropriation.

That loss of management and control over the property are important indicators for the existence of an expropriation is also accepted in academic writings. 96 In the words of the late Professor Brownlie: 95

The essence of the matter is the deprivation by state organs of a right of property either as such, or by permanent transfer of the power of management and control.152

97

In her Hague Lectures Judge Rosalyn Higgins said: There is, (...), ample international authority that measures other than nationalization can effectively deprive a party of its property rights: the test is whether there is loss of effective control over the use and disposition of property.153

In only little more than a dozen cases, including the following, tribunals have found an indirect expropriation: 99 Biloune v. Ghana154 concerned a hotel project through a local subsidiary. The project had proceeded substantially when the authorities issued a stop work order, demolished part of the project and arrested and expelled the investor. The arbitral tribunal said: 98

In the view of the Tribunal, such prevention of MDCL from pursuing its approved project would constitute constructive expropriation of MDCL’s contractual rights in the project and, accordingly, the expropriation of the value of Mr Biloune’s interest in MDCL (...).155

SPP v. Egypt156 concerned the cancellation of a hotel project by the Egyptian authorities. The government placed the joint venture, which had been created to develop the project, in judicial trusteeship. Regarding the severity of the interference, the tribunal mentioned that certain important rights of the investor had been irrevocably taken by the respondent.157 101 In Goetz v. Burundi158 the host State had revoked the investor’s free zone status without any formal taking of property. The tribunal held that the govern100

151 152 153 154 155 156 157 158

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El Paso Energy International Company v. Argentina (n. 121). Ian Brownlie (n. 45) 534. Rosalyn Higgins (n. 45) 259, 351. Biloune and Marine Drive Complex Ltd. v. Ghana Investments Centre and the Government of Ghana (n. 53) 183, 209–210. Ibid., at 209. Southern Pacific Properties (Middle East) Limited. v. Egypt, ICSID Case No. ARB/84/3, Award, 20 May 1992, 3 ICSID Rep. 189. Ibid., para. 164. Antoine Goetz and Others v. Burundi (n. 125).

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ment’s action fell under the concept of measures having a similar effect to expropriation. It said: Since (...) the revocation of the Minister for Industry and Commerce of the free zone certificate forced them to halt all activities (...), which deprived their investments of all utility and deprived the claimant investors of the benefit which they could have expected from their investments, the disputed decision can be regarded as a ‘measure having similar effect’ to a measure depriving of or restricting property within the meaning of Article 4 of the Investment Treaty.159

In Metalclad v. Mexico160 the refusal of a construction permit by the munici- 102 pality had completely destroyed the investor’s ability to pursue its previously approved project. The tribunal found that there had been an indirect expropriation. It said: (…) expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favor of the host State, but also 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 (…).161

In Wena Hotels v. Egypt,162 the tribunal in its award found that the seizure of 103 the investor’s hotel lasting for nearly a year was not ‘ephemeral’ but amounted to an expropriation.163 In its subsequent decision on interpretation164 the Wena tribunal said: It is true that the Original Tribunal did not explicitly state that such expropriation totally and permanently deprived Wena of its fundamental rights of ownership. However, in assessing the weight of the actions described above, there was no doubt in the Tribunal’s mind that the deprivation of Wena’s fundamental rights of ownership was so profound that the expropriation was indeed a total and permanent one.165

In CME v. Czech Republic166 the tribunal, citing Metalclad, referred to indi- 104 rect expropriation as (...) covert or incidental interference with 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 (...).167

Middle East Cement v. Egypt168 concerned the revocation of an import licence 105 through the prohibition of import of cement. The tribunal found that the investor had been deprived of the use and benefit of its investment even though it re159 160 161 162 163 164 165 166 167 168

Ibid., para. 124. Metalclad Corporation v. Mexico (n. 121) 212, 226. Ibid., para. 103 (emphasis added). Wena Hotels Limited v. Egypt (n. 142). Ibid., para. 99. Wena Hotels Limited v. Egypt, ICSID Case No. ARB/98/4, Decision on Interpretation, 31 October 2005. Ibid., para. 120. CME Czech Republic B.V. v. Czech Republic (n. 54). Ibid., para. 606. Referred to with approval by Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina (n. 79) para. 7.5.34. Middle East Cement Shipping and Handling Co. S.A. v. Egypt, ICSID Case No. ARB/99/6, Award, 12 April 2002, 7 ICSID Rep. 173, 178.

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tained the nominal ownership of its rights. Therefore, Article 4 of the Egypt– Greece BIT protecting the investor from expropriation or other measures of which the effects would be tantamount to expropriation had been violated. The tribunal said: When measures are taken by a State the effect of which is to deprive the investor of the use and benefit of his investment even though he may retain nominal ownership of the respective rights being the investment, the measures are often referred to as a ‘creeping’ or ‘indirect’ expropriation or, as in the BIT, as measures ‘the effect of which is tantamount to expropriation.’ As a matter of fact, the investor is deprived by such measures of parts of the value of his investment. This is the case here, and, therefore, it is the Tribunal’s view that such a taking amounted to an expropriation within the meaning of Art. 4 of the BIT and that, accordingly, Respondent is liable to pay compensation therefor.169

106

Tecmed v. Mexico,170 concerned the revocation of a licence for the operation of a landfill. The tribunal found that the failure to renew the operating permit had violated Article 5 of the Mexico–Spain BIT protecting investors from expropriation or equivalent measures. The tribunal said: 115. To establish whether the Resolution is a measure equivalent to an expropriation under the terms of section 5(1) of the Agreement, it must be first determined if the Claimant, due to the Resolution, was radically deprived of the economical use and enjoyment of its investments, as if the rights related thereto – such as the income or benefits related to the Landfill or to its exploitation – had ceased to exist. In other words, if due to the actions of the Respondent, the assets involved have lost their value or economic use for their holder and the extent of the loss. This determination is important because it is one of the main elements to distinguish, from the point of view of an international tribunal, between a regulatory measure, which is an ordinary expression of the exercise of the state’s police power that entails a decrease in assets or rights, and a de facto expropriation that deprives those assets and rights of any real substance.171

107

Eureko B.V. v. Poland,172 concerned a share purchase agreement between the investor and the Polish State under which the investor acquired a minority participation in a Polish company. A related agreement guaranteed the investor the right to acquire further shares that would have given it control over the company. Subsequently, Poland changed its privatisation strategy and withdrew its consent to the acquisition of further shares by the investor. The tribunal said: There is an amplitude of authority for the proposition that when a State deprives an investor of the benefit of its contractual rights, directly or indirectly, it may be tantamount to a deprivation in violation of the type of provision contained in Article 5 of the Treaty [dealing with measures depriving the investor of their investments]. The deprivation of contractual rights may be expropriatory in substance and in effect.173 (…) For the above stated reasons, the Tribunal finds that the RoP has breached Article 5 of the Treaty.174

169 Ibid., para. 107. 170 Técnicas Medioambientales Tecmed S.A. v. Mexico (n. 79). 171 Ibid., para. 115 citing Pope & Talbot v. Canada (n. 79) (footnote omitted). Referred to with approval by BG Group Plc v. Argentina (n. 58) para. 268; Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina (n. 79) paras. 7.5.29, 7.5.34. 172 Eureko B.V. v. Poland, Ad Hoc Arbitration, Partial Award, 19 August 2005. 173 Ibid., para. 241 (footnote omitted). 174 Ibid., para. 243.

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ADC v. Hungary175 concerned an investment at Budapest airport through a 108 build-operate-transfer (BOT) arrangement that Hungary had cancelled by decree. The decree had the effect of causing the rights of the Project Company to disappear and/or become worthless. The tribunal found that an illegal expropriation had occurred.176 Siemens v. Argentina177 concerned a project for the provision of an integral 109 service for the implementation of an immigration control, personal identification and electoral information system. After the project’s start, Argentina had taken a number of adverse measures including postponements and suspensions of the profitable activities, fruitless renegotiations and ultimately the cancellation of the project. Therefore, the claimant successfully argued that a creeping expropriation had occurred.178 Vivendi II179 concerned a water concession in an Argentinean province. The 110 tribunal required a substantial deprivation or an effective neutralisation of the enjoyment of property for the occurrence of an expropriation. It said: (…) Claimants were radically deprived of the economic use and enjoyment of their investment, the benefits of which (ie the right to be paid for services provided) had been effectively neutralised and rendered useless. Under these circumstances, rescission of the Concession Agreement represented the only rational alternative for Claimants. By leaving Claimants with no other rational choice, we conclude that the Province thus expropriated Claimants’ right of use and enjoyment of their investment under the Concession Agreement.180

Biwater Gauff v. Tanzania181 concerned a concession for the water supply of 111 Dar es Salaam in Tanzania. The tribunal considered a number of measures such as the withdrawal of value added tax (VAT) exemptions on purchases, the occupation of City Water’s facilities, usurpation of management control and deportation of City Water’s senior managers by the State during the termination period and found that these measures amounted to an expropriation.182 Rumeli v. Kazakhstan,183 concerned the termination of an investment contract 112 concerning a mobile telephone network by State officials and the ensuing court proceedings. The tribunal found that these actions culminating in a decision of the presidium of the supreme court affirming a compulsory redemption of claimant’s shares amounted to a creeping expropriation.184

175 ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006. 176 Ibid., paras. 423–444. 177 Siemens A.G. v. Argentina (n. 90). 178 Ibid., paras. 264–266, 271, 272. 179 Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina (n. 79). 180 Ibid., para. 7.5.34. 181 Biwater Gauff (Tanzania) Ltd. v. Tanzania (n. 79). 182 Ibid., para. 814. The tribunal awarded no damages since the investment no longer had any value at the time the breaches occurred. 183 Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Kazakhstan (n. 87). 184 Ibid., para. 708.

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Saipem v. Bangladesh185 concerned a dispute over an International Chamber of Commerce (ICC) award originating from a dispute over the construction of a pipeline by the investor in Bangladesh. What was at stake was the expropriation of ‘Saipem’s residual contractual rights under the investment as crystallised in the ICC Award.’186 The tribunal held that the abusive revocation of the ICC tribunal’s authority by Bangladeshi courts had indirectly expropriated Saipem’s rights under the ICC award.187 It said: In respect of the taking, the actions of the Bangladeshi courts do not constitute an instance of direct expropriation, but rather of ‘measures having similar effects’ within the meaning of Article 5(2) of the BIT. Such actions resulted in substantially depriving Saipem of the benefit of the ICC Award. This is plain in light of the decision of the Bangladeshi Supreme Court that the ICC Award is ‘a nullity’. Such a ruling is tantamount to a taking of the residual contractual rights arising from the investments as crystallised in the ICC Award. As such, it amounts to an expropriation within the meaning of Article 5 of the BIT.188

Gemplus v. Mexico/Talsud v. Mexico189 concerned a concession for the Mexican vehicle registry awarded to the investors’ consortium. A State organ ordered the requisition of the concessionaire’s operation on grounds of national security. The tribunal considered that this amounted to an indirect expropriation of the investment. The tribunal decided that the subsequent revocation of the concession was a direct expropriation of the investment.190 115 Alpha v. Ukraine191 concerned the expropriation of rights held by an Austrian property developer in a Ukrainian hotel refurbishment project. The tribunal pointed out that a deprivation of a significant part of the investment’s value is a requirement for an indirect expropriation.192 It found that: 114

410. Given that Claimant’s investment has been substantially deprived of value, that such deprivation is effectively permanent, and that the deprivation was the result of government action, the Tribunal finds that Claimant’s rights under the JAAs have been expropriated in violation of Article 4(1) of the UABIT.

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Therefore, there is unanimity in academic writings and case law that concedes that for an expropriation to occur, the government’s interference with property rights of the investor must be total or substantial. It has to deprive the investor of all or most of the benefits of the investment permanently or for a substantial period of time. There is an increasing trend also to require loss of control over the

185 186 187 188 189

Saipem S.p.A. v. Bangladesh, ICSID Case No. ARB/05/07, Award, 30 June 2009. Ibid., para. 128. Ibid., paras. 124–161. Ibid., para. 129. Gemplus, S.A., SLP, S.A. and Gemplus Industrial, S.A. de C.V. v. Mexico, ICSID Case No. ARB(AF)/04/3 (NAFTA), Award, 16 June 2010; Talsud S.A. v. Mexico, ICSID Case No. ARB(AF)/04/4 (NAFTA), Award, 16 June 2010. 190 Ibid., paras. 8–21; 8–28. 191 Alpha Projektholding GmbH. v. Ukraine (n. 121). 192 Ibid., para. 408.

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investment.193 Tribunals will generally not find that an expropriation has occurred if the investment has continued to perform its business activity. Tribunals are only split on the question of whether the severity alone is de- 117 cisive or whether the purpose and the character of the interference should also be taken into consideration when deciding upon the existence of an expropriation. 4. Partial Expropriation

It is widely accepted that an interference with property, in order to amount to an expropriation, must lead to a total or at least substantial deprivation. Measures that affect an investment without amounting to a ‘taking’ in this sense but merely reduce its value or profitability are usually not seen as expropriatory. At first sight, this doctrine would rule out the notion of a partial expropriation: if the investment has been affected only in part, there is no expropriation. But this line of reasoning can lead to results that are obviously absurd or unreasonable. If the investment consists of five fields and only one field is taken, does this mean that there is no expropriation because the major part of the investment has remained untouched? Similarly, if an investor were to acquire a concession it would own a protected investment under the property protection clauses of most investment treaties. A withdrawal of the concession may amount to an expropriation. If the same investor were to expand its investment by acquiring additional concessions in the same host State, the taking of one of the concessions would only affect part of the investment and might hence not be seen as an expropriation. Does this mean that the protection of the original concession will depend on whether the host State takes all concessions? Put differently, does the protection of one particular right depend on the destruction of (all) other related rights? In other words, does the acquisition of additional concessions endanger the protection of the original concession which can no longer be expropriated in isolation? The case law on partial expropriation is clearly divided.194 The concept of partial expropriation has been accepted explicitly by some arbitral tribunals.195 Others applied it implicitly but did not use the term.196 Still others denied the

193 See e.g. Spyridon Roussalis v. Romania (n. 83) para. 354; El Paso Energy International Company v. Argentina (n. 121) paras. 245–256; Sergej Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. Mongolia (n. 149) para. 331; Total S.A. v. Argentina (n. 121) para. 194; AES Summit Generation Limited and AES-Tisza Erömü Kft. v. Hungary (n. 121) para. 14.3.2; Suez, Sociedad General de Aguas de Barcelona S.A. and Interagua Servicios Integrales de Agua S.A. v. Argentina (n. 121) para. 126; Merrill & Ring Forestry L.P. v. Canada (n. 121) para. 146; Azurix Corp. v. Argentina (n. 145) para. 322; in the matter of Revere Copper & Brass Inc. v. Overseas Private Investment Corporation (n. 123) 258, 268, 290–292. 194 See Ursula Kriebaum, ‘Partial Expropriation’ (2007) 8 JWIT 69–84. 195 S.D. Myers Inc. v. Canada (n. 101) 18, para. 283; Waste Management, Inc. v. Mexico (n. 88) paras. 141, 155, 163 et seq.; GAMI Investments, Inc. v. Mexico (n. 127) paras. 126, 127, 131.

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possibility of a partial expropriation either implicitly197 or explicitly.198 In Merrill & Ring the tribunal adopted a middle position.199 122 The concept of partial expropriation has been used with regard to physical property as well as to rights arising from contracts and licences. Tribunals that have found in favour of a partial expropriation have accepted the specific rights that were affected by the State’s interference as independent investments or assets. 123 Other tribunals did not follow this approach but denied the occurrence of an expropriation because of a still existing control of the investor over the overall investment operation.200 These cases would indicate that the fact that the particular right that had been taken is covered by the definition of ‘investment’, in an investment protection treaty, would not automatically lead to the conclusion that there has been an expropriation. 196 Middle East Cement Shipping and Handling Co. S.A. v. Egypt (n. 168) 173, 178, paras. 101, 105, 107, 138, 144, 152–156, 163–165; Eureko B V. v. Poland (n. 172) paras. 239–241; EnCana Corporation v. Ecuador (n. 128) paras. 182, 183. 197 CMS Gas Transmission Company v. Argentina (n. 121) paras. 262–264; Nycomb Synergetics Technology Holding AB v. Latvia (n. 149) para. 4.3.1; Occidental Exploration and Production Company v. Ecuador (n. 127) 59, para. 89; Marvin Roy Feldman Karpa v. Mexico (n. 101) 341, paras. 111, 142, 152. For further analysis of these cases with regard to partial expropriation see Ursula Kriebaum (n. 194) 69, 73–77. 198 Telenor Mobile Communication AS v. Hungary (n. 107) paras. 66, 77; Grand River Enterprises Six Nations, Ltd. et al. v. USA, UNCITRAL (NAFTA), Award, 12 January 2011, paras. 147, 155. 199 The tribunal states that on the one hand the investment as a whole has to be considered to establish an expropriation. This would apply particularly where the targeted property does not have a stand-alone character. But, apparently a partial expropriation is possible if the affected property is of fundamental importance for the overall investment: ‘144. In this regard, as was also concluded in Pope & Talbot, the business of the investor has to be considered as a whole and not necessarily with respect to an individual or separate aspect, particularly if this aspect does not have a standalone character. It could well happen that a certain aspect is so fundamental to the business concerned that interference with it might result in a kind of compensable expropriation. And while the right to export is one such fundamental aspect, the protection against expropriation does not, and cannot, guarantee exports will be made at a certain price. Such a conclusion would transform NAFTA into an insurance policy, guaranteeing that every investor exporter will get for its products the best price available in the international market, which is a somewhat farfetched proposition’ (Merrill & Ring Forestry L.P. v. Canada (n. 121)). 200 Grand River Enterprises Six Nations, Ltd. et al. v. USA (n. 198) paras. 147, 155: ‘147. The starting point must be the language of Article 1110(1), providing that [no] Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory, unless certain conditions are met’ (emphasis added). The text speaks of ‘an investment,’ not ‘an investment or some portion thereof.’ The most natural reading of the language is that any act of expropriation will affect the totality of an investment. This is in harmony with the conception of expropriation applied in numerous cases – that expropriation involves the deprivation or impairment of all, or a very significant proportion of, an investor’s interests. ‘155. The Tribunal has been offered no reason to interpret the language of NAFTA’s Article 1110(1) to mean other than it says. An act of expropriation must involve “the investment of an investor,” not part of an investment. This is particularly so in these circumstances, involving an investment that remains under the investor’s ownership and control and apparently prospered and grew throughout the period for which the Tribunal received evidence.’

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No one will question that an expropriation has occurred if someone is de- 124 prived of land from five of its ten hectares. There seems to be no good reason for a different approach in a situation where an investment can be disassembled into various specified rights. An expropriation of part of an investment should be recognised provided the right affected qualifies as an investment under the definition of the applicable investment protection treaty and that right, standing alone, is capable of an independent economic exploitation.201 Any other solution would lead to the illogical result that an investor who, for 125 example, has three licences is worse off than an investor who only has one of these licences and it is taken. 5. Expropriatory Intent

It is inherent in the concept of an indirect expropriation that any intention to 126 expropriate is not made explicit. To insist on a manifestation of the intention to expropriate on the part of the host State would impose a virtually impossible burden of proof on the investor who would have to demonstrate the motivations behind government action. Even a government’s protestation that it never meant to expropriate cannot be accepted as decisive. As Professor Dolzer wrote: (...) the mere post-event statement of a government that a taking was not intended cannot, in itself, carry in the weight in the relevant analysis.202

An intention to expropriate, whether that intention is made explicit or is mere- 127 ly implicit, is not a requirement for the existence of an expropriation under international law. Professor Reisman and R. D. Sloane call this form of taking a ‘consequential 128 expropriation’. They write: In consequential expropriations, states do not form an express intent to expropriate; indeed, they may not have such an intent at all. Even though a state’s responsibility to pay compensation for expropriation does not, in any event, ‘depend on proof that the expropriation was intentional’, the manifestation of that intent at some level of the state’s government generally furnishes a tribunal with a useful demarcation.203

International judicial practice is almost unanimous in holding that an inten- 129 tion of the host State to expropriate is not essential.204 Professor Christie in his seminal study on expropriation wrote: 201 202 203 204

See in more detail Ursula Kriebaum (n. 194) 69–84. Rudolf Dolzer (n. 11) 65, 90. W. Michael Reisman and Robert D. Sloane (n. 49) 115, 130–131 (footnote omitted). A rare exception that seems to point to the relevance of intent is Eudoro Olguín v. Paraguay, ICSID Case No. ARB/98/5, Award, 26 July 2001, 6 ICSID Rep. 164. In that case the claimant had purchased ‘investment bonds’ upon which the State had defaulted. The tribunal found that there had not been an expropriation but merely a business loss due to a financial crisis. It added in an obiter dictum: ‘Expropriation therefore requires a teleologically driven action for it to occur; omissions, however egregious they may be, are not sufficient for it to take place’ (at para. 84). The context suggests that the tribunal’s point was that mere nonpayment of a debt did not constitute an expropriation. The words ‘teleologically driven action’ may suggest the requirement of an intention to expropriate. But it is also possible that

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Chapter 8: Standards of Protection There are several well-known international cases in which it has been recognized that property rights may be so interfered with that it may be said that to all intents and purposes those property rights have been expropriated even though the State in question has not purported to expropriate.205

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The same author has summarised the issue of intent to expropriate in the Certain German Interests in Polish Upper Silesia case206 and in the Norwegian Shipowners’ Claims case207 in the following terms: The Norwegian Claims and the German Interests in Polish Upper Silesia cases show that a State may expropriate property, where it interferes with it, even though the State expressly disclaims any such intention. More important, the two cases taken together illustrate that even though a State may not purport to interfere with rights to property, it may, by its actions, render those rights so useless that it will be deemed to have expropriated them.208

Besides these common parameters, different lines of authority exist with regard to the method by which the line is drawn by arbitral tribunals between noncompensatory regulation and regulatory expropriation. Some tribunals only rely on the effects of a measure to decide whether an expropriation has occurred. Other tribunals, although not requiring an intention to expropriate, consider the context and purpose of the State measure in their decision on the existence of an expropriation. 132 Under the ‘sole effects doctrine’209 an expropriation may take place without or regardless of any intention to expropriate on the part of the host State.210 According to this doctrine, the only determining factor for whether an indirect expropriation has occurred is the effect of the governmental measure on the investment. If the interference exceeds a certain intensity, there will be an expropriation regardless of the measure’s purpose. Sometimes the tribunals even explicitly referred to the noble motivations but stated that these are irrelevant to the question whether a compensable interference with property rights had occurred.211 131

205 206 207 208 209 210

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what the tribunal meant was simply that there had to be some positive action rather than a mere omission. George C. Christie (n. 50) 305, 310. Certain German Interests in Polish Upper Silesia (Germany v. Poland) (n. 53). Norwegian shipowners’ claims (Norway v. USA), Award, 13 October 1922, 1 RIAA 307. George C. Christie (n. 50) 305, 311; see also Rosalyn Higgins (n. 45) 259, 322–323. Rudolf Dolzer (n. 11) 65, 79, 80. Examples of cases where tribunals applied the sole effects doctrine are Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran (n. 119) 219; Phelps Dodge Corp., et al v. Iran (n. 144) 121; Biloune and Marine Drive Complex Ltd. v. Ghana Investments Centre and the Government of Ghana (n. 53) (Investment Agreement), 183; Southern Pacific Properties (Middle East) Limited (SPP) v. Egypt (n. 156) (National Law), 189; Metalclad Corp. v. Mexico (n. 121) 212; Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina (Vivendi II) (n. 79) (France–Argentina BIT), paras. 7.5.20, 7.5.21; Merrill & Ring Forestry L.P. v. Canada (n. 121) para. 143. See e.g. Phelps Dodge Corp., et al. v. Iran (n. 144) para. 22; Southern Pacific Properties (Middle East) Limited (SPP) v. Egypt (n. 156) (National Law), paras. 158, 163–172; Compañía del Desarrollo de Santa Elena S.A. v. Costa Rica (n. 79) (ad hoc Agreement), paras. 71, 72.

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The application of the ‘sole effects’ doctrine together with the already men- 133 tioned ‘all or nothing’ system leads to the following result: whenever the severity of an interference exceeds a certain level, the investor receives full compensation or in the case of an unlawful expropriation full damages.212 Important authority for the ‘sole effects doctrine’ or ‘consequential expropria- 134 tions’ comes from the practice of the Iran–US Claims Tribunal.213 In Starrett Housing v. Iran214 the tribunal said: (…) it is recognized in international law that measures taken by a State can interfere with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated, even though the State does not purport to have expropriated them and the legal title to the property formally remains with the original owner.215

In the Tippetts case216 the tribunal said in an often quoted passage:

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The intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact.217

In Phillips Petroleum Co. v. Iran218 the tribunal, after summarising the mea- 136 sures taken by the authorities of Iran against the claimant, said: 97. The effects of these events on the Claimant’s property are not in dispute.219

Then, after quoting the above passage in Tippetts, it said:

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Therefore, the Tribunal need not determine the intent of the Government of Iran;220 (...) a government’s liability to compensate for expropriation of alien property does not depend on proof that the expropriation was intentional, (...).221

Investment tribunals have also held that any intention to expropriate on the 138 part of the State was not decisive. In Biloune v. Ghana222 the authorities had is212 See on this issue Irmgard Marboe, ‘Compensation and Damages in International Law, The Limits of “Fair Market Value”’ (2006) 7 JWIT 723–759. 213 A counterexample is sometimes perceived in Sea-Land Service Inc. v. Iran, Iran–US Claims Tribunal, 20 June 1984, 6 Iran–US CTR 149. In that case the Tribunal said: ‘A finding of expropriation would require, at the very least, that the Tribunal be satisfied that there was deliberate government interference with the conduct of Sea-Land’s operation, the effect of which was to deprive Sea-Land of the use and benefit of its investment.’ at 166; see especially George H. Aldrich (n. 115) 585, 603. A closer reading of the passage would suggest that the tribunal did not require intent to expropriate. It is the government interference as such that would have to be deliberate. For the deprivation of the use and benefit of the investment it is the effect that is decisive. 214 Starrett Housing Corp. v. Iran (n. 53) 122. 215 Ibid., at 154 (emphasis added). 216 Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran (n. 119) 219. 217 Ibid., at 225, 226. The passage was quoted in Phelps Dodge Corp. v. Iran (n. 144) 121, 130; Payne v. Iran, Iran–US Claims Tribunal, 8 August 1986, 12 Iran–US CTR 3, 11 and in International Systems & Controls Corp. v. Iran, Iran–US Claims Tribunal, 26 September 1986, 12 Iran–US CTR 239, 263 as well as in Azurix Corp. v. Argentina (n. 145) para. 309. 218 Phillips Petroleum Co. v. Iran (n. 76) 79. 219 Ibid., para. 97. 220 Loc. cit. 221 Ibid., para. 98. 222 Biloune and Marine Drive Complex Ltd. v. Ghana (n. 53) 183.

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sued a stop work order, demolished part of the project and arrested and expelled the investor. The tribunal said: The motivations for the actions and omissions of Ghanaian governmental authorities are not clear. But the Tribunal need not establish those motivations to come to a conclusion in this case.223

The tribunal held that the effect of these actions in causing an irreparable cessation of work on the project was enough for a holding that there had been a constructive expropriation.224 140 In Tecmed v. Mexico,225 the tribunal found that there had been an indirect expropriation. After explaining the concept of indirect or de facto expropriation, the tribunal said: 139

The government’s intention is less important than the effects of the measures on the owner of the assets or on the benefits arising from such assets affected by the measures; and the form of the deprivation measure is less important than its actual effects.226

141

The tribunal in Fireman’s Fund v. Mexico227 stated that the effect and not the intention is relevant for the existence of an expropriation: (f) The effects of the host State’s measures are dispositive, not the underlying intent, for determining whether there is expropriation.228

142

In Siemens v. Argentina229 the tribunal found support in the applicable BIT for its finding that what mattered for the existence of an expropriation was the effect of the measures and not the government’s intention. The Argentina–Germany BIT, like many other BITs, refers to expropriation also in terms of a ‘measure the effects of which would be tantamount to expropriation’. The tribunal said: The Tribunal recalls that Article 4(2) refers to measures that ‘a sus efectos’ (in its Spanish original) would be equivalent to expropriation or nationalization. The Treaty refers to measures that have the effect of an expropriation; it does not refer to the intent of the State to expropriate.230

143

The Vivendi II231 tribunal also stated that what was relevant for the existence of an expropriation was the effect of the measures and not the State’s intent or motivations. The tribunal said: There is extensive authority for the proposition that the state’s intent, or its subjective motives are at most a secondary consideration. While intent will weigh in favour of showing a measure to be expropriatory, it is not a requirement, because the effect of the measure on the investor, not the state’s intent, is the critical factor.232

223 224 225 226 227 228 229 230 231

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Ibid., at 209. Loc. cit. Técnicas Medioambientales Tecmed S.A. v. Mexico (n. 79). Ibid., at 116 citing the decisions of the Iran–US Claims Tribunal in Tippetts (n. 119) and Phelps Dodge (n. 144) (footnote omitted). Fireman’s Fund Insurance Company v. Mexico (n. 79). Ibid., para. 176(f). Referred to in Corn Products International, Inc. v. Mexico (n. 79) para. 87. Siemens v. Argentina (n. 90). Ibid., para. 270. Referred to with approval by the tribunal in Toto Costruzioni Generali SpA v. Lebanon (n. 149) para. 182. Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina (n. 79).

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The tribunal in Biwater Gauff v. Tanzania233 referred to the ample practice of 144 arbitral tribunals to rely on the effect rather than on the intention of government conduct when deciding on the occurrence of an expropriation. It said: 463. The Arbitral Tribunal recognises that many tribunals in other cases have tested governmental conduct in the context of indirect expropriation claims by reference to the effect of relevant acts, rather than the intention behind them.234

The tribunal in National Grid v. Argentina235 when interpreting the provision 145 on expropriation in the Argentina–US BIT also stated that intent is no requirement. The tribunal said: 147. It is clear from a reading of Article 5(1) that whether the party concerned had the intent to expropriate or to nationalize in taking measures equivalent to either is not a requirement. Article 5(1) is concerned only with measures having an effect equivalent to nationalization or expropriation.

The dispute in Roussalis v. Romania arose out of the investor’s purchase of 146 shares in a frozen food warehousing business from the Romanian State. It principally concerned Romania’s attempts to enforce certain post-purchase obligations (including in particular a share pledge) in the Romanian courts. The tribunal relied on the Iran–US Claims Tribunal’s case law and considered the effect of a measure and not the underlying intention or purpose as decisive for the existence of an expropriation. 330. The intention or purpose of the State is relevant but is not decisive of the question whether there has been an expropriation. In Phillips Petroleum Co Iran v The Islamic Republic of Iran (CLA 61, 97), the arbitral tribunal decided that ‘[t]he intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact (...) Therefore, the Tribunal need not determine the intent of the Government of Iran (...)236

It denied the existence of an expropriation because of a lack of severity of the 147 interference. The tribunal also mentioned that the purpose of the measure has some relevance for the expropriation which it did not further specify. Therefore, the case cannot be considered a clear-cut example of an award based on the sole effects doctrine. This shift in focus away from only considering the effect of the measure is a 148 recent trend in the case law of arbitral tribunals. Professor Dolzer’s statement of 2002237 that said tribunals had a tendency to rely more heavily on the effects on the investor than on the context and purpose of the measure was true at that point in time. More recently, a number of tribunals focused on the context and on the purpose of the measure once the effect of the measure transgressed the required level of severity.

232 233 234 235 236 237

Ibid., para. 7.5.20 (emphasis in original; footnotes omitted). Biwater Gauff (Tanzania) Ltd. v. Tanzania (n. 79). Ibid., para. 463 (emphasis in original). National Grid PLC v. Argentina (n. 149). Spyridon Roussalis v. Romania (n. 83) para. 330. Rudolf Dolzer (n. 11) 65, 91.

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6. Police Powers and Legitimate Regulations

Regulatory measures taken by State authorities in the exercise of their public order functions, frequently have negative effects on private property rights including those of foreign investors. It is impossible to compensate a foreign investor for every measure taken by the host State that has some adverse effect, however minimal, on its business operation. Such a requirement would severely impair the State in its sovereign functions.238 On the other hand, the fact that a regulatory measure serves some legitimate public purpose cannot automatically lead to the conclusion that no expropriation has occurred.239 150 Under most treaty provisions dealing with expropriation the existence of a public purpose is a requirement for the legality of an expropriation. It follows that a legitimate public purpose cannot be the basis of an argument that no expropriation has occurred. Rather, the existence of a public purpose is a requirement for the expropriation’s legality in addition to compensation. 151 The difficulty lies in the identification of the line between normal regulation, the economic consequences of which have to be borne by the investor, and regulatory expropriation which may be perfectly legal but carries an obligation to compensate. The tribunal in Feldman v. Mexico240 described this problem in the following terms: 149

The Tribunal notes that the ways in which governmental authorities may force a company out of business, or significantly reduce the economic benefits of its business, are many. In the past, confiscatory taxation, denial of access to infrastructure or necessary raw materials, imposition of unreasonable regulatory regimes, among others, have been considered to be expropriatory actions. At the same time, governments must be free to act in the broader public interest through protection of the environment, new or modified tax regimes, the granting or withdrawal of government subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and the like. Reasonable governmental regulation of this type cannot be achieved if any business that is adversely affected may seek compensation, and it is safe to say that customary international law recognizes this (...).241

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In many cases legitimate regulation will not lead to a substantial deprivation of all or most of the benefits of the investment permanently or for a substantial period of time. In such cases tribunals deny the existence of an expropriation for lack of sufficient severity.242 238 See Telenor v. Hungary (n. 107) para. 64: ‘It is well established that the mere exercise by government of regulatory powers that create impediments to business or entail the payment of taxes and other levies does not of itself constitute expropriation.’ 239 See e.g. the statement in Kardassopoulos and Fuchs v. Georgia, where the tribunal found that the expropriation ‘was not an exercise of the State’s bona fide police powers’ (para. 382) and nevertheless found that it was in the public interest (paras. 391, 392) (Ioannis Kardassopoulos and Ron Fuchs v. Georgia (n. 47). 240 Marvin Feldman v. Mexico (n. 101). 241 Ibid., para. 103. 242 See e.g. Suez, Sociedad General de Aguas de Barcelona S. A., and InterAgua Servicios Integrales del Agua S.A. v. Argentina (n. 121) para. 129. The dispute in Suez v. Argentina arose out of a concession for water distribution and wastewater treatment granted in a privatisation process. During the Argentinian economic crisis it changed the legal framework introduced to attract foreign private capital and know-how. These changes negatively impacted the prof-

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Legitimate regulation or the right to regulate have been the object of consider- 153 able debate.243 Tribunals have grappled with the distinction between regulatory expropriation and legitimate regulation in a number of cases.244 Some tribunals have tended to disregard the regulatory purpose of the measures taken. For instance, in the Santa Elena case245 concerning an expropriation undertaken to enlarge a national park for the protection of rare species, the tribunal found that the fact that measures were taken for the purpose of environmental protection did not affect their nature as an expropriation. The tribunal said: While an expropriation or taking for environmental reasons may be classified as a taking for a public purpose, and thus be legitimate, the fact that the property was taken for this reason does not affect either the nature or the measure of the compensation to be paid for the taking. That is, the purpose of protecting the environment for which the Property was taken does not alter the legal character of the taking for which adequate compensation must be paid. The international source of the obligation to protect the environment makes no difference.246 Expropriatory environmental measures – no matter how laudable and beneficial to society as a whole – are in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.247

A legitimate or even laudable cause as reason for the expropriation does not 154 affect the compensation requirement. At the other end of the spectrum is the award in Methanex.248 The claimant 155 had argued that measures taken by the State of California in banning a certain

243 244 245 246 247 248

itability of the investment. After unsuccessful renegotiation attempts, Argentina terminated the concession. The tribunal in Suez stated that the effect of the measure was more important than the intent of the government for the existence of an expropriation: ‘122. That inquiry is directed particularly at the “effects” of the measure on an investment, rather than at the intent of the government enacting the measure. Each of the BIT articles quoted above specifically refers to the “effects” of an expropriation measure and thus affirms the importance of evaluating the effects of a measure on the investment in determining whether an expropriation has taken place.’ However, it explicitly acknowledged in para. 128 the existence of a legitimate right to regulate and to exercise police powers in the interest of public welfare and mentioned that such measures are not to be confused with expropriation. It denied the existence of an expropriation for lack of severity of the interference. On the requirement of severity of the interference see above C.3. ‘Severity and Duration’, mn. 79 et seq. See e.g. Catherine Yannaca-Small, ‘“Indirect Expropriation” and the “Right to Regulate” in International Investment Law’ in International Investment Law: A Changing Landscape (OECD, 2005) 43–72. See e.g. Southern Pacific Properties (Middle East) Ltd. v. Egypt (n. 156) paras. 158, 159. Compañía del Desarrollo de Santa Elena, S. A. v. Costa Rica (n. 79). Ibid., para. 71 (footnote omitted). Ibid., para. 72. The tribunal in Azurix quotes this passage at para. 309 (Azurix Corp. v. Argentina (n. 145). Methanex v. USA, UNCITRAL (NAFTA), Award, 3 August 2005, (2005) 44 ILM 1343. A similar approach has been adopted by the tribunal in Fireman’s Fund Insurance Company v. Mexico (n. 79) para. 176 (j, k): ‘j) To distinguish between a compensable expropriation and a noncompensable regulation by a host State, the following factors (usually in combination) may be taken into account: whether the measure is within the recognized police powers of the host State; the (public) purpose and effect of the measure; whether the measure is discriminatory; the proportionali-

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fuel additive amounted to an expropriation under Article 1110 of NAFTA. The tribunal rejected this claim and said: (...) as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.249

This statement has attracted considerable criticism because it seems to take the compliance with three of the conditions for a legal expropriation (non-discrimination, public purpose and due process) as evidence for the absence of an expropriation and hence as obviating the fourth requirement, compensation.250 157 As the second part of the quotation shows, even the Methanex tribunal’s restrictive attitude towards regulatory expropriation does not apply where the investor has obtained specific commitments. In fact, the tribunal discussed the issue of commitments in some detail. It found that 156

No such commitments were given to Methanex. (...) It did not enter the United States market because of special representations made to it. Hence this case is not like Revere, where specific commitments respecting restraints on certain future regulatory actions were made to induce investors to enter a market and then those commitments were not honoured.251

158

The Methanex tribunal252 emphasised the relevance of special undertakings by referring to the decisions in Revere Copper253 and in Waste Management. In Revere Copper the tribunal had said: We regard these principles as particularly applicable where the question is, as here, whether actions taken by a government contrary to and damaging to the economic interests of aliens are in conflict with undertakings and assurances given in good faith to such aliens as an inducement to their making the investments affected by the action.254

159

The relevance of special undertakings and assurances towards the investor for the legality of expropriatory measures has been emphasised also by other tribunals.255

249 250

251 252 253 254 255

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ty between the means employed and the aim sought to be realized; and the bona fide nature of the measure. k) The investor’s reasonable “investment–backed expectations” may be a relevant factor whether (indirect) expropriation has occurred’ (footnotes omitted). Methanex v. USA (n. 248) Part IV, Ch. C, para. 7. See e.g. Todd Weiler, ‘Methanex Corp. v. U.S.A. Turning the Page on NAFTA Chapter Eleven?’ (2005) 6 JWIT 903–920, 918, 919; Ursula Kriebaum, ‘Regulatory Takings: Balancing the Interests of the Investor and the State’ (n. 13) 717-744, 726; Joshua Elcombe, ‘Regulatory powers vs. investment protection under NAFTA’s Chapter 1110: Metalclad, Methanex, and Glamis Gold’ (2010) 68 U. Toronto Fac. L. Rev. 71. Methanex v. USA (n. 248) Part IV, Ch. C, paras. 9, 10. Ibid., para. 8. In the Matter of Revere Copper and Brass Inc. v. Overseas Private Investment Corporation (n. 123). Ibid., at 271. Metalclad Corp. v. Mexico (n. 121) para. 107; Técnicas Medioambientales Tecmed S. A. v. Mexico (n. 79) paras. 95–151; CME v. Czech Republic (n. 54) para. 529; Antoine Goetz and Others v. Burundi (n. 125) para. 124.

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Saluka v. Czech Republic256 concerned the forced administration and transfer 160 of business of an ailing bank at the hands of a regulatory authority. The tribunal, relying on Methanex, made a sweeping statement to the effect that States are not liable to pay compensation to a foreign investor when adopting bona fide regulations aimed at the general welfare in the normal exercise of their regulatory powers.257 The tribunal did not refer to the issue of special undertakings which did not arise in that case.258 The limits of the host State’s regulatory powers are spelled out in ADC v. 161 Hungary.259 The case concerned an investment at Budapest airport through a BOT arrangement that Hungary had cancelled by decree. The tribunal rejected Hungary’s reliance on its right to regulate: The Tribunal cannot accept the Respondent’s position that the actions taken by it against the Claimants were merely an exercise of its rights under international law to regulate its domestic economic and legal affairs. It is the Tribunal’s understanding of the basic international law principles that while a sovereign State possesses the inherent right to regulate its domestic affairs, the exercise of such right is not unlimited and must have its boundaries. As rightly pointed out by the Claimants, the rule of law, which includes treaty obligations, provides such boundaries. Therefore, when a State enters into a bilateral investment treaty like the one in this case, it becomes bound by it and the investment-protection obligations it undertook therein must be honoured rather than be ignored by a later argument of the State’s right to regulate. The related point made by the Respondent that by investing in a host State, the investor assumes the ‘risk’ associated with the State’s regulatory regime is equally unacceptable to the Tribunal. It is one thing to say that an investor shall conduct its business in compliance with the host State’s domestic laws and regulations. It is quite another to imply that the investor must also be ready to accept whatever the host State decides to do to it. In the present case, had the Claimants ever envisaged the risk of any possible depriving measures, the Tribunal believes that they took that risk with the legitimate and reasonable expectation that they would receive fair treatment and just compensation and not otherwise.260

The tribunal in Tecmed,261 inspired by the European Court of Human Rights’ 162 approach, balanced the public interest presumably pursued by the interference against the charge imposed on an investor.262 In doing so, it applied a proportionality test and in that way established a relationship between the two criteria ‘effect’ and ‘purpose’ of the interference: After establishing that regulatory actions and measures will not be initially excluded from the definition of expropriatory acts, in addition to the negative financial impact of such actions or measures, the Arbitral Tribunal will consider, in order to determine if they are to be characterized as expropriatory, whether such actions or measures are proportional to the public interest presumably protected

256 Saluka Investments BV (The Netherlands) v. Czech Republic (n. 19). 257 Ibid., para. 255. 258 The tribunal’s finding in Saluka contains an inexplicable contradiction on the issue of expropriation: in para. 267 it states that there can be no doubt that Saluka has been deprived of its investment. In para. 275 the tribunal states that the regulatory authority’s decision did not fall within the notion of a ‘deprivation’ in the applicable BIT. 259 ADC v. Hungary (n. 175). 260 Ibid., paras. 423, 424. 261 Técnicas Medioambientales Tecmed, S.A. v. Mexico (n. 79). 262 It based itself on the judgment in Matos and Silva: ECtHR, Matos e Silva v. Portugal, Judgment of 27 August 1996, ECHR 1996-IV, para. 92.

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The tribunal examined the interest of the State to interfere with property rights of the investor and held that the situation prevailing in the region did not give rise to a serious urgent situation, crisis or social emergency. It weighed this fact against the deprivation of the economic value of the investment and reached the conclusion that the interference did amount to an expropriation. 164 In its proportionality test it balanced the public interest of the host State in the interference (public purpose) with the effects of the interference on the investor and its interest in having its investment protected.264 It stated that three factors are of particular relevance in the balancing process: 1) the reasonableness of the government measures with respect to their goals; 2) the deprivation of economic rights (i.e. the effect of the measure); 3) the legitimate expectations of the investor. 165 The tribunals in Azurix265 and LG&E266 welcomed this approach. The tribunal in Azurix267 sought to find a balance between the host State’s right to act in the public interest and the protection of the investor’s rights. It held that the issue was whether the measures concerned being legitimate and serving a public purpose should give rise to a compensation claim. It found the criterion of bona fide regulation within the accepted police powers of the State insufficient and contradictory for purposes of establishing whether an expropriation had occurred.268 The tribunal said about this argument: 163

According to it, the BIT would require that investments not be expropriated except for a public purpose and that there be compensation if such expropriation takes place and, at the same time, regula-

263 Técnicas Medioambientales Tecmed, S.A. v. Mexico (n. 79) para. 122. 264 Ibid., para. 122. See Ursula Kriebaum (n. 13) 717–744. 265 Azurix Corp. v. Argentina (n. 145) paras. 311, 312, 322. ‘311. (…) The parties have referred in their exchanges to findings of the tribunal in Tecmed. That tribunal sought guidance in the case law of the European Court of Human Rights, in particular, in the case of James and Others. The Court held that “a measure depriving a person of his property [must] pursue, on the facts as well as in principle, a legitimate aim ‘in the public interest’”, and bear “a reasonable relationship of proportionality between the means employed and the aim sought to be realized”. This proportionality will not be found if the person concerned bears “an individual and excessive burden”. The Court considered that such “a measure must be both appropriate for achieving its aim and not disproportionate thereto.” The Court found relevant that non-nationals “will generally have played no part in the election or designation of its [of the measure] authors nor have been consulted on its adoption”, and observed that “there may well be legitimate reason for requiring nationals to bear a greater burden in the public interest than non-nationals.”’ (reference to James and Others, Judgment of 21 February 1986, Series A, No. 98, paras. 50 and 63, and Técnicas Medioambientales Tecmed, S.A. v. Mexico (n. 79) paras. 121, 122). ‘312. The Tribunal finds that these additional elements provide useful guidance for purposes of determining whether regulatory actions would be expropriatory and give rise to compensation.’ 266 LG&E Energy Corp, LG&E Capital Corp., LG&E International Inc. v. Argentina (n. 47) paras. 189, 194, 195. 267 Azurix Corp. v. Argentina (n. 145). 268 Ibid., paras. 310, 311.

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VIII. Expropriation tory measures that may be tantamount to expropriation would not give rise to a claim for compensation if taken for a public purpose.269

The Azurix tribunal approvingly quoted the European Court of Human 166 Rights270 which had found that in addition to a legitimate aim in the public interest there had to be ‘a reasonable relationship of proportionality between the means employed and the aim sought to be realized’. This proportionality would be lacking if the person concerned ‘bears an individual and excessive burden’.271 The tribunal in LG&E v. Argentina272 adopted a similar balancing test. It said: 167 In order to establish whether State measures constitute expropriation under Article IV(1) of the Bilateral Treaty, the Tribunal must balance two competing interests: the degree of the measure’s interference with the right of ownership and the power of the State to adopt its policies.273

The tribunal in El Paso274 equally opted for a balancing approach. It stated:

168

233. (…) 1. Some general regulations can amount to indirect expropriation a. b.

As a matter of principle, general regulations do not amount to indirect expropriation. By exception, unreasonable general regulations can amount to indirect expropriation.

The tribunal considered the police powers exception as not absolute and men- 169 tioned discriminatory regulations, regulations not respecting due process and disproportionate regulations as exceptions from the general principle that general regulations do not amount to expropriation.275 It characterised disproportional regulation in the following way: 243. (…) Another example would be a disproportionate regulation, meaning a regulation in which the interference with the private rights of the investors is disproportionate to the public interest. In other words, proportionality has to exist between the public purpose fostered by the regulation and the interference with the investors’ property rights, as recognised in Tecmed: (…).

Therefore, three main lines of authority exist with regard to the method by 170 which the line is drawn by arbitral tribunals between non-compensatory regulation and regulatory expropriation. Some tribunals only rely on the effects of a measure to decide whether an ex- 171 propriation has occurred. These are not able to take the public interest of the interference into consideration in their decision. Other tribunals, although not requiring an intention to expropriate, consider 172 the context and purpose of the State measure in their decision on the existence of an expropriation. For some tribunals it follows from the existence of a public interest in the interference that no expropriation will have occurred if the inter269 Ibid., para. 311. 270 James v. United Kingdom, (1986) 8 EHRR 123–164, Judgment of 21 February 1986, Ser. A, No. 98, paras. 50, 63. 271 Azurix Corp. v. Argentina (n. 145) para. 311. 272 LG&E v. Argentina (n. 47). 273 Ibid., para. 189. See also para. 195. For a similar balancing approach see Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, para. 276. 274 El Paso Energy International Company v. Argentina (n. 121) para. 233. 275 Ibid., paras. 237–243, 297–299.

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ference is non-discriminatory and in accordance with due process requirements.276 173 A further group of tribunals considers context and purpose of the interference and applies a proportionality test. They weigh the public purpose of the interference against the legitimate expectations of the investor. In that way these tribunals achieve a more nuanced decision but can of course also not escape of the ‘all or nothing’ result regarding compensation. Either there is an expropriation with the result that full compensation is due. Or there is no expropriation, with the result that the investor gets nothing.277 7. Legitimate Expectations

Although typically an element of the fair and equitable treatment standard, tribunals increasingly use the concept of legitimate expectations278 in the context of an indirect expropriation. 175 Legitimate expectations are not in themselves the protected rights. Therefore, a substantial deprivation of an underlying acquired right is a prerequisite for the application of the concept.279 The investor has to have a legitimate expectation to be able to exercise a right acquired under host State law, which at the same time according to investment law qualifies at investment. 176 Tribunals have relied on the concept of legitimate expectations for various purposes. Some have used it to deny the existence of a protected investment.280 174

276 See e.g. Chemtura Corporation v. Canada (n. 121) para. 266. 277 Ursula Kriebaum (n. 13) 719–720. 278 See Rudolf Dolzer, ‘Indirect Expropriation of Alien Property’ (n. 49) 41, 62; Rudolf Dolzer (n. 11) 65–93, 78 et seq.; Francisco Orrego Vicuña, ‘Regulatory Authority and Legitimate Expectations: Balancing the Rights of the State and the Individual under International Law in a Global Society’ (2003) 5 Int’l L. Forum 188–197; L. Yves Fortier and Stephen L. Drymer, ‘Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor’ (2004) 19 ICSID Rev.–FILJ 293, 306 et seq.; Alexei Barbuk, ‘The NAFTA Chapter 11 Arbitration and Protection of Legitimate Expectations’ (July 2004) 1 TDM, Issue 3, 1; Rudolf Dolzer, ‘Grenzen nationaler Steuerhoheit im völkerrechtlichen Investitionsschutz’ in Klaus Grupp and Ulrich Hufeld (eds), Recht – Kultur – Finanzen, Festschrift für Reinhard Mußgnug zum 70. Geburtstag am 26. Oktober 2005 (C. F. Müller, 2005) 189–294; Stephen Fietta, ‘International Thunderbird Gaming Corporation v. The United Mexican States: an indication of the limits of the “legitimate expectation” basis of claim under Article 1105 of NAFTA?’ (April 2006) 3 TDM, Issue 2, 1; Francesco Costamagna, ‘Investor’ Rights and State Regulatory Autonomy: the Role of the Legitimate Expectation Principle in the CMS v. Argentina case’ (April 2006) 3 TDM, Issue 2, 1; Elizabeth Snodgrass, ‘Protecting Investor’s Legitimate Expectations: Recognizing and Delimiting a General Principle’ (2006) 21 ICSID Rev.–FILJ 1–58; Alfred Siwy, ‘Indirect Expropriation and the Legitimate Expectations of the Investor’ in Christian Klausegger, Peter Klein, Florian Krehmslehner, Alexander Petsche, Nikolaus Pitkowitz, Jenny Power, Irene Welser and Gerold Zeiler (eds), Austrian Arbitration Yearbook (Kluwer, 2007) 355–377. 279 Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Kluwer, 2009) 92–98, 350; Zachary Douglas (n. 20) 151-289, 197; Zachary Douglas, The International Law of Investment Claims (n. 20) 56. 280 International Thunderbird Gaming Corporation v. Mexico, UNCITRAL (NAFTA), Award, 26 January 2006, para. 208: ‘The Tribunal does not need to decide on Mexico’s jurisdictional objection (…), since the Tribunal has already found that the EDM Companies could not

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A number of tribunals have included ‘legitimate expropriations’ into the formula describing the required effect of an interfering measure to amount to an expropriation.281 The award in LG&E282 can serve as an example: In evaluating the degree of the measure’s interference with the investor’s right of ownership, one must analyze the measure’s economic impact – its interference with the investor’s reasonable expectations – and the measure’s duration.283

In a number of cases, tribunals have referred to the concept when establishing 177 the existence of an expropriation284 or denying it because of the lack of an interference with legitimate expectations.285 The tribunal in Revere Copper286 mentioned that the principle is particularly applicable in situations where specific commitments had been made by the government and then not honoured. It said: We regard these principles as particularly applicable where the question is, as here, whether actions taken by a government contrary to and damaging to the economic interests of aliens are in conflict with undertakings and assurances given in good faith to such aliens as an inducement to their making the investments affected by the action.287

The concept was used in this sense both by tribunals applying the sole effects 178 doctrine and by tribunals favouring the police powers doctrine. Metalclad,288 a tribunal which followed the sole effects doctrine, used the interference with legitimate expectations when it found in favour of an indirect expropriation: These measures, taken together with the representations of the Mexican federal government, on which Metalclad relied, and the absence of a timely, orderly or substantive basis for the denial by the Municipality of the local construction permit, amount to an indirect expropriation.289

The same is true for the tribunal in Methanex290 which applied the police 179 powers approach. It said that for deciding whether an indirect expropriation has occurred in case of regulatory changes, it is important to consider whether a

281

282 283 284

285 286 287 288 289 290

have operated based on a legitimate expectation in Mexico. Accordingly, as acknowledged by Thunderbird, compensation is not owed for regulatory takings where it can be established that the investor or investment never enjoyed a vested right in the business activity that was subsequently prohibited.’ See e.g. Antoine Goetz and Others v. Burundi (n. 125) para. 124; Metalclad Corp. v. Mexico (n. 121) para. 103; Occidental Exploration and Production Co. v. Ecuador (n. 127) paras. 87–89; CME v. Czech Republic (n. 54) para. 606; Consortium R.F.C.C. v. Morocco (n. 134) para. 69. LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. Argentina (n. 47). Ibid., para. 190. See e.g. Biloune and Marine Drive Complex Ltd. v. Ghana Investments Centre and the Government of Ghana (n. 53) 183, 208, 209; Southern Pacific Properties (Middle East) Limited (SPP) v. Egypt (n. 156) 189, 108; CME v. Czech Republic (n. 54) paras. 529, 530; Eureko B.V. v. Poland (n. 172) paras. 242, 243. See e.g. Feldman v. Mexico (n. 101) paras. 146–149; Generation Ukraine Inc. v. Ukraine (n. 85) para. 20.37; Occidental Exploration and Production Co. v. Ecuador (n. 127) para. 89. In the Matter of Revere Copper and Brass Inc. v. Overseas Private Investment Corporation (n. 123). Ibid., at 271. Metalclad Corp. v. Mexico (n. 121). Ibid., para. 107. MethanexCorp. v. USA (n. 248).

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breach of legitimate expectations based on specific government assurances has occurred: (...) as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.291

Tribunals applying a balancing approach to establish the existence of an expropriation also used the concept of legitimate expectations. They balanced the legitimate expectations of the investor against the interest of the State to interfere with property rights to achieve a public purpose.292 181 The source of expectations of an investor can be diverse: from an expectation based on the prevailing regulatory system at the time of the investment to specific government assurances to a particular investor. However, not every expectation is legitimate and ‘Bilateral Investment Treaties are not insurance policies against bad business judgments’.293 182 Even the Model BITs that contain a reference to legitimate expectations in their clauses on expropriation neither define the concept nor describe the potential sources of such expectations.294 The tribunal in Thunderbird295 proposed the following definition of legitimate expectations in the context of the fair and equitable treatment standard: 180

Having considered recent investment case law and the good faith principle of international customary law, the concept of ‘legitimate expectations’ relates, within the context of the NAFTA framework, to a situation where a Contracting Party’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such a failure by the NAFTA Party to honour those expectations could cause the investor (or investment) to suffer damages.296

291 Ibid., Part IV, Ch. D, para. 7. 292 See e.g. Técnicas Medioambientales Tecmed, S.A. v. Mexico (n. 79) paras. 122, 149, 150. 293 Maffezini v. Spain, ICSID Case No. ARB/97/7, Award, 13 November 2000, 5 ICSID Reports 419, para. 64: ‘Bilateral Investment Treaties are not insurance policies against bad business judgments.’; Thomas Wälde and Abba Kolo (n. 115) 811, 839. 294 US Model BIT 2004, Annex B, Expropriation 4: ‘(a) 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: (…) (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations’, available at http://www.state.gov/documents/organization/ 38710.pdf. Canada Model BIT (FIPA), Annex B.13(1) Expropriation: ‘The Parties confirm their shared understanding that b) The determination of whether a measure or series of measures of a Party constitute an indirect expropriation requires a case-by-case, fact-based inquiry that considers, among other factors: (…) ii) the extent to which the measure or series of measures interfere with distinct, reasonable investment-backed expectations; and (…)’, available at http://www.dfait-maeci.gc.ca/tnanac/documents/2004-FIPA-model-en.pdf. 295 International Thunderbird Gaming Corporation v. Mexico (n. 280). 296 Ibid., para. 147 (footnote omitted).

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This means that an expectation is only legitimate if it has been created by the 183 State in an attributable way.297 With regard to indirect expropriations a number of tribunals either found that 184 the legitimate expectations which were frustrated had emanated from a specific undertaking by the State or denied the existence of such expectations for lack of such an undertaking.298 They did not necessarily ask for a contract between the State and the investor but for explicit or implicit assurances or representations made by the State. The tribunal in Azurix stated in this regard: The expectations as shown in that case [TecMed] are not necessarily based on a contract but on assurances explicit or implicit, or on representations, made by the State which the investor took into account in making the investment.299

The tribunal in Grand River also required a specific assurance for the exis- 185 tence of a legitimate expectation. Furthermore, it clarified that in the event of an unsettled situation in domestic law and a lack of specific assurances made to an investor, the investor would not have had a legitimate expectation: 140. The Tribunal understands the concept of reasonable or legitimate expectations in the NAFTA context to correspond with those expectations upon which an investor is entitled to rely as a result of representations or conduct by a state party. As the tribunal in Thunderbird Gaming explained, the ‘concept of “legitimate expectations” relates (...) to a situation where a Contracting Party’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the NAFTA Party to honour those expectations could cause the investor (or investment) to suffer damages.’ The question of reasonable expectations, therefore, is not equivalent to whether or not an investor is ultimately right on a contested legal proposition that would favor the investor. 141. (…) Ordinarily, reasonable or legitimate expectations of the kind protected by NAFTA are those that arise through targeted representations or assurances made explicitly or implicitly by a state party.300

Therefore, a regulatory interference with an investment which is of the neces- 186 sary severity and frustrates a government assurance amounts to an expropriation. On the other hand, a breach of explicit assurances is, of course, not always a requirement for the existence of an expropriation.

297 See International Thunderbird Gaming Corporation v. Mexico (n. 280), Separate Opinion, Thomas Wälde, para. 21. 298 See e.g. Revere Copper and Brass Inc. v. Overseas Private Investment Corporation (n. 123); Técnicas Medioambientales Tecmed, S.A. v. Mexico (n. 79) paras. 149, 150; Metalclad Corporation v. Mexico (n. 121) para. 107; Methanex Corporation v. USA (n. 248) Part IV, Ch. D, p. 4, para. 7; International Thunderbird Gaming Corporation v. Mexico (n. 280) paras. 147, 208; EnCana Corporation v. Ecuador (n. 128) para. 173; El Paso v. Argentina (n. 121) paras. 294, 295; Merrill & Ring Forestry L.P. v. Canada (n. 121) para. 150; Total S.A. v. Argentina (n. 121) para. 197; Grand River Enterprises et al. v. USA (n. 198) para. 140; Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v. Mongolia (n. 149) para. 302. See also W. Michael Reisman and Mahnoush H. Arsanjani, ‘The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes’ (2004) 19 ICSID Rev.–FILJ 328–343. 299 Azurix Corp. v. Argentina (n. 145) para. 318. 300 Grand River Enterprises et al. v. USA (n. 198) para. 140.

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8. The Requirement of an Official Act

In a number of cases investment tribunals had to decide whether the existence of an expropriation required the exercise of sovereign authority on the part of the State. This problem has arisen, in particular, in connection with the question of whether a breach of contract entered into by a State with a foreign investor could amount to an expropriation. 188 The requirement of an act of public authority for an expropriation of rights arising under contract is confirmed by international arbitral practice.301 Consortium R.F.C.C. v. Morocco arose from a contract for the construction of a road. The dispute concerned a delay in the completion of the project and the refusal to return a bank guarantee. The tribunal pointed out that in order to amount to an expropriation, the measure would have to involve public authority and not merely be a measure taken by the State in its capacity of a partner to the contract. In this particular case there was no expropriation but merely a contract dispute. The tribunal said: 187

Pour qu’il y ait droit à compensation il faut que la personne de l’exproprié prouve qu’il a été l’objet de mesures prises par l’Etat agissant non comme cocontractant mais comme autorité publique. Les décisions relatives aux cas d’expropriation indirecte mentionnent toutes l’ ‘interference’ de l’Etat d’accueil dans l’exercice normal, par l’investisseur, de ses droits économiques. Or un Etat cocontractant n’‘interfere’ pas, mais ‘execute’ un contrat. (…) Un manquement à l’exécution d’un contrat, de nature à léser les intérêts du cocontractant, ne peut s’analyser en une mesure d’expropriation. Une chose est de priver un investisseur de ses droits contractuels reconnus par la seule force de l’autorité étatique, autre chose est de contester la réalité ou l’étendue de ces droits par application du contrat.302 [For there to be a right to compensation the expropriated person has to prove that it was the object of measures taken by the State not acting as a party to the contract but in the exercise of public authority. The decisions on indirect expropriation all mention the ‘interference’ of the host State in the normal exercise by the investor of its economic rights. Thus a State acting as a party to the contract does not ‘interfere’ but ‘performs’ a contract. (…) A shortcoming in the performance of a contract, of a kind that affects the interests of the co-contractor, cannot be seen as an expropriatory measure. It is one thing to deprive an investor of its recognised contractual rights using governmental power, it is another thing to contest the reality or the extent of these rights in the application of the contract.]

189

SGS v. Philippines arose from the failure of the Philippine government to make payment for services rendered. The tribunal held that the mere failure to settle a debt without an act of public authority did not amount to an expropriation, at any rate where remedies were still available to the foreign creditor. The tribunal said:

301 For an older case see Jalapa R.R. & Power Co. Claim (1948), American–Mexican Claims Commission, reprinted in Marjorie Whiteman (ed.), Digest of International Law, vol. 8 (U.S. Government Printing Office, 1967) 908–909. 302 R.F.C.C. v. Morocco (n. 134) paras. 65, 87.

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VIII. Expropriation In the Tribunal’s view, on the material presented by the Claimant no case of expropriation has been raised. Whatever debt the Philippines may owe to SGS still exists; whatever right to interest for late payment SGS had it still has. There has been no law or decree enacted by the Philippines attempting to expropriate or annul the debt, nor any action tantamount to an expropriation. (…) A mere refusal to pay a debt is not an expropriation of property, at least where remedies exist in respect of such a refusal. A fortiori a refusal to pay is not an expropriation where there is an unresolved dispute as to the amount payable.303

Waste Management v. Mexico304 arose from a concession for the removal of 190 waste in the city of Acapulco. When the city failed to meet its payment obligations the investor argued that its rights under the concession had been expropriated. The tribunal accepted the possibility of an indirect expropriation: 143. It may be noted that Article 1110(1) distinguishes between direct or indirect expropriation on the one hand and measures tantamount to an expropriation on the other. An indirect expropriation is still a taking of property. By contrast where a measure tantamount to an expropriation is alleged, there may have been no actual transfer, taking or loss of property by any person or entity, but rather an effect on property which makes formal distinctions of ownership irrelevant.305

At the same time the tribunal pointed out that the mere non-performance of a 191 contract by a State did not amount to an expropriation. Any private person was capable of breaching a contract. The tribunal said: The mere non-performance of a contractual obligation is not to be equated with a taking of property, nor (unless accompanied by other elements) is it tantamount to expropriation. Any private party can fail to perform its contracts, whereas nationalization and expropriation are inherently governmental acts, as is envisaged by the use of the term ‘measure’ in Article 1110(1). (…) The Tribunal concludes that it is one thing to expropriate a right under a contract and another to fail to comply with the contract. Non-compliance by a government with contractual obligations is not the same thing as, or equivalent or tantamount to, an expropriation.306

Similarly, the tribunal in Impregilo v. Pakistan, pointed out that an act of 192 sovereignty was an indispensable requirement for the existence of an expropriation. It distinguished the non-performance of a contract from an interference with contract rights. The tribunal held: (…) that only measures taken by Pakistan in the exercise of its sovereign power (‘puissance publique’), and not decisions taken in the implementation or performance of the Contracts, may be considered as measures having an effect equivalent to expropriation.307

This position was confirmed in Azurix v. Argentina. The tribunal pointed out 193 that the existence of an expropriation depended on whether the State had 303 SGS v. Philippines, ICSID Case No. ARB/02/6, Decision on Jurisdiction, 29 January 2004, 8 ICSID Rep. 568, para. 161. 304 Waste Management, Inc. v. Mexico (n. 88). 305 Ibid., para. 143. 306 Ibid., paras. 174, 175. See also Fireman’s Fund Insurance Company v. Mexico (n. 79) para. 176(a). 307 Impregilo S.p.A. v. Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction, 22 April 2005, 12 ICSID Rep. 245, para. 281. This paragraph was subsequently quoted by the tribunal in Bayindir v. Pakistan Insaat Turizm Ticaret Ve Sanayi A.S. (n. 19) para. 257. The tribunal in Biwater Gauff (Tanzania) Ltd. v. Tanzania (n. 79) para. 458 equally relied on this approach.

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breached the contract in the exercise of its sovereign authority or as a party to the contract. The tribunal said: The Tribunal agrees that contractual breaches by a State party or one of its instrumentalities would not normally constitute expropriation. Whether one or [a] series of such breaches can be considered to be measures tantamount to expropriation will depend on whether the State or its instrumentality has breached the contract in the exercise of its sovereign authority, or as a party to a contract. As already noted, a State or its instrumentalities may perform a contract badly, but this will not result in a breach of treaty provisions, ‘unless it be proved that the state or its emanation has gone beyond its role as a mere party to the contract, and has exercised the specific functions of a sovereign.’308

194

The tribunal in Siemens v. Argentina, summarised the case law on this issue and concluded that the existence of an expropriation required action in the exercise of public authority. It said: 253. What all these decisions have in common is that for the State to incur international responsibility it must act as such, it must use its public authority. The actions of the State have to be based on its ‘superior governmental power’. It is not a matter of being disappointed in the performance of the State in the execution of a contract but rather of interference in the contract execution through governmental action.309

The same is true for situations where States terminate contracts. If the termination occurred in conformity with the contract and without exercise of a State’s sovereign powers, it will not be considered as a form of expropriation.310 196 Where tribunals found that the State’s action had indeed been in the exercise of public authority, they did not hesitate to diagnose the existence of an expropriation. Thus the tribunal in Vivendi II said: 195

(…) the measures identified at 7.4 herein, which constituted the Province’s destructive campaign against CAA and CGE / Vivendi cannot in any circumstance be cast as simple commercial acts of or relating to non-performance by a contracting counter-party. Here we have illegitimate sovereign acts, taken by the Province in its official capacity, backed by the force of law and with all the authoritative powers of public office.311

197

It follows from this consistent practice that the existence of an expropriation is contingent upon an act of public authority carried out in the State’s sovereign capacity. 308 Azurix Corp. v. Argentina (n. 145) para. 315 (footnote omitted); referred to with approval in Parkerings v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, paras. 443–444. 309 Siemens AG v. Argentina (n. 90) para. 253. See also Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Pakistan (n. 19), Award, 27 August 2009, para. 445: ‘In the present case, the Claimant has suggested that a breach of the Contract as a result of governmental directives would suffice for a finding of expropriation. The Tribunal disagrees. First, not every contract breach deprives an investor of the substance of its investment. Second, even where it does and the breach stems from a governmental directive, it would not necessarily follow that the contractual breach is the result of a sovereign act, as a directive of the State may be given in the framework of the contract.’ Suez, Sociedad General de Aguas de Barcelona S. A., and InterAgua Servicios Integrales del Agua S.A. v. Argentina (n. 121) para. 142. 310 See e.g. Malicorp Limited v. Egypt, ICSID Case No. ARB/08/18, Award, 7 February 2011, paras. 126, 137; Impregilo S.p.A. v. Argentina (n. 79) paras. 270, 272. 311 Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina (Vivendi II) (n. 79) para. 7.5.8.

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It is beyond doubt that actions taken by fiscal authorities in assessing, collect- 198 ing and enforcing taxes and customs duties are performed in the exercise of public authority. The same applies to tax audits. The imposition by the host State, by way of sovereign action, of a change in the investor’s legal position that leaves the investment vulnerable to interference by a private party, may also amount to an expropriation. In CME v. Czech Republic,312 the foreign investor had invested in a television station in cooperation with a local partner. As a consequence of changes in the local law and of actions by the Media Council, a regulatory authority, the foreign investor was forced to agree to a changed legal structure. That new legal structure enabled the investor’s local partner to terminate the agreement upon which the investment rested, thereby effectively depriving the investor of the value of its investment. The tribunal found that the waiver of legal protection forced upon the investor by the Media Council deprived the claimant of its investment’s security and constituted a substantial devaluation of the investment.313 The tribunal found that the Media Council’s actions in support of the local partner’s actions in destroying the investment amounted to an expropriation. The tribunal said: The Council’s actions and inactions, (…) cannot be characterized as normal broadcasting regulator’s regulations in compliance with and in execution of the law, in particular the Media Law. (...) They must be characterized as actions designed to force the foreign investor to contractually agree to the elimination of basic rights for the protection of its investment (in 1996) and as actions (in 1999) supporting the foreign investor’s contractual partner in destroying the legal basis for the foreign investor’s business in the Czech Republic.314

Under these circumstances the tribunal found that the Czech Republic had ex- 199 propriated the investor.315 It follows from CME v. Czech Republic that action taken by a State in its official capacity that weakens the legal position of an investor and makes it vulnerable to deprivations by a private person may amount to an expropriation. 9. Beneficiary of the Expropriation

In a typical direct expropriation, the taking will be to the immediate economic 200 benefit of the expropriating State. Where there is no transfer of title, as in the case of an indirect expropriation, or where the taking is gradual, as in the case of a creeping expropriation, the beneficiary of the measures will be less clear. The short-term beneficiary in economic terms may well be someone other than the expropriating State itself. The expropriation may work to the benefit of a competitor or business partner of the investor. In a regulatory expropriation the beneficiary may be the general public or a certain segment of the public. The indirect expropriation or equivalent measure may not serve the acting State’s immediate 312 313 314 315

CME v. Czech Republic (n. 54). Ibid., para. 599. Ibid., para. 603. Ibid., para. 609.

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enrichment but may be part of a wider political agenda. The motive behind the State’s actions may be the pursuit of a broad restructuring programme, indigenisation by transferring control into the hands of local citizens or simply the exploitation of xenophobic feelings to curry favour with the electorate. 201 The prevalent view is that the existence of an expropriation or equivalent measure does not require a direct transfer of rights to the expropriating authority or an immediate economic benefit to the host State. In an expropriation ‘there can be a loss by one party without there being a one-for-one gain by another.’316 There are however, some isolated dicta suggesting that the tribunals believed that a transfer of rights or of economic benefits to the host State was an essential or at least typical element of an expropriation.317 202 A much larger and weightier body of authority indicates that an expropriation or equivalent measure need not involve a wealth accretion to the benefit of the host State. 203 The Iran–US Claims Tribunal has accepted the principle that an expropriation is not contingent upon the acquisition by the government of the property or right that was taken from the investor. In the words of George H. Aldrich: The Tippetts award established, and subsequent awards confirmed, the Tribunal’s rejection of the argument that compensable takings under international law occur only if the state has acquired something of value to it; on the contrary, takings have occurred if the claimants have been deprived of property rights of value to them.318

204

In the Tippetts case319 the tribunal said: The Claimant is entitled under international law and general principles of law to compensation for the full value of the property of which it was deprived. The Tribunal prefers the term ‘deprivation’ to the term ‘taking,’ although they are largely synonymous, because the latter may be understood to imply that the Government has acquired something of value, which is not required.320

205

In the Amco case321 the tribunal was particularly clear on this point. In that case an Indonesian company had taken control of the investment by force with the assistance of members of the Indonesian armed forces. The tribunal said: (…) it is generally accepted in international law, that a case of expropriation exists not only when a state takes over private property but also when the expropriating state transfers ownership to another legal or natural person. Expropriation in international law also exists merely by the state withdrawing the protection of its courts from the owner expropriated, and tacitly allowing a de facto possessor to remain in possession of the thing seized, (…).322

316 Burns H. Weston (n. 45) 103, 113. 317 Olguín v. Paraguay (n. 204) para. 84; Ronald S. Lauder v. Czech Republic (n. 57) paras. 201, 202. 318 George H. Aldrich (n. 115) 585, 593, 609. 319 Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran (n. 119). 320 Ibid., at 225–226. 321 Amco Asia Corporation and Others v. Indonesia, Award, 20 November 1984, 1 ICSID Rep. 413. 322 Ibid., para. 158.

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SPP v. Egypt323 concerned the cancellation of a hotel project by the Egyptian 206 authorities. The tribunal rejected the argument that there was no nationalisation since there was no transfer of the investor’s rights to the State. The tribunal said: 163. As to the argument that the cancellation of the project did not involve a nationalization or confiscation, it is the Respondent’s contention that there was no nationalization because there was no transfer of the Claimant’s rights or of the project to the State, (...). The Tribunal cannot accept this contention.324

In Metalclad v. Mexico325 the investor had obtained construction and operat- 207 ing permits for the landfill project but the municipality refused to grant a construction permit. The tribunal pointed out that an expropriation may well exist even if it is not to the obvious benefit of the host State. It said: 103. Thus, expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also 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.326

In S.D. Myers v. Canada327 the tribunal seems to have regarded a benefit to 208 the State or to third persons as equivalent alternatives. The case concerned an export ban by Canada of PCB waste to the United States for remediation. The tribunal found that there was no measure tantamount to expropriation since the measure had only been temporary. It added that Canada realised no benefit nor was there evidence of a transfer of property or benefit directly to others.328 In Wena Hotels v. Egypt329 the investor had been forcibly deprived by its busi- 209 ness partner of the possession of the hotel which constituted the investment. The Egyptian authorities had not given appropriate assistance for its recovery. The tribunal relied heavily on the decision in Amco and said: (…) as the ICSID tribunal in Amco Asia v. Indonesia noted, ‘it is generally accepted in International Law, that a case of expropriation exists not only when a state takes over private property, but also when the expropriating state transfers ownership to another legal or natural person.’ The tribunal continued by observing that an expropriation ‘also exists merely by the state withdrawing the protection of its courts from the owner expropriated, and tacitly allowing a de facto possessor to remain in possession of the thing seized (...).’330

323 324 325 326 327 328

329 330

Southern Pacific Properties (Middle East) Ltd. v. Egypt (n. 156). Ibid., para. 163. Metalclad Corp. v. Mexico (n. 121). Ibid., para. 103 (emphasis added). The same approach was adopted by Rumeli Telekom AS and Telsim Mobil Telekomikasyon Hizmetleri AS v. Kazakhstan (n. 87) para. 707. S. D. Myers v. Canada (n. 101). Ibid., para 287. Sampliner explains that the requirement for a benefit to be transferred to others before a taking can be affirmed is found in many leading Canadian authorities but is not generally found in U.S. or international law precedents. See Gary H. Sampliner (n. 49) 24, fn. 97. Wena Hotels Ltd. v. Egypt (n. 142). Ibid., para. 97 (footnotes omitted).

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CME v. Czech Republic331 concerned interference with the investor’s contract rights by a regulatory authority. The interference, in turn, made it possible for the investor’s local partner to terminate the contract on which the investment depended. The tribunal found that there had been an expropriation even though there was no transfer of rights to or economic benefit for the Czech Republic. The tribunal relied on Metalclad and said: In the Metalclad Corporation v. United Mexican States case (...) in respect to NAFTA Article 1110 (expropriation), the ICSID Tribunal stated that an expropriation under this provision included not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with 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.332

211

In Tecmed v. Mexico,333 the dispute concerned the replacement of an unlimited licence by a licence of limited duration for the operation of a landfill. In the context of discussing the existence of an expropriation, the tribunal made the following statement with respect to the beneficiary of an expropriation: Although formally an expropriation means a forcible taking by the Government of tangible or intangible property owned by private persons by means of administrative or legislative action to that effect, the term also covers a number of situations defined as de facto expropriation, where such actions or laws transfer assets to third parties different from the expropriating State or where such laws or actions deprive persons of their ownership over such assets, without allocating such assets to third parties or to the Government.334

212

It follows from the above authority that an expropriation or equivalent measure may take place even in the absence of a transfer of the expropriated rights to the host State or one of its entities. An immediate economic gain of the host State is not a constitutive element of an expropriation or equivalent measure. 10. Consequences of Expropriation for the Title to the Property

213

In case of a direct expropriation the expropriatory measure triggers in the domestic law a transfer of title to either the State or a third person. In cases of indirect expropriation no such automatic title transfer will occur. Therefore, the question of double recovery arises in the case of compensation for an indirect expropriation where the owner still holds the title. Is the title holder required to transfer the title to the expropriating State in order to receive compensation?335 Tribunals have approached this question in different ways. Some tribunals have conditioned the payment of compensation on the transfer of the legal title.336 The tribunal in ADC decided, for example, that the investor shall immediately

331 332 333 334 335

1016

CME v. Czech Republic (n. 54). Ibid., para. 606 (emphasis added). Técnicas Medioambientales Tecmed S.A. v. Mexico (n. 79). Ibid., para. 113 (footnote omitted). See Noah Rubins, ‘Must the Victorious Investor-Claimant Relinquish Title to Expropriated Property’ (2003) 4 JWI 481–491.

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upon receipt of the sum awarded by the tribunal, transfer the ownership of all its shares in the project company to the respondent.337 Real property was involved in many though not all of these cases. The tri- 214 bunal in Biloune found that the title to the assets had already passed to the respondent as a consequence of a constructive expropriation and therefore no deduction of any residual value would be appropriate.338 The tribunal in CME followed the claimant’s suggestion to deduct the residual value from the fair market value of its investment.339 It did not order a transfer of shares like the tribunal in ADC. Other tribunals did not mention the issue and did not order any transfer of ti- 215 tle. The reason for the absence of such a finding might be that neither the claimant nor the respondent had raised the issue in their pleadings. Usually there will not be a significant residual value since no expropriation would otherwise have occurred. Therefore, the decision to order a transfer of title will depend upon the facts of the case and the pleadings of the parties. D. Conditions for the Lawfulness of an Expropriation

Investment protection treaties typically contain a set of requirements for the 216 legality of an expropriation. These are traditionally the requirement of a public purpose, the prohibition of discrimination and the requirement to pay compensation. In recent years, starting in the mid-1980s, a fourth requirement has appeared in most investment treaties: the measure has to be taken in accordance with due process of law.340 In case of an unlawful expropriation a breach of the investment treaty occurs 217 and the State incurs State responsibility.341

336 Southern Pacific Properties (Middle East) Ltd. v. Egypt (n. 156) paras. 173, 182; Metalclad Corp. v. Mexico (n. 121) para. 127; Técnicas Medioambientales Tecmed S.A. v. Mexico (n. 79) para. 199; ADC v. Hungary (n. 175) paras. 523, 543. 337 ADC v. Hungary (n. 175) para. 523: ‘523. As previously noted, Claimant ADC Affiliate has undertaken to return its shares in the Project Company (i.e., 34 %) to Respondent upon payment of the sum awarded by the Tribunal (see paras. 248–249 supra). Accordingly, the Tribunal orders ADC Affiliate to transfer the unencumbered ownership in those shares to Respondent immediately after receipt of payment in full of the sum awarded in this Award (including interest and cost). The promissory notes shall be deemed to have ceased to have any legal force and effect upon payment in full of the sum awarded in this Award (including interest and costs).’ 338 Biloune and Marine Drive Complex Ltd. v. Ghana Investments Centre and the Government of Ghana (n. 53) 183, 226. 339 CME v. Czech Republic (n. 130) para. 612. 340 See Ursula Kriebaum (n. 14) 488–538; August Reinisch, ‘Legality of Expropriation’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 171–204. 341 See Chapter 9 ‘Restitution, Damages and Compensation’ of this volume.

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1. Public Purpose

Investment protection treaties uniformly contain the requirement of a public purpose for the legality of an expropriation. Language is not uniform; instead of ‘public purpose’342 some treaties refer to ‘public benefit’343 or a variation thereof.344 Such a requirement also exists based on customary international law in case of expropriations.345 219 The treaties do not contain a definition of what is understood by public purpose and do not contain a declaratory or exhaustive list of goals which qualify as public purpose. Some treaties limit the public purpose to internal needs.346 In the literature there is agreement that an expropriation must be for a public pur218

342 See e.g. Article 5 of the Agreement on Reciprocal Promotion and Protection of Investments Between the Government of the Islamic Republic of Iran and the Government of the Kingdom of Thailand: ‘1. Investments of investors of either Contracting Party shall not be nationalized, confiscated, expropriated or (…) Except such measures are taken for public purposes, (…).’ Article 1110 NAFTA: ‘1. No Party may (…) nationalize or expropriate an investment of an investor (…) except: (a) for a public purpose;’ (emphasis added). 343 See e.g. Article 5 of the Treaty between the Federal Republic of Germany and the Federal Republic of Nigeria concerning the Encouragement and Reciprocal Protection of Investments of 28 March 2000: ‘(2) Investments by investors of either Contracting Party shall not directly or indirectly be expropriated, nationalized or subjected to any other measure the effects of which would be tantamount to expropriation of nationalization in the territory of the other Contracting Party except for the public benefit and against compensation.’ (emphasis added). Article 4 of the Treaty between the Federal Republic of Germany and Singapore concerning the Promotion and Reciprocal Protection of Investments of 3 October 1973: ‘(1) Investments by nationals or companies of either Contracting Party shall not be expropriated in the territory of the other Contracting Party except for the public benefit and against just and equitable compensation which represents the fair market value of the investment expropriated’ (emphasis added). 344 See e.g. Article 13 of the ECT: ‘(1) Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as “Expropriation”) except where such Expropriation is: (a) for a purpose which is in the public interest;’ (emphasis added). Article 4 of the Agreement between the Government of the Islamic Republic of Pakistan and the Government of the Republic of Yemen on the Reciprocal Promotion and Protection of Investments: ‘(…) 2. Investments or investors of one of the Contracting Parties shall not be nationalized, expropriated, requisitioned or subjected to any measures having equivalent effect in the territory of the other Contracting Party, except for public purposes or national interest’ (emphasis added). 345 See August Reinisch (n. 340), ‘Legality of Expropriation’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 173–176. 346 Article 5 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Arab Republic of Egypt for the Promotion and Protection of Investments of 11 June 1975: ‘(1) Investment of nationals (…) shall not be nationalised, expropriated or subjected to measures having effect equivalent (…) except for a public purpose related to the internal needs of that Party (…)’ (emphasis added). Article VI of the Agreement between the Government of the Kingdom of Thailand and the Government of the Democratic Socialist Republic of Sri Lanka for the Promotion and Protection of Investments of 3 January 1996: ‘(1) Investment of national (…) of either Contracting Party shall not be subjected (…) to any measure of nationalization or expropriation in the territory of the other Contracting Party except for a public purpose related to the internal needs of that Contracting Party (…)’ (emphasis added).

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pose.347 In practice, the public purpose requirement was rarely controversial. Apart from the tribunal in LIAMCO348 international courts as well as investment tribunals confirmed the requirement of a public purpose for the legality of an expropriation.349 Tribunals grant States a large though not unlimited margin of discretion.350 Therefore, it is not surprising that tribunals have only rarely found that there was no valid public purpose present and an expropriation was therefore illegal. In academic writing it is rightly pointed out that the requirement has a general preventive function against abusive expropriations.351 Tribunals have used it as such in extreme cases. An early case where a tribunal denied the existence of a public purpose was 220 Walter Fletcher Smith.352 There the expropriated land was used for the private use of a third party. The tribunal denied the existence of a public purpose: From a careful examination of the testimony and of the records, the Arbitrator is impressed that (…) the expropriation proceedings were not, in good faith, for the purpose of public utility. (…) While the proceedings were municipal in form, the properties seized were turned over immediately to the

347 See e.g. Georg Schwarzenberger, ‘The Abs-Shawcross Draft Convention on Investments Abroad: A Critical Commentary’ (1960) 9 J. Pub. L. 147–160; Rosalyn Higgins, Conflict of interests; international law in a divided world (Bodley Head, 1965) 56–57; Rosalyn Higgins, ‘The Taking of Property by the State: Recent Developments in International Law’ (1982-III) 176 RC 261, 288–292; Wil D. Verwey and Nico J. Schrijver (n. 2) 15–16; Matti Pellonpää and Malgosia Fitzmaurice, Taking of Property in the Practice of the Iran-United States Claims Tribunal (1988) 19 NYIL 53–178, 60 et seq.; Rudolf Dolzer and Margrete Stevens (n. 31) 104 et seq.; Charles N. Brower and Jason D. Brueschke, The Iran–United States Claims Tribunal (Martinus Nijhoff, 1998) 492 et seq.; Matti Pellonpää, ‘Compensable Claims before the Tribunal: Expropriation Claims’ in Richard B. Lillich, Daniel B. Magraw and David Bederman (eds), The Iran–United States Claims Tribunal: Its Contribution to the Law of State Responsibility (Transnational, 1998) 200 et seq.; August Reinisch (n. 340) 178 et seq. Of a different view e.g. Malcolm N. Shaw, International Law (Cambridge University Press, 2003) 742 et seq. 348 Libyan American Oil Company (LIAMCO) v. Libya, Award, 12 April 1977, (1981) 20 ILM 1. 349 For early cases see e.g. PCIJ, Certain German Interests in Polish Upper Silesia (Germany v. Poland) (n. 53) 22; Amco Asia Corporation and Others v. Indonesia (n. 321) para. 190; IUSCTR, American International Group v. Iran, Award No. 93-2-3, 19 December 1983, 4 IUSCTR 96, 105; IUSCTR, INA Corporation v. Iran, Award No. 184-161-1, 13 August 1985, 8 IUSCTR 373, 378; IUSCTR, Amoco International Finance Corporation v. Iran, et al., Partial Award No. 310-56-3, 14 July 1987, 15 IUSCTR 189, para. 145; Compañía del Desarrollo de Santa Elena S.A. v. Costa Rica (n. 79) para, 71; Antoine Goetz and Others v. Burundi (n. 125) para. 126. 350 The tribunal in Amoco can serve as example. It said with regard to the margin of appreciation of States and its limits: ‘It is clear that, as a result of the modern acceptance of the right to nationalize, this term is broadly interpreted, and that States, in practice are granted extensive discretion. An expropriation, the only purpose of which would have been to avoid contractual obligations of the State or of an entity controlled by it, could not, nevertheless, be considered as lawful under international law. (IUSCTR, Amoco International Finance Corporation v. Iran, et al. (n. 349), Partial Award No. 310-56-3, 14 July 1987, 15 IUSCTR 189, para. 145). 351 See e.g. Rosalyn Higgins (n. 45) 261, 292; Ignaz Seidl-Hohenveldern, International Economic Law (Kluwer Law International, 1999) 134. 352 In the Claim of Walter Fletcher Smith v. The Compañia Urbanizadora del Parque y Playa de Marianao (USA v. Cuba), Award, 2 May 1929, II RIAA 915.

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221

In LETCO354 the investor had been de facto deprived of its concession agreement to log timber in a certain area in Liberia by successively reducing the area covered by the concession. At the same time the government granted concessions on these parts of the concession territory to other foreign investors without invoking any public purpose for doing so. The tribunal found that an illegal expropriation had occurred: (…) even if the argument as to nationalization had been raised, it would have failed. (…) the taking of LETCO’s property was not for a bona fide public purpose, (…).355

222

The tribunal in ADC v. Hungary356 equally found that the public purpose requirement in case of an expropriation of an airport operation and management contract was not fulfilled. It pointed out that the mere invocation of a public purpose is not enough: The Tribunal can see no public interest being served by the Respondent’s depriving actions of the Claimant’s investments in the Airport Project.357 In the Tribunal’s opinion, a treaty requirement for ‘public interest’ requires some genuine interest of the public. If mere reference to ‘public interest’ can magically put such interest into existence and therefore satisfy this requirement, then this requirement would be rendered meaningless since the Tribunal can imagine no situation where this requirement would not have been met.358

223

The tribunal in Siemens359 raised the issue of a lack of public purpose but did not decide it. Finally, it decided that the expropriation was illegal because of a lack of compensation. It said with regard to the requirement of a public purpose: From this perspective, while the public purpose of the 2000 Emergency Law is evident, its application through Decree 669/01 to the specific case of Siemens’ investment and the purpose of same are questionable.360

224

The tribunal in Kardassopoulos and Fuchs v. Georgia 361 also discussed the issue. It found that despite the problematic way in which the expropriation occurred it was arguable that it was in Georgia’s interest.362 The public purpose accepted by the tribunal was the development of Georgia’s oil pipeline infrastructure which was considered to be a key national interest: 391. Beginning with the first criterion, the Tribunal finds that, on all the evidence, it is arguable that the expropriation of Mr. Kardassopoulos’ rights was in the Georgian public interest. As the Claimants acknowledge, the Respondent is entitled to a measure of deference in this regard. The Tribunal heard both fact and expert industry witnesses who asserted that the development of Georgia’s

353 354 355 356 357 358 359 360 361 362

Ibid., at 917 et seq. Liberian Eastern Timber Corporation (LETCO) v. Liberia (n. 79) 313, 338. Ibid., at 338. ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary (n. 175). Ibid., para. 429. Ibid., para. 432. Siemens AG v. Argentina (n. 90). Ibid., para. 273. Ioannis Kardassopoulos and Ron Fuchs v. Georgia (n. 47). Ibid., para. 392.

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VIII. Expropriation oil pipeline infrastructure was of crucial national importance to the country’s political independence in the region and its economic development. The Tribunal finds this evidence compelling in light of all the circumstances prevailing in Georgia and the wider region during the relevant period.363

2. Non-Discrimination

Most investment protection treaties364 require that for an expropriation to be 225 legal it must not be discriminatory.365 The treaties do not contain any definition of discrimination. Black’s Law Dictionary366 includes the following definitions for ‘discrimina- 226 tion’: 1. 2.

The effect of a law or established practice that confers privileges on a certain class or that denies privileges to a certain class because of race, age, sex, nationality, religion, or disability. Differential treatment; esp. a failure to treat all persons equally when no reasonable distinction can be found between those favoured and those not favoured.

Discrimination in the field of expropriation is also prohibited by customary 227 international law.367 This is reflected in the US Third Restatement of the Law of Foreign Relations 1987.368 It contains a prohibition of discrimination in case of 363 Ibid., para. 391. 364 Exceptions are e.g. Article 5 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Arab Republic of Egypt for the Promotion and Protection of Investments of 11 June 1975; Article 5 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China concerning the Promotion and Reciprocal Protection of Investments of 15 May 1986; Article 4 of the Treaty between the Federal Republic of Germany and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investments of 9 April 1991; Article VI of the Agreement between the Government of the Kingdom of Thailand and the Government of the Democratic Socialist Republic of Sri Lanka for the Promotion and Protection of Investments of 3 January 1996; Article 5 of the Treaty between the Federal Republic of Germany and the Federal Republic of Nigeria concerning the Encouragement and Reciprocal Protection of Investments of 28 March 2000. For a quantitative analysis of investment protection treaties on this issue see Wil D. Verwey and Nico J. Schrijver (n. 2) 3, 67. However even in cases where the provision on expropriation does not contain such a requirement the public international law prohibition of discriminatory expropriation is applicable. For further details see Ursula Kriebaum, Eigentumsschutz im Völkerrecht (n. 14) 511–516. 365 See e.g. Article 5 of the Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic of 29 April 1991: ‘Neither Contracting Party shall take any measures depriving (…) investors of the other contracting Party of their investment unless the following conditions are complied with: (…) the measures are not discriminatory’. Article 5 of the Agreement between the United Mexican States and the Republic of Austria on the Promotion and Protection of Investments of 18 February 1998: ‘(1) A Contracting Party shall not expropriate (…) an investment of an investor of the other Contracting Party (…) except: (…) (b) on a non-discriminatory basis, (…).’ Article 1110 of NAFTA: ‘1. No Party may (…) nationalize or expropriate an investment of an investor (…) except: (…) (b) on a non-discriminatory basis; (…)’ (emphasis added). 366 Black’s Law Dictionary (West, 2005) 393. 367 See e.g. August Reinisch (n. 340), ‘Legality of Expropriation’ in August Reinisch (ed) Standards of Investment Protection (Oxford University Press, 2008) 186–191; Ursula Kriebaum, Eigentumsschutz im Völkerrecht (n. 14) 509–523; Kaj Hobér, Investment Arbitration in Eastern Europe: Recent Cases on Expropriation (Juris Publishing, 2007) 40; Ian Brownlie (n. 45) 514 et seq.; Robert Jennings and Arthur Watts (n. 3) 920, 932; Gillian White (n. 5) 5,

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expropriations in § 712 (State Responsibility for Economic Injury to Nationals of Other States): A State is responsible under international law for injury resulting from: (1) a taking by the state of the property of a national of another state that (…) (b) is discriminatory, or (…).

228

This approach is confirmed by national courts that also consider non-discrimination as a requirement for the legality of an expropriation under international law. The US Court of Appeals, Ninth Circuit held in Siderman de Blake and Other v. Argentina and Others:369 In West, we described three requisites under international law for a valid taking. (…) Second, ‘aliens [must] not be discriminated against or singled out for regulation by the state.’ (…) If a taking violates any one of the aforementioned proscriptions, it violates international law.370

229

In Banco Nacional de Cuba v. Chemical Bank New York Trust Company and Others371 the US Court of Appeals, Ninth Circuit, stated that a discriminatory expropriation is illegal under international law: As a general principle of international law, a state is liable to a private person who is a national of another state if it takes the foreign national’s property and the taking is ‘discriminatory’.372

230

The tribunal in Amoco v. Iran373 held that discrimination in the field of expropriation is also prohibited by customary international law: Discrimination is widely held as prohibited by customary international law in the field of expropriation.374

The same is true for judge Lagergren in his separate opinion in INA375 and the arbitral tribunal in LIAMCO.376 232 A number of investment tribunals had to deal with the question of whether or not a discriminatory expropriation had occurred. 233 The tribunal in Aminoil377 denied the existence of discrimination. First, it found no hints that the difference in treatment was caused by the nationality of the investor. Second, it found that the State had a reasonable justification for treating Arabian Oil differently from Aminoil. It said: 231

368 369 370 371 372 373 374 375 376 377

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119–144; Martin Domke (n. 5) 585, 600–603; Gerald G. Fitzmaurice, ‘The Juridical Clauses of the Peace Treaties’ (1943-II) 73 RC 259, 349; John H. Herz (n. 5) 243–262, 249. Restatement (Third) of the Foreign Relations Law of the United States (n. 26) 196. US Court of Appeals, Ninth Circuit, Siderman de Blake and Other v. Argentina and Others, Judgment of 22 May 1992, (1996) 103 ILR 454–480. Ibid., at 467 et seq. US Court of Appeals, Ninth Circuit, Banco Nacional de Cuba v. Chemical Bank New York Trust Company and Others, Judgment of 10 June 1987, (1993) 92 ILR 431–441. Ibid., at 438. Amoco International Finance Corporation v. Iran, et al. (n. 349). Ibid., para. 140. INA Corporation v. Iran (n. 349) 373, 385. Libyan American Oil Company (LIAMCO) v. Libya (n. 348) 141–219, 194. Kuwait v. American Independent Oil Company (Aminoil), Award, 24 March 1982, 21 ILM 1982, 976.

Ursula Kriebaum

VIII. Expropriation The question (…) arises whether the nationalisation of Aminoil was not thereby tainted with discrimination, and whether this differentiation does not show that the Decree Law had other objects than that of realising a programme of economic development. The Tribunal does not think so. First of all, it has never for a single moment been suggested that it was because of the American nationality of the Company that the Decree Law was applied to Aminoil’s Concession. Next, and above all, there were adequate reasons for not nationalising Arabian Oil.378

Therefore, the tribunal apparently found that the two companies were in a 234 comparable situation but that a difference in treatment was justified. The tribunal in LETCO379 decided that a discriminatory expropriation had oc- 235 curred. It based this finding on the fact that Liberia, shortly after the expropriation, had granted concessions on the same land to other foreign investors without invoking any specific reasons for expropriating LETCO. It said: There was no evidence of any stated policy on the part of the Liberian Government to take concessions of this kind into public ownership for the public good. On the contrary, evidence was given to the Tribunal that areas of the concession taken away from LETCO were granted to other foreignowned companies; (…). Leaving aside the lack of any legislative enactment, the taking of LETCO’s property was not for a bone fide public purpose, was discriminatory (…).380

The dispute in LIAMCO v. Libya381 concerned the nationalisation of a US oil 236 company. The tribunal did not find a discrimination since the nationalisation had neither targeted exclusively US oil companies nor had all US oil companies been nationalised. Furthermore, the guidelines for negotiations with the oil companies were not formulated in a discriminatory manner. (…) LIAMCO was not the first company to be nationalized, nor was it the only oil company nor the only American company to be nationalized by the first nationalization Act, nor was it nationalized alone on the date of the second nationalization Act. Other companies were nationalized before it, other American and Non-American companies were nationalized with it and after it, and other American companies are still operating in Libya. Thus, it may be concluded from the above that the political motive was not the predominant motive for nationalization, and that such motive per se does not constitute a sufficient proof of a purely discriminatory measure.382

There was no unjustified distinction in treatment. The oil companies that were 237 not nationalised had agreed to renegotiate the concession agreements. The Iran–US CTR pointed out in Amoco v. Iran383 that it is not sufficient 238 proof of discrimination that one company of foreign nationality was expropriated while a company of a different nationality operating in the same sector was not. It found this to be a consequence of the specific circumstances prevalent in the case: That the Special Commission did not include the contract with IJPC among those which were nullified, the Respondents submit, was an exception due to specific circumstances.384

378 379 380 381

Ibid., para. 87. Liberian Eastern Timber Corporation (LETCO) v. Liberia (n. 79). Ibid., at 338. Libyan American Oil Company (LIAMCO) v. Libya (n. 348). See Olav Alt, ‘Neue Schiedssprüche zum Recht der Verstaatlichung’ (1985) 35 ÖZÖR 265–304. 382 Libyan American Oil Company (LIAMCO) v. Libya (n. 348) 1, 60. 383 Amoco International Finance Corporation v. Iran, et al. (n. 349).

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Chapter 8: Standards of Protection The Tribunal finds it difficult, in the absence of any other evidence, to draw the conclusion that the expropriation of a concern was discriminatory only from the fact that another concern in the same economic branch was not expropriated. Reasons specific to the non-expropriated enterprise, or to the expropriated one, or to both, may justify such a difference of treatment.385

239

In Eureko B.V. v. Poland386 the tribunal decided that the refusal to conduct a public offering guaranteed to the investor in addition to a share purchase agreement, was a discriminatory expropriation. The authorities took this measure to prevent a major Polish insurance company from coming under foreign control.387 The tribunal found this to be discriminatory: Furthermore, the measures taken by the RoP in refusing to conduct the IPO are clearly discriminatory. As the Tribunal noted earlier, these measures have been proclaimed by successive Ministers of the State Treasury as being pursued in order to keep PZU under majority Polish control and to exclude foreign control such as that of Eureko. That discriminatory conduct by the Polish Government is blunt violation of the expectations of the Parties in concluding the SPA and the First Addendum. For the above stated reasons, the Tribunal finds that the RoP has breached Article 5 of the Treaty.388

In ADC v. Hungary389 the claimant was deprived of its right to operate and manage Budapest International airport. 241 Hungary claimed it had to pass the regulation leading to the expropriation to harmonise Hungarian law with EU law. Hungary took over the airport operation and management but subsequently handed it over to another foreign investor. Hungary argued that the treatment could not have been discriminatory since the investor was the only foreign company concerned by the measure. The tribunal rejected this argument and stated that the group of comparison is foreign investors as a whole. 240

The Tribunal cannot accept the Respondent’s argument that as the only foreign parties involved in the operation of the Airport, the Claimants are not in a position to raise any claims of being treated discriminately. It is correct for the Respondent to point out that in order for a discrimination to exist, particularly in an expropriation scenario, there must be different treatments to different parties. However and unfortunately, the Respondent misses the point because the comparison of different treatments is made here between that received by the Respondent-appointed operator and that received by foreign investors as a whole. The Tribunal therefore rejects the contentions made by the Respondent and concludes that the actions taken by the Respondent against the Claimants are discriminatory.390

242

Since there was only one foreign terminal operator, a comparison with other foreign terminal operators was impossible. The tribunal compared the claimant to foreign investors as a whole. It did not mention why such a cross sector comparison was justified in this case. Rather, it should have argued that no reasonable arguments had been brought forward to justify why a transfer of the control 384 385 386 387 388 389 390

Ibid., para. 141. Ibid., para. 142. Eureko B.V. v. Poland (n. 172). Ibid., paras. 242, 243. Ibid., paras. 242, 243. ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary (n. 175). Ibid., paras. 441–443.

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over the airport operation and management to a company somehow under the control of the Hungarian State was necessary, if later on control could again be transferred to a foreign company. The dispute in Kardassopoulos and Fuchs v. Georgia391 concerned conces- 243 sion rights over certain oil and gas pipelines held by an investment vehicle (Tramex) and a State-owned national oil company (SakNavtobi) via a joint venture company (GTI). These rights were terminated when the government decided to cooperate with another foreign investor. The claimants considered this expropriation also to be discriminatory. The tribunal rejected this claim since the difference in treatment was not based on the foreignness or the nationality of the investor and it affected both the foreign and Georgian investors in GTI. It said: 393. [T]his was not a case in which the Georgian government discriminated against Tramex or Mr. Kardassopoulos qua foreign investor, but rather a case in which it determined that there was a better deal to be had with a different foreign investor. The Tribunal is not convinced that there has been a breach of the non-discrimination element of the ECT’s expropriation provision.

The tribunal confirmed that no discriminatory intent is required for discrimination. Investment tribunals have generally held that discrimination is a distinction in treatment in a similar situation because of a certain characteristic (such as race, age, sex, nationality, religion, or disability) without a reasonable justification. So far they have only been confronted with distinctions in treatment based on nationality. However, the protection against discrimination is wider than the national treatment standard.392 National treatment only covers distinction based on nationality between foreigners and nationals. Discrimination can occur between foreigners and nationals393 as well as between different groups of foreigners394 based either on the foreignness or another characteristic. Three conditions have to be fulfilled for discrimination to occur.395 First, there must be an appropriate comparator.396 Second, there must have been a difference in treatment. Third, the distinction within the basis of comparison must have been unreasonable.397 If there is no comparator in the same sector, a cross sector approach may be useful. In such a situation, the margin of discretion of States and the potential to

391 Ioannis Kardassopoulos and Ron Fuchs v. Georgia (n. 47). 392 See contribution of August Reinisch, ‘National Treatment’, ch. 8.V., 846–869. 393 See e.g. Gerald G. Fitzmaurice (n. 367) 259, 349; Gillian White (n. 5) 119; Robert Jennings and Arthur Watts (n. 3) 920. 394 See e.g. BP Exploration Company (Libya) Limited v. Libya, Award, 10 October 1973, (1979) 53 ILR 297, 313 et seq., 329; Liberian Eastern Timber Corporation (LETCO) v. Liberia (n. 79) 313, 338. Gillian White (n. 5) 119; Gerald G. Fitzmaurice (n. 367) 259, 349. 395 Ursula Kriebaum, Eigentumsschutz im Völkerrecht (n. 14) 523. 396 See on basis of comparison the contribution of Ursula Kriebaum, ‘Arbitrary/Unreasonable or Discriminatory Treatment’, ch. 8.III., 790–806. 397 See on justification for the difference in treatment the contribution of Ursula Kriebaum, ‘Arbitrary/Unreasonable or Discriminatory Treatment’, ch. 8.III., 790–806.

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consider reasons as compelling should increase the wider the circle of areas of activity used for comparison is. 3. Due-Process and Judicial Review

Older treaties as well as the US Third Restatement of the Law of Foreign Relations 1987398 do not contain the requirement that expropriations have to take place in accordance with due process of law. The condition is frequently, but not always, included in investment protection treaties since the 1990s.399 249 The guarantee appears in several forms. Many treaties contain a requirement that the expropriation has to be accomplished under due process of law.400 Other 248

398 Restatement (Third) of the Foreign Relations Law of the United States (n. 26) 196: ‘§ 712 State Responsibility for Economic Injury to Nationals of Other States A State is responsible under international law for injury resulting from: (1) a taking by the state of the property of a national of another state that (a) is not for a public purpose, or (b) is discriminatory, or (c) is not accompanied by provision for just compensation; (…).’ 399 For a quantitative analysis of older treaties see: Wil D. Verwey and Nico J. Schrijver (n. 2) 3, 66. 400 ‘[M]easure is taken under due process of law’. See e.g. Article 5 of the Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic of 29 April 1991: ‘Neither Contracting Party shall take any measures depriving (…) investors of the other contracting Party of their investment unless the following conditions are complied with: (…) the measure is taken in the public interest and under due process of law’ (emphasis added); Article 4 of the Agreement between the Government of the Kingdom of Sweden and the Government of the Republic of Albania on the Promotion and Reciprocal Protection of Investments of 31 March 1995; Article VIII of the Agreement between the Government of Canada and the Government of the Republic of Ecuador for the Promotion and Reciprocal Protection of Investments of 29 April 1996. ‘[T]he expropriation is accomplished under due process of law’. See e.g. Article III of the Treaty between the United States of America and the People’s Republic of Bangladesh concerning the Reciprocal Encouragement and Protection of Investment of 12 March 1986: ‘1. No investment or any Part of an investment of a national or a company of either Party shall be expropriated or nationalized by the other Party (…) unless the expropriation: (…) (b) is accomplished under due process of law (…)’ (emphasis added); Article III of the Treaty between the United States of America and the Arab Republic of Egypt concerning the Reciprocal Encouragement and Protection of Investments of 11 March 1986; Article III of the Treaty between the United States of America and the Republic of Haiti concerning the Reciprocal Encouragement and Protection of Investment of 13 December 1983. ‘[E]xcept in accordance with due process of law’. See e.g. Article 1110 of the NAFTA: ‘1. No Party may (…) nationalize or expropriate an investment of an investor (…) except: (…) (c) in accordance with due process of law (…)’ (emphasis added); Article III of the Treaty between the United States of America and the Republic of Cameroon concerning the Reciprocal Encouragement and Protection of Investment of 26 February 1986; Article 5 of the Agreement between the United Mexican States and the Republic of Austria on the Promotion and Protection of Investments of 29 June 1998; Article III of the Treaty between the United States of America and the Kingdom of Morocco concerning the Encouragement and Reciprocal Protection of Investments of 22 July 1985; Article 5 of the Agreement between the Government of the Republic of Croatia and the Government of the Kingdom of Thailand on the Reciprocal Promotion and Protection of Investments of 18 February 2000; Article 5 of the Agreement on Reciprocal Promotion and Protection of Investments between the Government of the Islamic Republic of Iran and the Government of the Kingdom of Thailand of

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treaties state that the expropriation must be accomplished under due process of national law or in accordance with domestic law. Some treaties do not know a due process requirement.401 Arbitral practice on the due process requirement is limited. Most arbitral tri- 250 bunals require that already during the process leading to the expropriation certain procedural guarantees must be observed. Sometimes they combine this with a possibility to challenge an expropriation that has already occurred.

1997; Article 5 of the Agreement between the Government of the Republic of Croatia and the Government of the Republic of Belarus on the Reciprocal Promotion and Protection of Investments of 26 June 2001. 401 See e.g. Article 5 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Arab Republic of Egypt for the Promotion and Protection of Investments of 11 June 1975: ‘(1) Investment of nationals (…) shall not be nationalised, expropriated or subjected to measures having effect equivalent (…) except for a public purpose related to the internal needs of that Party and against prompt, adequate and effective compensation.’ Article 5 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China concerning the Promotion and Reciprocal Protection of Investments of 15 May 1986: ‘(1) Investments of national or companies of either Contracting Party shall not be expropriated, nationalised (…) except for a public purpose related to the internal needs of that Contracting Party and against reasonable compensation.’ Article VI of the Agreement between the Government of the Kingdom of Thailand and the Government of the Democratic Socialist Republic of Sri Lanka for the Promotion and Protection of Investments of 3 January 1996: ‘(1) Investment of national (…) of either Contracting Party shall not be subjected (…) to any measure of nationalization or expropriation in the territory of the other Contracting Party except for a public purpose related to the internal needs of that Contracting Party and against adequate and effective compensation.’ Article 4 of the Agreement between the Government of the Islamic Republic of Pakistan and the Government of the Republic of Yemen on the Reciprocal Promotion and Protection of Investments of May 1999: ‘(…) 2. Investments or investors of one of the Contracting Parties shall not be nationalized, expropriated, requisitioned or subjected to any measures having equivalent effect in the territory of the other Contracting Party, except for public purposes or national interest. However, such measures shall be subject to prompt and adequate compensation and on condition that these measures are taken on a non-discriminatory basis.’ Article 5 of the Treaty between the Federal Republic of Germany and the Federal Republic of Nigeria concerning the Encouragement and Reciprocal Protection of Investments of 28 March 2000: ‘(2) Investments by investors of either Contracting Party shall not (…) be expropriated, nationalized or subjected to any other measure the effects of which would be tantamount to expropriation or nationalization in the territory of the other Contracting Party except for the public benefit and against compensation.’

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Some treaties specify that a remedy against the expropriation is part of the due process guarantee,402 others contain a separate guarantee that requires that there is a meaningful remedy against expropriations available.403 252 Some tribunals were confronted with the question of whether compliance with the local law or compliance with an international due process standard is due. Most of them found that the expropriating State has to comply with an international due process standard.404 However, this standard includes a requirement to comply with the local law.405 253 Some tribunals have tested the expropriation procedure only against the local law. Here, the formulation of the relevant expropriation clause was of particular relevance. The tribunal in Goetz v. Burundi406 found that the expropriation was in accordance with the legal procedure provided in host State law. This was inspired by the formulation of the clause in the BIT that requires an expropriation in accordance with a legal procedure.407 251

402 See e.g. Article 5(3) of the Agreement between the United Mexican States and the Republic of Austria on the Promotion and Protection of Investments of 29 June 1998: ‘(1) A Contracting Party shall not expropriate or nationalise, directly or indirectly, an investment of an investor of the other Contracting Party or take any measures having equivalent effect (hereinafter referred to as “expropriation”) except: (a) for a purpose which is in the public interest, (b) on a non-discriminatory basis, (c) in accordance with due process of law, and (d) accompanied by payment of compensation in accordance with paragraphs (2) and (3) below (…). (3) Without prejudice to Articles 12 and 13, due process of law includes the right of an investor of a Contracting Party which claims to be affected by expropriation by the other Contracting Party to prompt review of its case, including the valuation of its investment and the payment of compensation in accordance with the provisions of this Article, by a judicial authority or another competent and independent authority of the latter Contracting Party.’ 403 See e.g. Article III(3) of the Treaty between the United States of America and the Kingdom of Morocco concerning the Encouragement and Reciprocal Protection of Investments of 22 July 1985: ‘(…) 3. A national, or company of either Party that asserts that all or part of its investment has been expropriated shall have a right to prompt review by the appropriate judicial or administrative authorities of the other Party to determine whether any such expropriation and any compensation, conforms to the principles of international law.’ Article 5(4) of the Agreement between the Republic of Chile and the Republic of Austria for the Promotion and Reciprocal Protection of Investment of 8 September 1997: ‘(…) (4) The investor affected shall have a right to access, under the law of the Contracting Party making the expropriation, to the judicial or, if applicable, other independent authority of that Party, in order to review the legality of any such expropriation and the amount of compensation.’ 404 Amoco International Finance Corporation v. Iran, et al. (n. 349) para. 283; Mobil Oil Iran Inc., et al. v. Iran, et al., Partial Award No. 311-74/76/81/150-3, 14 July 1987, 16 IUSCTR 3, para. 73; Middle East Cement Shipping and Handling Co. S.A. v. Egypt (n. 168) para. 143; Ioannis Kardassopoulos and Ron Fuchs v. Georgia (n. 47) para. 394. See also Charles N. Brower and Jason D. Brueschke (n. 347) 502 et seq. 405 Andrew Newcombe and Lluís Paradell (n. 279) 376. 406 Antoine Goetz and Others v. Burundi (n. 125). 407 Convention entre l’Union économique Belgo-Luxembourgeoise et la République du Burundi concernant l’encouragement et la protection réciproques des investissements, Article 4: ‘Mesures privatives et restrictives de propriété (…) auquel cas les conditions suivantes doivent êtres remplies: a) les mesures sont prises selon une procédure légale (…).’

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The tribunal in ADC summarised the procedural due process guarantees re- 254 quired by international law in the context of an expropriation as follows: 435. The Tribunal agrees with the Claimants that ‘due process of law’, in the expropriation context, demands an actual and substantive legal procedure for a foreign investor to raise its claims against the depriving actions already taken or about to be taken against it. Some basic legal mechanisms, such as reasonable advance notice, a fair hearing and an unbiased and impartial adjudicator to assess the actions in dispute, are expected to be readily available and accessible to the investor to make such legal procedure meaningful. In general, the legal procedure must be of a nature to grant an affected investor a reasonable chance within a reasonable time to claim its legitimate rights and have its claims heard. If no legal procedure of such nature exists at all, the argument that ‘the actions are taken under due process of law’ rings hollow. And that is exactly what the Tribunal finds in the present case.408

The tribunal in Kardassopoulos409 applied the criteria used by ADC with ap- 255 proval.410 Since only a few tribunals have had the occasion to decide on the issue thus 256 far, the general conclusions on the due process requirements in the context of expropriations must remain tentative. Investment tribunals have required the following procedural guarantees concerning the international due process standard in the context of expropriation: – –

– –

reasonable advance notice of the expropriation;411 a procedure established by the local law that is accessible for investors to raise its claims against the depriving actions already taken or about to be taken against it and compliance with this procedure;412 within this procedure a fair hearing before an unbiased and impartial adjudicator has to take place;413 a hearing within a reasonable time following the expropriation by such an unbiased and impartial adjudicator.414 4. Compensation

In practice, by far the most important requirement for the legality of an expro- 257 priation is monetary compensation. Investment treaties invariably prescribe compensation as a requirement for the lawfulness of an expropriation.415 408 ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary (n. 175) para. 435. 409 Ioannis Kardassopoulos and Ron Fuchs v. Georgia (n. 47). 410 Ibid., paras. 395–404. 411 Middle East Cement Shipping and Handling Co. S.A. v. Egypt (n. 168) para. 143; ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary (n. 175) para. 435; Ioannis Kardassopoulos and Ron Fuchs v. Georgia (n. 47) paras. 395–397. 412 ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary (n. 175) para. 435; Ioannis Kardassopoulos and Ron Fuchs v. Georgia (n. 47) paras. 395, 396, 402. 413 ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary (n. 175) para. 435; Ioannis Kardassopoulos and Ron Fuchs v. Georgia (n. 47) paras. 395, 397. 414 ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary (n. 175) para. 435; Ioannis Kardassopoulos and Ron Fuchs v. Georgia (n. 47) paras. 396, 404. 415 On the issue of compensation in case of an expropriation see ch. 9, ‘Restitution, Damages and Compensation’, 1031–1153.

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E. Concluding Remarks 258 259

260

261

262

263

An express guarantee against uncompensated expropriation is a standard feature of bilateral as well as multilateral investment protection treaties. The conditions for the lawfulness of an expropriation (public purpose, prohibition of discrimination, requirement to pay compensation) have remained largely unchanged. Since the 1990s it has become common in investment protection treaties that the expropriatory action has to be taken in accordance with due process of law. The most important requirement for the legality of an expropriation remains monetary compensation. What is currently in dispute is not the question whether an expropriation requires compensation but whether a particular interference is to be considered an expropriation. This is especially true in the field of regulatory interference. Formal expropriations and their characteristics remain unchallenged as a concept. The concept of indirect expropriation as such is accepted in the case law, but different approaches are used by arbitral tribunals to decide whether an indirect expropriation has occurred. There is also a certain trend in model BITs and investment protection treaties to limit the concept of indirect expropriation. It is common ground among arbitral tribunals and academic commentators that for the existence of an expropriation the interference must reach a certain intensity: the capability to make use of the investment must be destroyed or greatly diminished and the interference must not be merely ephemeral. Arbitral tribunals often refer to ‘total or at least substantial deprivation’ as a yardstick in this regard. Loss of management and control over the investment are important indicators for the existence of an expropriation. The fulfilment of the quantitative requirement is a necessary condition for the existence of an expropriation. More recently a number of tribunals have additionally focused on the context and purpose of the interfering measure once it transgressed the required level of severity to decide whether an expropriation had occurred. Certain tribunals have denied the existence of an expropriation if the interference was for a public purpose, non-discriminatory and followed due process of law rules. Others balanced the public interest of the host State in the interference with the effects of the interference on the investor and its legitimate expectations to exercise a right acquired under host State law in order to decide on the existence of an expropriation. However, there is unanimity among arbitral tribunals that an expropriation requires the exercise of sovereign authority on the part of the State. Mere non-performance of a contract does not amount to an expropriation.

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Chapter 9: Restitution, Damages and Compensation I. The System of Reparation and Questions of Terminology

Irmgard Marboe A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. ‘Compensation’ upon Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6

C. The System of ‘Reparation’ under the Law of State Responsibility. . . . . 1. Restitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9 14 17

D. ‘Damages’ for Breaches of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27

E. ‘Unjust Enrichment’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30

F. ‘Punitive’ Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33

G. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36

Literature: Markham Ball, ‘Assessing Damages in Claims By Investors Against States’ (2001) 16 ICSID Rev.–FILJ 408–429; John Gotanda, ‘Assessing Damages in International Commercial Arbitration: A Comparison with Investment Treaty Disputes’ in Andrea Bjorklund, Ian Laird, and Sergey Ripinsky (eds), Investment Treaty Law. Current Issues III (British Institute of International and Comparative Law, 2008) 77–86; Mark Kantor, Valuation for Arbitration (Kluwer Law International, 2008); Irmgard Marboe, Calculation and Damages in International Investment Law (Oxford University Press, 2009); Irmgard Marboe, ‘Compensation in International Investment Law and Arbitration’ in Andrea Bjorklund, Ian Laird, and Sergey Ripinsky (eds), Investment Treaty Law. Current Issues III (British Institute of International and Comparative Law, 2008) 29–40; Irmgard Marboe, ‘Compensation and Damages in International Law. The Limits of “Fair Market Value”’ (2006) 7 JWIT 723–759; Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2009); Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration. Principles and Practice (Oxford University Press, 2011); Borzu Sabahi, ‘The Calculation of Damages in International Investment Law’ in Philippe Kahn and Thomas Wälde (eds), New Aspects of International Investment Law (Martinus Nijhoff Publishers, 2007) 553–595; Abby Cohen Smutny, ‘Principles of Compensation in Investment Treaty Arbitration’ (2007) 22 ICSID Rev.–FILJ 1–23; Anne van Aaken, ‘Primary and Secondary Remedies in International Investment Law and National State Liability: A Functional and Comparative View’ in Stephan Schill (ed), International Investment Law and Public Law (Oxford University Press, 2010) 721–754; Thomas Wälde and Borzu Sabahi, ‘Compensation, Damages and Valuation’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook on International Investment Law (Oxford University Press, 2008), 1049–1124.

A. Introduction

Remedies are at the centre of any legal system properly called, ubi remedium 1 ibi ius.1 This is particularly true for financial remedies in the area of international investment. Yet, the practice of investment tribunals in the valuation of claims

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is very divergent. The financial outcome of a proceeding is hardly predictable and sometimes seems arbitrary. This poses a significant problem because it puts into question the integrity of the dispute settlement process as a whole. From the perspective of the investor, there should be the possibility to have at least a rough estimate about what could be the financial outcome of the uneasy and costly undertaking of an investment arbitration proceeding. The lack of clarity and predictability in valuation matters has been the reason for an increased interest in the issue of valuation in the past few years. A number of studies have recently been dedicated to analyse existing arbitral practice and to provide some guidance.2 2 The valuation of claims in international investment disputes is a difficult and complex task. The reasons for this complexity include evidentiary challenges and, most importantly, confusion over the applicable legal and economic terms and principles. The obligation to pay an amount of money can be referred to as the duty to pay ‘compensation’, ‘damages’, ‘reparation’, ‘indemnification’, or otherwise.3 Even if these terms all refer to an amount of money to repair injury or damage, the underlying legal concepts vary. As the German–American Claims Commission has already stated in the Lusitania case: It is a general rule of both the civil and the common law that every invasion of a private right imports an injury and that for every such injury the law gives a remedy. Speaking generally, that remedy must be commensurate with the injury received. It is variously expressed as ‘compensation’, ‘reparation’, ‘indemnity’, ‘recompense’, and is measured by pecuniary standards, because, says Grotius, ‘money is the common measure of valuable things’.4

The various terms are sometimes used interchangeably which blurs the fact that they are connected to legal concepts which cannot equally be applied to different cases. 4 Furthermore, various areas of law are relevant in international investment disputes, such as the international law on State responsibility, rules on expropriation, and contract law principles. The reasonings of the tribunals at the valuation stage often do not coherently reflect these different legal bases. 3

1 Anne van Aaken, ‘Primary and Secondary Remedies in International Investment Law and National State Liability: A Functional and Comparative View’ in Stephan Schill (ed), International Investment Law and Public Law (Oxford University Press, 2010) 721–754, 722. 2 See in particular, Yves Derains and Richard Kreindler (eds), Evaluation of Damages in International Arbitration (ICC Publishing, 2006); Mark Kantor, Valuation for Arbitration (Kluwer Law International, 2008); Thomas Wälde and Borzu Sabahi, ‘Compensation, Damages and Valuation’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook on International Investment Law (Oxford University Press, 2008); Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2009); Irmgard Marboe, Calculation and Damages in International Investment Law (Oxford University Press, 2009) 1049–1124; Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration. Principles and Practice (Oxford University Press, 2011). 3 See a more detailed discussion of this problem in Irmgard Marboe, ‘Compensation and Damages in International Law. The Limits of “Fair Market Value”’ (2006) 7 JWIT 723–759. 4 Lusitania (United States v. Germany), Award of 1 November 1923, 7 RIAA 32, 35 with reference to Hugo Grotius, De iure bellis ac pacis, vol. 2, chapter 17, 22.

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Finally, valuation in investment arbitration is of multidisciplinary nature 5 which requires knowledge of valuation and finance in addition to law.5 Valuation approaches and methods as developed in economic theory and practice are not necessarily familiar to lawyers involved in international investment proceedings. Even if the assignment of valuation experts is useful and sometimes indispensible, it is necessary for counsel, judges and arbitrators to develop an understanding of the underlying concepts to evaluate the purported numbers and assumptions. This first part of the present chapter will discuss the different financial remedies available to foreign investors against States in international investment disputes and tries to contribute to the clarification of pertinent concepts and terminology. B. ‘Compensation’ upon Expropriation

Under public international law, it is generally recognised that a State has the 6 right to expropriate private property in the public interest.6 This right is considered to be part of the State’s territorial sovereignty. As regards the conditions of a lawful expropriation, States enjoy a large margin of discretion concerning their own nationals.7 If, however, the property of foreign nationals is affected, a number of criteria under international law has to be fulfilled. One of those criteria is the payment of ‘compensation’.8 Compensation, therefore, is one of the condi-

5 Christopher Dugan, Don Wallace, Noah Rubins and Borzu Sabahi, Investor-State Arbitration (Oxford University Press, 2008) 563. 6 See already the arbitral tribunal’s decision in Norwegian Shipowners’ Claim which pointed to this sovereign right of a State under both American and international law as ‘the power of a sovereign State to expropriate, take or authorise the taking of any property within its jurisdiction which may be required for the “public good” or for the “general welfare”.’ Norwegian Shipowners’ Claim (Norway v. United States), Award of 13 October 1922, 2 RIAA 309, 332; see also Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals (Stevens & Sons, 1953) 37; Georg Schwarzenberger, International Law, vol. I (3rd ed, Stevens & Sons, 1957) 184 et seq.; Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Springer, 1985) 2; John Westberg and Bertrand Marchais, ‘General Principles Governing Foreign Investment as Articulated in Recent International Tribunal Awards and Writings of Publicists’ in World Bank (ed), Legal Framework for the Treatment of Foreign Investment, vol. 1 (World Bank, 1992) 136, 139; Malcolm Shaw, International Law (Cambridge University Press, 2008) 828. 7 This is true even in the context of the European Convention on Human Rights, where the right to property is regarded as a human right (see Art. 1, Protocol No 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms). See, e.g., James and others v. United Kingdom (1986) ECHR Series A No. 98, para. 54, and Lithgow and others v. United Kingdom (1986) ECHR Series A No. 102, para. 116. 8 Ben Wortley, ‘Some Early but Basic Theories of Expropriation’ (1977) 20 GYIL 236, 242; Francisco V. Garcia-Amador, The Changing Law of International Claims (Oceana, 1984) 293 et seq.; Rosalyn Higgins, ‘The Taking of Property by the State’ (1982) 176 RC 259–392, 277; Paul Comeaux and Stephan Kinsella, Protecting Foreign Investment Under International Law (Oceana Publications, 1997) 57; Christoph Schreuer, ‘The Concept of Expropriation under the ECT and other Investment Protection Treaties’ in Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (JurisNet, 2006) 108–199, 108.

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tions of an expropriation to be in conformity with the State’s international obligations. 7 The discussion about the required standard of compensation for expropriation has been particularly controversial between capital exporting and capital importing countries in the past century.9 Today, there exist a large number of bilateral investment treaties (BITs) and some multilateral treaties, like the NAFTA or the ECT, which generally provide that the host State may only expropriate foreign investment against payment of compensation equivalent to the ‘value’ of the expropriated investment at the time of its expropriation or immediately before the expropriation became publicly known.10 The ‘value’ of the expropriated property must generally be assessed in an objective manner. This is the case, for example, when the ‘fair market value’ is the standard required. The ‘fair market value’ is commonly defined as the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.11

8

It is important to note that the obligation to pay compensation in this context is not a consequence of unlawful behaviour but a prerequisite of a lawful expropriation.12 We can therefore conclude that ‘compensation for expropriation’ has a very specific meaning and has to be evaluated in accordance with the particular rules on lawful expropriations. This is in contrast with a more general understanding of the term ‘compensation’ which is often used to denote the financial remedy to repair damage, including damage caused by an unlawful act. These cases will be discussed in the following. C. The System of ‘Reparation’ under the Law of State Responsibility

9

If a State breaches its international obligations, the law of State responsibility becomes engaged. The International Law Commission, in its Articles on the Responsibility of States for Internationally Wrongful Acts (hereinafter: ILC Articles)13, codified existing rules under customary international law regulating con-

9 See about this discussion and more references Irmgard Marboe, ‘Valuation in Cases of Expropriation’, ch. 9.III., 1057–1081. 10 See Irmgard Marboe, ‘Valuation in Cases of Expropriation’, ch. 9.III., 1057–1081. 11 International Glossary of Business Valuation Terms, available at http://www.nacva.com/association/a_by_terms.asp. See also CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para. 402. See also Azurix v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006, para. 424. See also Markham Ball, ‘Assessing Damages in Claims By Investors Against States’ (2001) 16 ICSID Rev.–FILJ 408–429, 414 et seq.; Richard Walck, ‘Methods of Valuing Losses’, ch. 9.II., 1045–1056, as well as Irmgard Marboe, ch. 9.III., ‘Valuation in Cases of Expropriation’, 1057–1081. 12 Irmgard Marboe, ‘Compensation in International Investment Law and Arbitration’ in Andrea Bjorklund, Ian Laird, and Sergey Ripinsky (eds), Investment Treaty Law. Current Issues III (British Institute of International and Comparative Law, 2008) 29–40, 30.

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ditions and consequences of acts of States in violation of their international obligations.14 These norms should be understood as ‘secondary norms’ of international law which describe the conditions and consequences of a State’s responsibility for a violation of international law.15 The ‘primary’ obligations of States derive from treaties, customary international law and general principles of law, the sources of international law as enumerated in Article 38 of the Statute of the International Court of Justice, thus including also bilateral and multilateral investment protection treaties. The distinction between ‘primary’ and ‘secondary’ norms of international law 10 is important for the understanding of the different remedies available in investment arbitration: the ‘primary’ norms of investment law are, in particular, contained in international investment treaties. In the case of an alleged breach of such a primary norm, it is the task of the tribunal to decide if the breach was attributable to the State16 and what consequences derive from it according to the ‘secondary’ norms of international law. The most important consequence of a violation of international law is the 11 obligation to make ‘full reparation’ as codified in Article 31 of the ILC Articles: 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.

The ILC Articles restate the principle of ‘full reparation’ which has been de- 12 scribed by the Permanent Court of International Justice (PCIJ) in Chorzów in the following way: 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 re-establish the situation which would, in all probability, have existed if that act had not been committed.17

13 Articles on the Responsibility of States for Internationally Wrongful Acts, Resolution of the General Assembly of 21 December 2001, UN Doc. A/Res/56/83, Annex. 14 Investment tribunals have repeatedly recognised that the ILC Articles constitute customary international law, and that they should be considered as such by investment tribunals. See, for example, Noble Ventures Inc. v. Romania, ICSID Case No. ARB/1/11, Award, 12 October 2005, para. 69; Biwater Gauff (Tanzania) Ltd. v. Tanzania, ICSID Case No. ARB/05/22, Award, 24 July 2008, para. 773; Duke Energy Electroquil Partners & Electroquil S.A. v. Ecuador, ICSID Case No. ARB/04/19, Award, 18 August 2008, para. 468; Railroad Development Corporation v. Guatemala, ICSID Case No. ARB/07/23, Award, 29 June 2012, para. 260. 15 James Crawford, The International Law Commission’s Articles on State Responsibility. Introduction, Text and Commentaries (Cambridge University Press, 2009) 14 et seq. 16 Kaj Hobér, ‘State Responsibility and Attribution’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook on International Investment Arbitration (Oxford University Press, 2008) 521–583. 17 Case Concerning the Factory at Chorzów (Germany v. Poland), PCIJ Judgment, Claim for Indemnity (Merits), Judgment of 13 September 1928, PCIJ 1928, Series A (1928), No. 17, 47. See James Crawford (n. 15) 202.

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Article 34 of the ILC Articles then specifies that ‘full reparation’ for the injury caused ‘shall take the form of restitution, compensation and satisfaction, either singly or in combination, in accordance with the provisions of this Chapter’. 1. Restitution

14

Restitution is the first of the three forms of reparation and is defined more specifically in Article 35 of the ILC Articles as the obligation 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 proportion to the benefit deriving from restitution instead of compensation.

Under the law of State responsibility, restitution is regarded as the primary remedy, while compensation is only a secondary remedy, should restitution be impossible or impractical.18 However, in investment arbitration, restitution or specific performance has only rarely been sought.19 In some cases, claimants tried to get relief by the re-establishment of the status quo ante,20 but arbitral tribunals have generally been rather reluctant to award restitution in favour of an investor.21 As restitution could imply modifications of the legal situation, such as annulling or amending legislative or administrative measures, it may be regarded as an undue interference with the sovereignty of the respondent State.22 The difficulty of enforcing such an award adds to the existing reluctance. 16 However, as a matter of principle, investment tribunals have the power to order specific performance.23 In view of recent awards on rather high amounts of money in favour of investors, respondent States might in the future even find it preferable to at least have a choice between specific performance and the payment of a large sum of money.24 15

18 James Crawford (n. 15) 213; see the more detailed discussion about remedies under the law of State responsibility in Stephan Wittich, ‘State Responsibility’, ch. 2.II., 23–45 and ch. 11.V., ‘Investment Arbitration: Remedies’, 1392–1431. 19 See the discussion on the reasons by Thomas Wälde and Borzu Sabahi (n. 2) 1058 et seq.; Borzu Sabahi (n. 2) 61 et seq. 20 Examples are Antoine Goetz et al v. Burundi, ICSID Case No. ARB/95/3, Award, 10 February 1999; Nykomb Synergetics Technology Holding AB v. Latvia, Arbitration Institute of the Stockholm Chamber of Commerce (ECT), Award, 16 December 2003; loan Micula, Viorel Micula, S.C. European Food S.A., S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Decision on Jurisdiction, 24 September 2008. 21 A well-known exception is Texaco Overseas Petroleum Company/California Calasiatic Oil Company (TOPCO) v. Libya, Award, 19 January 1977, (1978) 17 ILM 3, paras. 505–507. 22 LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. Argentina, ICSID Case No. ARB/02/1, Award, 25 July 2007, para. 87. 23 Christoph Schreuer, ‘Non-Pecuniary Remedies in ICSID Arbitration’ (2004) 20 Arb. Int’l 325–332, 331; Ursula Kriebaum, ‘Restitution in International Investment Law’ in Rainer Hofmann and Christian Tams (eds), International Investment Law and General International Law. From Clinical Isolation to Systemic Integration? (Nomos, 2011) 201–210, 210. 24 Thomas Wälde and Borzu Sabahi (n. 2) 1060.

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2. Compensation

The second form of reparation under the law of State responsibility is the duty 17 to pay ‘compensation’ in accordance with Article 36. The ILC has, after considerable debate,25 renounced determining more specific rules for the calculation of the amount of compensation. Amongst a number of other reasons, Special Rapporteur Crawford explained that this would almost inevitably reopen the discussion about primary obligations of international law, including the issue of compensation upon expropriation.26 The ILC eventually agreed on a rather general formulation of Article 36: 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.

This general formulation leaves room for interpretation and flexibility. Details 18 and examples are provided in the comprehensive Commentary to the ILC Articles.27 In essence, Article 36 only determines that the damage must be ‘financially assessable’.28 This represents only a very rough guideline, in particular as it not only covers material29 but also immaterial damage30 which is certainly not financially assessable without difficulties.31 To provide some guidance, the ILC refers in its Commentary to the measure of ‘full reparation’ as set out by the PCIJ in Chorzów in 1928: 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.32

The first point of reference of the valuation is, therefore, restitution in kind, 19 because, if restitution is not possible, the financial equivalent of this restitution

25 Report of the International Law Commission on the work of its fifty-second session, UN Doc. A/55/10, Supplement No. 10, paras 188–197. 26 International Law Commission, Third Report on State Responsibility, UN Doc. A/CN.4/507/ Add. 1, para. 154 et seq. 27 This was, according to Special Rapporteur Crawford, also the better place for it. See Report of the International Law Commission (n. 26) para. 197; see also James Crawford (n. 15) 218– 230. 28 See the discussion on this item by the International Law Commission, UN Doc. A/CN.4/507/ Add. 1, at para. 193. 29 This should mean: ‘[D]amage to property or other interests of the State and its nationals which is assessable in financial terms.’ See James Crawford (n. 15) 202. 30 This is interpreted in the Commentary as meaning: ‘[S]uch things as individual pain and suffering, loss of loved ones or personal affront associated with an intrusion on one’s home or private life.’ James Crawford (n. 15) 202. 31 See on the recent developments regarding moral damages Patrick Dumberry, ‘Moral Damages’, ch. 9.VII., 1130–1141. 32 Case Concerning the Factory at Chorzów (Germany v. Poland), PCIJ Judgment, Claim for Indemnity (Merits), Judgment of 13 September 1928, PCIJ 1928, Series A (1928), No. 17 at 47. See James Crawford (n. 15) 202.

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should be paid. In addition, there might be damage or loss sustained which would not be covered by restitution in kind or payment in place of it. The important question then is what kind of damage or loss can be successfully claimed in addition to the restitution value?33 One could take into account additional costs incurred, such as costs for transportation and storage or for a necessary loan but also costs for remedying the breach, negotiating, mitigation of damages, and pursuing the claims. 20 In order to arrive at an amount of money that represents ‘full reparation’, it is necessary to create a hypothesis as to how the financial situation of the injured ‘in all probability’ would be in the absence of the unlawful act. Then this hypothetical situation must be compared with the actual financial situation at present. This method was developed in the 19th century by Friedrich Mommsen in his ‘Theory on the Interest’ (referring to the Latin id quod interest)34 and is called ‘differential method’ (Differenzmethode).35 Mommsen defined ‘the interest’ as the difference between the amount of capital of a person, at a specific point in time, and the amount this capital would have without the interference of a particular damaging event at this specific point of time.36

21

Valuation of the damage on the basis of ‘the interest’ is generally regarded as a ‘subjective’ valuation approach, as opposed to an ‘objective’ valuation approach.37 It takes into account the specific financial situation of the injured person and is therefore a ‘concrete’ valuation of the damage. This has been spelled out clearly by the tribunal in Lemire v. Ukraine where the tribunal held that the actual calculation of damages cannot be made in the abstract, it must be case specific: it requires the definition of a financial methodology for the determination of a sum of money which, delivered to the investor, produces the equivalent economic value which, in all probability, the investor would enjoy, ‘but for’ the State’s breach.38

22

Similarly, the tribunal in El Paso v. Argentina points out that ‘the function of compensation is to address the actual losses incurred as a result of the internationally wrongful act.’39 The difference in relation to an ‘abstract’ valuation ap33 Crawford explains the well-known dictum of the PCIJ in Factory at Chorzów in the following way: ‘In the first sentence, the Court gave a general definition of reparation, emphasizing that its function was the re-establishment of the situation affected by the breach. In the second sentence it dealt with that aspect of reparation encompassed by “compensation” for an unlawful act – that is restitution or its value, and in addition damages for loss sustained as a result of the wrongful act.’ See James Crawford (n. 15) 202 (emphasis added). 34 Friedrich Mommsen, Zur Lehre von dem Interesse (Schwetschke, 1855) 3. 35 Georg Dannemann, Schadensersatz bei Verletzung der Europäischen Menschenrechtskonvention (Carl Heymanns, 1994) 226; see Irmgard Marboe (n. 3) 733; Borzu Sabahi (n. 2) 31; Thomas Wälde and Borzu Sabahi (n. 2) 1057. 36 Friedrich Mommsen (n. 34) 3, translation from German by the author. 37 Georg Dannemann (n. 35) 226; Peter Rummel and Josef Schlager, Enteignungsentschädigung (Signum, 1983) 83; see already Irmgard Marboe (n. 2) 34 et seq.; Irmgard Marboe (n. 3) 731. 38 Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, 28 March 2011, para. 152. 39 El Paso Energy International Company v. Argentina, ICSID Case No. ARB/03/15, Award, 31 October 2011, para. 710 (emphasis in original).

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proach becomes apparent when the concrete damage is atypical or unusually high. In international investment disputes, the concrete damage is higher than the abstract value, for example, when the investor has spent more money than ‘a hypothetical willing buyer’ would be willing to pay for the asset in question.40 The comparison of the two situations has to take place at the latest possible moment because speculation should be avoided as much as possible.41 Georg Schwarzenberger has already adopted this reasoning in the realm of the 23 law of State responsibility. He concluded that the valuation date should be the date of the award or a date as close as possible to that date and explained this in the following way: Much is to be said in favour of the date of the judgment as the operative date. It is the judgment or award which established between the parties with binding force that reparation is due from one party to the other. If restitution in kind were possible, it would have to take place as soon as possible after the judgment or award. It, therefore, appears appropriate that the amount of any monetary substitute for actual restitution should be related to the same date.42

This is an important distinction from the compensation standard in expropria- 24 tion cases, where the valuation date lies in the past, at the date of the expropriation. In case of State responsibility it is necessary not only to assess the value of the affected property in the past, but also to include all the financial consequences caused by the illegal act after that date. This can include an increase in value of the investment or other consequential damage.43 Despite these differences, international practice and commentators often do 25 not distinguish between compensation upon expropriation and compensation as part of reparation in the law of State responsibility.44 One of the reasons could be that the ILC itself did not distinguish in its terminology between ‘compensation’ for lawful acts and ‘damages’ for unlawful acts, even though this distinction has been relatively widespread and pointed out in jurisprudence and in scholarly writing.45 Commentators suggested that the ILC opted for a broader 40 Not all but many international investment tribunals have recognised that the money actually spent should be paid back to the investor, irrespective of the remaining objective ‘value’ of the investment. See the discussion of cases in Irmgard Marboe, ‘Valuation in Cases of Expropriation’, ch. 9.III., 1057–1081 and ‘Valuation in Cases of Breaches of International Law Unrelated to Expropriation’, ch. 9.IV., 1082–1102. 41 Friedrich Mommsen (n. 34) 3. See also El Paso Energy International Company v. Argentina (n. 39) para. 706. 42 Georg Schwarzenberger (n. 6) 666. 43 See, for example, Thomas Merrill, ‘Incomplete Compensation for Takings’ (2002) 11 NYU Env. L. J. 110–135, 118; and the discussion of cases in Irmgard Marboe, ‘Valuation in Cases of Expropriation’, ch. 9.III., 1057–1081. 44 See, for example, Thomas Wälde and Borzu Sabahi (n. 2) 1053; Sergey Ripinsky and Kevin Williams (n. 2) 4; Borzu Sabahi (n. 2) 91. 45 See, for example, Amerasinghe, who explicitly pointed out: ‘It is important in all cases to distinguish between unlawful takings of property and lawful takings. In the former what is due is damages. In the latter the alien must be compensated. There is clearly a distinction between the two cases, damages being naturally usually heavier than compensation.’ Chittharanjan F. Amerasinghe, ‘Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice’ (1992) 41 ICLQ 22, 37–38; see also an ICSID tribunal’s assessment:

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meaning of the term, including also the option for compensation without the unlawfulness of the underlying act.46 This interpretation is supported by the fact that ‘compensation’ may also be due in cases of lawful acts, as under a state of necessity under Article 25 of the ILC Articles.47 26 It follows that the use of the term ‘compensation’ both in the context of lawful and unlawful State actions is widespread. This, however, contributes to the existing confusion of terms and concepts and blurs the line between ‘primary’ and ‘secondary’ obligations of States. D. ‘Damages’ for Breaches of Contract

The legal relations between investors and host States are often determined by contracts. In case of a breach of the contract by the host State, the issue arises which law is applicable to determine the amount of ‘damages’.48 According to the prevailing view in academic writing and arbitral practice, the mere breach of a contract by a State does not constitute a violation of international law and, thus, does not entail State responsibility.49 The calculation of damages after a breach of such contracts is, therefore, primarily based on the applicable contract law.50 28 Frequently, the choice of law clauses, however, are rather unclear and refer to more than one law. They often point not only to one particular national law, but also to general principles of law and to international law. The implications of 27

46 47 48

49

50

‘The Tribunal notes that it is seized not only of a claim for compensation for the consequences to AGIP of the nationalization of the Company but also of a claim for damages for the losses resulting from all the violations of the contractual obligations of which the Government is impugned.’ AGIP SpA v. Congo, ICSID Case No. ARB/77/1, Award, 30 November 1979, para. 95; see further references in Irmgard Marboe ‘Compensation and Damages in International Law. The Limits of “Fair Market Value”’ 7 JWIT (2006) 723–759, 726. See Sergey Ripinsky and Kevin Williams (n. 2) 4; Thomas Wälde and Borzu Sabahi (n. 2) 1053. See Art. 25 of the ILC Articles, n. 26. See also Christina Binder, ‘Circumstances Precluding Wrongfulness’, ch. 5.IV., 442–480. That the term ‘damages’ and not ‘compensation’ should be used for unlawful acts and breaches of contract has been argued by the present author in the article ‘Compensation and Damages in International Law. The Limits of “Fair Market Value”’ 7 JWIT (2006) 723–759, 726; this has been affirmed by John Gotanda, ‘Assessing Damages in International Commercial Arbitration: A Comparison with Investment Treaty Disputes’ in Andrea Bjorklund, Ian Laird, and Sergey Ripinsky (eds) Investment Treaty Law. Current Issues III (British Institute of International and Comparative Law, 2008) 77–86, 77. Frederick A. Mann, ‘State Contracts and State Responsibility’ (1960) 54 AJIL 572, 575; Chittharanjan F. Amerasinghe, ‘State Breaches of Contracts with Aliens and International Law’ (1964) 58 AJIL 881, 912; Oscar Schachter, ‘International Law in Theory and Practice’ (1982) 178 RC 9, 309; Georges van Hecke, ‘Contracts between States and Foreign Private Law Persons’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 1 (1992) 814, 816; Irmgard Marboe and August Reinisch, ‘Contracts between States and Foreign Private Law Persons’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (last updated July 2007), available at http://www.mpepil.com; Ian Brownlie, Principles of Public International Law (Oxford University Press, 2008) 548 et seq. Markham Ball (n. 11) 410.

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such references are not always evident. Furthermore, it is important to note that ‘general principles’ of contract law hardly exist.51 Nevertheless, in a leading case of international arbitral practice, Sapphire v. National Iranian Oil Company, the arbitrator held: According to the generally held view the object of damages is to place the party to whom they are awarded in the same pecuniary position that they would have been if the contract had been performed in the manner provided for by the parties at the time of conclusion.52

In addition, a number of codifications of contract law contain similar princi- 29 ples.53 It follows that the principle of ‘full reparation’ seems to have evolved into a general principle which can be used as a guideline in the valuation of contract damages.54 E. ‘Unjust Enrichment’

The prevention of ‘unjust enrichment’ is sometimes referred to as an addi- 30 tional principle for the valuation of claims in investment arbitration cases.55 In essence, it aims at prohibiting that somebody benefits from the financial disadvantage of somebody else without a legal justification.56 As this principle can be found in a large number of legal systems, it is sometimes regarded as a general principle of law which is also a source of international law.57 At the core of its application lies the absence of any (other) legal basis upon which to base the obligation to restore a financial advantage acquired without a legal ground. During the controversies about the valuation of compensation in expropriation cases, it was put forward as an argument to limit the claims of the investors.58 51 Derek Bowett, ‘State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach’ (1988) 59 BYIL 49–74, 54. 52 Sapphire International Petroleums Ltd v. National Iranian Oil Company (1967) 35 ILR 136, 185; in the same direction see also Amco Asia Corp. v. Indonesia (Amco I), ICSID Case No. ARB/81/1, Award, 20 November 1984, para. 267; Amco Asia Corp. v. Indonesia (Amco II), ICSID Case No. ARB/81/1, Award, 5 June 1990, para. 183; Himpurna California Energy Ltd. v. PT (Persero) Perusahaan Listruik Nagara (PLN), Final Award, 4 May 1999, (2000) 25 YCA 13, para. 275. 53 Such as Article 74 of the UN Convention on Contracts for the International Sale of Goods, Article 7.4.2 of the UNIDROIT Principles of International Commercial Contracts and Article 9:502 of the Principles of European Contract Law. 54 See Irmgard Marboe, ‘Valuation in Cases of Breach of Contract’, ch. 9.V., 1103–1114. 55 Thomas Wälde and Borzu Sabahi (n. 2) 1053; Mark Kantor (n. 2) 115 et seq.; Sergey Ripinsky and Kevin Williams (n. 2) 129 et seq. 56 The roots of this principle go back to Roman Law, according to which it was also applicable in ius gentium, thus in international contexts. See Detlev Dicke, ‘Unjust Enrichment and Compensation’ in Detlev Dicke (ed), Foreign Investment in the Present and A New International Economic Order (Fribourg University Press, 1987) 268, with reference to Marcianus’ dictum ‘Nam iure gentium condici puto posse res ab his, qui non ex iusta causa possident’. 57 Christoph Schreuer, ‘Unjustified Enrichment in International Law’ (1974) 22 Am. J. Comp. L. 281–301; Sea-Land Services v. Iran, Award, 20 June 1984, 6 Iran–US CTR 149, 168, para. (v) (footnote omitted). 58 See, for example, Eduardo Jimenez de Arechaga, ‘International Law in the Past Third of a Century’ (1978) 159 RC 297, 299–300; Chittharanjan F. Amerasinghe, ‘The Quantum of

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However, the principle of unjust enrichment can also be regarded as a tool for valuation once liability has been established pursuant to some other cause of action.59 Contemporary commentators refer to it as an additional element when ‘equitable principles’ are discussed.60 The measure of damage would then not be the financial situation of the claimant but that of the respondent.61 32 In practice, however, there are hardly any cases where the principle has actually been applied.62 Some tribunals have discussed it,63 but have eventually come back to the perspective of the loss of the investor and not to that of the gain of the host State. 31

F. ‘Punitive’ Damages 33

‘Punitive’, or ‘exemplary damages’, are sums awarded in addition to compensatory damages, usually because of particularly aggravated misconduct on the part of the defendant.64 However, in most countries the concept of ‘punitive damages’ is not accepted.65 The task of punishing transgressors of the law is usually regarded as an exclusive competence of the State in the form of criminal or administrative proceedings and is considered as inappropriate in civil or arbitral proceedings.66

59 60 61 62

63

64

65

Compensation for Nationalized Property’ in Richard Lillich (ed), The Valuation of Nationalized Property in International Law, vol. III (University Press of Virginia, 1975) 91, 95–96; Norman Girvan, Expropriating the Expropriators: Compensation Criteria from a Third World Viewpoint, ibid., 149, 166 et seq.; see also the position of Iran on the valuation of compensation upon expropriation in Amoco International Finance Corp. v. Iran, 15 Iran–US CTR (1987) 189, para. 190. Sergey Ripinsky and Kevin Williams (n. 2) 129 et seq. See Mark Kantor (n. 2) 115. Irmgard Marboe (n. 3) 732; Mark Kantor (n. 2) 115–116. One of them is Lena Goldfields, Award, 3 September 1930, 36 Cornell L. Q. (1950) 31, para. 25. The unpersuasive approach of the tribunal in this case has, however, been criticised by Christoph Schreuer (n. 57) 289. His opinion was shared by the tribunal in Azurix v. Argentina, Award of 14 July 2006, para. 435; see, in the same sense, also Sergey Ripinsky and Kevin Williams (n. 2) 131. Southern Pacific Properties v. Egypt, ICSID Case No. ARB/84/3, Award, 20 May 1992, para. 247; Amoco International Finance v. Iran (n. 58) paras. 225, 259; Azurix v. Argentina (n. 11) paras. 436, 438; Enron v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007, para. 382; ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006, paras. 243, 500; for a comment on the question of unjust enrichment see Ana Vohryzek, ‘Unjust Enrichment Unjustly Ignored: Opportunities and Pitfalls in Bringing Unjust Enrichment Claims under ICSID’ (2009) 31 Loy. L.A. Int’l & Comp. L. Rev. 501–580. John Gotanda ‘Damages in Private International Law’ (2007) 326 RC 73–407, 322; Jacques Werner, ‘Punitive and Exemplary Damages in International Arbitration’ in Yves Derains and Richard Kreindler (eds), Evaluation of Damages in International Arbitration (ICC Publishing, 2006) 101–111, 101. See the comparative overview by John Gotanda (n. 64) 324 et seq.; Ronald Brand, ‘Punitive Damages and the Recognition of Judgements’ (1996) 43 NILR 143–186; John Gotanda, ‘Charting Developments Concerning Punitive Damages: Is the Tide Changing?’ (2007) 45 Colum. J. Transnat’l L. 507–528, 508.

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In public international law, due to the absence of criminal sanctions, the ac- 34 ceptance of punitive damages or exemplary damages has, in scholarly debates, sometimes been discussed.67 The respective academic and theoretical considerations have, however, not found support in international practice.68 There are even treaty provisions explicitly prohibiting punitive damages.69 It seems, therefore, that the well-known dictum of the German–American 35 Claims Commission in Lusitania still represents the prevailing view in international law, namely that the ‘superimposing of a penalty in addition to full compensation and naming it damages, with the qualifying word exemplary, vindictive, or punitive, is a hopeless confusion of terms, inevitably leading to confusion of thought’.70 Nevertheless, international tribunals sometimes have awarded damages in excess of the damage actually incurred. These, however, were not necessarily representing punitive damages but should rather be regarded as reparation for immaterial or moral damage.71 G. Conclusion

It has been shown that different pecuniary remedies are available to investors 36 in investor-State arbitration and that they could and should be distinguished. In cases of expropriation, foreign investors may claim ‘compensation’ for their expropriated investment. The standard of compensation is usually determined in an applicable investment treaty, a ‘primary’ norm of international law. Generally, an objective valuation approach, such as the fair market value, is provided for in the treaty. If a State violates its international obligations, including those contained in investment treaties, its international responsibility becomes engaged. Under international law, the responsible State is obliged to make ‘full reparation’. The secondary norms of State responsibility provide for three forms of reparation, ‘restitution’, ‘compensation’ and ‘satisfaction’ of which the second one is the most relevant in international investment arbitration. In order to

66 See Michael Reisman and Robert Sloane, ‘Indirect Expropriation and its Valuation in the BIT Generation’ (2003) 74 BYIL 115–150, 138; James Crawford (n. 15) 219. 67 See, for example, the proposals by the Special Rapporteur of the ILC, Gaetano Arangio-Ruiz, in the Second Report on State Responsibility, UN Doc. A/CN.4/425, 33–34; similarly Eibe Riedel, ‘Damages’ in Rudolf Bernhardt (ed), International Encyclopedia of Public International Law (Elsevier, 1992) 929, 932, and Robert Jennings and Arthur Watts (eds), Oppenheim’s International Law (Longman, 1996) § 156. Brower’s Concurring Opinion in Sedco Inc v NIOC (Final Award), 15 Iran–US CTR (1987) 23, 205 also points into the same direction. 68 Charles Brower and Jason Bruschke, The Iran–US Claims Tribunal (Martinus Nijhoff, 1999) 477, referring to Amoco International Finance v. Iran (n. 58) para. 197; see also S. D. Myers Inc. v. Canada, UNCITRAL (NAFTA), First Partial Award, 13 November 2000, para. 309, n. 53. 69 See, for example, Art. 1135 para. 3 of NAFTA. 70 Lusitania (United States v. Germany) (n. 4) 39. 71 See Stephan Wittich, ‘Awe of the Gods and Fear of the Priests: Punitive Damages and the Law of State Responsibility’ (1998) 3 ARIEL 101–199, 144 et seq.; see also Patrick Dumberry, ‘Moral Damages’, ch. 9.VII., 1130–1141.

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achieve ‘full reparation’, not only the objective value of the damage but also the concrete ‘interest’, thus the ‘subjective’ loss of the injured person has to be taken into account. Furthermore, international investments are often based on contracts between investors and the host State or host State entities. In case of a breach, contract ‘damages’ have to be paid which also have to be commensurate with ‘full reparation’. Frequently, also this kind of remedy is termed ‘compensation’. Other monetary claims based on the concepts of ‘unjust enrichment’ or ‘punitive damages’ have been discussed in international investment disputes but have so far not been accepted as a basis for monetary awards in practice.

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Richard E. (Rory) Walck A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Valuing the Entire Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Cost- or Asset-Based Methods of Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Market or Transactions Based Methods of Valuation . . . . . . . . . . . . . . . . 3. Income-Based Methods of Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Reconciling the Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 11 16 21 28

C. Valuing the Loss of Profits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32

D. Professional Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37

E. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39

Literature: ASA Business Valuation Standards (American Society of Appraisers, 2009); Business Valuation: A Guide for Small and Medium Sized Enterprises (Fédération des Experts Comptables Européens, 2001); Aswath Damodaran, The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses (FT Press, 2010); Aswath Damodaran, Investment Valuation (John Wiley & Sons, 2002); Yves Derains and Richard Kreindler, Evaluation of Damages in International Arbitration (ICC Services, 2006); Robert Dunn, Recovery of Damages for Lost Profits (Lawpress Corporation, 2005); Nancy Fannon, The Comprehensive Guide to Lost Profits Damages (Business Valuation Resources, 2009); Peter Frank, Christian Hughes, Michael Wagner and Roman Weil, Litigation Services Handbook: The Role of the Financial Expert (John Wiley & Sons, 2007); International Valuation Standards (International Valuation Standards Committee, 2007); Mark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence (Kluwer Law Int’l, 2008); Tim Koller, Marc Goedhart and David Wessels, Valuation: Measuring and Managing the Value of Companies (John Wiley & Sons, 2005); Irmgard Marboe, Calculation of Compensation and Damages in International Investment Law (Oxford University Press, 2009); Shannon Pratt, Robert Reilly and Robert Schweihs, Valuing a Business (McGraw-Hill, 2000); Robert Reilly and Robert Schweihs, Valuing Intangible Assets (McGraw-Hill, 1999); Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2008); Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice (Oxford University Press, 2011); Borzu Sabahi and Thomas Wälde, ‘Compensation, Damages and Valuation in International Investment Law’ (2007) 4 Transnational Dispute Management, Issue 6, 1–64; Statement on Standards for Valuation Services No. 1: Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset (AICPA, 2007); Gary Trugman, Understanding Business Valuation (AICPA, 2008).

A. Introduction

Losses in international investment matters can be evaluated in a variety of 1 ways. While there may be guidance on the standard of compensation found in customary international law, ‘[w]hen it comes to the method of establishing and calculating “full reparation”, customary international law does not provide much guidance.’1 The choice of method or methods will typically depend on the specific facts surrounding the loss, as well as legal guidance from an investment treaty, the investment law of the host country or other relevant source. That Richard E. (Rory) Walck

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guidance may point toward an objective valuation or a subjective one.2 At times, guidance may be scant, leaving the parties (and perhaps the arbitral tribunal) to fashion a method of their choosing that is appropriate to the circumstances and supported by logical reasoning. 2 As one noted practitioner has pointed out: [F]inding common principles in these awards is not always easy either, given the absence of precedent, the variety of factual situations and the sometimes less than detailed reasoning as to how the final figure, often a compromise global figure, is reached.3

This section will introduce concepts for the valuation of losses that may be applied in international investment matters. These include methods for valuing companies and investments, as well as methods for evaluating business losses which, while potentially affecting the value of the overall investment, do so only partially or incrementally, rather than completely. The latter may be useful, for example, in circumstances where an investor has suffered compensable losses, such as a violation of standards of treatment under an investment treaty, but where the investor has not been deprived of its investment.4 The section also touches briefly on some of the professional standards and guidance for those performing valuations, which will be equally of interest to those who instruct them and those who must evaluate the results of their work. 4 Subsequent sections of this chapter will explore these topics in greater detail from a legal perspective. Section III covers the valuation of losses in expropriation cases, where the value of the entire investment may be most relevant.5 Sections IV and V, on non-expropriatory harm and breach of contract, respectively, address the valuation of losses falling short of a total loss of the business value. The remaining sections of this chapter focus on other related damages and compensation concepts. 3

B. Valuing the Entire Company 5

There are three broad categories of valuation methods commonly used by valuators in assessing the value of a business or investment. These are generally re-

1 Kaj Hobér, ‘The Energy Charter Treaty – Awards Rendered’ (2007) 1 Disp. Res. Int’l 36–57, 55 (emphasis in original). 2 For a fuller treatment of this distinction, see Irmgard Marboe, Calculation of Compensation and Damages in International Investment Law (Oxford University Press, 2009) 34–39. 3 Hilary Heilbron, ‘Assessing Damages in International Arbitration: Practical Considerations’ in Richard Hill and Lawrence Newman (eds), The Leading Arbitrators’ Guide to International Arbitration (JurisNet, 2008) 445, 468 and in (2014) 1 JDIA 1–29, 23. 4 Of course, where the effect of a standard of treatment violation is to destroy the entire value of the investment, methods that are used to value the entire company may be used by parties and tribunals, even if there was no actual expropriation of the investment. 5 The reader will note that there has been much discussion of the difference in compensation for a lawful expropriation and an unlawful one. This is principally a legal question of the standard of compensation under a treaty or applicable law, rather than a question of valuation. The harm to the investor is frequently the same in either case, although the compensable nature may differ.

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ferred to as (a) cost- or asset-based methods, (b) market- or transactions-based methods and (c) income-based methods. Valuators will typically use one or more approaches to the estimation of value, and reconcile the results of varying approaches in reaching conclusions of value or damage. Valuators will have to determine the appropriate standard of value (fair market value, fair value, investment value, or some other standard), which may be set by the legal context. In addition, the valuator should consider the premise of value, which is the valuator’s assumption regarding the most likely transactional circumstances (going concern, liquidation, etc.).6 Not all of these methods may be applicable in any given circumstance. There 6 may be good reasons why a particular method may be inapplicable, or may give results that are not appropriate to the subject investment. For example, intellectual property may have little in the way of tangible cost – it is the intellectual brainchild of its developer. Yet its market value may be substantial, far outweighing the development cost. Similarly, when a development company obtains raw land, creates plans for its development and obtains rezoning of the land, the resulting parcel(s) may have value far in excess of the simple cost of the raw land, planning labour and zoning hearings. Taking that a step further, once construction of the project is completed, the finished structures are valued (and priced) significantly above the costs incurred in the process of getting to the endpoint of the development. In each case, the ‘market’ values the creative additions that occurred along the way, although the tangible asset values reflected in the company’s books generally will not. For any particular asset – say, for example, a piece of equipment – its value 7 can be related to the benefit it brings to the owner. Assets that deliver great value, e.g., through significant cost savings, will be priced higher than those that do not. If there is a ready market in which the asset can be purchased, the task of valuing it is straightforward. In such a case, a cost- or asset-based model would be used by most valuators, rather than engaging in the more difficult process of estimating the future economic benefit the equipment will bring (perhaps in the form of labour cost savings). Where the investment being valued is an entire firm, the analysis becomes in- 8 creasingly complex. The firm is not simply a collection of assets, each of which can be purchased at the local store, but an organised entity comprising physical assets, personnel, intellectual capital, financial capital and more. Here, the valuator will be more likely to look to comparable purchases and sales of companies, 6 The terms ‘standard of value’ and ‘premise of value’ are set out in the International Glossary of Business Valuation Terms, reprinted at Appendix B in ‘Statement on Standards for Valuation Services No. 1: Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset’ (AICPA, 2007) 40–50, http://www.aicpa.org/interestareas/forensicandvaluation/ resources/standards/downloadabledocuments/ssvs_full_version.pdf (hereinafter ‘SSVS-1’). See also Shannon Pratt, Robert Reilly and Robert Schweihs, Valuing a Business: The Analysis and Appraisal of Closely Held Companies (McGraw-Hill, 2000) 28–34 and Robert Reilly and Robert Schweihs, Valuing Intangible Assets (McGraw-Hill, 1999) 59–64.

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or to an estimation of the future earnings prospects of the business. Historic transactions in the subject company’s stock may also provide an indication of value, though care must be taken to ensure that they reflect market value, and not an arbitrary price or some other measure. 9 But even historic transactions in the company’s shares may be insufficient to capture the nuance of a future market potential for the company. As Pratt, et al. caution: [T]he valuation analyst should keep in mind that the value of an investment is a function of what it will do for an owner in the future, not what it has done for an owner in the past. Therefore, regardless of what valuation approach is used, in order for it to make rational economic sense from a financial point of view, the results should be compatible with what would result if a well-supported discounted economic income analysis were carried out.7

10

The various techniques used in valuation should be viewed as mutually supportive, not mutually exclusive. A discounted cash flow (DCF) projection may be confirmed by market transactions, in which an investor performs its own DCF calculations and invests on that basis. Alternatively, an investor may consider the historic asset costs or current replacement values for tangible assets and estimate the intangible asset values that are brought by the experience, knowledge and abilities of the company’s personnel – the latter being reflected in the ability of the enterprise to generate cash flows from putting those tangible and intangible assets to good use. Those assets collectively drive the anticipated future cash flows of the firm, which are what is most important to an investor. The objective, of course, is to perform a valuation that meets the test of ‘reasonable certainty,’ and avoids reliance upon mere speculation.8 1. Cost- or Asset-Based Methods of Valuation

11

The simplest way to view the cost method of valuation (or asset method of valuation) is to consider an asset that is not unique, and that can be easily replaced by simply calling a vendor and saying, ‘Ship us another one.’ Costs can be relatively easily obtained, and the reliability of the resulting figure is generally high. But while reliability may be high, relevance may or may not be. Historical cost is, by definition, a backward-looking exercise. Although historical cost has long been a fundamental basis of U.S. generally accepted accounting principles, the U.S. Financial Accounting Standards Board has recognised for decades that accounting information may not be directly reflective of business or asset value: Financial accounting is not designed to measure directly the value of a business enterprise, but the information it provides may be helpful to those who wish to estimate its value.9

7 Shannon Pratt, Robert Reilly and Robert Schweihs (n. 6) 154. 8 For a discussion of the concept of reasonable certainty, see, e.g., Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2008) 165–167, 280–288. See also, Yves Derains and Richard Kreindler (eds), Evaluation of Damages in International Arbitration (ICC Services, 2006) 125–128 and Robert Dunn, Recovery of Damages for Lost Profits (Lawpress, 2005) 16–32.

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The valuation exercise becomes substantially more complex when you con- 12 sider a business as a whole entity, as distinct from a mere collection of tangible and easily replaced assets. As the Fédération des Experts Comptables Européens notes in its guide to business valuation: Businesses are specific combinations of tangible and intangible items which, together, are intended to work jointly to produce business profits. The value of a business is thus not determined as the sum of individual items of assets and liabilities, but rather by the combination of all items involved in the business.10 (...) The value of a business is based, under the assumption of purely financial objectives, on the present value of net cash flows from the business to the owner (net receipts of the owner of the business). This means that the value of the business is based solely on its ability to earn business profits for the owner. (...) On the other hand, the net asset value is, of itself, of no importance when calculating the value of a business.11

Notwithstanding the many potential objections to the use of cost- or asset- 13 based methods for valuing a business, principally relating to their relative inability to address a forward-looking market value, they do generally provide an objective, verifiable benchmark that may be of some baseline value in assessing an investment, particularly where forward-looking projections are deemed too speculative or uncertain. The general view of valuation professionals is that while historic cost or cur- 14 rent asset values may have some degree of relevance, they are not the best evidence of the value of the business going forward. The International Valuation Standards Committee and the American Society of Appraisers acknowledge this explicitly: In fact, when an operating business is valued as a going concern by means of a method within the Asset-Based Approach, the IVSC advises that use of the asset-based method should be accompanied by valuations from the Market-Based or Income-Based Approaches as well.12 (...) The asset-based approach should not be the sole appraisal approach used in assignments relating to operating companies appraised as going concerns unless this approach is customarily used by sellers and buyers.13

Even where adjustments are made to state asset values at current market val- 15 ues, whether through current value appraisals or by adding a market rate of return to historical cost data, the asset method will often fail to fully reflect forward-looking market values. This may result from the intangible aspects of the 9 Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 1 (1978) 6. 10 Fédération des Experts Comptables Européens, Business Valuation: A Guide for Small and Medium Sized Enterprises (2001) para. 4.2 (hereinafter ‘FEE Guide’). 11 FEE Guide (n. 10) para. 2.2. 12 Mark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence (Kluwer Law International, 2008) 29. 13 American Society of Appraisers, ASA Business Valuation Standards (2009) 9, available at http://www.appraisers.org/docs/default-source/discipline_bv/bv-standards.pdf?sfvrsn=0.

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business – some owners are simply better managers and are able to generate superior returns from the assets. Those greater returns are reflected in higher value for the well-managed company. 2. Market or Transactions Based Methods of Valuation

The transactions method of valuation (also called the market method of valuation) looks at the metrics of comparable companies, e.g., through observation of share prices of publicly traded companies or analysis of merger and acquisition data. In some cases, this may be the most compelling method, particularly where the transactions involve the subject company or a very close proxy, are in close time proximity to the date of valuation and were made at arm’s length prices that are reasonably reflective of the ‘willing buyer – willing seller’ criteria typically utilised in determining fair market value. 17 In using guideline companies as a proxy for the subject company, the valuation analyst attempts to amass metrics of the guideline companies – typically comparing the prices of the guideline companies to various financial information – and then uses those metrics to project a value for the company being studied. Pratt, et al. list several possible income statement measurements that might be used in this regard: 16

– – – – – – –

Net sales. Net income after taxes. Gross cash flow (net income plus noncash charges). Net cash flow (gross cash flow adjusted for capital expenditures, changes in working capital, and sometimes changes in debt). Net income before taxes. Gross cash flow before taxes (earnings before depreciation, other noncash charges, and taxes, sometimes called EBDT). Dividends or dividend-paying capacity.14

The challenge inherent in this method is to define what is ‘comparable.’ Considerable judgment is required to ensure that the comparisons make sense from the standpoint of comparability of the companies’ operations, business risks, markets, timing, and a host of other factors. 19 Even transactions in the subject company’s own shares may fail to capture fair market value. Where such transactions are made under non-market conditions, e.g., in a buy-sell agreement specifying a measure other than fair market value, or some other arrangement specifying a specific value without reference to market value, they may provide the valuator with little guidance. As Pratt et al. note, ‘Formula approaches for setting the price in a buy-sell agreement can easily turn out to be unfair to one party or the other when the transaction eventu18

14 Shannon Pratt, Robert Reilly and Robert Schweihs (n. 6) 226.

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ally occurs.’15 Under such circumstances, non-market based transactions will generally be given little or no weight by the objective valuator. In using potentially comparable firms to estimate the value of an investment, 20 the first step is to identify the comparable firms for which transactional or market data can be observed. From there, these comparables must be evaluated to assess the degree to which they are truly comparable. Adjustments may be required to the observed data to reflect the impact of control, or lack or control, as well as for marketability (or lack thereof) of the subject investment.16 3. Income-Based Methods of Valuation

Valuation professionals recognise a number of methods and variants for the 21 calculation of values using an income method of valuation. The most frequently encountered is the discounted cash flow analysis, which estimates the cash flow available to a class of investors (i.e., to equity holders, or to all the providers of both debt and equity capital), and then discounts future amounts back to a common date using an appropriate discount rate. The discount rate will vary depending on the cash flows that are being measured: cash flows to equity will be discounted at a rate appropriate to equity, while cash flows to total invested capital (i.e., cash flows to both debt and equity) are generally discounted at the weighted average cost of capital (WACC).17 A variant on the DCF method that is often used for companies with relatively 22 stable earnings and a relatively consistent expected rate of growth is the capitalised cash flow (CCF) method. Under the CCF method, a single year’s earnings are divided by the capitalisation rate to ‘gross up’ the earnings into a valuation amount. In contrast, the DCF method uses the expected returns for each of the years. Pratt, et al. summarise the difference in this way: In contrast to the more comprehensive method of discounting all of the expected returns, a capitalization rate converts only a single return flow number to an indicated present value.18

This is not problematic when the annual returns show a consistent pattern and 23 a consistent level of growth. Where a DCF model might, for example, use a growth rate to project future cash flows, and then discount those future cash flows to the equity holders at the cost of equity, the CCF method would capitalise one year’s earnings at the difference between the discount rate and the 15 Shannon Pratt, Robert Reilly and Robert Schweihs (n. 6) 627. 16 For further discussion of premiums (discounts) for control, marketability and other issues see Philip Saunders, Jr., ‘Control Premiums, Minority Discounts and Marketability Discounts’ in Robert Dickie (ed), Financial Statement Analysis and Business Valuation for the Practical Lawyer (American Bar Association, 2006) 325–334. See also Shannon Pratt, Robert Reilly and Robert Schweihs (n. 6) 345–436 and Jeffrey Risius, Business Valuation: A Primer for the Legal Profession (American Bar Association, 2007) 154–162. 17 The WACC reflects (a) the cost of equity, weighted by the proportion of the firm’s capital supplied by equity holders, plus (b) the after-tax cost of debt, weighted by the proportion of the firm’s capital supplied by lenders. 18 Shannon Pratt, Robert Reilly and Robert Schweihs (n. 6) 204 (emphasis in original).

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growth rate. Both methods accomplish the same objectives – to capture future growth and discount it to the present – but do that in slightly different ways. In some cases, both DCF and CCF methods are used, with the initial years discounted using a DCF model, and the distant years measured using a CCF calculation. 24 Where annual returns are highly variable, or where growth rates are all over the map from one year to the next, the CCF method does not work well. But for companies that have reached a stage of maturity at which growth is expected to normalise, the CCF method can be reasonably employed. 25 A third variant is the adjusted present value (APV) method. The APV method attempts to separately value the unleveraged (or equity financed) firm, and the impacts of leverage. This can be helpful where the capital structure of the firm changes over the damages period.19 However, it comes at the cost of some additional, and potentially significant, complexity. As Sénéchal notes in discussing the complexity of the APV method: The adjusted present value is equal to the sum of the value of the unleveraged company and the value of tax shield less the present value of financial distress costs. Each of these components is discounted at different rates representing the different risks.20

26

This adds a level of complexity that is frequently unwarranted. As Sénéchal writes: [T]he [DCF] approach should be privileged over the APV method which can be complex to implement and very costly or time consuming. At the general level, DCF has proven to be simple and consistent, rather than subtle and arbitrary.21

27

The use of income approaches, and in particular a DCF projection, is well established in valuation theory.22 Where investments in emerging markets are the subject of the valuation, a well-constructed DCF may be the best way to account for certain risks, such as high inflation, currency exchange and other countryspecific risks.23 The challenge is to reasonably forecast the firm’s future activity. As Kantor writes: To assess damages suffered by a company, or to value a business based upon its value to third parties, an arbitrator or an expert must regularly answer questions about that future. What would the

19 For a discussion of the APV method, see Bonnie Goldsmith and Greg Hallman, ‘Adjusted Present Value (APV) Method’ in Peter Frank, Christian Hughes, Michael Wagner and Roman Weil (eds), Litigation Services Handbook: The Role of the Financial Expert (John Wiley & Sons, 2007) Chapter 13, App. B. 20 Thierry Sénéchal, ‘Dealing with Uncertainty: Discounted Cash Flow (DCF) Versus Adjusted Present Value (APV)’ (2007) 4 TDM, Issue 3, 1–5, 3. 21 Thierry Sénéchal (n. 20) 1. 22 Prof. Marboe notes that the Fédération des Experts Comptables Européens reiterates the importance of the income method of valuation in its valuation guide. See Irmgard Marboe (n. 2) paras. 4.11–4.12. 23 The particular risks of emerging markets and their treatment in valuation are described in detail in Tim Koller, Marc Goedhart and David Wessels, Valuation: Measuring and Managing the Value of Companies (John Wiley & Sons, 2005) 605–636.

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II. Methods of Valuing Losses revenues have been? The expenses? Would additional capital have been required? How certain or reliable are those estimates?24

4. Reconciling the Results

Once valuations have been performed using the methods described above, the 28 final step is to reconcile results that may differ significantly. Most valuators will do this by giving each method a weight that is appropriate under the circumstances. Where a business has a limited track record, a lower weight will be given to the future projections used in an income method, all other things remaining equal. Alternatively, in situations where the facts suggest the future will be brighter than the past – due, for example, to new product innovation or new management – a higher weight may be given to the income method valuation than to a historical cost-based one. The valuator should bear in mind not only the purpose of the valuation, but 29 the user(s) of the valuation, as well. As Sabahi points out: Arbitrators prefer certainty over speculation. This in turn may lead to a preference for methods that rely on historical market data rather than on financial modelling based on various assumptions required by valuation methods such as discounted cash flow.25

The valuation expert can accommodate that perceived preference by present- 30 ing the results of each valuation method employed, along with the valuator’s rationale for assigning relative weights to each in the final value conclusion. This reconciliation of potentially conflicting results requires considerable 31 judgment by the valuator. This is one of the principal challenges in assessing valuations in international matters. As Sabahi and Wälde note: A major challenge for the assessment of damages is therefore to find an objective valuation method which can be founded on rational reasoning, and on objective standards independent from an individual’s subjective judgment or the psychological dynamics of litigation and internal tribunal decision-making.26

C. Valuing the Loss of Profits

Loss of profits claims arise in a number of circumstances, including viola- 32 tions of investment treaties, contract breach and torts. As Dolzer and Schreuer state, ‘If the illegal act results in deprivation of income, damages may have to include lost profits.’27 Gotanda echoes this view, quoting Lauterpacht’s decadesold statement that the proposition that international law disregards lost profits is ‘repellant to justice and common sense.’28 Compensation for an unlawful expro-

24 Mark Kantor (n. 12) 7. 25 Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice (Oxford University Press, 2011) 108. 26 Borzu Sabahi and Thomas Wälde, ‘Compensation, Damages and Valuation in International Investment Law’ (2007) 4 TDM, Issue 6, 1–64, 10. 27 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 273.

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33

34

35

36

priation may include not only the investor’s loss of its investment, but the profits that would have been earned in the future.29 In each case, some wrong is alleged, which results in a loss of revenues, increased costs, or both. Sabahi points out that the calculation of lost profits, or business interruption value, is done ‘by comparing the actual (impaired) value with the hypothetical value that the investment would have had.’30 The counterfactual scenario can be developed in a variety of ways, including the use of the investor’s experience before and/or after the damaging act, by reference to the investor’s experience at other non-impacted locations, the use of comparables or industry averages, and by using the investor’s pre-litigation projections. In some situations, such as where a concession has been taken back, it may be possible to draw useful data from the subsequent operation, whether by the respondent or another party.31 Where a calculation can be supported using multiple methods, the persuasiveness of the calculation will be increased. While the measurement of such losses can be done by measuring the DCF value of the firm before and after the complained act (since the firm value using the income method is simply the net present value of future cash flows), it is more common to simply calculate the cash flows that were lost and discount them. There is usually no need to take the additional step of calculating the value of the entire firm or investment before and after. An exception to this can occur when an expropriation claim must take into account elements of business risk and/or legal defences such as necessity, or where ‘creeping expropriation’ combines elements of lost profits with the ultimate destruction of the investment’s remaining value. In such cases, successive iterations of a well-formulated DCF valuation model can be used to isolate compensable elements of damage from those that are non-compensable, as well as to isolate diminution in value or loss of profits from the investment’s residual value at the time of the final taking.32 The concepts used in calculating lost profits are very similar to those that would be used in valuation of an investment. Both valuation under the income method and the calculation of lost profits require the projection of revenues and costs, and the determination of an appropriate discount rate to bring future amounts to present value, as well as the assessment of how the discount rate interacts with the interest rate applied to past amounts.33 Both efforts may rely on

28 John Gotanda, ‘Assessing Damages in International Commercial Arbitration: A Comparison with Investment Treaty Disputes’ (2007) 4 TDM, Issue 6, 1–14, 6. 29 There are, of course, questions that may arise regarding double counting of damages. For a discussion of the compensability of damnum emergens and lucrum cessans, see Irmgard Marboe (n. 2) 69–74. 30 Borzu Sabahi (n. 25) 123. 31 For discussion of these and other methods, and the circumstances in which U.S. courts have accepted or rejected them, see Robert Dunn (n. 8) 430–466. 32 This concept is described by Leonardo Giacchino and Richard Walck, ‘Damages Models to Accommodate the Necessity Defense’ (2010) 27 Int’l Litigation Quarterly 1–6.

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comparable firms or transactions for support. Both are subject to similar debates over whether to limit the use of ex post information.34 D. Professional Standards

The expert who is trained and certified in valuation theory may be governed 37 by professional standards set by his or her certifying body or professional organisation. The Fédération des Experts Comptables Européens, the representative organisation for the accounting profession in Europe, issued a business valuation guide in 2001.35 Its member bodies have also provided guidance for practitioners within their specific country. Its U.S. counterpart, the American Institute for Certified Public Accountants, oversees the examination and ongoing certification requirements for its professional designation ‘Accredited in Business Valuation’ and issued substantive practice guidance in 2007.36 Non-accountants may be held to the Uniform Standards of Professional Appraisal Practice of the Appraisal Institute,37 the standards of the CFA Institute,38 or some other set of standards promulgated by the particular professional society to which the valuator belongs. These professional standards provide an objective reference point for the val- 38 uator’s work. They serve to guide the expert valuator, his or her instructing counsel, and the arbitral tribunal in the performance of the difficult task of valuing losses. E. Conclusions

While customary international law may provide scant guidance in the mea- 39 surement of compensable losses, particularly in the absence of a formal system of precedent in international arbitration, valuation theory and the professional standards of organisations whose members engage in valuation provide a robust set of guidance in the measurement of damage. Experts, counsel, parties and tri33 This interaction has been described by Manuel Abdala, Pablo López Zadicoff and Pablo Spiller, ‘Invalid Round Trips in Setting Pre-Judgment Interest in International Arbitration’ (2011) 5 WAMR 1–21. See also Mark Beeley and Richard E. Walck, ‘Approaches to the Award of Interest by Arbitration Tribunals’ (2011) 30 Arbitrator & Mediator 15–30. Interest is addressed in depth in Section VIII of this chapter. 34 Some of the arguments for and against limiting information to that which was available at the time of the damaging act are set out in Franklin Fisher and R. Craig Romaine, ‘Janis Joplin’s Yearbook and the Theory of Damages’ (1990) 5 J. Accounting, Auditing & Finance 145–157 (arguing against the use of ex post information) and Konrad Bonsack, ‘Damages Assessment, Janis Joplin’s Yearbook, and the Pie-Powder Court’ (1990) 13 Geo. Mason U. L. Rev. 1–26 (arguing in favour of the use of ex post data). 35 FEE Guide (n. 10), available at http://www.fee.be/index.php?option=com_content&view=article&id=845&Itemid=106&lang=en. 36 SSVS-1 (n. 6), available at http://www.aicpa.org/interestareas/forensicandvaluation/resources/ standards/downloadabledocuments/ssvs_full_version.pdf. 37 Available at http://www.appraisalinstitute.org/ppc/ethics_standards.aspx. 38 Available at http://www.cfainstitute.org/ethics/codes/Pages/index.aspx.

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bunals will be well served by using that guidance as the underpinnings for their evaluation of quantum. 40 Where multiple valuation methods can be utilised, they should be. Each method of valuation has its own strengths and weaknesses in any particular case. Cost methods may lack the forward-looking nature of a DCF calculation, but they have greater precision and reliability. Transactions in comparable firms may provide current measures of just what the market is thinking, but they may be difficult to map from the comparable firm to the subject of the dispute. Income methods may provide a better measure of the future potential cash flows of the investment, but at the cost of some uncertainty regarding what the future holds. There is no single method that is the ‘gold standard,’ with all others devalued to some lesser status. Rather, a well-reasoned synthesis of multiple approaches – balancing the best strengths that each can bring – will provide a better supported conclusion of value, whether the task is to value the entire firm, or to simply calculate the profits that were lost due to some action of the respondent.

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Irmgard Marboe A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Relevant Types of Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Direct and Indirect Expropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Lawful and Unlawful Expropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Expropriation of Contract Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 6 8 17

C. Compensation for Lawful Expropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Compensation Standard under Treaty Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Applicable Valuation Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Valuation Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19 19 24 27

D. Compensation for Unlawful Expropriations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Customary Law Standard of the Law of State Responsibility. . . . . . . 2. Applicable Valuation Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Valuation Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29 29 30 32

E. Valuation Approaches Applied by Investment Tribunals. . . . . . . . . . . . . . . . . 1. Market Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Income Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Asset Value or Cost-Based Approaches. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. ‘Mixed’ Approaches. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Consequential Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42 43 48 50 56 60

F. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

63

Literature: Yves Derains and Richard Kreindler (eds), Evaluation of Damages in International Arbitration (ICC Publishing, 2006); Paul Friedland and Eleanor Wong ‘Measuring Damages for Deprivation of Income-Producing Assets: ICSID Case Studies (1991) 6 ICSID Rev.–FILJ 400–430; Mark Kantor, Valuation for Arbitration (Kluwer Law International, 2008); William Lieblich, ‘Determining the Economic Value of Expropriated Income-Producing Property in International Arbitrations’ (1991) 8 J. Int’l Arb. 59–88; Richard Lillich (ed), The Valuation of Nationalized Property in International Law, vols. I–IV (University of Virginia, 1972, 1973, 1975, 1987); Irmgard Marboe, Calculation and Damages in International Investment Law (Oxford University Press, 2009); Irmgard Marboe, ‘Compensation and Damages in International Law. The Limits of “Fair Market Value”’ (2006) 7 JWIT 723–759; Thomas Merrill, ‘Incomplete Compensation for Takings’ (2002) NYU Env. L. J. 110–135; Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2009); Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration. Principles and Practice (Oxford University Press, 2011); Thomas Wälde and Borzu Sabahi, ‘Compensation, Damages and Valuation’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook on International Investment Law (Oxford University Press, 2008) 1049–1124.

A. Introduction

The discussion on the issue of compensation in cases of expropriation has for 1 a long time concentrated on the question of the ‘standard’ of compensation under customary international law.1 Today, however, this question has lost much of 1 See, for example, the controversy between Oscar Schachter, Davis Robinson, and Maurice Mendelson in the American Journal of International Law: Oscar Schachter, ‘Editorial Com-

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its importance as the respective ‘standard’ of compensation is contained in many international treaties which have been concluded in the past decades. The discussion has therefore shifted to the issue of the valuation and calculation of such compensation. 2 The most important treaties are bilateral investment treaties (BITs),2 and some multilateral treaties, such as the Energy Charter Treaty (ECT)3 and the North American Free Trade Agreement (NAFTA).4 There are also older bilateral treaties on ‘friendship, commerce and navigation’5 still in force which contain provisions on expropriation.6 The standard of compensation in those treaties varies slightly but the overall trend is to provide for ‘adequate, prompt and effective’ compensation, as will be analysed in more detail below. 3 This convergence as regards the required standard does, however, not answer the most important question, namely how to arrive at a determined sum. It turns out that implementing this standard in practice is a difficult task. Investment tribunals often have struggled with the issue of calculation of compensation and the valuation of expropriated property because there was no clear guidance. Only in the past few years, a number of publications dedicated to the topic have helped to identify appropriate valuation approaches.7 The particular challenge

2 3 4

5 6

7

ment: Compensation for Expropriation’ (1984) 78 AJIL 121 et seq.; Oscar Schachter, ‘Compensation Cases – Leading and Misleading’ (1985) 79 AJIL 420 et seq.; for arguments against this, see Davis Robinson, ‘Expropriation in the Restatement (Revised)’ (1984) 78 AJIL 176 et seq.; Maurice Mendelson, ‘Compensation for Expropriation: The Case Law’ (1985) 79 AJIL 414 et seq.; see also Chittharanjan F. Amerasinghe, ‘The Quantum of Compensation for Nationalized Property’ in Richard Lillich (ed), The Valuation of Nationalized Property in International Law, vol III (University Press of Virginia, 1975) 91–130; idem, ‘Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice’ (1992) 41 ICLQ 22–65; as regards in particular the Third World perspective, see Cornelius Murphy, ‘Limitations Upon the Power of a State to Determine the Amount of Compensation Payable to an Alien Upon Nationalization’ in Richard Lillich (ed), The Valuation of Nationalized Property in International Law, vol. III (University of Virginia Press, 1975) 49–68; Norman Girvan, ‘Expropriating the Expropriators: Compensation Criteria from a Third World Viewpoint’ in ibid., 149–179. On the importance of BITs see ch. 4.II., ‘Bilateral Approaches’. The Energy Charter Treaty of 17 December 1994, in force since April 1998, 2080 UNTS 100, 34 ILM 360, available at http://www.encharter.org/fileadmin/user_upload/document/EN.pdf; for more details see Richard Happ, ‘The Energy Charter Treaty’, ch. 4.III.A., 240–260. The North American Free Trade Agreement of 17 December 1992, in force since 1 January 1994, (1993) 32 ILM 289 UNTS, available at http://www.nafta-sec-alena.org/en/view.aspx; for more details see Andrea Bjorklund, ‘NAFTA’s Contributions to Investor-State Dispute Settlement’, ch. 4.III.B., 261–282. See Andreas Paulus, ‘Treaties of Friendship, Commerce and Navigation’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law, available at http:// www.mpepil.com (last updated March 2007). The Treaty of Amity, Economic Relations and Consular Rights between the United States and Iran of 15 August 1955 has, for example, been the basis for the decisions of the Iran–US Claims Tribunal which decided a large number of expropriation cases. See Charles Brower and Jason D. Brueschke, The Iran–United States Claims Tribunal (Martinus Nijhoff Publishers, 1998) 321, 504 et seq. Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2009); Irmgard Marboe, Calculation and Damages in International Investment Law (Oxford University Press, 2009); Yves Derains and Richard Kreindler (eds), Evaluation of Damages in International Arbitration (ICC Publishing, 2006);

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here is that the arbitrators must recur to economic principles and techniques which they – as lawyers – are not necessarily familiar with.8 The help of valuation experts is often called upon, but the tribunals nevertheless must give precise guidelines on how to approach the valuation, which circumstances to consider and which valuation date to choose. In the end, the tribunal must understand the experts, including the methodology they applied, and render a decision which is in conformity with both the legal requirements and economic reasoning. The present chapter will highlight some aspects that are important for the val- 4 uation of claims in expropriation cases. It will, first, identify relevant types of expropriation and their respective problems and pitfalls. Then, it will analyse valuation of compensation in cases of lawful expropriations and in cases of unlawful expropriations. Finally, a number of different valuation approaches as applied by international investment tribunals will be discussed. B. Relevant Types of Expropriation

Expropriation can take the form of a formal act of a State, usually a legis- 5 lative or an administrative act, or the form of another State act or a combination of acts that deprive private persons of their property.9 Under the treaties, ‘direct’ and ‘indirect’ forms of expropriation are generally treated equally so that the legal consequences, including the standard of compensation, are the same. However, there is another distinction which has to be taken into consideration, namely the one between ‘lawful’ and ‘unlawful’ expropriations which has repercussions on the standard of compensation. In addition, it has to be emphasised that contract rights can also be expropriated. Here, the overlapping of the law on expropriation and the law of contracts can cause confusion. In the following, the differences between the relevant types of expropriation will briefly be discussed as far as this is relevant for valuation purposes. 1. Direct and Indirect Expropriations

In its original form, expropriation is a tool and a right of the State to rearrange 6 property relationships. The transfer of the title to the property is characteristic for ‘direct’ or ‘formal’ expropriations or nationalisations, which the State carries out by a sovereign act, be it a legislative, administrative or judicial act.10 InvestThomas Wälde and Borzu Sabahi, ‘Compensation, Damages and Valuation’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook on International Investment Law (Oxford University Press, 2008), 1049–1124; Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration. Principles and Practice (Oxford University Press, 2011). 8 In this regard see the most helpful book by Mark Kantor, Valuation for Arbitration (Kluwer Law International, 2008). 9 See Ursula Kriebaum, ‘Expropriation’, ch. 8.VIII., 959–1030. 10 Ian Brownlie, Principles of Public International Law (Oxford University Press, 2008) 531– 532; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 92; Anne K. Hoffmann, ‘Indirect Expropriation’ in August

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ment tribunals have, however, rather rarely dealt with such ‘direct’ expropriations.11 Much more important in number are the so-called ‘indirect’ expropriations which are not based on a formal act but indirectly deprive the previous owners of the enjoyment of their property.12 7 The treaties usually accord the investor the same level of protection against expropriation, be it direct or indirect. However, indirect expropriations are more likely to be unlawful than direct expropriations, which makes a difference as far as the standard of compensation is concerned as will be discussed further below. Another problem in relation to indirect expropriations is the determination of the valuation date. As there may be several acts of the State which only cumulatively constitute an expropriation, the identification of a determined point in time when this expropriation was effectuated may turn out to be difficult. The ILC Articles provide some guideline in the context of unlawful acts. According to Article 15, the breach of an international obligation by a State through a series of actions or omissions defined in aggregate as wrongful occurs when ‘the last action or omission occurs which, taken with the other actions or omissions, is sufficient to constitute the wrongful act (...).’13 International jurisprudence has found a variety of solutions to determine the date of the violation, often on a case by case analysis.14 2. Lawful and Unlawful Expropriations 8

Under international law, a State has the right to expropriate private property due to its territorial sovereignty which accords it the power to decide on its own social, economic and political order.15 However, this is only true with regard to its own citizens against whom it might only have limited this right by acceding to international human rights instruments.16 By contrast, the expropriation of

11 12

13 14 15

16

Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 151–170, 151. Examples are Southern Pacific Properties v. Egypt, ICSID Case No. ARB/84/3, Award, 20 May 1992; Sedelmayer v. Russia, SCC, Award, 7 July 1998; Compañía del Desarrollo de Santa Elena, S.A. v. Costa Rica, ICSID Case No. ARB/96/1, Award, 10 February 1999. August Reinisch, ‘Expropriation’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 407–458, 409; Rudolf Dolzer, ‘Indirect Expropriations: New Developments?’ (2002) 11 NYU Env. L. J. 64, 65; Michael Reisman and Robert Sloane, ‘Indirect Expropriation and its Valuation in the BIT Generation’ (2003) 74 BYIL 115–150, 119; Anne Hoffmann (n. 10) 153. See James Crawford, The International Law Commission’s Articles on State Responsibility. Introduction, Text and Commentaries (Cambridge University Press, 2002) 141 et seq. See, for examples in investment arbitration practice, Irmgard Marboe (n. 7) 135 et seq. Ian Brownlie (n. 10) 531 et seq.; Malcolm Shaw, International Law (Cambridge University Press, 2008) 828; Robert Jennings and Anthony Watts, Oppenheim’s International Law, vol. 1 (Longman, 1992) 919 et seq.; Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Springer, 1985) 2; Rudolf Dolzer and Christoph Schreuer (n. 10) 89. However, the International Covenant on Civil and Political Rights (ICCPR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR) do not contain a human right to property. Only regional instruments, such as the European Convention on Human Rights (ECHR) and the Inter-American Court of Human Rights (IACtHR), also contain provi-

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foreign citizens, because of its international ramifications, is not merely an issue of the State’s national law but also of international law. The State has to comply with certain standards of international law when it expropriates foreign property.17 This is all the more true when the State has ratified international treaties pro- 9 tecting foreign investments. These treaties generally do not ban expropriation as such but they explicitly regulate the conditions under which such expropriation would be considered lawful. Generally, the conditions are (a) public interest, (b) non-discrimination, and (c) payment of compensation, and, though not always, the requirement of (d) due process of law.18 If a State expropriates foreign property and does not comply with the provision set out in the treaty, the expropriation must be considered as unlawful. In this context, the question arises whether the non-payment of compensation 10 or the payment of less than the required sum of compensation would render the expropriation per se unlawful.19 A strict interpretation of the treaty terms would lead to this result. However, according to the prevailing opinion and the practice of investment tribunals, the payment of no or only little compensation does not render the underlying taking ipso facto wrongful, in particular in cases of direct expropriations.20 Illegality might however be the consequence if there is an outright rejection of the obligation to compensate on the part of the expropriating State21 and in cases of indirect expropriations.22

17 18

19 20

21 22

sions on the protection of property. See Ali Riza Coban, Protection of Property Rights within the European Convention on Human Rights (Ashgate, 2004); Angela Collier, ‘Compensation for the Violation of Property Rights’, (1996) The Human Rights Brief, available at http:// www.wcl.american.edu/hrbrief/v 3i2/cimien32.htm. Todd Weiler ‘Standards of Treatment’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 259–304, 266. August Reinisch, ‘Legality of Expropriation’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 171–204, 176; UNCTAD, Taking of Property, UNCTAD Series on issues in international investment agreements, UNCTAD/ITE/IIT/15 (United Nations, 2000) 24; Peter Muchlinski, Multinational Enterprises and the Law (Oxford University Press, 2007) 692. For a detailed discussion on the role of compensation for the lawfulness of the expropriation see August Reinisch (n. 18) 194 et seq., and Irmgard Marboe (n. 7) 2 et seq. A number of tribunals have considered expropriations as lawful where no compensation has been paid. See, e.g., Aminoil v. Kuwait, Award of 24 March 1982, (1982) 21 ILM 976, para. 115; American International Group v. Iran, (1983) 4 Iran–US CTR 96, 106; INA Corporation v. Iran, (1985) 8 Iran–US CTR 373, 378; Southern Pacific Properties (Middle East) v. Egypt, (n. 11); Compañía del Desarrollo de Santa Elena S.A. v. Costa Rica (n. 11) para. 71. Derek Bowett, ‘State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach’ (1988) 59 BYIL 49, 69–70. Rudolf Dolzer and Christoph Schreuer (n. 10) 91; Michael Reisman and Robert Sloane (n. 12) 124; see also the Separate Opinion of Judge Brower, Sedco Inc v. NIOC, (1986) 10 Iran–US CTR 189, 204. In RosInvestCo UK Ltd. v. Russia, the tribunal underlined that the respondent ‘did not offer or pay any compensation to claimant for the taking’ and came to the conclusion that ‘Respondent’s measures, seen in their cumulative effect towards Yukos, were an unlawful expropriation under Article 5 IPPA’, RosInvestCo UK Ltd. v. Russia, SCC Case No. V079/2005, Final Award, 12 September 2010, paras. 632–633.

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The distinction between lawful and unlawful expropriation is relevant for valuation purposes, because the standard of compensation is different. The Permanent Court of International Justice (PCIJ) in the Chorzów Factory case explained the difference in detail because, otherwise, ‘it would be tantamount to rendering lawful liquidation and unlawful dispossession indistinguishable in so far as their financial results are concerned.’23 This was taken up by the Iran–US Claims Tribunal in Amoco International Finance v. Iran which pointed to the practical consequences of the distinction between reparation of the damages caused by a wrongful expropriation and payment of compensation in case of lawful expropriations. The legal bases of the two concepts are totally different and, logically, the practical methods to be used in order to derive the amount due should differ.24

However, the conclusion of the tribunal in Amoco according to which the difference lies in the compensability of ‘lost profits’25 is not the decisive consequence, as has correctly been pointed out by commentators.26 The dichotomy between damnum emergens (damage incurred) and lucrum cessans (profits lost) stems from the law of damages in tort or contract law and does not necessarily fit to the measure of compensation upon expropriation.27 Instead, under public international law, the legal consequences of an unlawful act of a State – such as an unlawful expropriation – are a matter of customary international law, namely the law of State responsibility.28 13 The relevance of the distinction between lawful and unlawful expropriation for the valuation of compensation was questioned by some commentators29 and was not realised in the practice of international investment tribunals for some time.30 The tribunal in Phillips Petroleum v. Iran, while denying that there was a relevant difference between lawful and unlawful expropriations in the case at hand, noted that in case of unlawful expropriations, (1) the immediate obligation of the State would be restitution of the property and not compensation, and that 12

23 Factory at Chorzów (Germany v. Poland), PCIJ 1928, Series A, No. 17, 47. 24 Amoco International Finance v. Iran, (1987) 15 Iran–US Claims Tribunal Rep. 247, para. 194. See also Aminoil v. Kuwait (n. 20) 1031; as well as Chittharanjan Amerasinghe, ‘Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice’ (1992) 41 ICLQ 22, 37–38. 25 Amoco International Finance v. Iran (n. 24) para. 200. 26 William Lieblich, Determinations by International Tribunals of the Economic Value of Expropriated Enterprises, (1990) 7 J. Int’l Arb. 37, 47; idem, ‘Determining the Economic Value of Expropriated Income-Producing Property in International Arbitrations’ (1991) 8 J. Int’l Arb. 59, 68. 27 See in more detail, Irmgard Marboe, ‘Compensation and Damages in International Law. The Limits of “Fair Market Value”’ (2006) 7 JWIT 723–759, 728. 28 See Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. 29 Audley Sheppard, ‘The Distinction Between Lawful and Unlawful Expropriation’ in Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (JurisNet, 2006) 169, 198–199. 30 Metalclad Corp. v. Mexico, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000, paras 113, 118; Técnicas Medioambientales, S.A. v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 187 et seq.

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(2) an increase in value of the expropriated property between the date of the taking and the date of the judicial or arbitral decision must be taken into account.31 While the first consequence remains disputed,32 the second one had for a long time not been regarded as relevant in practice, as after the expropriation, investments generally had not gained, but rather lost value. The arbitral award of the tribunal in ADC v. Hungary of 200633 changed this 14 situation. The case concerned a concession to operate the airport in Budapest which had been expropriated and granted to another company. It turned out that, in the course of time and due to a number of economic and political factors, the value of the airport concession had increased substantially between the time of expropriation and the time of the arbitration proceedings. The tribunal emphasised the difference between lawful and unlawful expropriations and explained that the BIT does not stipulate any rules relating to damages payable in the case of an unlawful expropriation. The BIT only stipulates the standard of compensation that is payable in the case of a lawful expropriation, and these cannot be used to determine the issue of damages payable in the case of an unlawful expropriation since this would be to conflate compensation for a lawful expropriation with damages for an unlawful expropriation.34

The tribunal in ADC v. Hungary referred, amongst others, to the European 15 Court of Human Rights in Papamichalopoulos v. Greece35 and pointed out that the court had emphasised the importance of the lawfulness of the expropriation for the valuation of compensation: The unlawfulness of such a dispossession inevitably affects the criteria to be used for determining the reparation owed by the respondent State, since the pecuniary consequences of a lawful expropriation cannot be assimilated to those of an unlawful dispossession.36

The tribunals in Siemens v. Argentina,37 Vivendi v. Argentina,38 Saipem v. 16 Bangladesh,39 Siag and Vecchi v. Egypt,40 Kardassopoulos v. Georgia,41 Shum v. Peru,42 and Quasar de Valores SICAV SA and others v. Russia43 confirmed the 31 Philips Petroleum v. Iran, (1989) 21 Iran–US CTR 79, para. 110. 32 See, however, the decision of the arbitral tribunal in Texaco v. Libya, Award of 19 January 1977, 17 ILM 1, 24, 37 which awarded the restitution of the unlawfully expropriated oil concession. See also the arbitrator’s finding in Walter Fletcher Smith (USA v. Cuba), Award of 2 May 1929. As regards the general availability of ‘restitution’ as a remedy for foreign investors in investment arbitration see Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. 33 ADC Affiliate Ltd. and ADC and ADMC Management Ltd. v. Hungary, ICSID Case No. ARB/ 03/16, Award, 2 October 2006. 34 Ibid., para. 481. 35 Papamichalopoulos v. Greece (just satisfaction), ECHR Ser. A No 330-B, Judgment of 31 October 1995. 36 ADC v. Hungary (n. 33) para. 497, quoting Papamichalopoulos v. Greece, para. 36. 37 Siemens A.G. v. Argentina, ICSID Case No. ARB/02/08, Award, 6 February 2007, para. 352. 38 Vivendi v. Argentina, ICSID Case No. ARB/03/19, Award, 20 August 2007, paras. 8.2.3–8.2.5. 39 Saipem v. Bangladesh, ICSID Case No. ARB/05/7, Award, 30 June 2009, para. 201. 40 Siag and Vecchi v. Egypt, ICSID Case No. ARB/05/15, Award, 1 July 2009, para. 539. 41 Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Award, 3 March 2010, para. 514. 42 Tza Yap Shum v. Peru, ICSID Case No. ARB/07/6, Award, 7 July 2011, para. 253.

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relevance of the difference between lawful and unlawful expropriation as far as the valuation of compensation is concerned. The tribunals in Funnekotter v. Zimbabwe44 and Unglaube v. Costa Rica45 discussed the distinction but found that it would not be a practical issue in the case at hand. Only rarely has a tribunal rejected the relevance of the difference, such as in Rumeli v. Kazahstan.46 It may therefore be concluded that, after the ADC v. Hungary award, the need for a distinction has been increasingly recognised in international practice. This has also been reflected in academic writing.47 3. Expropriation of Contract Rights 17

A considerable number of expropriation cases concern contract rights. It is important to note that contracts between an investor and a State cannot only be breached but also be expropriated.48 Investment treaties protect the investor from expropriation of contract rights under the same conditions as they protect tangible property.49 In the practice of international investment tribunals, usually long-term contracts are at stake.50 They include concessions for oil, water supply

43 Quasar des Valores SICAV S.A., Orgor des Valores SICAV S.A., GBI 9000SICAV S.A. and ALOS 34 S.L. v. Russia, SCC Award, 20 July 2012, para 215. The tribunal emphasised, in the discussion about how ‘to attach a number to the claim’, that ‘the claim is for simple uncompensated expropriation, not unlawful expropriation.’ (emphasis in original). This limitation was, however, due to the claimants’ own submissions, as the presiding arbitrator, Charles N. Brower, pointed out. He noted in this respect ‘that it is solely the Claimants’ own insistence that we may not address the issue of whether the alleged expropriation of which they complain was lawful or unlawful that has precluded us from addressing such issue (…).’ Separate opinion of Charles N. Brower, para. 2. 44 Funnekotter v. Zimbabwe, ICSID Case No. ARB/05/6, Award, 22 April 2009, para. 112. 45 Unglaube v. Costa Rica, ICSID Case No. ARB/09/20, Award, 16 May 2012, paras. 306–307. 46 The tribunal in Rumeli v. Kazakhstan found that the standard of compensation as stipulated in the BIT should be applied for lawful and unlawful expropriations alike. See Rumeli v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, para. 793. 47 Sergey Ripinsky and Kevin Williams (n. 7) 65; August Reinisch (n. 18) 200; Rudolf Dolzer and Christoph Schreuer (n. 10) 273; Borzu Sabahi (n. 7) 102, noting, however, that ‘in most of the cases, the distinction has not been applied significantly, often because it would not have made a practical difference.’ 48 Rosalyn Higgins, ‘The Taking of Property by the State: Recent developments in International Law’ (1982) 176 RC (1982-III) 263–392, 271; Stanimir Alexandrov, ‘Breaches of Contract and Breaches of Treaty. The Jurisdiction of Treaty-Based Arbitration Tribunals to Decide Breach of Contract Claims in SGS v. Pakistan and SGS v. Philippines’ (2004) 5 JWIT 555, 559; August Reinisch (n. 12) 410; see also the tribunals’ statements in M. Meerapfel Söhne AG v. Central Africa, ICSID Case No. ARB/07/10, Award, 12 May 2011, para. 338, and in Deutsche Bank AG v. Sri Lanka, ICSID Case No. ARB/09/2, Award, 31 October 2012, para. 506. 49 John Westberg and Bertrand Marchais, ‘General Principles Governing Foreign Investment as Articulated in Recent International Tribunal Awards and Writings of Publicists’ in World Bank (ed), Legal Framework for the Treatment of Foreign Investment, vol. I (Worldbank, 1992), 135–181, 147 et seq.; World Bank Group, ‘Legal Framework for the Treatment of Foreign Investment’ (1992) 31 ILM 1363–1379, 1365 et seq. 50 See Burkhard Schöbener, ‘Outlook on the Developments in Public International Law and the Law Relating to Aliens’, ch. 2.IV., 64–79.

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and sewage systems, energy supply, but also contracts of shorter terms, such as construction contracts or delivery contracts. The distinction between a breach of a contract and an expropriation of a con- 18 tract is that the latter involves an act of the State in its sovereign capacity, exercising governmental or public power or authority.51 If this is not the case, the State has simply breached the contract. If a contract has been expropriated, the same criteria as in cases of expropriation of other investments are applicable for the valuation. Also the distinction between lawful and unlawful has to be borne in mind.52 C. Compensation for Lawful Expropriations 1. Compensation Standard under Treaty Law

Treaties concluded between two or more States for the promotion and protec- 19 tion of foreign investments contain provisions on expropriation as a standard feature. Since the 1990s, States have increasingly negotiated such treaties and drafted them according to their particular needs and priorities.53 It follows that each treaty is different so that the determination of the standard of compensation depends on the exact wording of the treaty applicable in a particular case. However, the standard of compensation contained in the various treaties is not 20 as different as one could think. The provisions on compensation are rather similar to each other and, generally, refer to a standard identical or very similar to the famous ‘Hull Formula’ of 193854 demanding ‘prompt, adequate and effective’ compensation.55 It is interesting to note that also developing and (former) socialist countries rely on those conditions.56 Compensation usually is deemed ‘adequate’ if it is equivalent to the ‘value’ 21 of the investment, be it the ‘fair market value’,57 the ‘genuine value’,58 the ‘real value’59 or just ‘value’.60 This concurs with the World Bank Guidelines for the 51 August Reinisch (n. 12) 418. See Ursula Kriebaum, ‘Expropriation’, ch. 8.VIII., 959–1030. 52 Derek Bowett, ‘State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach’ (1988) 59 BYIL 49–74, 49, stating that ‘the advantage in showing that the taking is unlawful lies in the fact that the remedies for an unlawful act are more beneficial to the claimant than are the remedies for a lawful taking.’ 53 See Chester Brown, ‘The Evolution of the Regime of International Investment Agreements: History, Economics and Politics’, ch. 4.I., 153–185. 54 See the note of Secretary of State Cordell Hull to the Ambassador of Mexico ‘(…) it has been stated with equal emphasis that the right to expropriate property is coupled with and conditioned on the obligation to make adequate, effective and prompt compensation.’ Whiteman, Digest of International Law, vol. 8 (1967) 1020 (emphasis added). 55 See, for example, ECT Art. 13 lit. d; Art. 6(1) of the US Model BIT (2012); Art. 6(1) of the Colombian Model BIT (2007); Art. 5(2) of the French Model BIT (2006); Art. 13(1) of the Canadian Model BIT (2004). 56 See, for example, Art. 6 of the Colombian Model BIT (2007); Article 4 of the Chinese Model BIT (2003) or Article 6 of the Agreement between the Government of the Russian Federation and the Government of the Republic of Lithuania on the Promotion and Reciprocal Protection of the Investments.

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Treatment of Foreign Investments, which were formulated on the basis of a broad study on the topic: Compensation will be deemed ‘adequate’ if it is based on the fair market value of the taken asset as such value is determined immediately before the time at which the taking occurred or the decision to take the asset became publicly known.61

The ‘value’ of the investment is the central concept in existing treaties and model treaties. A few treaties are even more explicit and include particular guidelines how the valuation should be performed and which methods should be applied. An example is NAFTA Art. 1110 which provides that ‘[v]aluation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.’ 23 If the treaty gives no indication, the applicable valuation approach must be determined by the evaluator. The standard of compensation contained in the treaty, be it the ‘value’ of the investment, or any more specific term, such as the ‘fair market value’, which are concepts having a particular meaning in economic valuation practices, provides the basis for the valuation and thus for the task of actually transforming legal claims into numbers.62 22

2. Applicable Valuation Approach 24

The valuation approach explicitly or impliedly provided for in the applicable investment treaty as the ‘primary’ international norm represents the starting point for the valuation of compensation.63 Numerous investment protection treaties provide for the ‘fair market value’ which is a concept that is also widely used in business valuation practice64 and commonly defined as the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.65

57 NAFTA Art. 1110(2); ECT Art. 13; Art. 6(2) of the US Model BIT (2012); Art. 13(2) of the Canadian Model BIT (2004); Art. V(3) of the Italian Model BIT (2003); Art. 8(B) of the IISD Model International Agreement on Investment for Sustainable Development (2005). 58 Art. 5 of the Indian Model BIT (2003). 59 Art. 5(2) of the French Model BIT (2008). 60 Art. 4 of the German Model BIT (2008). 61 World Bank (ed), Legal Framework for the Treatment of Foreign Investment, Report to the Development Committee and Guidelines on the Treatment of Foreign Direct Investment, (1992) 31 ILM 1363, 1382. 62 See Richard Walck, ‘Methods of Valuing Losses’, ch. 9.II., 1045–1056. 63 As to the distinction between ‘primary’ and ‘secondary’ norms of international law, see Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. 64 As to the importance of fair market value in business valuation practice, see Scott Gabehart and Richard Brinkley, The Business Valuation Book (Amacom, 2002) 23; Shannon Pratt, Robert Reilly and Robert Schweihs, Valuing a Business: The Analysis and Appraisal of Closely Held Companies (McGraw-Hill, 2000) 24. 65 American Society of Appraisers, ASA Business Valuation Standards, available at https:// www.asabv.org/userfiles/files/Website%20Content/2009_BV_Standards.pdf; quoted, for ex-

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The fair market value implies an ‘objective’ valuation which has a lot of ad- 25 vantages. It balances the differing subjective valuation perspectives of the involved parties and regards the valuation by an independent third person as decisive. It appears unbiased and ‘fair’. However, it does not reflect the concrete outlays or expectations which the former owner might have had for his investment. The expropriated owner will not necessarily recover all the financial loss he or she has suffered as a consequence of the expropriation.66 The investment might be of particular importance to him or her for strategic reasons, for synergetic effects or for other individual grounds. The ‘subjective’ perspective which is, for example reflected in the ‘investment value’67 cannot be included in the evaluation of the fair market value.68 It follows that the objective compensation may be less or more than the concrete financial loss actually incurred. Fair market value can be determined by use of generally applied methods 26 which include variants of the discounted cash flow method (DCF method), comparable sales, asset-based approaches, and others.69 In all cases it is necessary to distinguish between the ‘value’ of an object, which can only be an estimate and its ‘price’ or ‘cost’.70 3. Valuation Date

The treaties usually also determine the valuation date which is generally equal 27 to the date of the expropriation or the time immediately before the expropriatory action was taken or became known, whichever is earlier.71 The compensation should not reflect any change in value because the intended expropriation had become known earlier. The expropriation date as the decisive date for the valuation is logical because the compensation should be the equivalent, in financial terms, to the value of the expropriated property at the time of the expropriation.

66 67 68

69 70 71

ample, in CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para. 402. See also Azurix v. Argentina, ICSID Case No. ARB/01/12, para. 424, Award, 14 July 2006; see also International Glossary of Business Valuation Terms, available at http://www.bvappraisers.org/glossary/glossary.pdf. See the diligent analysis of American and international law in this respect by Thomas Merrill, ‘Incomplete Compensation for Takings’ (2002) NYU Env. L. J. 110, 115–120. See also Mark Kantor (n. 8) 32, who points out that many courts and arbitral awards use the term ‘fair market value’ when in fact applying an ‘investment value’ standard. This is a choice the States have made on the international level. On the national level, some States, such as the United Kingdom, Austria, or Switzerland have encompassed subjective damage in the assessment of compensation in cases of expropriation. This solution reflects the ‘full reparation’ or ‘damages’ approach. See Irmgard Marboe (n. 27) 731. See an overview over the different approaches at Irmgard Marboe (n. 7) 188 et seq.; Mark Kantor (n. 8) 131 et seq.; and Richard Walck, ‘Methods of Valuing Losses’, ch. 9.II., 1045– 1056. This is correctly highlighted, for example, by Borzu Sabahi (n. 7) 103–104. See, for example, NAFTA Art. 1110(2); ECT Art. 13; Art. IV of the Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment; Art. 4 of the Treaty between the Federal Republic of Germany and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investments.

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The determination of the valuation date is particularly difficult when the expropriation is not effected by one single act of a State but by a combination of State actions which in their cumulative effect amount to indirect expropriation.72 28 To underline that ‘prompt’ compensation should be paid, treaties are sometimes explicitly providing for interest.73 This represents an additional incentive to avoid late payment by the expropriating State. The criterion of ‘effective’ is generally reflected in the determination of the currency in which compensation has to be paid or corresponding exchange modes.74 D. Compensation for Unlawful Expropriations 1. Customary Law Standard of the Law of State Responsibility 29

If a State does not comply with its international obligations, including those contained in an international investment treaty, the customary international law rules on State responsibility, in other words, the ‘secondary’ rules of international law, are applicable.75 As has been pointed out above, Article 31 of the ILC Articles on State Responsibility obliges the responsible State ‘to make full reparation for the injury caused by the internationally wrongful act’ (emphasis added).76 This standard, also known as the ‘Chorzów standard’, is not identical with the ‘compensation standard’ as explained above because there is no specific valuation approach and no specific valuation date given. Tribunals enjoy a larger margin of appreciation in order to determine how an amount of money may ‘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.’77

72 See Michael Reisman and Robert Sloane (n. 12) 123; see already above, at marginal note 7; recently this question has been extensively discussed in Quasar de Valores SICAV SA and others v. Russia (n. 43) paras. 185–186, 188 et seq. 73 See, for example, NAFTA Art. 1110(4): ‘If payment is made in a G7 currency, compensation shall include interest at a commercially reasonable rate for that currency from the date of expropriation until the date of actual payment.’ See also ECT Art. 13. 74 NAFTA Art. 1110(5); see ECT Art. 13: ‘Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date.’ On the issue of interest, see John Y. Gotanda, ‘Interest’, ch. 9.VIII., 1142–1153. 75 As to the applicability of the law on State responsibility in investment disputes and as to the distinction between ‘primary’ and ‘secondary’ norms of international law, see Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. 76 Compensation is only one form of ‘reparation’ under the law of State responsibility, apart from ‘restitution’ and ‘satisfaction’, see Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. 77 Case Concerning the Factory at Chorzów (Germany v. Poland), Claim for Indemnity (Merits), Judgment of 13 September 1928, PCIJ 1928, Ser. A (1928), No. 17 at 47. See also James Crawford (n. 13) 202. See already in more detail Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044.

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2. Applicable Valuation Approaches

The principle of full reparation is more difficult to apply than the determina- 30 tion of the ‘value’ of expropriated property. It is necessary to make a comparison of the actual financial situation of the injured person with the financial situation that would have existed if the illegal act had not been committed. This is sometimes referred to as the ‘differential method’78 or the ‘but-for-approach’.79 As there is no express reference to a fair market value or another value stan- 31 dard, other methods to assess the damage are allowed. For example, a tribunal may decide to add up the amounts invested by the investor in the past and oblige the host State to pay this amount back to the investor (plus interest) which would represent the ‘investment value’.80 The amounts invested do not necessarily reflect the value of the investment – because the investment might be worth more or less –, but they may best reflect the damage actually incurred by the investor. Without the unlawful act, the investor would have this money still at his or her disposal.81 3. Valuation Date

The valuation date is highly relevant for the outcome of the valuation because 32 the economic circumstances change over time and affect the comparison between the two scenarios ‘with and without’ the unlawful act. In contrast to the standard of compensation for lawful expropriation, there is no generally accepted valuation date for the calculation of reparation after an unlawful act. The ILC Articles do not explicitly refer to a valuation date. However, the guidance given by the Chorzów standard is that the actual financial situation of the victim has to be compared with the hypothetical situation the victim would be in if the wrongful act had not been committed. In view of the unlawfulness of the expropriation by the Polish government, the PCIJ pointed out that

78 The ‘differential method’ has been developed by Friedrich Mommsen in the 19th century. He distinguishes clearly between ‘value’ and ‘interest’, the latter being usually larger than the former. See Friedrich Mommsen, Zur Lehre von dem Interesse (Braunschweig, 1855) 27 et seq. To determine the ‘interest‘ of an injured party, it is generally necessary to employ a ‘subjective’ valuation approach which needs to be distinguished from an ‘objective’ valuation approach. See Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. 79 See Shannon Pratt, Robert Reilly and Robert Schweihs (n. 64) 870; Mark Kantor (n. 8) 49; see also Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 436; LG&E Energy Corp et al v. Argentina, ICSID Case No. ARB/ 02/1, Award, 25 July 2007, para. 35. 80 Mark Kantor (n. 8) 76. 81 There might be many reasons why investment outlays are higher than the actual market value of an asset. In cases of economically ‘good’ investments, outlays are lower than the market value of an investment. Tribunals have frequently recognised that the value of an investment may be higher than the amounts invested. See, for example, Southern Pacific Properties (Middle East) v. Egypt (n. 11) para. 214; Técnicas Medioambientales Tecmed, S.A. v. Mexico (n. 30) paras. 186, 195.

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33

It follows that the victim must receive something more, namely the ‘loss sustained as the result of the seizure’83 in the period between the expropriation and the time of the award. The decisive valuation date therefore should be the date of the award.84 This consequence has been pointed out by the tribunal in ADC v. Hungary: The Chorzów Factory standard requires that the date of valuation should be the date of the Award and not the date of expropriation, since this is what is necessary to put the Claimants in the same position as if the expropriation had not been committed.85

34

The conclusion of the ADC tribunal as to the valuation date has been reiterated by subsequent tribunals.86 For example, the ICSID tribunal in Siemens v. Argentina confirmed this approach and stated: The key difference between compensation under the (…) [ILC] Articles and the (...) Treaty standard is that (...) Siemens is entitled not just to the value of its enterprise as of (...) the date of expropriation, but also to any greater value that enterprise has gained up to the date of this Award, plus any consequential damages.87

35

The tribunal in Kardassopoulos v. Georgia, even if it was rather reluctant to accept a practical difference between lawful and unlawful expropriation, nevertheless admitted that [i]t may be appropriate to compensate for value gained between the date of the expropriation and the date of the award in cases where it is demonstrated that the Claimants would, but for the taking, have retained their investment.88

The tribunal did not consider that, even if the value had not increased in the meantime, other losses and damages would have to be included anyway so that, as a result, the valuation date would again be the date of the award. 37 The tribunal in Unglaube v. Costa Rica, even though opining that there was no practical difference between lawful and unlawful expropriations, did not determine the valuation date as the date on which the actual or threatened expropriation had become publicly known.89 It noted that ‘Mrs. Unglaube’s ownership 36

82 Factory at Chorzów (Germany v. Poland) (n. 23) 47. 83 Ibid., 48. 84 See already above, Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. See also Sabahi who points out that ‘[c]ompensation necessary to put the aggrieved party in the hypothetical position consists of: (1) the value of the property or losses, generally, at the time of indemnification or at any time between then and the commission of the wrongful act, if it can be proven that the investor would have been in that economic position taking into account the relevant post-act events, such as general economic conditions as well as conditions specific to the asset and other factors. (…) (2) Supplemental compensation for additional damages (…).’ Borzu Sabahi (n. 7) 60. 85 ADC v. Hungary (n. 33) para. 497. 86 See the cases mentioned above (n. 37–43). 87 Siemens v. Argentina (n. 37) para. 352. 88 Kardassopoulos v. Georgia (n. 41). 89 Unglaube v. Costa Rica (n. 45) para. 315 et seq.

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rights in the 75-Meter Strip have been seriously interfered with since at least 2003’,90 but believed that it would be ‘more reasonable, instead, to assume a sale of the property on January 1, 2006.’91 In selecting this later date, the tribunal in fact deviated from the valuation standard date for lawful expropriations and took into account the subsequent increase in value.92 The determination of the date of the expropriation still remains important in 38 cases of unlawful expropriations, namely for the assessment whether the expropriated property has increased or decreased in value. As the value at the time of the expropriation is the standard for lawful expropriations, the compensation in cases of unlawful expropriations cannot be lower. The ‘primary’ rule contained in the treaty is the minimum for the calculation of compensation for unlawful expropriations.93 In case of doubt and in case of evidentiary problems which value is higher, the value at the expropriation date or the value at the date of the award, the claimant should have the choice between the two dates. This important principle, although it seems to be rather obvious, has not been 39 respected in all cases. The tribunal in RosInvest v. Russia, after having taken the hurdles of jurisdiction and the main causes of action, decided, at the valuation stage, that the date of valuation should be 24 January 2007.94 By this date, however, the actions by the Russian government against the claimant had been going on for more than two years. Since August 2004, the investment had suffered serious impairments of its value because of the actions by the government which the tribunal considered to amount to an unlawful expropriation. The value of the affected investment one month before the first action started was USD 11.66 million, the value at the time of the award was USD 183.2 million. The tribunal, however, awarded only USD 3.5 million to the claimant. This result appears rather unsatisfactory not only from the perspective of the investor who had won the case but was awarded only a fraction of the value of his investment – not to think about the damage actually incurred – but also because it contrasts with the widely recognised way of determining the valuation date in cases of even allegedly lawful expropriations.95

90 Ibid., para. 316. 91 Ibid., para. 318. 92 Even though the tribunal spelled out that the unlawfulness of the expropriation would not make a difference in terms of valuation (see fn. 45), the choice of the valuation date in fact is evidence of the contrary. 93 This is the important difference to other treaty standards, unrelated to expropriation, where such a minimum does not exist. See Irmgard Marboe, ‘Valuation in Case of Breaches of International Law Unrelated to Expropriation’, ch. 9.IV., 1082–1102. 94 RosInvest Co UK Ltd. v. Russia, SCC Case No. Arb. V079/2005, Award, 10 September 2010, para. 673. 95 One can only ruminate about the reasons for this result. A possible explanation is that the tribunal did not remain unimpressed by the allegations by the respondent State that the parent company of the investor was ‘a notorious US-based “vulture fund” and an archetype of pre-

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The tribunal in Quasar de Valores SICAV SA and others v. Russia, which was based on similar facts did not follow the RosInvest tribunal’s approach.96 The tribunal in determining the value of the expropriated company for ‘simple uncompensated expropriation, not unlawful expropriation’97 did not refer to the date of the expropriation, either, but selected yet another valuation date. While the date of the expropriation was set at the date ‘when Yukos was removed from the Unified Register of Companies in the wake of the end of the bankruptcy proceedings’ (23 November 2007),98 the tribunal took the date when the claimants had made their first purchase of shares in the company (19 December 2003).99 It explained this choice by contending that, while this downward adjustment might lack precision, under the present circumstances, that approach ‘adequately compensates the Claimants for the expropriation of their investments and avoids awarding a windfall.’100 In selecting the date of the first purchase, the tribunal excluded the subsequent increase of the value of the shares in the company. 41 This brief overview shows that the selection of the valuation date is important and difficult. If the valuation date is set different from the expropriation date, one should not lose sight of the imperative of the customary and BIT standard requiring a valuation of the expropriated property immediately before the expropriation or the threat of it becomes publicly known.101 Otherwise, a State can, by its own actions, diminish the value of the property and thus the amount of compensation due. In particular, in cases of unlawful indirect expropriations, the State should not benefit from its own wrongdoing. Furthermore, investors are not required to budget unlawful conduct of the host State when making the investment. In other words, unlawful acts cannot diminish the ‘legitimate expectations’102 of the investor. 40

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98 99 100 101

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crash Wall Street “anything goes” capitalism.’ (para. 5) It seems that the tribunal, even though it had found that the Russian government had abused its tax law and had taken other measures to in fact enact an expropriation, did not want to reward the ‘speculative’ commercial activity of the investor. The tribunal found ‘it somewhat difficult to follow RosInvest’s reasoning with respect to the discount applied to the valuation of the investor’s shareholding inasmuch as it focused on their having made a “speculative investment”.’ Quasar de Valores SICAV SA and others v. Russia (n. 43) para. 195. Ibid., para. 215 (emphasis in original). It did so on the basis of the narrow jurisdictional clause of the BIT which provided for arbitration only on the amount of expropriation and the explicit submissions of the claimants. See, Irmgard Marboe, ‘Quasar de Valores SICAV SA and others v The Russian Federation. Another Chapter of the Yucos Affair’ (2013) 28 ICSID Rev.–FILJ 247–253, 248. Ibid., para. 189. The claimants had proposed the date of the ‘last reliable stock price’ of the company ‘before the threat of a taking rendered the stock price an unreliable indication of Yukos’ worth’ (14 April 2004) as the valuation date. Ibid., paras. 191–192. Ibid., para. 217. As, for example, the claimants in Quasar de Valores SICAV SA and others v. Russia had proposed, namely to choose the date of the ‘last reliable stock price’ of the company ‘before the threat of a taking rendered the stock price an unreliable indication of Yukos’ worth’ (14 April 2004) as the valuation date. Ibid., paras. 191–192.

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E. Valuation Approaches Applied by Investment Tribunals

On the basis of the legal rules and principles above, tribunals have to proceed 42 and apply economic concepts and techniques in order to decide on the financial outcome of the case. In the following, some of the approaches and methods applied in international investment practice will briefly be discussed. 1. Market Approach

The market or sales comparison approach considers the sales of similar or 43 substitute properties and related market data, and establishes a value estimate by processes involving comparison.103 Frequently, the ‘market approach’ as a method to evaluate assets is confused with the (fair) market value basis of valuation, as Kantor correctly points out: Arbitrators should be aware that references to the Market-Based Approach are occasionally confused with references to the similar sounding concept of market value. These are, however, concepts; the Market-Based Approach, like the Income-Based and Asset-Based Approaches, is just one means of determining the market value of a business.104

According to the market approach, the asset shall be compared with sales of 44 similar assets that have been sold and bought in the market. Listings and offerings may also be considered.105 The valuation may be based on stock prices, prior transactions, offerings, partial sales, comparable sales or the use of ‘multiples’.106 Stock market prices seem to be the most reliable and objective indicator of 45 value. It appears to be a rather simple and safe exercise to assess the value of a publicly traded company by simply multiplying the price of a single share by the number of shares issued.107 A number of arbitral tribunals have relied on share prices,108 recently, for example, the tribunals in RosInvest v. Russia109and Quasar de Valores SICAV SA and others v. Russia.110 However, other tribunals 102 The tribunal in Quasar de Valores SICAV SA and others v. Russia noted: ‘The value of that residual potential is what the Claimants were free to seek to capture; and when that legitimate expectation was defeated by the ultimate completion of an uncompensated expropriation their BIT’s protection was enlivened’. Ibid., para. 203. 103 See the ‘Concepts Fundamental to Generally Accepted Valuation Principles’ in International Valuation Standards Committee, International Valuation Standards (International Valuation Standards Committee, 2007) 32; Shannon Pratt, The Lawyer’s Business Valuation Handbook (American Bar Association, 2000) 139; Mark Kantor (n. 8) 8; Sergey Ripinsky and Kevin Williams (n. 7) 212. 104 Mark Kantor (n. 8) 13. 105 Ibid. 106 See Shannon Pratt (n. 103) 139 et seq. 107 See, for example, Statement of Financial Accounting Standards No. 142 (issued 6/01), 13: ‘Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available.’ 108 American International Group v. Iran, (1983) 4 Iran–US CTR 96, 106; INA Corporation v. Iran, (1985) 8 Iran–US CTR 373, 380; Khosrowshahi v. Iran, (1994) 30 Iran–US CTR 76, para. 47. 109 RosInvestCo UK Ltd. v. Russia (n. 94) para. 675.

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have pointed out that temporary and artificial distortions must be disregarded.111 Stock prices have also been used to confirm the result achieved by other valuation approaches.112 In any case, it has to be borne in mind that stock market prices are volatile and often do not reflect the real economic value of the company. This is particularly true, if the company as a whole is evaluated. It follows that stock market prices are more appropriate for the valuation of minority shareholding. 46 Most importantly, investment tribunals have appreciated prior or later transactions as a reliable measure for the value of the expropriated investment.113 This is particularly true for the valuation of companies as a whole. In contrast, offerings114 and partial sales115 have not been readily accepted. Some tribunals regarded comparable sales as problematic because of the lack of comparability of the investment project in question.116 This problem was, for example, addressed by the tribunal in Siag v. Egypt which nevertheless decided to rely on the comparable sales method but adjusted the expert’s amount by 20 percent downwards.117 In contrast, the use of multiples, even though wide spread in business valuation practice, has so far only rarely been applied by investment tribunals.118 47 It can be concluded that the market approach even though seemingly practical and convincing only plays a limited role in investment arbitration. Stock market prices do not always indicate the real economic value of a company. Other market related methods suffer from the handicap that, in practice, it often turns out to be difficult to find sufficiently similar investments which could be taken for a meaningful comparison. 2. Income Approach 48

Today, the income approach represents the most appropriate valuation approach for the determination of the value of an asset.119 It is the capitalisation of 110 Quasar de Valores SICAV SA and others v. Russia (n. 43) para. 217. 111 Reineccius et al. v. Bank for International Settlements, Permanent Court of Arbitration, Partial Award, 22 November 2002, para. 196. 112 CME v. Czech Republic, UNCITRAL, Final Award on Damages, 14 March 2003, paras 550– 551. 113 Gould Marketing v. Iran, (1984) 6 Iran–US CTR 272, 286; CME v. Czech Republic (n. 112) para. 514; Técnicas Medioambientales, S.A. v. Mexico (n. 30) 191; Kardassopoulos v. Georgia (n. 41) para. 599; Unglaube v. Costa Rica (n. 45) paras. 313 and 318. 114 United Painting v. Iran, (1989) 23 Iran–US CTR 351, 73–74; Middle East Cement Shipping and Handling Co. S.A. v. Egypt, ICSID Case No. ARB/99/6, Award, 12 April 2002, para. 148. 115 Starrett Housing Corp. v. Iran, (1987) 16 Iran–US CTR 112, para. 309 et seq.; Southern Pacific Properties (Middle East) v. Egypt (n. 11) 197; CME v. Czech Republic (n. 112) para. 610. 116 Sedco v. NIOC, Final Award, (1987) 15 Iran–US CTR 23, para. 76. 117 Siag and Vecchi v. Egypt (n. 40) paras. 572 et seq., in particular 575–576. 118 In CME v. Czech Republic, the use of multiples was discussed in detail, in particular, because the offer of the Scandinavian TV company which had made an offer to buy the company had been based on such a multiples analysis. CME v. Czech Republic (n. 112) para. 166 et seq.

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prospects and can be used both for objective and for subjective valuation depending on the parameters which are used for the projection of future financial benefits and the discount factors.120 One of the most widely used methods of this category is the discounted cash flow (DCF) method which is based on prospects of future cash flows that have to be discounted by a factor reflecting the risk and the time value of money.121 Investment tribunals have long been rather reluctant to apply this approach.122 49 Their scepticism has been primarily driven by the ‘speculative’ element of the methods to be employed. The main argument has been that ‘speculative or uncertain damages’123 cannot be awarded. In expropriation cases, however, compensation is not an issue of ‘damages’ but it should reflect the ‘value’ of the investment. If this ‘value’, in business practice, is generally evaluated by forwardlooking valuation methods this should in principle also be reflected in international arbitration which aims to restore – at least – the ‘value’ of the investment in expropriation cases. Nevertheless, despite numerous attempts by claimants, counsel and experts in their submissions in expropriation cases, the tribunals have hardly changed their sceptical attitude towards forward looking valuation methods. It is interesting to note that they are more inclined to apply them in cases unrelated to expropriation, thus for claims based on violations of other treaty standards.124

119 Scott Gabehart and Richard Brinkley (n. 64) 35–36; Aswath Damodaran, Investment Valuation (Wiley & Sons, 2002) 6 et seq.; Thomas E. Copeland, Tim Koller and Jack Murrin, Valuation. Measuring and Managing the Value of Companies (Wiley & Sons, 2000) 47 et seq., 131; Shannon Pratt (n. 103) 105; William Lieblich, ‘Determining the Economic Value of Expropriated Income-Producing Property in International Arbitrations’ (1991) 8 J. Int’l Arb. 59, 61 et seq. 120 Aswath Damodaran (n. 119) 6 et seq. 121 See more in detail Richard Walck, ‘Methods of Valuing Losses’, ch. 9.II., 1045–1056. 122 There are only a few cases where tribunals have applied income-based valuation methods in expropriation cases. The rare examples include Starrett Housing Corporation v. Iran, Final Award, (1987) 16 Iran–US CTR 112; Phillips Petroleum Company Iran v. Iran, (1989) 21 Iran–US CTR 79; ADC v Hungary (n. 33) para. 502; Bridas SAPIC v. Government of Turkmenistan, Partial Award of 25 June 1999, excerpts reprinted in R. Doak Bishop, James Crawford, and W. Michael Reisman, Foreign Investment Disputes. Cases, Materials and Commentary (Kluwer, 2005) 1270 et seq. 123 Amoco International Finance Corporation v. Iran (n. 24) para. 238; see also Phelps Dodge Corp v. Iran, (1986) 10 Iran–US CTR 121, para. 30; Metalclad Corp. v. Mexico (n. 30), para. 121 and Wena Hotels v. Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, para. 122. 124 See Irmgard Marboe, ‘Valuation in Cases of Breaches of International Law Unrelated to Expropriation’, ch. 9.IV., 1082–1102. It has also been applied in Occidental Petroleum Corp. et al. v. Ecuador, ICSID Case No. ARB/06/11, Award, 5 October 2012, where the tribunal found a violation of the obligation of fair and equitable treatment and measures tantamount to expropriation. The tribunal accepted the DCF method as applied by the claimant’s expert but made a number of adjustments. See para. 722 et seq.; see also the comprehensive case comment by Borzu Sabahi and Kabir Duggal, ‘Occidental Petroleum v. Ecuador (2012). Observations on Proportionality, Assessment of Damages and Contributory Fault‘ (2013) 28 ICSID Rev.–FILJ 279–290.

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3. Asset Value or Cost-Based Approaches

According to the asset value or cost approach, the values of different component parts determine the overall value of an object.125 The advantage of the approach is that, compared to the income capitalisation approach, it appears to be easier and less speculative.126 It looks into the past and not into the future and is seemingly much simpler to apply than the highly complex capitalisation and discounting processes. Evidence is usually available and no prognoses about the future are required. Tribunals have frequently applied such approaches and termed them, as appropriate, ‘book value’, ‘investment value’, or ‘sunk investment or costs’. 51 As regards the ‘book value’, valuation experts point out that it is not appropriate for valuation purposes.127 The numbers appearing in the account books or the balance sheet of the business reflect the application of accounting principles that usually serve other purposes than those of valuation. They are the result of the application of rules and entrepreneurial decisions in the exercise of the discretion granted to them. Several tribunals have therefore rejected the book value for valuation purposes.128 52 Occasionally, tribunals nevertheless referred to the book value, sometimes as the starting point of the valuation. The tribunal in Siemens v. Argentina found that the book value would be an appropriate measure of damage when the investment was made not long ago. It pointed out that ‘the book value method applied to a recent investment is considered an appropriate method of calculating its fair market value when there is no market for the assets expropriated.’129 As the tribunal had found that it was not likely that the investment would have been profitable,130 it decided that the calculation should be limited to the book value, based on the audited financial annual report and the balance sheet, and be sub50

125 Scott Gabehart and Richard Brinkley (n. 64) 24. 126 See the preference of investment tribunals for the asset approach in contrast to the preference of valuation experts for the income approach above. 127 See, for example, Joseph McCosker, ‘Book Values in Nationalization Settlements’ in Richard Lillich (ed), Valuation of Nationalized Property in International Law, vol. 2 (University Press of Virginia, 1973) 36, 51; Shannon Pratt (n. 103) 256; see also Jeffrey Risius, Business Valuation: A Primer for Legal Professionals (ABA Publishing, 2008) 23. 128 The tribunal in Amoco International Finance v. Iran held that ‘[t]he theory that net book value is the appropriate standard of compensation in all cases of lawful expropriation overlooks the fact that a nationalized asset is not a collection of discrete tangible goods (equipment, stocks and, possibly, grounds and buildings). It can include intangible items as well, such as contractual rights and other valuable assets, such as patents, knowhow, goodwill and commercial prospects.’ Amoco International Finance Corporation v. Iran (n. 24), para. 255; in Starrett Housing v. Iran, the tribunal pointed out that the ‘book value does not represent fair market value’; instead it needed to determine ‘the price a reasonable buyer would pay for the Project.’ Starrett Housing Corporation v. Iran, (1987) 16 Iran–US CTR 112, para. 279. See also Motorola Inc. v. Iran Airlines Corporation and Iran, (1988) 19 Iran–US CTR 73, para. 68. 129 Siemens v. Argentina (n. 37) para. 355. 130 Ibid., para. 379 et seq.

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ject to a number of adjustments.131 Also the tribunal in Tza Yap Shum v. Peru referred to an ‘adjusted book value’.132 The repayment of investments undertaken – the ‘investment value’133 or the 53 ‘sunk investment’134 – is sometimes referred to as a variant of the book value method.135 This is not entirely correct as the book value by definition is reduced by depreciation, which is not the case if the entire sum of the investment undertaken is paid back more than one year later. International practice has been rather receptive towards the sunk investment costs as a means for calculating compensation. This was particularly so, when the expropriation occurred at a very early stage of the investment,136 such as in Biloune v. Ghana,137 Metalclad v. Mexico,138 Wena Hotels v. Egypt139 or Vivendi v. Argentina.140 Some tribunals reasoned that the fair market value of the expropriated invest- 54 ment would best be arrived at by reference to the claimant’s actual investment in the project.141 However, this is questionable, if there is no evidence that a hypothetical willing buyer would have paid to the investor all the expenses actually spent. By contrast, the tribunal in Vivendi v. Argentina referred to this as ‘investment value’142 which is more in accordance with the terminology of business valuation practice.143

131 Ibid., para. 368 et seq. The tribunal also added expenses undertaken and consequential damages. See infra, at n. 136. 132 Tza Yap Shum v. Peru (n. 42) paras. 264–266. The tribunal adjusted the net book value by a factor of 1.48 on the basis of four comparable fishing companies, as proposed by the claimant’s expert (para. 267). 133 Mark Kantor (n. 8) 67. 134 The term ‘sunk investment’ is not a technical term in business valuation practice. Generally, only three valuation approaches are used: the income approach, the asset approach and the market approach. However, ‘sunk investment costs’ or ‘actual investments’ play an important role in the practice of investment tribunals and are therefore frequently commented on in the literature. See, for example, Mark Kantor (n. 8) 49 et seq.; Sergey Ripinsky and Kevin Williams (n. 7) 226 et seq.; Borzu Sabahi (n. 7) 131 et seq. 135 Paul Friedland and Eleanor Wong, ‘Measuring Damages for Deprivation of Income-Producing Assets: ICSID Case Studies’ (1991) 6 ICSID Rev.–FILJ 400–430, 405. 136 See, for example, Phelps Dodge Corporation et al. v. Iran, (1986) 10 Iran–US CTR 121, para. 31, where the tribunal found that at the time of the expropriation production had not started so that ‘that the value of Phelps Dodge’s ownership interest in SICAB on 15 November 1980 was equal to its investment (…).’ 137 Biloune and Marine Drive Complex Ltd. v. Ghana, UNCITRAL, Award (Damages and Costs), 30 June 1990, (1992) 95 ILR 211, 218, at 229; in addition, the tribunal awarded interest and costs to the claimant; a valuation of the fair market value of the investment on the basis of ‘expected profits’ was not considered appropriate by the tribunal. Biloune v. Ghana, UNCITRAL, Award (Jurisdiction, Liability), 27 October 1989, (1994) 95 ILR 183, 211. 138 Metalclad Corp. v. Mexico (n. 30) para. 120. 139 Wena Hotels v. Egypt (n. 123) para. 122. Expenses undertaken in the preparation of the investment have, however, not been accepted as damage. Ibid., para. 125. 140 Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 8.3.13. 141 Metalclad Corp. v. Mexico (n. 30); Wena Hotels v. Egypt (n. 123) para. 122. 142 Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 8.3.13.

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Nevertheless, as most of the expropriation cases are in any event not concerned with lawful expropriations, the ‘value’ or the ‘fair market value’ of the investment is not the only decisive factor anyway. Rather, the tribunals may find that ‘full reparation’ is best to be achieved by a repayment of investments and expenses undertaken plus an award of interest. In particular, if the case concerns start-up or unprofitable investment, the repayment of the sums spent may appear to be the most appropriate way to make good the actual damage caused by the unlawful act. 4. ‘Mixed’ Approaches

Tribunals sometimes chose to award, in addition to a sum derived from an asset-based approach or an actual investment approach, an extra amount to balance the loss of income opportunity. This resembles the damnum emergens and lucrum cessans dichotomy which does not fit into the legal concepts of expropriation compensation.144 The rationale behind this could have been the recognition that the value of the investment was higher than the amount invested, but that applying the income approach would have been too ‘speculative’.145 Such a combination of valuation approaches is, however, not in accordance with internationally accepted valuation principles and causes conceptual problems. Economic assets cannot be restituted and yield profit at the same time. 57 Nevertheless, many cases show the preference of arbitral tribunals of the ‘mixed’ approach. Examples are LIAMCO v. Libya,146 and Aminoil v. Kuwait,147 which, however aimed rather at ‘appropriate’ compensation than at an exact valuation of the expropriated property. The Iran–US Claims Tribunal has also applied the mixed approach, for example, in Amoco International Finance Corporation v. Iran,148 and Sedco Inc v. NIOC.149 Under the auspices of ICSID, Ben56

143 Kantor, however, correctly points out that repaying the investments made is not putting the claimant in the position he would be in if the unlawful act had not been committed but rather in the situation which would exist had the investment never been made. Mark Kantor (n. 8) 50. 144 See already supra, n. 27 and accompanying text. 145 Sergey Ripinsky and Kevin Williams (n. 7) 232; Irmgard Marboe (n. 7) 294. 146 The tribunal started with the book value including reductions because of depreciation and amortisation. In addition, it noted that it was necessary to account for ‘the great initial expenses and risks taken by LIAMCO in their pioneer works and subsequent activities‘; LIAMCO v. Libya, Award of 12 April 1977, (1982) 62 ILR 141, 211, 213, 214. 147 The tribunal started by valuing the ‘fixed assets’ by a ‘depreciated replacement value’ and eventually awarded a lump sum, which should also reflect that the company was a ‘going concern’. Aminoil v. Kuwait (n. 20) para. 178(3). 148 The tribunal stated that ‘a nationalized asset is not a collection of discrete tangible goods (equipment, stocks and, possibly, grounds and buildings). It can include intangible items as well, such as contractual rights and other valuable assets, such as patents, knowhow, goodwill and commercial prospects’. Amoco International Finance Corporation v. Iran (n. 24) 248 et seq. 149 The tribunal accepted the approach submitted by the claimant and noted that the award of lost profits in addition to the asset value was justified because it appeared ‘to be a direct loss resulting from the unavailability of the rigs to Claimant for use elsewhere.’ Sedco Inc. v. NIOC, Final Award, (1987) 15 Iran–US CTR 23, para. 78 et seq.

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venuti & Bonfant v. Congo,150 Southern Pacific Properties v. Egypt151 and American Manufacturing and Trading Inc. v. Zaire152 may be mentioned in this context. In Sedelmayer v. Russia, the tribunal found that the ‘actual value’ of the expropriated investment consisted in the value of tangible assets, such as office equipment and vehicles, and the right to commercially use the buildings which should be compensated by an additional lump sum.153 The ICSID tribunal in Tecmed v. Mexico found that the investment had been 58 productive and had added value to the landfill in question and therefore engaged in valuing the future prospects of the investment in addition to the asset value.154 It thus found it appropriate to increase the asset-based value by an amount of lost profits and added lost profits for two years.155 The combination of backward-looking and forward-looking method, despite 59 its deviation of generally accepted valuation principles, is still rather widespread, also in the submissions of the parties. In Siemens v. Argentina, for example, the claimant asked, first, for the value of lost assets and, second, for lost profits based on the DCF method. The tribunal correctly rejected this approach and clearly pointed out that ‘the two methods are regarded as alternative means of valuing the same object. Here, however, Siemens’s expert has applied the two in tandem (…).’156 5. Consequential Damages

As under the customary law of State responsibility, the financial situation 60 should be re-established which would have existed if that act had not been committed,157 not only the financial loss incurred by the deprivation of the investment itself, but also additional damage and financial outlays which were the direct consequence of an unlawful expropriation should be compensated.158 150 Benvenuti & Bonfant v. Congo, (1993) 1 ICSID Rep. 330, 366. 151 Southern Pacific Properties (Middle East) v. Egypt (n. 11) paras. 213 et seq. 152 American Manufacturing and Trading Inc. v. Zaire, ICSID Case No. ARB/93/1, Award, 21 February 1997, (1997) 36 ILM 1531, para. 7.19 et seq. From the text of the award it is, however, not possible to discern how the tribunal arrived at this amount which eventually resulted in a duplication of the amount. 153 In view of the long duration of the 25-year contract and taking into account the costs for maintenance and similar works plus the partially private use, the tribunal awarded a lump sum of USD 1.5 million for this additional item of damages. Sedelmayer v. Russia (n. 11) para. 3.1.1. et seq. 154 The tribunal noted that ‘[i]t cannot be denied that the investment in the Landfill was productive and added value to the former Landfill’s operation as well as goodwill, or that the Claimant was deprived of its investment’s profits, and value added and goodwill, or that the Claimant’s losses also include lost profits.’ Técnicas Medioambientales S.A. v. Mexico (n. 30) para. 194. 155 Ibid., para. 193. 156 Siemens v. Argentina (n. 37) para. 355. 157 This rule reflects the Chorzów standard as mentioned earlier. See above n. 76 and accompanying text. 158 In order to limit the extent of consequential damages, the proposal has been made to apply the criteria of ‘adequacy’. According to this proposal, only the damage ‘adequately’ caused should be compensated, referring to the ‘natural’ or ‘normal’ course of events. See Eibe

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In ADC v. Hungary, the tribunal awarded the value of the investment at the date of the award, plus unpaid dividends and management fees, based on an approved business plan of the shareholders.159 The tribunal in Saipem v. Bangladesh, even though emphasising the difference between lawful and unlawful expropriations and the need for the Chorzów standard,160 only awarded the amount of the expropriated investment at the time of expropriation, plus interest. It did not accept costs, legal fees and other expenses which Saipem paid to combat the unlawful acts of the State, apparently due to the narrow jurisdictional clause.161 Also the tribunal in Kardassopoulos v. Georgia accepted the difference of lawful and unlawful expropriations but did not award the additional expenses related to pursuit of the compensation commission process.162 62 On the other hand, in Siemens v. Argentina, the tribunal referred to the ‘skeleton operation’, which was maintained after the expropriation and to ‘unpaid bills for services rendered’.163 The tribunal in Siag and Vecchi v. Egypt also awarded additional ‘discrete’ damages.164 Similarly, the tribunal in Funnekotter v. Zimbabwe, accepted consequential damages pointing out that an increase in value had not occurred but that each claimant should receive EUR 20.000 as ‘reparation for the disturbances resulting from the taking over of their farms and for the necessity for them to start a new life often in another country’.165 61

F. Conclusion 63

It follows from the above that in the valuation of compensation in expropriation cases, several aspects need to be taken into consideration. For lawful expropriations, the ‘primary’ norm of international law as generally contained in BITs

159 160 161 162 163 164

165

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Riedel, ‘Damages’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 1 (North-Holland Publishing, 1992) 931; similarly Anton Roth, Schadensersatz für Verletzungen Privater bei völkerrechtlichen Delikten (Carl Heymanns, 1934) 78, 113. Others have underlined the Roman law principle of in jure causa proxima non remota inspicitur incorporated in the ‘principle of proximate causality’. See the ‘Principle of Proximate Causality’ in Bin Cheng, General Principles of Law as Applied by International Tribunals (Stevens and Sons Ltd, 1953), 241, 245. See also Administrative Decision No II of the German–American Mixed Claims Commission: ‘This is but an application of the familiar rule of proximate cause – a rule of general application both in private and public law.’ 1 November 1923, 7 RIAA, 29. Ibid., para. 517. Saipem v. Bangladesh (n. 39) para. 201. Ibid., para. 205. The jurisdictional clause of the applicable BIT was limited to the issue of compensation upon expropriation and consequently barred the tribunal from awarding ‘full reparation’. Kardassopoulos v. Georgia (n. 41) para. 648. Siemens v. Argentina (n. 37) para. 386. In addition to the value of the property at the time of expropriation it accepted costs of construction which were not included in the value of the property at the time of expropriation, and USD 1 million for legal expenses incurred by the claimants in bringing their claims before the domestic courts over a period of more than seven years. Siag and Vecchi v. Egypt (n. 40) para. 585 et seq., in particular 587 and 593. Funnekotter v. Zimbabwe (n. 44) para. 138.

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or in regional treaties on investment protection is central. It determines the standard of compensation, usually referring to the ‘value’ of the investment, and sometimes also provides for a specific valuation approach. If the valuation approach is not explicitly mentioned in the treaty, the ‘value’ of the investment has to be determined by the application of generally accepted valuation methods, usually with the help of a valuation expert. The date of the valuation is the date of the expropriation or the time immediately before the expropriatory action was taken or became known, whichever is earlier. In cases of unlawful expropriation, the ‘secondary’ norms of international law regulating the consequences of internationally wrongful acts of States are applicable. Here, the standard of ‘full reparation’ is decisive. In order to arrive at a determined sum, a comparison of the financial situation of the investor with and without the breach has to be made. This can be regarded as an application of the so-called ‘differential method’ or of the ‘but-for-valuation’. The selection of the most appropriate method is less clear so that tribunals have a large variety of valuation approaches to choose. The valuation date in cases of unlawful expropriations should be the date of the award, if the value of the investment has increased. Otherwise, the value of the property at the date of the expropriation remains decisive and may be increased by any additional damage incurred up to the date of the award. In case of doubt and evidentiary problems which value is higher, the claimant should have the choice. This helps to arrive as closely as possible to the standard of ‘full reparation’ under the law of State responsibility which provides for a combination of restitution and compensation, if necessary. International investment tribunals have applied various different methods in 64 their practice of valuation expropriation compensation. Such methods include the market approach, the income-based approach, the asset-based or costs approach as well as ‘mixed’ approaches. Consequential damages have also been awarded in a number of cases in order to arrive as closely as possible to the required ‘full reparation’. This last aspect, however, is still underdeveloped in the practice of tribunals and could be expanded more in the future in order ‘to reestablish as far as possible the situation which would exist if the unlawful act had not been committed’, as the famous Chorzów dictum demands.

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Irmgard Marboe A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Customary Law Standard of Reparation under the Law of State Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

C. Valuation Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

D. Valuation Practice of Investment Tribunals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Valuation of Amounts Invested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Valuation of Lost Income, Cash Flow or Profits . . . . . . . . . . . . . . . . . . . . . 3. Mixed Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Amounts Based on Judicial Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Payment of Previously Determined Amounts . . . . . . . . . . . . . . . . . . . . . . . . 6. Giving Effect to National Tax Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27 28 32 43 45 51 52

E. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Kaj Hobér, ‘Fair and Equitable Treatment – Determining Compensation’ in Rainer Hofmann and Christian Tams (eds), The International Convention on the Settlement of Investment Disputes (ICSID): Taking Stock after 40 Years (Nomos, 2007) 79–102; Mark Kantor, Valuation for Arbitration (Kluwer Law International, 2008); Irmgard Marboe, Calculation and Damages in International Investment Law (Oxford University Press, 2009) 185–315; Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2009) 88–101, 188–358; Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration. Principles and Practice (Oxford University Press, 2011) 91–133; Thomas Wälde and Borzu Sabahi, ‘Compensation, Damages and Valuation’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook on International Investment Law (Oxford University Press, 2008) 1049–1124; Matthew Weiniger, ‘The Standard of Compensation for Violation of the Fair and Equitable Treatment Standard’ in Federico Ortino, Lahra Liberti, Audley Sheppard and Hugo Warner (eds), Investment Treaty Law Issues, Vol II: Nationality and Investment Treaty Claims. Fair and Equitable Treatment (British Institute of International and Comparative Law, 2007) 197– 203.

A. Introduction 1

International investment tribunals increasingly deal with cases unrelated to expropriation. Several other treaty standards aimed at the protection of foreign investment in the host State may be the basis for a claim for damages – such as the obligations of full protection and security, fair and equitable treatment, nondiscrimination, or most favoured nation treatment. This part of the chapter will analyse how tribunals have dealt with the challenge to apply the rather general rule of ‘full reparation’ under the law of State responsibility to various different factual situations.1 It will be shown that the number and type of obligations 1 For a more detailed analysis of cases see Kaj Hobér, ‘Fair and Equitable Treatment – Determining Compensation’ in Rainer Hofmann and Christian Tams (eds), The International Convention on the Settlement of Investment Disputes (ICSID): Taking Stock after 40 Years (Nomos, 2007)

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breached in most cases appears to be irrelevant for the valuation of the economic loss caused by the act of the State. Even if there are multiple violations by the same governmental measure, this does not directly influence the valuation approach. The decisive criteria for the selection of a valuation approach or method appear to be more factual and dependent of the economic circumstances of each case. An important factor is, however, whether the unlawful action of the State has led to the total loss or only to an impairment of the investment. Sometimes, the act of the State represents at the same time a contract breach and a treaty breach. In this case, the contract breach may be absorbed by the violation of a treaty obligation, such as the fair and equitable treatment standard or an umbrella clause. Another issue to be discussed is the valuation date which seems not to be perceived clearly in cases of breaches of international law unrelated to expropriation. B. Customary Law Standard of Reparation under the Law of State Responsibility

As discussed earlier,2 the violation of an obligation under international law by 2 a State entails the State’s international responsibility. The consequences of such a violation have been codified by the International Law Commission (ILC) in its Articles on the international responsibility of States for internationally wrongful acts (hereinafter ILC Articles).3 It is not necessary that the applicable investment treaty provides for explicit rules on reparation or valuation, because the applicability of the secondary rules of State responsibility follows automatically.4 This has already been formulated by the Permanent Court of International Justice (PCIJ) in the Chorzów Factory case: It is a principle of international law that the breach of an engagement involves an obligation to make reparation in an adequate form. Reparation therefore is the indispensable complement of a failure to apply a convention and there is no necessity for this to be stated in the convention itself.5

2 3 4

5

79–102; Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2009) 88–101, 188–358; Borzu Sabahi Compensation and Restitution in Investor-State Arbitration. Principles and Practice (Oxford University Press, 2011) 91–133; Irmgard Marboe, Calculation and Damages in International Investment Law (Oxford University Press, 2009) 185–315. See Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. Article on the International Responsibility of States for Internationally wrongful Acts, Resolution of the GA of 21 December 2001, UN Doc. A/AC.105/Res/56/83, Annex. Matthew Weiniger, ‘The Standard of Compensation for Violation of the Fair and Equitable Treatment Standard’ in Federico Ortino, Lahra Liberti, Audley Sheppard and Hugo Warner (eds), Investment Treaty Law Issues, Vol II: National and investment treaties. Fair and Equitable Treatment (BIICL, 2007) 197, 198. Case Concerning the Factory at Chorzów (Jurisdiction) (Germany v. Poland), ICJ Judgment, 26 July 1927, PCIJ 1927 Ser. A, No. 9, 21; see also the ILC Commentary to Art. 31, James Crawford, The International Law Commission’s Articles on State Responsibility. Introduction, Text and Commentaries (Cambridge University Press, 2009) 201.

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Contemporary investment tribunals generally decide in conformity with this statement and point out that the customary international law rules of State responsibility as codified in the ILC Articles are applicable to breaches of investment treaties as far as the issue of reparation is concerned.6 Some tribunals refer directly to the Chorzów standard without explicitly mentioning the ILC Articles.7 4 Occasionally, tribunals explicitly emphasise that the standard of compensation upon expropriation contained in the applicable investment protection treaty is not applicable in cases unrelated to expropriation. This is particularly the case, if the damage incurred does not consist in a total loss or destruction of the investment, but in restraints on commercial activity, thus, essentially in lost profits. In these cases, tribunals tend to emphasise that the compensation provisions meant for expropriations are not applicable in cases of other treaty violations. The tribunal in Myers v. Canada was very pronounced in this respect and distinguished, in particular, ‘lawful’ from ‘unlawful’ behaviour: 3

Expropriations that take place in accordance with the framework of Article 1110 – that is, expropriations that are conducted for a public purpose, on a non-discriminatory basis and in accordance with due process of law – are ‘lawful’ under Chapter 11 provided that compensation is paid in accordance with the (...) fair market value of the asset (...) formula. Under other provisions of Chapter 11, the liability of the host Party arises out of the fact that the government has done something that is contrary to the NAFTA and is ‘unlawful’ as between the disputing parties.8

5

According to the tribunal, assessing the ‘fair market value’ in a case concerning the violation of ‘fair and equitable treatment’ would not appropriately reflect the damage actually caused by the governmental act and would not be ‘a logical, appropriate or practicable measure of the compensation to be awarded’.9 Instead, the principle of full reparation as formulated by the PCIJ in Factory at Chorzów and as reflected in the work of the ILC on State Responsibility should be applied.10 It concluded that the concrete damage suffered by the investor should be 6 National Grid P.L.C. v. Argentina, UNCITRAL, Award, 3 November 2008, paras. 269–270; Duke Energy Electroquil Partners & Electroquil S.A. v. Ecuador, ICSID Case No. ARB/ 04/19, Award, 18 August 2008, paras. 467–468; BG Group plc. v. Argentina, UNCITRAL, Award, 24 December 2007, para. 426; Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. Mexico, ICSID Case No. ARB(AF)/04/05, Award, 21 November 2007, paras. 275, 280–281; Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, 28 March 2011, para. 151; El Paso Energy International Company v. Argentina, ICSID Case No. ARB/03/15, Award, 31 October 2011, paras. 700, 705, 710; Railroad Development Corporation v. Guatemala, ICSID Case No. ARB/07/23, Award, 29 June 2012, para. 260; Franck Charles Arif v. Moldova, ICSID Case No. ARB/11/23, Award, 8 April 2013, para. 559 et seq. 7 MTD Equity v. Chile, ICSID Case No ARB/01/7, Award, 25 May 2004, para. 238; ATA Construction Industrial and Trading Company v. Jordan, ICSID Case No. ARB/08/2, Award, 18 May 2010, para. 129; Impregilo S.p.A. v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, para. 361; White Industries Australia Ltd. v. India, UNCITRAL, Award, 30 November 2011, para. 14.3.3; Chevron Corporation and Texaco Petroleum Company v. Ecuador, UNCITRAL, Final Award, 31 August 2011, para. 308. 8 S. D. Myers Inc. v. Canada, First Partial Award, 13 November 2000, para. 308 (emphasis in original). 9 Ibid., para. 309.

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the measure of compensation and not the assessment by an independent third person, such as a hypothetical willing buyer.11 The NAFTA tribunal in Pope & Talbot v. Canada also did not refer to the in- 6 vestment’s fair market value but found that, after a violation of the ‘fair and equitable treatment’ provision of NAFTA Art. 1105,12 the claimant was entitled to concrete damages, in this case only out of pocket expenses, legal fees and disbursements.13 Similarly, the tribunal in Feldman v. Mexico pointed out the fact that the text of the NAFTA only contained the standard of compensation for lawful expropriations and not for treaty violations. In this case, the obligation to national treatment as provided in NAFTA Article 1102 was violated because the government had discriminated the claimant with regard to his right to a rebate of taxes applied to exported cigarettes.14 The tribunal referred to the awards in S. D. Myers v. Canada and Pope & Talbot v. Canada and awarded compensation in the amount of the loss or damage actually incurred, and did not relate this to the fair market value, either: NAFTA provides no further guidance as to the proper measure of damages or compensation for situations that do not fall under Art. 1110 (expropriation); (...) It follows that, in case of discrimination that constitutes a breach of Article 1102, what is owed by the responding Party is the amount of loss or damage that is adequately connected to the breach. (...) Thus, if loss or damage is the requirement for the submission of a claim, it arguably follows that the Tribunal may direct compensation in the amount of the loss or damage actually incurred.15

The NAFTA tribunal in Archer Daniels v. Mexico also followed this ap- 7 proach16 in a case about an alleged violation of the ‘national treatment’ provision (NAFTA Art. 1102) and of NAFTA Art. 1106 para. 3 on performance requirements.17 The violation consisted in the imposition of a 20 % tax on soft drinks but only on such soft drinks which were not made of cane sugar, a Mexican domestic product. The tax was lifted after a couple of years. According to the tribunal, the claimants were not expropriated but it was evident that they had suffered damage because the imposition of the tax had triggered a sharp drop in sales. The tribunal in Nykomb v. Latvia, deciding on the basis of the ECT, also noted 8 that the criteria of compensation provided for in Article 13(1) for cases of expropriation were not applicable to the assessment of losses caused by violations of Article 10 on fair and equitable treatment.18 Similarly, the tribunal in Petrobart

10 Ibid., para. 309. 11 As to the difference between ‘concrete’ and ‘abstract’ valuation see Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. 12 Pope & Talbot Inc. v. Canada, Award on the Merits of Phase 2, 10 April 2001, para. 195. 13 Pope & Talbot Inc. v. Canada, Award in Respect of Damages, 31 May 2002, para. 87. 14 Marvin Roy Feldman Karpa v. Mexico, ICSID Case No. ARB/(AF)/99/1, Award, 16 December 2002, para. 187. 15 Ibid., para. 194. 16 Archer Daniels v. Mexico (n. 6) para. 279. 17 Ibid., paras. 213 and 227.

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v. Kyrgyzstan, another case of a violation of Article 10 of the ECT, referred to the Chorzów standard and the ILC Articles.19 9 In cases of BIT violations, several ICSID tribunals also have denied the applicability of the expropriation standard to other treaty violations. The ICSID tribunal in MTD v. Chile, deciding on the consequences of a violation of the fair and equitable treatment standard, noted that the BIT provides for the standard of compensation applicable to expropriation, ‘prompt, adequate and effective’ (...) It does not provide what this standard should be in the case of compensation for breaches of the BIT on other grounds.20

The claimant had referred to the ‘classic’ standard of the PCIJ in Factory at Chorzów which had not been challenged by the respondent so that the tribunal decided to apply this standard for the valuation.21 11 This was also the case in LG&E v. Argentina which concerned gas distributing companies affected by Argentina’s emergency measures in 2002 which were considered in violation of the ‘fair and equitable treatment’ standard and the umbrella clause by the tribunal.22 It explained that ‘compensation in this case cannot be determined by the impact on the asset value; it does not reflect the actual damage incurred by Claimants. The measure of compensation must be different.’23 It decided that the valuation should be the ‘actual loss’ incurred ‘as a result’ of the wrongful act.24 It found that the actual damage inflicted by the measures was the amount of dividends that could have been received but for the adoption of the measures.25 12 In American Manufacturing and Trading v. Zaire, the respondent State’s responsibility resulted from a violation of the obligation of full protection and security26 and of the obligation to compensate for the damage suffered due to revolution, state of national emergency, revolt, insurrection, riot, or other acts of violence.27 According to the ICSID tribunal, this could not be assimilated to ex10

18 Nykomb Synergetics Technology Holding AB v. Latvia, Arbitration Institute of the Stockholm Chamber of Commerce (ECT), Award, 16 December 2003; see the more detailed analysis of the case by Kaj Hobér (n. 1) 94 et seq. 19 Petrobart Limited v. Kyrgyzstan, Arb. No. 126/2003, Arbitration Institute of the Stockholm Chamber of Commerce (ECT), Award, 29 March 2005; see also Kaj Hobér (n. 1) 96 et seq. 20 MTD Equity et al v. Chile (n. 7) para. 238. 21 Ibid., para. 238; see also Kaj Hobér (n. 1) 83 et seq. 22 LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina, Award on Liability, 25 July 2007, ICSID Case No. ARB/02/1, paras. 132 and 175. 23 LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc v. Argentina, Award, 25 July 2007, ICSID Case No. ARB/02/1, para. 36. 24 Ibid., para. 45. 25 Ibid., paras. 48, 59–62. 26 American Manufacturing and Trading Inc. v. Zaire, Award, 21 February 1997, ICSID Case No. ARB/93/1, para. 6.05. 27 It did not matter whether the damaging acts had been committed by the military or rioting private individuals: ‘[I]t suffices to confirm once more the engagement of the responsibility of the State of Zaire for all the losses resulting “from riot or act of violence in the territory of such other Party”, in this case, Zaire. Such is the case without the Tribunal enquiring as to the identity of the author of the acts of violence committed in the Zairian territory. It is of little or

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propriation28 which meant that the expropriation standard was not applicable. Instead, the standard of restitutio in integrum should be applied. However, in the case at hand, the tribunal did ‘not see any substantial difference in practice’.29 In this case, in contrast to the cases mentioned earlier, the violation of the treaty standard had, in fact, led to the total destruction of the property. The view that there would not be ‘any substantial difference in practice’ is 13 maintained by several tribunals which decided cases where the BIT violation led to a total loss of the investment. The ICSID tribunal in CMS v. Argentina, also concerned with a gas transmission company affected by Argentina’s emergency measures and persuaded that there was a violation of the obligation to fair and equitable treatment and the treaty’s umbrella clause,30 found that the cumulative nature of the breaches discussed here is best dealt with by resorting to the standard of fair market value. While this standard figures prominently in respect to expropriation, it is not excluded that it might also be appropriate for breaches different from expropriation if their effect results in important long term losses.31

The tribunal applied a DCF valuation in order to determine the losses extend- 14 ed through the respective period of time.32 Similarly, the ICSID tribunal in Azurix v. Argentina, after a finding that the 15 government had failed to provide ‘fair and equitable treatment’ and had breached the standard of ‘full protection and security’,33 also decided that ‘a compensation based on the fair market value of the Concession would be appropriate, particularly since the Province has taken it over.’34 The tribunal explicitly referred to the decision of the CMS v. Argentina tribunal,35 but paradoxically also to the NAFTA tribunals in S.D. Myers, Pope & Talbot and Feldman36 as well as to the ICSID tribunal in MTD v. Chile37 which have specifically denied the applicability of the fair market value standard in cases unrelated to expropriation. The tribunal claimed to apply the Chorzów standard, apparently not making a distinction between the standard of fair market value for lawful expropriations and the principle of ‘full reparation’ for internationally wrongful acts under the Chorzów standard.38

28 29 30 31 32 33 34 35 36 37 38

no consequence whether it be a member of the Zairian armed forces or any burglar whatsoever.’ Ibid., para. 6.13. Ibid., para. 7.03. Ibid., para. 7.13. CMS Gas Transmissions Company v. Argentina, Award, 12 May 2005, ICSID Case No. ARB/ 01/8, paras. 281 and 303. Ibid., para. 410. Ibid., para. 417. Azurix Corporation v. Argentina, ICSID Case No. ARB/01/12, Award of 14 July 2006, paras. 377 and 408. Ibid., para. 424. Ibid., para. 420. Ibid., para. 421. Ibid., para. 423. See as to the difference supra Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044, and, more comprehensively, Irmgard Marboe, ‘Compensa-

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Such lack of clarity may lead to inconsistent and unsatisfying outcomes. In Azurix v. Argentina, it resulted in a considerable loss of the claimant’s investment which was recognised by the tribunal only to a very limited extent. The 438 million pesos (i.e. USD 438 million in 1999)39 paid for the water concession were evaluated as being worth only USD 60 million because ‘no well-informed investor, in March 2002, would have paid for the Concession the price (…) paid by Azurix in mid-1999.’40 The tribunal admitted that ‘the Province benefited from the alleged aggressive price paid’ and that ‘the loss in value is partly attributable to the actions of the Province and the politicization of the Concession’.41 The wrongdoer in this case, however, did not have to pay back the higher sum which it had actually received but only an abstract value which presumably represented the ‘fair market value’. The tribunal did not recognise that the ‘fair market value’ was generally meant for lawful expropriations but that in cases of unlawful acts the concrete loss incurred would have to be honoured. The determination of the concrete loss incurred would have led at least to the amount the investor had actually invested – which can be regarded as the minimum to be expected if an investment is destroyed by the wrongdoing of a host State.42 The tribunal then, however, accepted the claimant’s additional investment in the amount of USD 105 million. The tribunal, thus, by awarding, in sum, USD 165 million combined an abstract valuation of the initial investment with a concrete valuation of the subsequent investment.43 Surprisingly, this inconsistency was not highlighted by the claimant in the annulment proceedings.44 Only Argentina claimed that the tribunal had failed to apply the appropriate standard – namely the customary law standard as codified by the ILC instead of the fair market val-

39 40 41 42 43 44

tion and Damages in International Law. The Limits of “Fair Market Value”’ 7 JWIT (2006) 723,729 et seq.; quoted affirmatively by the ICSID tribunal in LG&E v. Argentina (n. 22) in footnotes 10 and 22. Ibid., para. 41. Ibid., para. 426. Ibid., para. 426. In order to achieve this aim, the investor had also invoked calculation of damages under the ‘enrichment standard’ which was, however, not accepted by the tribunal. See Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. Ibid., para. 430. Azurix Corporation v. Argentina, ICSID Case No. ARB/01/12, Decision on the application for annulment, 1 September 2009, para. 298. On the contrary, he argued that the tribunal ‘did not contradict itself or fail to state reasons for awarding both the “value of the Canon” and the “additional investments”’. Ibid., para. 298(o). This can only be explained by the claimant’s intention to deny that there were reasons for a possible annulment of the award. However, he could have also argued that the valuation was inconsistent but this alone would not be a ground for annulment. The scope of the annulment proceeding under the ICSID convention is very limited and should not be confused with appeal. See Christoph Schreuer, Loretta Malintoppi, August Reinisch, and Anthony Sinclair, The ICSID Convention. A Commentary (Cambridge University Press, 2009) Article 52, at para. 10; see also Irmgard Marboe, ‘ICSID Annulment Proceedings – Three Generations Revisited’ in Christina Binder, Ursula Kriebaum, August Reinisch and Stephan Wittich (eds), International Investment Law for the 21st Century (Oxford University Press, 2009) 200, 201.

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ue standard.45 Yet, the ad hoc committee did not find this to be a reason to annul the award.46 Despite this apparent inconsistency in the Azurix award, also other ICSID tri- 17 bunals, such as in Enron v. Argentina,47 Sempra v. Argentina,48 and El Paso v. Argentina49 have referred to the fair market value standard in cases of fair and equitable treatment violations. Their approaches are also not always consistent. In Enron v. Argentina, the tribunal found that the difference between the ‘current fair market value’ at the time of the award in 2007 and the value of the company in 2001 before the incriminated measures were adopted would represent the damage actually suffered by the claimants.50 However, by comparing the two values as of the date before the measures were taken, the tribunal shifted the burden of 14.5 per cent inflation of the peso to the claimant.51 Similarly, the tribunal in Sempra v. Argentina found that comparing the fair 18 market value of the investment concerned with and without the measure adopted by Argentina in 2002 would most appropriately lead to full reparation as required under customary international law.52 However, it did not strictly stick to the fair market value concept, as it denied the relevance of the market value before the measures had been taken noting that the ‘Claimant had originally not invested in CGP and CGS for trading purposes. It invested for the long term.’53 These intentions of the concrete investor should, however, be irrelevant when assessing the price a ‘hypothetical willing buyer’ might be ready to pay.54 Enron v. Argentina and Sempra v. Argentina have both subsequently been annulled but on other grounds than the inconsistent measure of damages.55 45 Ibid., para. 297. 46 The ad hoc committee did not find it disturbing that the province had received the high price for the concession which it destroyed and only had to pay back a fraction. Ibid., paras. 308– 309. It also did not see an inconsistency adding abstract and concrete values together or not distinguishing between ‘full reparation’ and ‘fair market value’ or quoting inept precedents for this. Ibid., paras. 305–306. However, due to the limited scope of the annulment procedure – see above (n. 44) –, the ultimate result of the proceeding – not to annul – would probably have remained the same. 47 Enron Corporation Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007, paras. 361–363. 48 Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, paras. 403–404, 416 et seq. 49 El Paso Energy International Company v. Argentina (n. 6) para. 703. 50 While the latter should be assessed on the basis of a DCF analysis, the former should be evaluated by reference to a purchase price actually paid by a willing buyer in 2006 because the tribunal found that this price would provide an accurate and realistic base for the estimate of the current fair market value of the regulated business. Enron v. Argentina (n. 47) para. 404. 51 Ibid., para. 436; see as regards the importance of the valuation date further below, at subsection C. 52 Sempra v. Argentina (n. 48) paras. 401 and 404. 53 Ibid., para. 435. 54 There are also a number of other ‘subjective’ elements in the valuation which are not consistent with the fair market value concept. See, for example, paras. 436, 442, 451 et seq. 55 Enron Corporation Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Decision on the application for annulment, 30 July 2010; Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Decision on Argentina’s application for annulment, 29 June

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C. Valuation Date

As has been discussed earlier,56 in order to put the investor in the same financial position he would be in if the unlawful act had not been committed, the decisive date of the comparison should be the date of the award. This seems both consistent with the ‘full reparation’ standard – under its ‘restitution’ premise – and economically logical.57 Yet, it may come as a surprise, that international arbitration practice does not follow this logic in general.58 While in cases of unlawful expropriations there might be some plausible or practical explanations,59 this is not the case with regard to treaty violations unrelated to expropriations. A number of tribunals decided to use the date of the wrongful act as the date of the valuation. 20 The ICSID tribunal in Azurix v. Argentina assimilated the breach of the fair and equitable treatment obligation to an expropriation.60 The tribunal found the date of the breach would be decisive for the valuation and decided that the date at which the ‘cumulative actions of the Province (…) had reached a watershed’ should be retained for the purpose of calculating compensation.61 However, the tribunal only took this date for the purpose of the valuation of the initial investment – which was substantially reduced62 – but in fact, it added to this amount also subsequent investments undertaken by the investor. It would have been more logical to explain that the damage incurred should be evaluated at the date of the award.63 21 In Enron v. Argentina, the ICSID tribunal considered that it needed to compare the fair market value of the claimant’s investment before the measures were adopted ‘and its value at present’.64 However, as already mentioned above, the 19

56 57 58 59 60 61 62 63

64

2010. See Irmgard Marboe, ‘Introductory Note to the International Centre for Settlement of Investment Disputes: Sempra Energy International v. Argentine Republic, Application for Annulment of the Award’ (2010) 49 ILM 1441–1444. See Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. Manuel Abdala, ‘Key Damages Compensation Issues in Oil and Gas International Arbitration Cases’ (2009) 24 Am. U. Int’l L. Rev. 539, 557–558; Borzu Sabahi (n. 1) 105–106. See, for example, Asian Agricultural Products Ltd. v. Sri Lanka, ICSID Case No. ARB/87/3, (1997) 4 ICSID Rep. 246, para. 114. See Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. See already Azurix Corporation v. Argentina (n. 33) para. 424. Azurix Corporation v. Argentina (n. 33) para. 418, referring to Malek v. Iran, Iran–US Claims Tribunal Rep. (1992), para. 114; International Technical Products Corp. v. Iran, Award, 28 October 1985, 9 Iran–US Claims Tribunal Rep. (1985) 206, 240–241. See supra, n. 44. The annulment committee did not discuss explicitly the date chosen for the valuation but rather generally was of the opinion that there was no ground for annulment in the determination of the tribunal ‘that the amount of damages would be the fair market value of the Concession on March 12, 2202.’ Azurix Corporation v. Argentina, Decision on the application for annulment (n. 44) para. 338. This can also be explained by the limited scope of review under the ICSID annulment procedure. See already supra, n. 44. Enron v. Argentina (n. 47) para. 380 (emphasis added).

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problem arose with respect to the calculation of the inflation.65 The tribunal first assessed the total net value of the claimants’ participation in the regulated business as of 31 December 2001, the day before the emergency measures had been adopted.66 The value ‘at present’ – the award was issued in 2007 – should be assessed by reference to a purchase price actually paid by a willing buyer in 2006.67 It would appear that the inflation between 2001 and 2006 should be taken into account by increasing the value of 2001 by the inflation rate and subtracting from this amount the current value of the investment in order to arrive at the difference between the non-pesification scenario and the pesification scenario.68 However, the tribunal chose the opposite approach. It decreased the actual value by the inflation rate and subtracted from this the value of 2001.69 In doing so, the tribunal passed the burden of the inflation of the peso of an average 14.5 per cent per annum to the victim of the unlawful act. The rate of pre-award interest, by contrast, was only between 4 and 6.5 per cent (based on the LIBOR plus two).70 The ICSID tribunal in Amco v. Indonesia was one of the first to emphasise 22 that the comparison should be made from the perspective of the date of the award. The respondent in that case had breached a number of different duties vis-à-vis the foreign investor which had led to a total destruction of the investment project, the construction and operation of a hotel and office complex.71 In order to assess the damage incurred, the tribunal did not see any reason why it should do this from the perspective of a businessman at the time of the wrongful acts. The first tribunal in Amco Asia Corp. v. Indonesia (Amco I), instead, held: If the purpose of compensation is to put Amco in the position it would have been in had it received the benefits of the Profit-Sharing Agreement, then there is no reason of logic that requires that to be done by reference only to data that would have been known to a prudent businessman in 1980.72

The calculation was divided into two phases, thus the first phase from the 23 date of the unlawful act until the valuation date (the date of the award), and the 65 The tribunal paid particular attention to the inflation aspect when it compared the ‘but for’ scenario with the current value of the regulated business in the pesification scenario. Ibid., para. 411. 66 See ibid., at paras. 403 and 405. 67 The tribunal found that this price would provide a more accurate and realistic base for the estimate of the current fair market value of the regulated business than a DCF analysis. Ibid., at para. 429. According to its valuation, the value of the claimant’s investment on 31 December 2011, before the measure was taken, was USD 129 million. The price paid for the same interest in 2006 was USD 62.5 million. See ibid., at para. 423. 68 This would have resulted in an amount of damages of approximately USD 141.3 million (own calculation). 69 See ibid., para. 438. This resulted in an amount of damages of only USD 38.6 million for this item of damages. 70 Ibid., para. 452. 71 Amco Asia Corporation v. Indonesia, Award, 20 November 1984 (Amco I), ICSID Case No. ARB/81/1, (1993) 1 ICSID Rep. 413, para. 163 et seq.; Amco Asia Corporation v. Indonesia, Award, 5 June 1990 (Amco II), ICSID Case No ARB/81/8, (1993) 1 ICSID Rep. 569, para. 137 et seq. 72 Amco II (n. 71) para. 186.

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second phase from the valuation date into the future.73 As for the first phase, actual economic developments and dates, such as inflation, exchange rates and taxes, were taken into consideration.74 This approach was confirmed and also applied by the second tribunal which decided the case after the annulment of the first award. The second tribunal also divided the valuation period in one before and one after the award. It did so by referring to the principle of full reparation which should be oriented towards restitution:75 It may, on one view, be the case that in a lawful taking, Amco would have been entitled to the fair market value of the contract at the moment of dispossession. In making such a valuation, a Tribunal in 1990 would necessarily exclude factors subsequent to 1980. But if Amco is to be placed as if the contract had remained in effect, then subsequent known factors bearing on that performance are to be reflected in the valuation technique (…).76

24

The tribunal thereby confirmed, once again, the distinction between the fair market value and the principle of full reparation which, amongst others, should also be reflected in the valuation date. The tribunal emphasised that later developments have to be taken into account. Only the consequences following from the unlawful act itself must be disregarded: Foreseeability not only bears on causation rather than on quantum, but it would anyway be an inappropriate test for damages that approximate to restitutio in integrum. The only subsequent factors relevant to value which are not to be relied on are those attributable to the illegality itself.77

Similarly, the tribunal in S.D. Myers v. Canada explicitly included subsequent developments in its damages valuation.78 It did not assess the damage incurred only at the time of the Canadian export ban but made an assumption about the hypothetical development of claimant’s business operation up until the date of the award.79 Similarly, the tribunal in CMS v. Argentina, even though relying on the fair market value standard, included the economic situation after the unlawful act and found that the impact of the crisis in Argentina even after the emergency measure must be taken into account in the valuation of the damage caused by the unlawful act.80 The tribunal in El Paso v. Argentina also emphasised that the property has to be evaluated by reference to the time when compensation is paid, as compensation ‘is in fact in lieu of restitution that “has become impossible”’.81 26 In particular this latter case shows that subsequent events and developments are included in the valuation may not only increase but also reduce the amount of damages.82 This is the consequence of the principle of full reparation under 25

73 74 75 76 77 78

Ibid., para. 196. Ibid., para. 201 et seq. Ibid., paras. 186 and 197. Ibid., para. 186. Ibid. S.D. Myers, Inc. v. Canada, Second Partial Award, 21 October 2002, (2005) 8 ICSID Rep. 124, para. 98. 79 Ibid., para. 222 et seq. 80 CMS v. Argentina (n. 30) paras. 443–444. See also Borzu Sabahi (n. 1) 111. 81 El Paso Energy International Company v. Argentina (n. 6) para. 706.

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the restitution assumption. If subsequent events lead to a diminution of value, the injured party would have suffered this also in absence of the unlawful act. This part of the damage is, therefore, not causally linked to the violation. Only in expropriation cases, the objective value at the time of the State action is the guaranteed minimum to be received. In other cases of State responsibility, such as violations of BIT standards, like fair and equitable treatment or full protection and security, there is no such lower limit. The decisive measure of damages is the comparison of the financial situations with and without the breach. D. Valuation Practice of Investment Tribunals

The ‘full reparation’ standard under the law of State responsibility provides a 27 rather large margin of appreciation to the tribunals when it comes to the selection of an appropriate valuation method. The following is a brief summary of the most important approaches applied by investment tribunals.83 1. Valuation of Amounts Invested

Due to the uncertainty of future prospects or profits, international tribunals 28 have frequently been inclined to limit the amount of damages awarded to the amounts invested or expenses lost. This is particularly true with respect to violations of treaty standards, such as ‘fair and equitable treatment’ or ‘full protection and security’. In Pope & Talbot v. Canada, damages had to be calculated after a violation of NAFTA Article 1105 (fair and equitable treatment).84 The closure of the border by the export control regime on the export of timber had, according to the tribunal, not amounted to an expropriation.85 The tribunal decided that the unlawful interference lasted only for seven days, for which reason the amount of damages was rather modest. The only items of damages accepted were the ‘out of pocket expenses’ which consisted mainly in costs for legal advice, lobbying, and experts’.86 It did not award an amount for lost profits because the company had enough inventory stock to bridge the seven-day gap.87 The tribunal in MTD v. Chile also awarded only investments actually under- 29 taken and expenses incurred after a violation of Article 2(2) of the BIT between Malaysia and Chile containing the obligation to fair and equitable treatment.88 82 The tribunal in El Paso v. Argentina emphasised that Argentina’s policies had subsequently also had positive effects on the economy which needed to be considered in the calculation of the amount of damages. See ibid., para. 324. 83 For a more detailed discussion of the cases see Sergey Ripinsky and Kevin Williams (n. 1) 88–101, 188–358; Borzu Sabahi (n. 1) 91–133; Irmgard Marboe (n. 1) 185–315. 84 Pope & Talbot Inc. v. Canada, Interim Award, 26 June 2000, para. 105 et seq. 85 Ibid., para. 105. 86 The accepted ‘heads of damages’ were: investor’s out of pocket expenses, legal fees and disbursements, accountant’s fees and disbursements, lobbyists. See Pope & Talbot Inc. v. Canada, Award in Respect of Damages, 31 May 2002, para. 85 et seq. 87 Ibid., para. 163 et seq. 88 MTD Equity et al v. Chile (n. 7) para. 215 et seq.

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The construction project of the foreign investors had first been approved by the competent central authorities, but had later been rejected for not being in accordance with the urban planning and zoning regulations of the regional government. Before calculating the amount of damages payable, the tribunal emphasised the difference between compensation upon expropriation and the standard of reparation as explained by the PCIJ in Factory at Chorzów.89 The tribunal then awarded (1) the restitution of the original investment, (2) expenses incurred in connection with the project, and (3) financial costs insofar as they have been caused by the behaviour of the respondent.90 The residual value of the investment was deducted from the resulting amount as well as 50 per cent for ‘contributory negligence’.91 30 The ICSID Tribunal in PSEG v. Turkey decided that expenses undertaken must be refunded even if the investment had not been finally agreed upon. It maintained that already during the preparatory stage of a planned investment the investor had been treated grossly unfairly which amounted to a violation of the obligation of fair and equitable treatment.92 The tribunal awarded all the investments undertaken and expenses incurred in the course of the preparation and negotiation of the investment project.93 31 In Impregilo v. Argentina, the tribunal did not accept the claimant’s method relying on a combination of two methods, on the one hand, a cost- or asset-based method and, on the other hand, an income method attaching more weight (two thirds) to the income method than on the asset-based method (one third).94 Instead, it based its calculation only on the capital contribution made, because it could not find it established with a sufficient degree of probability that the concession, even in the absence of acts violating the standard of fair and equitable treatment, would have been profitable.95 Similarly, the tribunal in Franck v. Moldova calculated the amount due on the basis of wasted costs by considering capital expenditures, operating costs, and the stock purchased for the airport shop, because the airport store in question had never opened.96 2. Valuation of Lost Income, Cash Flow or Profits 32

The NAFTA tribunal in S.D. Myers v. Canada was one of first to apply the income-based valuation method almost exclusively by use of economic parameters.97 The tribunal found that the Canadian export prohibition of a hazardous 89 90 91 92 93 94 95 96

Ibid., para. 163 et seq. Ibid., para. 238. Ibid., para. 240. PSEG Global Inc. v. Turkey, ICSID Case No. ARB/02/5, Award, 19 January 2007, para. 316 et seq. Ibid., para. 256. Impregilo S.p.A. v. Argentina (n. 7) para. 372. Ibid., para. 375. The tribunal rejected the DCF methodology as not appropriate for a business that never operated, because this would give too speculative outcomes. In addition, the tribunal applied a 20 % reduction as adjustment. See Arif v. Moldova (n. 6) para. 547 et seq. and 576 et seq.

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waste substance between November 1995 and February 1997 constituted a violation of national treatment (NAFTA Art. 1102)98 and fair and equitable treatment (NAFTA Art. 1105).99 After having stated that not the fair market value but rather the Chorzów standard should be applied,100 the tribunal formulated more precisely that the concrete economic loss suffered by the investor should be determined and be measured by the lost net income stream: The Tribunal concludes that compensation should be awarded for the overall economic losses sustained by SDMI that are a proximate result of CANADA’s measure, not only those that appear on the balance sheet of its investment. (…) As stated above, the Tribunal has determined that the appropriate compensation is the value of SDMI’s lost net income stream.101

The situation was particularly difficult because the company had not yet start- 33 ed operation. There were data available from the claimant’s business operations in the United States but these could not be simply transferred to the Canadian market.102 In view of this, the tribunal accorded particular importance to the investor’s extensive preparatory and successful marketing activities.103 A decisive factor for the calculation was the first-mover advantage of the claimant who had already made a detailed analysis of the quantity of the material and contacted numerous potential customers.104 Because of the competitive price offered and certain geographical advantages the tribunal concluded that there was a high probability that the investment would have been commercially successful, even if it had only been a ‘start up’ venture.105 After the lift of the export ban, 50 per cent of the material had been processed by the Canadian competitors. The tribunal concluded that the damage consisted in three different forms: The Canadian closure had three adverse effects on SDMI’s investment. Part of the total available inventory was irretrievably lost to others; part of the inventory that remained unprocessed after the border re-opened was lost to others; and another part was delayed or lost because SDMI could not obtain the orders and export the material before the USA closed the border.106

97 S.D. Myers, Inc. v. Canada, Second Partial Award, 21 October 2002, (2005) 8 ICSID Rep. 124, para. 173 et seq. 98 S.D. Myers, Inc v. Canada, Partial Award, 13 November 2000, (2005) 8 ICSID Rep. 18, para. 256. 99 Ibid., para. 268. The arguments submitted by the respondent that the export prohibition was a measure for environmental protection was not accepted by the tribunal. It found that the reason was rather the intended protection of the national waste disposal industry. Ibid., para. 251 et seq. 100 Ibid., para. 315. 101 S.D. Myers, Inc. v. Canada (n. 78), Second Partial Award, para. 122 and para. 174. 102 The tribunal noted: ‘The Tribunal has taken due notice of SDMI’s successful experience of seizing marketing opportunities in the USA, but at the same time acknowledges that the Canadian market had certain distinctive features.’ Ibid., para. 173. 103 Ibid., para. 182. 104 The claimant asserted that his first-mover advantage was lost as a result of the Canadian closure which ended his unique opportunity. He contended that by the time the border reopened, other competitors were poised to enter the Canadian market and that the claimant’s competitive advantage was eliminated. Ibid., para. 176. 105 Ibid., para. 182 et seq. 106 Ibid., para. 222.

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In its calculation, the tribunal estimated the quantity of material that would have been processed by the claimant.107 It also considered the damage incurred by the delays.108 The income actually achieved in the ‘window of opportunity’ of 18 months when the border had been open only played a minor role in these calculations. The tribunal took it for granted that the claimant would have been much more successful than it actually was without the unlawful closure of the border due to its specific advantages, its engagement, and its particular knowhow.109 The award of the tribunal in S.D. Myers v. Canada is not only remarkable for its application of the income-based valuation method without a performance record of the past but also because of its diligent consideration of the subjective qualities and competitive advantages of the investor in accordance with the principle of full reparation as pronounced by the PCIJ in Factory at Chorzów.110 35 The tribunal in CMS v. Argentina also intended to base its valuation of the lost income stream.111 It referred to the two methodologies presented by the claimant’s expert.112 The tribunal presented the two alternatives in the following summarised form: 34

One can start computations with the cash flows to the firm before interest and debt repayments, discount such flows at the weighted average cost of capital (the ‘WACC’) and add the discounted cash flows to the firm to establish its value; then, the value of debt is subtracted and the residual value is the value of equity (‘the indirect equity value’). Alternatively, one can compute first the cash flow to equity (cash flows from equity (‘COE’) and add the discounted cash flows to equity to establish the value of equity (‘the direct equity value’); then one adds the value of debt to establish the value of the firm.113

The tribunal in Enron v. Argentina did not explain in such detail the basis of income and type of cash flow.114 It basically relied on the claimant’s expert DCF computations and undertook a number of adjustments.115 Similarly, the tribunal in Sempra v. Argentina based its damages valuation largely on the claimant’s expert’s DCF calculations and only changed some of the assumptions.116 37 The tribunal in LG&E v. Argentina, in contrast, applied the income valuation approach in a different way because it found that neither the stock market price of shares nor the DCF would properly account for the accrued loss.117 It decided 36

107 Ibid., para. 223 et seq. 108 Ibid., para. 226. 109 It therefore awarded an amount of 6.05 million Canadian dollars, plus compound interest. Ibid., para. 301. 110 See above (n. 100 and 101). 111 CMS v. Argentina (n. 30) paras. 430–433. 112 While the expert favoured the computation of ‘indirect equity value’, the tribunal followed the advice of its own expert and chose the ‘direct equity value’. Ibid., para. 433. 113 Ibid., para. 430. 114 The tribunal, however, clearly endorsed the DCF method as a reliable approach to calculate damages in this case. Enron Corp. v. Argentina (n. 47) para. 386. See already above (n. 50). 115 These adjustments concerned the tariff base, the Weighted Average Cost of Capital (WACC), the period of tariff adjustment, the efficiency adjustment, and the percentage attributable to the regulated business. Ibid., paras. 408–419. 116 Sempra Energy v. Argentina (n. 48) paras. 418–480.

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to concentrate on the ‘dividends’ lost as the most appropriate measure of damage and summarised in a procedural order: A calculation will be made of the dividends that would or could have been generated without any change in the tariff system. Dividends received by the Claimants will be subtracted from this figure, after which the damages suffered during the State of Necessity will be subtracted from this amount.118

The NAFTA tribunal in Archer Daniels Midland v. Mexico decided that the 38 damages incurred by the violation of national treatment requirements as regards the claimants tax status would best be represented by the amount of profits lost: In the Tribunal’s view, lost profits are allowable insofar as the Claimants prove that the alleged damage is not speculative or uncertain – i.e. that the anticipated profits were probable or reasonably anticipated and not merely possible. (…) Based on the evidence presented, the Tribunal concludes that the introduction of the Tax adversely affected the business of Claimants. The issue becomes the quantum of damages which in the present case will depend on the amount of profits that have been proved.119

The tribunal calculated the amount of damages exclusively on the basis of the 39 loss of profits which could be sufficiently proved by the claimants. The tribunal in Lemire v. Ukraine accepted the DCF method as agreed by the 40 claimant’s and the respondent’s experts as the most appropriate methodology.120 It, however, examined the different assumptions carefully and made its own evaluation of the numbers and submissions by the experts and the parties, including the use of EBIDTA (earnings before interest, taxes, depreciation and amortisation) multiples and comparable transactions as a cross check.121 The tribunal in El Paso v. Argentina found that the DCF method should be 41 applied in order to determine the difference of the fair market value of the investment with and without the breach.122 It endorsed the choice of the DCF method because the method has been used widely, including by numerous arbitral tribunals in similar circumstances. It makes it possible to assess the loss of value of El Paso’s investment due solely to the [Argentinian] measures, including Argentinian companies’ capacities, as going concerns, to generate returns.123

117 LG&E v. Argentina (n. 22) para. 59. 118 Ibid. 119 Archer Daniels Midland v. Mexico (n. 6) paras. 285, 287. The exact calculation cannot be verified as paras. 288 to 292 have been redacted. 120 Joseph Charles Lemire v. Ukraine (n. 6) para. 254. 121 Ibid., paras. 267–309. 122 El Paso Energy International Company v. Argentina (n. 6) paras. 703, 714. 123 Ibid., para. 712 (footnotes omitted). Similarly, the tribunal in EDF International v. Argentina evaluated the damage caused by the emergence measures by calculating the difference between the value of the claimant’s stake without these measures (‘but for scenario’), determined on the basis of a DCF analysis, discounted as of 31 December 2001, and the value of the same stake under a scenario with these measures (‘actual scenario’). See EDF International S.A., SAUR International S.A. and León Participaciones Argentinas S.A. v. Argentina, ICSID Case No. ARB/03/23, Award, 11 June 2012, para. 1183 et seq.

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This short overview demonstrates that international tribunals increasingly rely on income-based valuation approaches. It is noteworthy that the income approach is used both by tribunals applying the fair market value standard and those applying the Chorzów standard. This is possible because the basis of income can be different from case to case. In CME v. Argentina, the tribunal referred to the demand for gas, the tariff adjustments, and the operations and maintenance expenditures.124 The tribunal in Enron v. Argentina, by contrast, did not discuss the demand for gas explicitly but concentrated mainly on the tariff base and its adjustments.125 The working capital and investments in fixed assets were considered as being part of the ‘tariff base’.126 The tribunal in Sempra Energy v. Argentina addressed the issue of consumption in addition to the tariff adjustments as relevant factors for the valuation.127 It also found that the ‘asset base’ of the gas distribution company was a ‘major factor’ for the quinquennial tariff review foreseen in the concession.128 The tribunal in LG&E v. Argentina referred to the tariff adjustments and the average annual growth of gas volumes as the most important factors for the valuation.129 3. Mixed Methods

Due to the traditional scepticism towards income-based valuation approaches tribunals frequently started with an asset- or cost-based valuation. If this alone seemed to be insufficient and inappropriate under the circumstances tribunals sometimes increased the resulting figure by an extra amount in order to balance the loss of income opportunity. This ‘mixed approach’ was not always based on precise calculations but rather reflected an overall assessment. 44 The ICSID tribunal in American Manufacturing and Trading, Inc. v. Zaire decided that the value of the destroyed buildings and other assets as determined by an expert should be supplemented by an amount of approximately the same size for the loss of the business opportunity.130 From the text of the award it is, however, not possible to discern how the tribunal arrived at this amount which eventually resulted in a duplication of the amount.131 The tribunal limited itself to explain its reasoning about the economic chances and risks of the investment 43

124 125 126 127 128 129 130

CMS v. Argentina (n. 30) para. 442 et seq. Enron Corporation and Ponderosa Assets (n. 47) para. 408 et seq. Ibid., para. 410. Sempra Energy International v. Argentina (n. 48) para. 416 et seq. Ibid., para. 418. LG&E v. Argentina (n. 22) para. 100. The case concerned the violation of the obligation to provide full protection and security as provided for in the applicable BIT between the United States and Zaire. While the loss of assets amounted to USD 4,452.500 according to the tribunal appointed expert, the award totalled USD 9 million. American Manufacturing and Trading, Inc. v. Zaire (n. 26) para. 7.19 et seq. 131 Arbitrator Mbaye appended a ‘Declaration’ in which he criticised this imprecise approach. While he concurred with the considerations of the tribunal as a matter of principle, he found that the amount of 9 million US dollars by far exceeded the damage actually incurred by the investor. He stated that the total amount of damages should not have gone beyond USD 4

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which led it to conclude that a combination of sunk investment and a – in relation to the amount claimed – drastically reduced amount of lost profits would best reflect the amount of damage incurred.132 4. Amounts Based on Judicial Decisions

Some tribunals considered that the best way of putting the claimant in the 45 position he would be in the absence of the unlawful act was to give effect to a decision rendered by a judicial institution which had not been respected by the respondent State. The ICSID tribunal in Desert Line Project v. Yemen found that the amount de- 46 termined in the national arbitral proceedings would be the principal sum to be paid to the successful claimant. It held: The Tribunal considers that the Yemeni Arbitral Award should constitute the bench-mark for the reparation due to the Claimant for the breach of the BIT, and that it should have been open to the Claimant to repatriate the corresponding amount as of the date of the Yemeni Arbitral Award.133

In addition, the tribunal raised the question of how the time and money spent 47 on litigation and other disadvantages could be reflected appropriately. It eventually decided to award, in addition to interest from the date of the local arbitration award and a large part of claimant’s legal costs and 70 % of the arbitration fees, moral damages which also should include damages for the loss of reputation.134 Similarly, the tribunal in White Industries v. Australia decided that the amount 48 to be awarded should be the same as that determined by the ICC award which India had declined to enforce in violation of the BIT.135 This amount was, however, increased by interest from the date of the original ICC award as well as by fees and expenses of the arbitrators and the claimant’s costs in the ICC arbitra-

132

133

134

135

million. American Manufacturing and Trading, Inc. v. Zaire, Declaration by Kéba Mbaye, arbitrator, (1997) 36 ILM 1561. The tribunal noted: ‘Preferably, the tribunal will opt for a method that is most plausible and realistic in the circumstances of the case, while reflecting all other methods of assessment which would serve unjustly to enrich an investor who, rightly or wrongly, has chosen to invest in a country such as Zaire, believing that by doing so the investor is constructing a castle in Spain or a Swiss chalet in Germany without any risk, political or even economic or financial or any risk whatsoever.’ Ibid., para. 7.15. Desert Line Project LLC v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, para. 253; a similar decision was rendered in Pey Casado and President Allende Foundation v. Chile, ICSID Case No. ARB/98/2, Award, 8 May 2008, para. 694. This award however, has been subject to an annulment proceeding which has not been decided at the time of writing of this article. Desert Line v. Yemen (n. 133) para. 290; in Pey Casado v. Chile, the issue of moral damages was also realised but the tribunal came to the conclusion that the award being in favour of the claimant was sufficient moral satisfaction. See Pey Casado v. Chile (n. 133) para. 704. In Rompetrol v. Romania, the tribunal declined to make any award of damages as it was not in a situation to determine whether any quantifiable economic loss occurred to the claimant. It also denied moral damages, underlining that ‘“moral damages” cannot be admitted as a proxy for the inability to prove actual economic damage’, see The Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award, 6 May 2013, para. 293. White Industries Australia v. India (n. 7) para. 14.3.6.

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tion. The tribunal explained that the claimant had incurred those costs in pursuing litigation through Indian courts, in attempting to settle the dispute with India and in bringing the arbitration under the BIT against India.136 49 The tribunal in Petrobart v. Kyrgyzstan took a different view and found that the amount calculated and awarded by a national court deciding on the non-payment for delivery of gas condensate was acceptable under the Energy Charter Treaty only to the extent of 75 %.137 It referred to the difficult economic situation of the debtor, the State joint stock company KGM for oil, natural gas and liquid gas products. The tribunal argued that, even in the absence of the particular breach of the ECT by the respondent State which originated from a reform of the system for oil and gas supply, Petrobart would not have been able to collect all of the unpaid invoices for gas condensate delivered by it to KGM, despite the fact that they were confirmed in the judgment of the national court.138 Even if this result does not appear particularly satisfactory, it is both logically tenable and economically rational and therefore in accordance with the Chorzów principle. 50 A particular challenge was the calculation of damages for the tribunal in Chevron and Texaco v. Ecuador after having found essentially a denial of justice by the respondent State which was covered by the obligation to ‘provide effective means of asserting claims and enforcing rights’ in the applicable BIT.139 It decided that the proper measure of damages was the amount which would have been awarded by the national courts of the respondent if the proceedings had not been unduly delayed. This meant that the tribunal had to put itself into the shoes of the national judges and evaluate the seven court cases initiated by the claimant before national courts.140 The task was facilitated by joint experts who largely agreed on the expected sums.141 More controversy arose about the amount of taxes that the resulting awards and interest thereon had to be subjected to. The tribunal concluded that the applicable tax rate was – based on the respective contracts and national tax law – 87.31 %.142 It achieved this result also by explicitly referring to the Chorzów principle.143 5. Payment of Previously Determined Amounts 51

In the absence of local judicial decisions, tribunals sometimes used the amounts shown in securities or bank accounts as a solid measure of damages. In Fedax NV v. Venezuela, the tribunal found that the amount due under the promis136 137 138 139 140 141 142 143

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Ibid., para. 14.3.5. Petrobart Limited v. Kyrgyzstan (n. 19) p. 84. Ibid., at 83–84. Chevron Corporation and Texaco Company v. Ecuador, UNCITRAL, Partial Award, 30 March 2010, para. 275. Ibid., para. 388 et seq. Ibid., para. 546. Chevron Corporation and Texaco Company v. Ecuador (n. 7) para. 308. Ibid., para. 308.

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IV. Valuation in Cases of Breaches of International Law Unrelated to Expropriation

sory notes would at best represent the damage caused by the violation of fair and equitable treatment by the respondent State.144 Similarly, in Maffezini v. Spain, the tribunal took the amount which had been wrongfully transferred in violation of the fair and equitable treatment and the full protection and security standard as the principle measure of damage.145 6. Giving Effect to National Tax Laws

In Feldman v. Mexico, the damage after a violation of the NAFTA provision 52 on national treatment (Art. 1102) consisted in the amount of tax refunds due under Mexican tax law.146 Similarly, in Occidental Exploration v. Ecuador, the amount of undue taxes paid represented the amount of damages after a violation of the BIT provisions on national treatment and fair and equitable treatment.147 E. Conclusion

Arbitral tribunals frequently confirm, as a matter of principle, that the appro- 53 priate valuation standard in cases unrelated to expropriation should be the customary international law standard as formulated by the PCIJ in its judgment in the Chorzów Factory case and as codified in the ILC Articles on the Responsibility of States for internationally wrongful acts. This standard aims at arriving at ‘full reparation’ of the concrete and actual damage incurred. However, in cases where the violation of the treaty obligation led to a total loss of the investment, practice shows that tribunals are also inclined to refer to the fair market value standard. Yet, as a matter of principle, the objective and abstract valuation approach connected to the fair market value standard is often not consistently applied and sometimes lacks behind the damage actually sustained by the investor. On the other hand, the actual damage incurred may also be lower than the fair market value. As has been shown, the concrete valuation approach which focuses on the actual loss caused by the wrongful act and which measures the damage at the date of the award rather than as of the date of the wrongful act, is more likely to produce appropriate results. As regards the valuation method to be applied, tribunals have, in fact, a larger choice than in the context of fair market value. In practice, they have decided to accept, either singly or in combination, out of pocket expenses, the loss of dividends, the loss of profits, some variant of the DCF method or the accumulated amount of investments undertaken. Tribunals that have decided to apply the standard of fair market value or the impairment of the fair market value of an investment in cases unrelated to expropriation have not always applied this standard properly, sometimes combining it 144 145 146 147

Fedax NV v. Venezuela, ICSID Case No. ARB/96/3, Award, 9 March 1998, para. 31. Maffezini v. Spain, ICSID Case No. ARB/97/7, Award, 9 November 2000, para. 95. Feldman v. Mexico (n. 14) para. 205. Occidental Exploration and Production Company v. Ecuador, LCIA Case No. UN3467, Award, 1 July 2004, para. 202 et seq.

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with assumptions not fitting to the ‘hypothetical willing buyer and hypothetical willing seller’ scenario. In particular, the correct selection and application of the valuation date would be important to avoid, amongst others, shifting the burden of inflation to the injured party.

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Irmgard Marboe A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Principle of Full Reparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Damnum Emergens and Lucrum Cessans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Reliance Interest and Expectation Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 6 17

C. Frequent Rejection of Lost Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23

D. Damages for Lost Opportunities? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30

E. Liquidated Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35

F. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36

Literature: John Gotanda, ‘Recovering Lost Profits in International Disputes’ (2004) 36 Geo. J. Int’l L. 61–112; Irmgard Marboe, Calculation and Damages in International Investment Law (Oxford University Press, 2009) 30–32, 97–120; Jan Paulsson ‘The Expectation Model’ in Yves Derains and Richard Kreindler (eds), Evaluation of Damages in International Arbitration (International Chamber of Commerce, 2006) 57–78; Sergey Ripinsky, ‘Damnum emergens and Lucrum cessans in Investment Arbitration: Entering through the Back Door’ in Andrea Bjorklund, Ian A Laird and Sergey Ripinsky (eds), Investment Treaty Law. Current Issues III (British Institute of International and Comparative Law, 2009) 47–60; Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2009) 101–110, 278–298; Abby Cohen Smutny, ‘Principles of Compensation in Investment Treaty Arbitration’ (2007) 22 ICSID Rev.–FILJ 1–23; Louis Wells, ‘Double Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Karaha Bodas Company in Indonesia’ (2003) 19 Arb. Int’l 471–481.

A. Introduction

Investment disputes frequently involve contracts between the foreign investor 1 and the host State or a State-controlled company or entity. A breach of a contract by a State does not automatically entail a breach of international law.1 Nevertheless, it is possible that the breach of contract simultaneously constitutes a violation of a treaty provision, such as an obligation to fair and equitable treatment, full protection and security or – most importantly – an umbrella clause.2 Contracts may also be expropriated in which case the rules on expropriation apply.3 However, investment tribunals also have treated contract claims separately and independently from treaty claims and applied the law governing the contract, 1 Irmgard Marboe and August Reinisch, ‘Contracts between States and Foreign Private Law Persons’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (last updated July 2007), available at http://www.mpepil.com; see also Stanimir Alexandrov, ‘Breach of Treaty Claims and Breach of Contract Claims: is it still Unknown Territory?’ in Katia YannacaSmall (ed), Arbitration under International Investment Agreements: a Guide to the Key Issues (Oxford University Press, 2010) 323–350. 2 See Anthony Sinclair, ‘Umbrella Clause’, ch. 8.VII., 887–958; see also Thomas Wälde, ‘The “Umbrella” Clause in Investment Arbitration. A Comment on Original Intentions and Recent Cases’ (2005) 6 JWIT 183–236. 3 See Irmgard Marboe, ‘Valuation in Cases of Expropriation’, ch. 9.III., 1057–1081.

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and not international law. Yet, as regards valuation, the applicable contract laws generally also require ‘full reparation’ of the damage. This may be regarded as a consequence of the principle of pacta sunt servanda.4 2 The calculation of damages has traditionally been based on the distinction of damnum emergens and lucrum cessans, meaning that both ‘the expenses incurred in performing the contract’ and ‘the net profit which the contract would have produced’5 should be included. However, in the context of investment disputes which usually encompass multi-annual long term contracts, the combination of damnum emergens and lucrum cessans might lead to confusion and to double counting. As will be shown, the calculation of damage in such cases is a particularly difficult task which involves both legal and economic issues. 3 For the calculation of contract damages, it is important to consider the specific provisions of the contract as well as pertinent economic circumstances. The contract reflects the particular relationship between the parties based on specific competences and expectations. It follows that the valuation of contract damages can hardly ever be based on an ‘objective’ valuation standard, such as the fair market value.6 Instead, it involves complex factual, legal and economic issues which vary from case to case. In establishing the economic terms, the contract may include reference to sales prices or other market-related parameters. It may also provide for different value definitions and assumptions or include liquidated damages. B. Principle of Full Reparation 4

The principle of ‘full reparation’ is central to the valuation of damages after breaches of international law under the rules of State responsibility.7 It is, however, also present in the various existing contract laws. A comparative analysis of national contract laws8 and international codification initiatives9 shows that, 4 Sapphire International Petroleums Ltd. v. National Iranian Oil Company, Award, 15 March 1963, (1967) 35 ILR 136, 186. 5 Sapphire v. NIOC (n. 4) 186. See also Abby Cohen Smutny, ‘Principles of Compensation in Investment Treaty Arbitration’ (2007) 22 ICSID Rev.–FILJ 1–23, 15–16; Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (BIICL, 2009) 106. 6 The tribunal in Bridas v Turkmenistan explained this very clearly: ‘Contract damages reflect the contractual context of parties. This may, or may not, mirror the market value when a bargain – the contractual asset – is lost, because the terms of the contract may give to a party more or less than the market will pay. In addition, a party may decide for its own reasons to persist in a contract which directly does not maximize the available return on its investment, a crucial component of fair market value.’ Bridas SAPIC v Turkmenistan, Partial Award of 25 June 1999, published in part in Doak Bishop, James Crawford, and Michael Reisman, Foreign Investment Disputes. Cases, Materials and Commentary (Kluwer Law International, 2005) 1270, 1271. 7 See already above, Irmgard Marboe, ‘The System of Reparation and Questions of Terminology’, ch. 9.I., 1031–1044. 8 The ICSID tribunal in Amco Asia Corp v. Indonesia, for example, undertook such a comparative law analysis. With regard to English law, it observed – with regard to Robinson v. Harman (1848) 1 Exch. 850, 855 – that ‘where a party sustains a loss by reason of breach of contract, he is, so far as money can do it, to be placed in the same situation with respect to damages, as if

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generally, the purpose of a damages claim is to remedy the financial loss caused by the breach of contract. The tribunal in Sapphire v. NIOC pointed this out very clearly: According to the generally held view, the object of damages is to place the party to whom they are awarded in the same pecuniary position that they would have been in if the contract had been performed in the manner provided for by the parties at the time of its conclusion.10

This resembles the well-known Chorzów formula formulated by the Perma- 5 nent Court of International Justice (PCIJ) according to which reparation must ‘re-establish the situation which would, in all probability, have existed if that act had not been committed.’11 It follows that the valuation of contract damages and the valuation of damages after a breach of international law are generally based on the same principle, namely the principle of ‘full reparation’.12 However, as will be shown, it is not always easy to reconcile this principle with the damnum emergens/lucrum cessans dichotomy. 1. Damnum Emergens and Lucrum Cessans

A number of international tribunals have applied the damnum emergens and 6 lucrum cessans approach in contractual cases.13 This approach can be found in

9

10 11 12

13

the contract had been performed.’ Amco Asia Corp. v. Indonesia (Amco I), ICSID Case No. ARB/81/1, Award, 20 November 1984, para. 266. For example, Article 74 of the UN Convention on the International Sales of Goods (CISG) reads: ‘Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen (…).’ Similarly, Article 7.4.2 of the UNIDROIT Principles of International Commercial Contracts emphasises the principle of full reparation: ‘(1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. (…)’. The same is true for Article 9:502 of the Principles of European Contract Law: ‘General Measure of Damages: The general measure of damages is such sum as will put the aggrieved party as nearly as possible into the position in which it would have been if the contract had been duly performed (…)’. See more details to this comparative analysis in Irmgard Marboe, Calculation and Damages in International Investment Law (Oxford University Press, 2009) 31–32. Sapphire v. NIOC (n. 4) 185–186. Case Concerning the Factory at Chorzów (Germany v. Poland), PCIJ Judgment, Claim for Indemnity (Merits), Judgment of 13 September 1928, PCIJ 1928, Series A (1928), No. 17, 47. As to this similarity see already Irmgard Marboe (n. 9) 32; Irmgard Marboe, ‘Compensation in International Investment Law and Arbitration’ in Andrea Bjorklund, Ian A. Laird and Sergey Ripinsky (eds), Investment Treaty Law. Current Issues III (British Institute of International and Comparative Law, 2009) 29, 39–40; Sergey Ripinsky and Kevin Williams (n. 5) 106. The tribunal in Himpurna v. PLN pointed out that this approach had been followed by ‘countless international arbitrations’. Himpurna California Energy Ltd. v. PT (Persero) Perusahaan Lsitruik Nagara (PLN), Final Award, 4 May 1999, (2000) 25 YCA 13, para. 235. This include widely known cases, such as Sapphire v. NIOC (n. 4) 185–186; Delagoa Bay and East African Railway Company, Award, 30 May 1900, reprinted in Marjorie M. Whiteman, Damages in International Law, vol. 3 (Washington: Government Printing Office, 1943) 1694 et seq.; Robert H. May (United States v. Guatemala, Award, 16 November 1900), reprinted in pertinent part in Whiteman, Damages in International Law (Washington: Government Printing Office, 1943), vol. III, 1704, 1709; Shufeldt Claim (United States v. Guatemala), Award, 2 November 1929, 2 RIAA, 1079, 1099; Société Ouest Africaine des Bétons Industriels (SOABI) v. Sene-

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many national legal systems where it is characteristic for synallagmatic relationships.14 The tribunal in Robert H. May v. Guatemala, pointed out that [t]he law of Guatemala (…) establishes, like those of all civilized nations of the earth, that contracts produce reciprocal rights and obligations between the contracting parties and have the force of law in regard to those parties; that whoever concludes a contract is bound not only to fulfill it, but also to recoup or compensate (the other party) for damages and prejudice which result directly or indirectly from the nonfulfillment or infringement by default or fraud of the party concerned, and that such compensation includes both the damage suffered and the profits lost.15

7

The distinction between damnum emergens and lucrum cessans is particularly relevant in short-term sales and delivery contracts. As regards mid- and longterm investment contracts, including large infrastructure projects, the situation gets more complex. These contracts are different from normal sales contracts in many respects, in addition to the fact that one of the contracting parties is a State or a State entity. The specific problems include the risk the investor undertakes, the volume of the financial engagement, the long duration of the contract, the structures of ownership, the frequent involvement of natural resources, and the operation of public services, such as the construction and operation of infrastructure, water and energy supply, or waste disposal. We may recall a statement of Sir Robert Jennings who pointed to these differences more than 45 years ago in the following words: It is absurd therefore, to deal under the same heading as it were with an agreement between a state and an alien for the supply and purchase of a certain quantity of buttons and an agreement for the economic development of a great territory for a period of twenty years.16

8

In the case Robert H. May v. Guatemala mentioned above, the situation was particular to the extent that the remaining period of the contract was only six months. The tribunal took the average profit of the past six months and used it for calculating the profits lost for the remaining six months.17

14 15

16 17

gal, ICSID Case No. ARB/82/1, Award, 25 February 1988, paras 5.77 et seq. and 5.84 et seq.; Autopista Concesionada de Venezuela CA v. Venezuela, ICSID Case No. ARB/00/5, Award, 23 September 2003, para. 341. See the comparative law and arbitration analysis by John Gotanda, ‘Recovering Lost Profits in International Disputes’ (2006) 36 Geo. J. Int’l L. 61–122. Robert H. May (United States v. Guatemala) (n. 13). The respondent State, Guatemala, had breached its contractual obligations to pay the costs and expenses for the construction work. The delay in payment of loans to the workers led to strikes which made the further operation of the railway impossible. Robert Jennings, ‘Rules Governing Contracts Between States and Foreign Nationals’ in The Southwestern Legal Foundation (ed), Rights and Duties of Private Investors Abroad (Matthew Bender & Company, 1965) 123, 137–138. See already supra (n. 15) and Robert H. May (n. 13) 1708. The tribunal in Shufeldt v. Guatemala referred to the decision in Robert H. May v. Guatemala and calculated the amount of damages after the withdrawal of a rubber concession also on the basis of the profits of the past years. The concession, in this case, had originally been concluded for ten years, but withdrawn by the government after six years. Shufeldt Claim (n. 13) 1079, 1083, 1099. The arbitrator rejected the argument of the respondent State that it had a sovereign right to regulate concessions and held: ‘[I]t is a settled principle of international law that a sovereign cannot be permitted to set up one of his own municipal laws as a bar to a claim by a sovereign for a wrong done to the latter’s subject.’ Ibid., at 1098.

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One of the main reasons of the difficulty to calculate damnum emergens and lucrum cessans in mid-term and long-term contracts is that the investor, at the beginning of the relationship, makes investments the financial benefits of which are only received in the future. The income gained in this period can in principle not be regarded as ‘profits’, as long as it does not exceed the amount of money initially invested.18 In addition, the time value of money has to be taken into account.19 This means that the value of future income decreases with its distance in the future. Even without inflation, present money is worth more than money in the future because the former can be immediately used or invested. Furthermore, inflation and exchange rates have substantial effects in long-term contracts, much more than in short-term contracts. Another important factor in long-term contracts is the involvement of risk. As the future is always uncertain, one must appropriately take into account that the calculation of lost future profits is connected to a certain risk. There are a number of economic tools to deal with the risk factor in valuation matters.20 Finally, in contrast to normal sales contracts, the investor usually does not get back the expenses undertaken but only the right to generate income and possibly earn profits in the long term.21 On the contrary, the parties frequently agree that, after a certain period of time, the assets become the property of the host State upon payment of a small amount of money or even for free.22 The idea behind this is that, after a certain period of time, the investment is amortised.23 It follows that the application of the concepts of damnum emergens and lucrum cessans on long-term investment contracts may lead to double counting.24 18 See the definition of the term ‘profit’: ‘The positive gain from an investment or business operation after subtracting for all expenses; opposite of loss.’ available at http://www.investorwords.com/3880/profit.html (30 January 2012). 19 See Richard Brealey and Stewart Myers, Principles of Corporate Finance (McGraw-Hill Higher Editions, 2008) 16 et seq. 20 Economic methods of risk management are discussed above, see Richard Walck, ‘Methods of Valuing Losses’, ch. 9.II., 1045–1056. 21 See also, Jan Paulsson ‘The Expectation Model’ in Yves Derains and Richard Kreindler (eds), Evaluation of Damages in International Arbitration (International Chamber of Commerce, 2006) 57–78, 62 et seq. 22 See, for example, Liberian Eastern Timber Corporation (LETCO) v. Liberia, ICSID Case No. ARB/83/2, Award, 31 March 1986, (1994) 2 ICSID Rep. 346: ‘The Tribunal has noted that the installations utilized during the concession were to become the property of the Government of Liberia at the conclusion of the Agreement, thus negating LETCO’s right to indemnity. Therefore, the value which such installations would have had at the termination of the Agreement, once corrected to reflect the 1985 value, has been deducted in the determination of damages.’ Ibid., at 376. 23 With reference to the award in Sapphire v. NIOC, the tribunal in Himpurna v. PLN pointed out that ‘pre-Contract expenditures were made in reliance not upon promises yet to be given, but on unilateral expectations of commercial success. Those costs are to be amortised, if at all, in the only way the claimant could have expected: out of future profits.’ Himpurna. v. PLN (n. 13) para. 275. 24 See Derek Bowett, ‘State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach’ (1988) 59 BYIL 49–74. The ICSID tribunal Letco v. Liberia, for example, added the value of the investment at the time of the breach plus profits foregone.

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The decision of the tribunal in Karaha Bodas v. Pertamina,25 a case concerning a geothermal project in Indonesia for the production of energy, triggered an intensive debate on this issue. Professor Lou Wells argued that the award of the tribunal, by adding together the value of the investment and the profits lost was not economically logical and appeared to be excessive.26 14 The tribunal in Himpurna California v. PLN, a similar case about a geothermal project in Indonesia, addressed this problem in detail.27 The claimant had asked for lucrum cessans on the basis of a discounted cash flow (DCF) calculation, but the tribunal pointed out that the application of such a method must be handled with great care and emphasised that contractual cases must not be confused with cases of expropriation.28 According to the tribunal, the main difference was that, in expropriation cases, the worth of the expropriated property could best be evaluated by an analysis which discounts the future revenue stream. However, there would not be recovery of sunk costs. In contrast, in contractual cases, it is usual that claimants seek recoupment of their entire investment as a discrete element of compensation. Claimants are on solid ground when they ask to be reimbursed monies they have actually spent in reliance on the contract; recovery of lost future profits is less certain.29

15

It follows that the expenses must be deducted and not added in the quantification of lost profits to avoid double counting. Future net cash flow can also be used to calculate amortisation of the investment over a period of time. The tribunal in Himpurna California v. PLN concluded: To ask for the full amount of the future revenue stream when also claiming recoupment of all investments is wanting to have your cake and eat it too.30

16

It is therefore necessary to adapt the dichotomy of damnum emergens and lucrum cessans as known in Roman law and national contract laws in order to fit to the specificities of long-term investment contracts. An alternative would be to

25

26

27 28 29 30

It based its calculation of damages on Liberian contract law and awarded the estimated value of the net worth of LETCO and LLIC at the date operations were terminated in Liberia and future profits that would normally be expected from the forestry exploitations by LECTO and from the sawmill of LLIC during the period of the concession. LETCO v. Liberia (n. 22) 371. Karaha Bodas Company LLC v. Perusahaan Pertambangan Minyak dan Gas Bumi Negara (Pertamina) and PT PLN (Persero), Final Award, 18 December 2000, summarised in pertinent part in Karaha Bodas Co. v. Perusahaan Pertambangan Minyak dan Gas Bumi Negara, 364 F.3d 274, 282–285 (5th Cir. 2004). Louis Wells, ‘Double Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Karaha Bodas Company in Indonesia’ (2003) 19 Arb. Int’l 471. This was, however, criticised by Mark Kantor who emphasised that the projected profits had been substantially deducted, reflecting the amortisation of the initial investment. Mark Kantor, Valuation for Arbitration (Kluwer Law International, 2009) 86–87. Himpurna California v. PLN (n. 13) para. 240 et seq. For an explanation of this method, see Richard Walck, ‘Methods of Valuing Losses’, ch. 9.II., 1045–1056. Himpurna California v. PLN (n. 13) para. 241. The tribunal in Himpurna California v. PLN had rejected the DCF method for the calculation of lucrum cessans and explained this by the quote above. Himpurna California v. PLN (n. 13) para. 242.

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replace the concept by another one which is also well-known in the history of contract law, namely that of ‘reliance’ and ‘expectation’ interest. 2. Reliance Interest and Expectation Interest

The distinction between expenses undertaken and profits lost in the case of a 17 breach of contract can also be represented by the concepts of reliance interest and expectation interest which exist in some national contract laws, in particular common law countries.31 Sometimes, it is also referred to as ‘positive’ and ‘negative’ interest.32 Reliance or negative interest is the financial harm suffered by the contracting party in reliance on the contract and in compliance with its own obligations thereof. Expectation or positive interest, by contrast, represents the entire financial loss suffered by the contracting party as a consequence of the breach of the other party. If the injured party receives the reliance interest he or she is placed in the financial position they would be in, if the contract had never been concluded. In order to calculate the expectation interest, by contrast, the injured party should be put into a position in which it would have been, had the contract been duly performed giving it the full benefit of the bargain.33 It is important to point out that positive and negative interest are mutually ex- 18 clusive. The claimant must choose either the former or the latter, he/she cannot have both.34 It is not possible to place the injured party in the financial position as if the contract had been fully performed and at the same time in the financial position as if the contract had never been concluded. The arbitrator in Sapphire International v. NIOC has, therefore, rightfully rejected certain expenses incurred in the preparation of the contract by explaining: This claim cannot be allowed by way of positive damages (Erfüllungsinteresse), as claimed by the plaintiff. Their claim should put Sapphire International in the same pecuniary position as they would have been in if the contract had been performed. But the repayment of the expenses incurred in concluding the contract would tend to put them in the position they would be in if the contract had never been concluded (negative damages). (…) Adding positive and negative damages together is a contradiction and cannot be allowed.35

While reliance and expectation interest are mutually exclusive, damnum 19 emergens and lucrum cessans are regarded as two items of damages to be awarded cumulatively in order to achieve ‘full reparation’.

31 See William Lieblich, ‘Determinations by International Tribunals of the Economic Value of Expropriated Enterprises’ (1990) 7 J. Int’l Arb. 37, 47–48; see also Sergey Ripinsky and Kevin Williams (n. 5) 107. 32 Sapphire v. NIOC (n. 4) 186–187. 33 John Gotanda, ‘Damages in Breach of Contract in Lieu of Specific Performance’, 2006 Villanova Law/Public Policy Research Paper No. 2006-8, available at http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=917424 (last accessed 31 January 2012) 53. 34 Guenter H. Treitel, ‘Remedies for Breach of Contract’ in Arthur von Mehren (ed), International Encyclopedia of Comparative Law (Martinus Nijhoff, 1976), Vol. VII, ‘Contracts in General’, ch. 16, 49–50, at 27–29; Sergey Ripinsky and Kevin Williams (n. 5) 108. 35 Ibid.

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Conceptually, the expectation interest would provide a better basis for evaluating long-term investment contracts than the damnum emergens/lucrum cessans approach because it allows valuations over longer periods of time and the use of generally accepted valuation principles.36 Economic factors, such as risk, market conditions, depreciation etc., could be taken into consideration. It would also be more in conformity with the principle of full reparation, because all positive and negative economic circumstances could be appropriately reflected. 21 Nevertheless, the expectation approach has rather rarely been applied in contract cases.37 Tribunals apparently have preference for the damnum emergens/ lucrum cessans concept because it seems to offer more flexibility.38 They prefer to start with awarding damnum emergens as a loss that has already occurred and that is relatively easy to establish and quantify. As the tribunal in Himpurna v. PLN put it, claimants are ‘on solid ground when they ask to be reimbursed monies they have actually spent.’39 22 Awarding ‘reliance interest’ is the same as awarding only damnum emergens. However, tribunals might be reluctant to call it such as it appears not to represent ‘full reparation’. 20

C. Frequent Rejection of Lost Profits 23

Even if, in principle, lost profits should be awarded in cases of breach of contract in order to achieve ‘full reparation’, international tribunals have often rejected them. The main obstacle is that ‘lucrum cessans must be the direct fruit of the contract and not too remote or speculative.’40 As regards the conditions for lost profits in national contract laws, a comparative analysis by Gotanda shows that they are different in various jurisdictions, in particular as regards the necessary evidence.41 In international investment cases, the rejection of lost profits has mainly been based on the opinion of the tribunals that the gain of profits would have been unlikely, even if the contract had not been breached. 36 Jan Paulsson, ‘The Expectation Model’ in Yves Derains and Richard Kreindler (eds), Evaluation of Damages in International Arbitration (International Chamber of Commerce, 2006) 57, 62 et seq. 37 Ibid., at 57. The tribunal in Himpurna v. PT Persero considered this approach in principle. However, it found that it could not calculate profits from investments not yet made, as this would be an ‘abuse of rights’. Himpurna v. PT Persero (n. 13) para. 343. This was however criticised by commentators which pointed out that the application of the ‘duty to mitigate damages’ or a similar concept would have been more appropriate. See Mark Kantor, ‘The Limitations of Arbitration’ (2004) TDM, vol. 1, issue 2; John Gotanda (n. 14) 104 et seq. 38 Sergey Ripinsky and Kevin Williams (n. 5) 107. 39 Himpurna California v. PLN (n. 13) para. 241. 40 Shufeldt (USA v. Guatemala) (n. 13) 1099. 41 Gotanda points out that the different jurisdictions – in common law countries on one hand and in civil law countries on the other – and international codifications of contract law (e.g. CISG, UNIDROIT Principles on Commercial Contracts) contain different conditions and limitations for awarding lost profits. The criteria on foreseeability, standard of proof, and the relevance of the fault of the party have a direct influence on the claim to recover lost financial benefit. See John Gotanda (n. 14) 86–87.

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In Atlantic Triton v. Guinea, for example, the calculation of the damage in- 24 curred comprised all the costs and expenses necessary for the renovation and conversions of three Norwegian ships for the purpose of fishing in the tropical sea.42 However, it had not been possible to use the ships profitably. The tribunal, therefore, only awarded expenses undertaken for the conversion of the ships and partly for personnel and management. In Levitt v. Iran, the Iran–US Claims Tribunal came to the conclusion that the 25 planned building project relating to 6,000 apartments could never have been realised profitably.43 Furthermore, it pointed out that the project was still in an early phase: [T]he basis of the claim (…) under this head is highly speculative. (…) By the time the Contract came to an end only the initial stages of clearing and grading had been completed, and no construction work had begun on the buildings. The project had therefore reached only a very early stage.44

The tribunal concluded that ‘the claimant has not established with a sufficient 26 degree of certainty that the project would have resulted in a profit. The claim in this respect is therefore dismissed.’45 Similarly, the tribunal in Dadras International and Per-Am Construction v. Iran,46 was of the opinion that lost profits under the contract were unduly speculative, and that the claimant had not established with a sufficient degree of certainty that the construction of the project would have resulted in a profit.47 The ICSID tribunal in Autopista v. Venezuela also referred to the necessity to 27 establish ‘with a sufficient degree of certainty’48 the existence and the amount of lost profits for which the claimant sought compensation. The project concerned the construction and operation of a highway system the financial success of which was based on the tolls paid by the highway users. The respondent had, in violation of its contractual obligations, failed to raise the toll. As a consequence, the investor made use of its contractual right to terminate the contract. Venezuela argued that raising the toll would have caused major political problems which had already happened in the past. The tribunal did not accept this as a ‘force majeure’ excuse for the breach of the contract49 but it accepted it as a reason for rejecting lost profits. It concluded that Aucoven’s claim for future profits does not rest on sufficiently certain economic projections and thus appears speculative. Hence, it does not meet the standards for an award of lost profits under

42 Atlantic Triton Company Limited v Guinea, ICSID Case No. ARB/84/1, Award, 21 April 1986, (1995) 3 ICSID Rep. 13, 28. 43 The respondent had breached the contract by not fulfilling its obligations with respect to necessary infrastructural measures, such as water supply and access to the construction site. Levitt, William J. v. Iran, (1987) 14 Iran–US CTR 191, para. 56 et seq. 44 Ibid., para. 56. 45 Ibid., para. 58. 46 Dadras International and Per-Am Construction v. Iran, (1995) 31 Iran–US CTR 127 et seq. 47 Ibid., para. 276. 48 Autopista v. Venezuela (n. 13) para. 352 (emphasis added). 49 Ibid., para. 129.

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In order to support this conclusion, the tribunal referred to earlier decisions issued by ICSID tribunals and by the Iran–US Claims Tribunal which have often dismissed claims for lost profits ‘on the ground that they were speculative and that the claimant had not proven with a sufficient degree of certainty that the project would have resulted in a profit’.51 As a result, the tribunal only awarded an amount representing the out-of-pocket expenses undertaken by the investor, such as negotiation costs, legal fees, costs for studies, and additional works.52 The tribunal put considerable weight on the fact that the contract was breached before the construction of the highway bridge had even started. The tribunal rejected the comparison with the awards in Delagoa Bay and Karaha Bodas put forward by the claimant, as in those cases a substantial part of the construction had already been completed.53 29 On the other hand, lost profits have been awarded in Mohamed Abdulmohsen Al-Kharafi & Sons Co. v. Libya and others by the Arab Investment Court despite the fact that the contract was breached already at a very early stage. Construction work had never started due to assaults against the workers and other problems concerning, inter alia, the ownership of the land. In 2010, the Libyan minister of economy annulled the project. In order to interpret ‘lost profits’ resulting from the missed opportunity to operate and manage the project, the court referred to doctrine and jurisprudence of Libyan law. It eventually awarded lost profits for the remaining life of the contract, a period of 83 years.54 28

D. Damages for Lost Opportunities? 30

In view of the difficulty in determining long-term profits precisely, arbitral tribunals have sometimes awarded lump sums for the loss of profits or for the loss of ‘opportunity’ or loss of a ‘chance’. This was, for example, the case in Sapphire v. NIOC55 where the contractual relation had been at an early stage.56 50 Ibid., para. 362 (emphasis added). The tribunal based its assessment primarily on Venezuelan law. Ibid., para. 358. 51 Ibid., para. 351 (footnotes omitted). The tribunal referred, amongst others, to Asian Agricultural Products Ltd. v. Sri Lanka, American Manufacturing and Trading, Inc. v. Zaire, and Metalclad Corp. v. Mexico. However, those cases concerned expropriations or violations of international treaty standards, such as ‘fair and equitable treatment’ or ‘full protection and security’, while in Autopista v. Venezuela the tribunal had to calculate contract damages. 52 Ibid., para. 352 et seq. The tribunal concentrated its award on the items presented by the claimants and not disputed by the respondent. It conducted an independent assessment only in regard to items disputed between the parties. 53 In the first case, 82 out of 90 kilometres had already been built, in the second case USD 93 million had been invested. Ibid., paras. 357, 361. 54 The Arab Investment Court awarded damages in the amount of USD 900 million. Mohamed Abdulmohsen Al-Kharafi & Sons Co. v. Libya and others, Final Arbitral Award, 22 March 2013, Cairo, Arab Investment Court, 374 et seq. 55 Sapphire v. NIOC (n. 4) 136 et seq.

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The problem was that there were no data on past performance which could have facilitated the calculation of lost profits. On the other hand, the tribunal found that the mere reimbursement of expenses made would not be appropriate, either.57 What the tribunal did, in order to assess the ‘probability’ of future profits was, inter alia, to analyse the behaviour and rationality of the two parties, in particular of the respondent: Another factor to be considered is that NIOC, who certainly have an extensive documentation available and possess great experience, would not have made a concession of an area where they did not think that there was a serious chance of discovering oil. It is reasonable to suppose that they would not have required a minimum investment of $U.S. 8,000,000 from a company if they did not think that these investments had a serious possibility of being turned to a profit, of which they and the Iranian Government would take the largest share.58

The tribunal concluded that these indications were enough to show that the 31 respondent also relied on the probability of future profits and awarded eventually USD 650,875 in restitution of the sums invested and a lump sum of USD 2 million for the loss of a chance.59 In the ICSID case SOABI v. Senegal, the contract was also breached before 32 the ten-year project had even started.60 The respondent had terminated the contract on the basis of the alleged non-fulfilment of contractual obligations by the investor. The tribunal, however, found that the contract was breached unlawfully and that the respondent for its part had not fulfilled its obligations. As regards the claim for damages, the tribunal found: In most cases, and particularly in a case such as this one which involves a construction project spanning ten years, it is impossible to calculate the profits that would have been made had the parties’ relations not been terminated. What gives rise to the claim in damages is not the loss of profits itself, but rather the loss of opportunity, the value of which is set in the discretion of the judge or arbitrator, as the case may be.61

The tribunal, in the exercise of its discretion, eventually awarded 2.7 per cent 33 of the amount claimed as lost profits.62 The larger part of the damages award consisted in expenditures actually undertaken and investments for ‘operational expenses and capital expenditures’ as well as compensatory interest at a rate of 10 per cent.63 It seems, therefore, that between the rejection of awarding ‘speculative’ prof- 34 its and lost profits which can be proved with sufficient certainty there is a ‘grey 56 The tribunal formulated this question explicitly: ‘Does the loss of this opportunity give the right to compensation?’ Ibid., at 187. 57 Ibid., at 187. 58 Ibid., at 189. 59 Ibid., at 187, 190. 60 SOABI v. Senegal (n. 13) paras 5.77 et seq. and 5.84 et seq. 61 Ibid., para. 7.13. 62 In its reasoning, the tribunal referred to the inconsistencies of the claimant’s submissions and in addition to the agreement contained in the contract that the government should in five years receive 50 per cent of the capital invested. This meant that for a term of ten years, 25 per cent of the yearly net profit must be for the government. Ibid., para. 7.11 et seq. 63 Ibid., paras. 6.27, 9.26, 12.06.

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zone’ where the ‘probability’ of profits would be enough. In those cases lump sums have been awarded to account for the loss of a ‘chance’ or ‘opportunity’ to generate profits.64 E. Liquidated Damages 35

In order to avoid complicated and expensive disputes about valuation issues in contract cases, the parties could provide for liquidated damages for cases of early termination or breach of contract. Sometimes, this is connected to the use of a certain method of calculation which is particularly advisable in long-term contracts.65 Liquidated damages are generally allowed as long as they are not characterised as penalties or grossly excessive in relation to the harm resulting from the non-performance and other circumstances.66 F. Conclusion

36

The evaluation of damages in international investment disputes involving breaches of long-term contracts is particularly complex. The traditional dichotomy of damnum emergens and lucrum cessans known in many national contract laws and in juridical practice is hardly appropriate for such long-term contracts and may lead to double counting. Instead, the general principle that ‘full reparation’ of the damage caused by the breach is to be achieved should be implemented in an economically consistent manner. This would also be more in line with the principles of valuation in the related cases of breaches of international law where also ‘full reparation’ is required. An overall evaluation of the financial situation of the investor with and without the breach would allow to arrive in a more suitable manner at the goal of determining full reparation than starting from the seemingly ‘secure’ ground of damnum emergens. Of course, the expenses lost should be recoverable in any event and represent the minimum to be awarded. Yet, insisting on sunk investment may forebear a claim for a more comprehensive value of the contract, as adding ‘positive and negative damages together is a contradiction and cannot be allowed’, as the Sapphire tribunal memorably observed.

64 Critical to this approach taken by tribunals Sergey Ripinsky, ‘Damnum emergens and Lucrum cessans in Investment Arbitration: Entering through the Back Door’ in Andrea Bjorklund, Ian A. Laird and Sergey Ripinsky (eds), Investment Treaty Law. Current Issues III (British Institute of International and Comparative Law, 2009) 47–60, 60; Irmgard Marboe (n. 9) 116. 65 See, for example, Lena Goldfields Arbitration, Award of 2 September 1930, reprinted in pertinent parts in (1950) 36 Cornell L. Q. 42, paras. 26, 28; see also Delagoa Bay and East African Railway Company, Award of 30 May 1900, reprinted in Marjorie M. Whiteman, Damages in International Law, vol. 3 (Washington: Government Printing Office, 1943) 1694 et seq. 66 Paul-A. Gélinas, ‘General characteristics of recoverable damages in international arbitration’ in Yves Derains and Richard Kreindler (eds), Evaluation of Damages in International Arbitration (International Chamber of Commerce, 2006) 11–36, 18–19.

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Borzu Sabahi, Kabir Duggal and Nicholas Birch A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Double Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

C. Causation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Factual Causation and Burden of Proof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Legal Causation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 5 6

D. Contributory Fault and Bad/Risky Business Judgments. . . . . . . . . . . . . . . . . .

7

E. Mitigation of Damages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

F. Counterclaims and Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

G. Necessity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

H. Speculative, Uncertain or Hypothetical Damages . . . . . . . . . . . . . . . . . . . . . . . .

15

I. Limitations Arising Out of Contractually Agreed Obligations . . . . . . . . . .

17

J. Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

K. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20

Literature: Roberto Aguirre Luzi, ‘BITs & Economic Crises: Do States Have Carte Blanche?’ in Todd J. Grierson Weiler (ed), Investment Treaty Arbitration and International Law (Juris, 2008); José E. Alvarez and Kathryn Khamsi, ‘The Argentine Crisis and Foreign Investors: A Glimpse into the Heart of the Investment Regime’ (2008–2009) YB Int’l Inv. L. & Pol’y 379–478; Stanimir Alexandrov and Joshua Robbins, ‘“Proximate Causation” in International Investment Disputes’ (2008–2009) YB Int’l Inv. L. & Pol’y 317–345; Andrea K. Bjorklund, ‘Causation, Morality, and Quantum’ (2009) 32 Suffolk Transnat’l L. Rev. 435– 450; Ian Brownlie, 1 System of the Law of Nations: State Responsibility (Oxford University Press, 1983); Jennifer Cabrera, ‘Moral Damages in Investment Arbitration and Public International Law’ in Ian A. Laird and Todd J. Weiler (eds), Investment Treaty Arbitration and International Law (Juris, 2009); David D. Caron, Matti Pellonpää and Lee M. Caplan, The UNCITRAL Arbitration Rules: A Commentary (Oxford University Press, 2006); Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals (Stevens & Sons, 1953); James Crawford, The International Law Commission’s Articles on State Responsibility (Cambridge University Press, 2002); Mark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence (Wolters Kluwer, 2008); Irmgard Marboe, Calculation of Damages and Compensation in International Investment Law (Oxford University Press, 2009); Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2008); Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008); August Reinisch, ‘The Issues Raised by Parallel Proceedings and Possible Solutions’ in Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung and Claire Balchin (eds), The Backlash Against Investment Arbitration (Wolters Kluwer, 2010); Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (BIICL, 2008); Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration (Oxford University Press, 2011); Borzu Sabahi and Kabir Duggal, ‘Occidental Petroleum v. Ecuador (2012): Observations on Proportionality, Assessment of Damages and Contributory Fault’ (2013) 28(2) ICSID Rev. 279–290; Baiju S. Vasani * The views expressed in this chapter are only those of the authors and do not represent the views of Curtis, Mallet-Prevost, Colt & Mosle LLP or its clients.

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Chapter 9: Restitution, Damages and Compensation and Timothy L. Foden, ‘Burden of Proof regarding Jurisdiction’ in Katia Yannaca-Small (ed), Arbitration under International Investment Agreements: A Guide to the Key Issues (Oxford University Press, 2010); Louis T. Wells, ‘Double-Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Karaha Bodas Company in Indonesia’ (2003) 19 Arb. Int’l 471–481.

A. Introduction 1

There are a number of principles in international investment arbitration which may limit the amount of compensation.1 These principles seem to be a corollary of the full reparation principle2 inasmuch as they require that the compensation awarded not exceed the loss actually suffered as a consequence of the wrongful act. In this Chapter, we will discuss nine such principles: first, the prohibition on double recovery, followed by the principles of causation, both factual and legal. Next, the effects on compensation of a claimant’s contributory fault or failure to mitigate damages are discussed. This is followed by discussion of claims the respondent may positively assert to lower compensation awarded, both counterclaims and the defence of necessity. Then we turn to the limitations on speculative damages, and then limitations arising from contractual obligations. Finally, we note how use of equity and discretion by tribunals may limit amounts awarded. B. Double Recovery

2

One generally established principle which may limit the amount of compensation is the prohibition on double recovery or double counting for the same loss. This can be a particular problem in investment arbitration, where the claimant may have brought multiple proceedings at the international and domestic levels seeking compensation for the same State action.3 Additionally, double recovery may be an issue in the following situations, among others: (i) when 1 For a more in-depth treatment on this subject, see Chapter 7 of Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration (Oxford University Press, 2011) 170–186; Chapter 8 of Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (BIICL, 2008) 313–358; Mark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence (Wolters Kluwer, 2008) 70–118. 2 The full reparation principle as prominently encapsulated in a PCIJ dictum in the Chorzów case provides that: ‘Reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in 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.’ Case Concerning the Factory at Chorzów (Germany v. Poland), Award on the Merits of 13 September 1928, 1928 PCIJ (Series A) No. 17, 47. This ruling has been recognised by arbitral tribunals as expressing customary international law and many have referred to it. See ADC Affiliate Ltd and ADC & ADMC Management Ltd v. Hungary, ICSID Case No. ARB/03/16, Final award on jurisdiction, merits and damages, 27 September 2006, paras. 484–499. See also Borzu Sabahi (n. 1) 47–53.

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dealing with forward-looking valuation methods such as discounted cash flow, awarding both sunk costs as well as future lost profits could lead to doublecounting,4 (ii) when moral damages are awarded, there may be overlap with injury also compensated by material damages,5 or (iii) when compensation for violation of or interference with long-term contracts is awarded, if the investor has the opportunity to re-invest the compensation to earn returns higher than those that it used to earn under the contract.6 C. Causation

Causation requires showing a ‘cause and effect’ relationship between the un- 3 lawful act and the injury to be compensated.7 Without such a showing, no com3 The possibility of double recovery due to parallel proceedings was raised in the twin arbitrations of Lauder v. Czech Republic, UNCITRAL, Final Award, 3 September 2001, and CME Czech Republic BV v. Czech Republic, UNCITRAL, Final Award, 14 March 2003. The Lauder tribunal stated that as long as the second tribunal took note of the first award, there would not be an issue. Lauder, para. 172. See also Chevron Corporation and Texaco Petroleum Corporation v. Ecuador, UNCITRAL, Partial Award on Merits, 30 March 2010, para. 557 (addressing concerns of recovery for the same injury in both international arbitration and domestic proceedings). See generally Katia Yannaca-Small, ‘Parallel Proceedings’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 1008; August Reinisch, ‘The Issues Raised by Parallel Proceedings and Possible Solutions’ in Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung and Claire Balchin (eds), The Backlash Against Investment Arbitration (Wolters Kluwer, 2010) 113. 4 See Louis T. Wells, ‘Double-Dipping in Arbitration Awards? An Economist Questions Damages Awarded to Karaha Bodas Company in Indonesia’ (2003) 19 Arb. Int’l 471–481. On valuation methods, see Richard Walck, ‘Methods of Valuing Losses’, ch. 9.II., 1045–1056. 5 For example, when an aggrieved investor receives fair market value of its business as compensation. Such compensation, to the extent that it includes elements of the company’s good will, repairs losses relating to damage to the company’s reputation too. In this context, the investor cannot also seek moral damages on the basis of damage to the reputation of the business. On the differentiation between the two, see Jennifer Cabrera, ‘Moral Damages in Investment Arbitration and Public International Law’ in Ian A. Laird and Todd J. Weiler (eds), Investment Treaty Arbitration and International Law (Juris, 2009) 197, 207–208. On moral damages generally, see Patrick Dumberry, ‘Moral Damages’, ch. 9.VII., 1130–1141. 6 In Himpurna the tribunal noted that, ‘[i]n cases of breach of long-term contracts, the prospect of reinvestment of recovered funds in profitable activities elsewhere is an obviously realistic possibility. A claimant may in theory be better off in the end because it was able to cash in early. Especially when the contract breached had an intended duration of decades, the prospect of double recovery arises.’ Himpurna California Energy Ltd. (Bermuda) v. PT (Persero) Perusahaan Listruik Negara (Indonesia), Final Award, 4 May 1999, in A. Jan van den Berg (ed), (2000) YCA, Vol. XXV, para. 366; Patuha Power Ltd. (Bermuda) v. P.T. (Persero) Perusahaan Listruik Negara (Indonesia), Final Award, 4 May 1999, para. 477. See also Autopista Concesionada de Venezuela C.A. (Aucoven) v. Venezuela, ICSID Case No. ARB/00/5, Award, 23 September 2003, para. 357 (where the tribunal took into consideration the fact that the bridge was not even built; ‘[o]therwise, Aucoven would obtain the same compensation that it would have received had it built the Bridge and, for that purpose, invested the amounts forecast.’). 7 This view has been espoused in recent ICSID decisions. See Joseph C. Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, 28 March 2011, para. 157 (‘Proof of causation requires that (A) cause, (B) effect, and (C) a logical link between the two be established.’); Duke Energy Electroquil Partners and Electroquil S.A. v. Ecuador, ICSID Case No. ARB/04/19, Award, 18 August 2008, para. 468 (‘[C]ompensation will only be awarded if there is a sufficient causal link between the breach of the BIT and the loss sustained by the Claimants.’). See also Andrea

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pensation may be awarded, even where an internationally wrongful act can be established. 4 Causation is a general principle of law8 included in ILC Article 319 which limits State responsibility to only the injury ‘resulting from and ascribable to the wrongful act’ in question.10 This limitation is reflected in the language of investment treaties, such as NAFTA which limits compensation to only those losses which occur ‘by reason of, or arising out of’ the wrongful act in question.11 Such an ascribable act is referred to as a ‘proximate cause’ of the injury.12 The determination of the proximity has both factual and legal aspects.13 1. Factual Causation and Burden of Proof 5

The factual aspect requires a showing, by evidence, that the particular unlawful act actually caused the injury in dispute. Generally, each party has the burden of proving the facts it alleges,14 though this burden may shift in various situa-

8 9

10

11

12

13 14

K. Bjorklund, ‘Causation, Morality, and Quantum’ (2009) 32 Suffolk Transnat’l L. Rev. 435– 450, 436. On causation in investment treaty arbitration generally, Mark Kantor (n. 1) 105– 108; Irmgard Marboe, Calculation of Damages and Compensation in International Investment Law (Oxford University Press, 2009); Sergey Ripinsky and Kevin Williams (n. 1) 135–148; and Thomas W. Wälde and Borzu Sabahi, ‘Compensation, Damages, and Valuation’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (n. 3) 1093–1103. Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals (Stevens & Sons, 1953) 241 et seq. International Law Commission Draft Articles on Responsibility of States for Internationally Wrongful Acts (‘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.’). Id., comment 9, in Report of the International Law Commission on the Work of Its Fifty-third Session, UN GAOR, 56th Sess., Supp. No. 10, at 43, UN Doc. A/56/10 (2001) (‘Paragraph 2 addresses a further issue, namely the question of a causal link between the internationally wrongful act and the injury.’). In other words, ‘Respondent States should be held responsible for the harm they cause, but not more than that.’ Andrea Bjorklund (n. 7) 449. NAFTA, Art. 1116 (‘1. An investor of a Party may submit to arbitration under this Section a claim that another Party has breached an obligation (...) and that the investor has incurred loss or damage by reason of, or arising out of, that breach.’) and Art. 1117 (‘1. An investor of a Party, on behalf of an enterprise of another Party that is a juridical person that the investor owns or controls directly or indirectly, may submit to arbitration under this Section a claim that the other Party has breached an obligation under: (a) Section A or Article 1503(2) (State Enterprises), or (b) Article 1502(3)(a) (Monopolies and State Enterprises) where the monopoly has acted in a manner inconsistent with the Party’s obligations under Section A, and that the enterprise has incurred loss or damage by reason of, or arising out of, that breach.’). Causation may also be addressed as ‘foreseeability’ or ‘remoteness’ of the injury. ILC Articles (n. 9) Art. 31, comment 10; Stanimir Alexandrov and Joshua Robbins, ‘“Proximate Causation” in International Investment Disputes’ (2008–2009) YB Int’l Inv. L. & Pol’y 317–345. A cause that is not factually and legally proximate to the injury is a ‘remote cause.’ Other terms are also used, such as direct or indirect cause. See ILC Articles (n. 9) Art. 31, comment 10. See UNCITRAL Arbitration Rules, Article 24(1); Autopista Concesionada de Venezuela C.A. (Aucoven) v. Venezuela (n. 6) para. 110 (‘As a matter of principle, each party has the burden of proving the facts upon which it relies. This is a well-established principle of both Venezuelan and international law.’). Since investors often raise questions of breaches of international law,

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tions.15 Unlike some national legal systems, however, there is no clear hierarchy of various levels of burden that a moving party should allege to establish a legal point.16 2. Legal Causation

Legal causation limits the extent to which the factual chain of events should 6 be followed. It may be used to determine proximity when establishing factual causation with precision is not possible, such as when two acts or actors are both factual, independent causes of the injury. Various legal theories may be used to set the limits of proximity, such as foreseeability or intervening causes.17 Such the prima facie burden is upon them. See, e.g., Tokios Tokelės v. Ukraine, ICSID Case No. ARB/02/18, Award, 29 June 2007, para. 121 (‘[T]he burden of demonstrating the impact of the state action indisputably rests on the Claimant. The principle of onus probandi actori incumbit – that a claimant bears the burden of proving its claims – is widely recognized in practice before international tribunals’); Asian Agricultural Products Ltd v. Sri Lanka, ICSID Case No. ARB/87/3, Final Award on merits and damages, 21 June 1990, para. 56 (‘There exists a general principle of law placing the burden of proof upon the claimant (...). The international responsibility of the State is not to be presumed. The party alleging a violation of international law giving rise to international responsibility has the burden of proving the assertion.’); Bin Cheng (n. 8) 302; Baiju S. Vasani and Timothy L. Foden, ‘Burden of Proof regarding Jurisdiction’ in Katia Yannaca-Small (ed), Arbitration under International Investment Agreements: A Guide to the Key Issues (Oxford University Press, 2010) 271 (‘It is trite law to state “he who asserts must prove.” A well-established general principle of law holds that an actor must prove the facts on which he relies in support of his claim – Actori incumbit probation. This maxim holds true regardless of whether the actor is a claimant asserting a claim for damages or a respondent seeking counter-claims, proffering defenses or requesting interim or provisional measures, document discovery, and the like.’). 15 International Thunderbird Gaming Corporation v. Mexico, UNCITRAL, Award, 26 January 2006, paras. 94–95 (discussing UNCITRAL Arbitration Rules, Article 24(1) and noting ‘[th]e Tribunal notes that the Parties do not seem to diverge on the principles governing the burden of proof. The Tribunal shall apply the well-established principle that the party alleging a violation of international law giving rise to international responsibility has the burden of proving its assertion. If said Party adduces evidence that prima facie supports its allegation, the burden of proof may be shifted to the other Party, if the circumstances so justify.’). Further, the rules would apply when the other party controls evidence in question. Thomas Wälde and Borzu Sabahi (n. 7) 1111. 16 Thomas Wälde and Borzu Sabahi (n. 7) 1110; David D. Caron, Matti Pellonpää and Lee M. Caplan, The UNCITRAL Arbitration Rules: A Commentary (Oxford University Press, 2006) 569. 17 See Stanimir Alexandrov and Joshua Robbins (n. 12) 317–319 (explaining foreseeability as ‘[a]n alternative test focuses on foreseeability. If a wrongdoer could or should reasonably anticipate that his/her action will lead to a particular type of harm, he/she will be liable for such harm. If not, the harm will not be deemed to have been “proximately caused”;’ and explaining intervening cause as follows: ‘A second common purpose of the doctrine is to address situations in which there is an “intervening cause” of harm. The classic scenario involves an impersonal outside force. For example, a pedestrian is hit by a negligent driver and taken to the hospital with only minor injuries, but is struck by lightning and killed as he is carried into the hospital; the driver would likely not be held liable for the death.’). See also CME Czech Republic BV v. Czech Republic, UNCITRAL, Partial Award and Separate Opinion, 13 September 2001, paras. 583–585 (applying foreseeability); Methanex Corporation v. United States, UNCITRAL, Partial award, 7 August 2002, para. 139 (requiring a ‘legally significant connection’); SD Myers Inc v. Canada, UNCITRAL, Second Partial Award, 21 October 2002, paras. 152–160 (applying a test of remoteness); Joseph C. Lemire v. Ukraine (n. 7) paras. 157–208;

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legal determination of proximity reflects policy choices made to limit the extent of liability.18 D. Contributory Fault and Bad/Risky Business Judgments 7

The compensation recoverable by the claimant may also be limited by the actions of the claimant itself. One such limiting principle is contributory fault,19 which requires that the claimant’s wilful or negligent contribution to the injury be taken into account and limit the amount of compensation that the claimant may recover.20 The principle of contributory fault is widely recognised21 and ap-

18

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Kardassopoulos v. Georgia and joined case, ICSID Case No. ARB/05/18, Award, 28 February 2010, para. 469 (applying ‘remoteness or foreseeability of damage’). Borzu Sabahi (n. 1) 172 (‘The legal aspect of causation, and whether a particular cause is proximate reflects certain policy choices on the part of the law makers or those who apply the law. Such choices may weaken a factually established causal link, or strengthen a relatively tenuous causal link. Legal proximity limits the extent to which factual proximity (i.e., the normal consequence of an event) should be followed. It may provide concrete answers when establishing factual proximity with precision is not possible’); Stanimir Alexandrov and Joshua Robbins (n. 12) 317. Questions of where legal causation establishes the boundaries for liability may particularly arise where multiple actors jointly caused the claimant’s injury. Depending on the circumstances of a case, where there are multiple causes and the injury due to the respondent’s acts cannot sufficiently be isolated factually or legally, some tribunals have held the respondent ‘responsible for all the consequences (...).’ ILC Articles (n. 9) Art. 31, comment 13 (emphasis added). See also CME v. Czech Republic, Partial Award (n. 17) paras. 580– 584 (holding that the respondent state was liable for the entire injury where the injury was inseverably caused by both the government and a private actor). But see Lauder v. Czech Republic (n. 3) paras. 234–235, 288 (holding in essentially the same case that the government’s actions were far enough removed from the injury to be a proximate cause and that the private actor was the only legal cause of the injury). Contributory fault is also referred to as comparative fault, contributory negligence, and ‘contribution to the injury’ in ILC Articles (n. 9) Art. 39. Gemplus, S.A., SLP, S.A. and Gemplus Industrial, S.A. de C.V. v. Mexico, ICSID Case No. ARB(AF)/04/3 & ARB(AF)/04/4, Award, 16 June 2010 (‘Article 39 of the ILC’s Articles on State Responsibility precludes full or any recovery, where, through the wilful or negligent act or omission of the claimant state or person, that state or person has contributed to the injury for which reparation is sought from the respondent state.’). See also Sergey Ripinsky and Kevin Williams (n. 1) (‘if the loss of an investment is wholly or partially caused by claimant’s bad business judgment, then the respondent State should not be held liable for the relevant part of the loss.’). See ILC Articles (n. 9) Art. 39, comment 2 (‘Article 39 recognizes that the conduct of the injured State, or of any person or entity in relation to whom reparation is sought, should be taken into account in assessing the form and extent of reparation. This is consonant with the principle that full reparation is due for the injury – but nothing more – arising in consequence of the internationally wrongful act. It is also consistent with fairness as between the responsible State and the victim of the breach.’). See, e.g., AGIP SpA v. Congo, ICSID Case No. ARB/77/1, Award, 30 November 1979, para. 99 (stating compensation could be limited by contributory negligence by the claimant if such were to be shown); MTD Equity Sdn Bhd and MTD Chile SA v. Chile, ICSID Case No. ARB/ 01/7, Award, 25 May 2004, para. 242 (noting that claimants made investment decisions that a ‘wise investor would not have’ made); Iurii Bogdanov, Agurdino-Invest Ltd. and AgurdinoChimia JSC v. Moldova, SCC Arbitral Award, 22 September 2005, para. 84 (‘The Arbitral Tribunal does not find that the Respondent is liable for payment of damages corresponding to the entire loss, and that the Local Investment Company must be deemed partially responsible for the loss because it did not ensure that the Privatization Contract contained an appropriately precise regulation of the compensation.’); RosInvestCo UK Ltd. v. Russia, SCC Case No.

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plied by arbitral tribunals to reduce the amount of compensation. In international investment arbitration, issues of contributory fault often arise over the contribution of the investor’s (bad) business judgement to the injury: where losses are partly due to the business risks of the investment rather than any wrongful act on the part of the State.22 ‘Bilateral Investment Treaties [, however,] are not insurance policies against bad business judgments (…) they cannot be deemed to relieve investors of the business risks inherent in any investment.’23 In MTD, investors failed to conduct full due diligence before making their investment. Because of that failure, the tribunal reduced the amount of compensation to which they would have been entitled by 50 % after deduction of the residual value of their investment.24 E. Mitigation of Damages

It is a general principle of law that the party seeking to recover compensation 8 has a duty to mitigate its losses.25 As the AIG tribunal noted, ‘Mitigation of

22 23

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V079/2005, Final Award, 12 September 2010, paras. 634–635 (‘While these contributions of Yukos to its own demise do not change the conclusion that Respondent breached the IPPA with regard to Claimant’s shares, they may be relevant in the consideration later in this Award of the quantum of any damage due to Claimant which will be examined hereafter in this award.’). See also LaGrand (Germany v. US), [2001] ICJ Rep 466, paras. 57, 116; SS Wimbledon, 1923 PCIJ (Ser. A) No. 1; Ian Brownlie, 1 System of the Law of Nations: State Responsibility (Oxford University Press, 1983) 46–47; Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2008) 341; Sergey Ripinsky and Kevin Williams (n. 1) 331, 337. See Stanimir Alexandrov and Joshua Robbins (n. 12). Maffezini v. Spain, ICSID Case No. ARB/97/7, Award, 11 November 2000, para. 64. This view has been supported by other tribunals as well. Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award, 23 June 2006, paras. 426–429 (holding that the claimant had made an irrational business judgment and consequently holding claimant responsible in part); Total S.A. v. Argentina, ICSID Case No. ARB/04/1, Decision on Liability, 27 December 2010, para. 309 (‘[T]he conduct of the investor is also “subjectively” relevant since BITs “are not insurance policies against bad business decisions”’); Waste Management Inc v. Mexico, ICSID Case No. ARB(AF)/00/3; Award, 30 April 2004, para. 177 (‘In the Tribunal’s view, it is not the function of the international law of expropriation as reflected in Article 1110 to eliminate the normal commercial risks of a foreign investor, or to place on Mexico the burden of compensating for the failure of a business plan which was, in the circumstances, founded on too narrow a client base and dependent for its success on unsustainable assumptions about customer uptake and contractual performance. A failing enterprise is not expropriated just because debts are not paid or other contractual obligations are not fulfilled.’). MTD Equity Sdn Bhd and MTD Chile SA v. Chile (n. 21) para. 243. In its 2013 decision, the ICSID tribunal in Occidental v. Ecuador reduced damages by 25 % because Claimants contributed to the prejudice they suffered, while the dissenting arbitrator Professor Stern opined that the damages should be reduced by 50%. Occidental Petroleum Corp. and Occidental Exploration and Production Co., ICSID Case No. ARB/06/11, Award, 5 October 2012, paras. 662-687; Dissenting Opinion of Professor Brigitte Stern, 20 September 2013, paras. 7-8. See generally Borzu Sabahi and Kabir Duggal, ‘Occidental Petroleum v Ecuador (2012): Observations on Proportionality, Assessment of Damages and Contributory Fault’ 28(2) ICSID Rev. (2013). See ILC Articles (n. 9) Art. 31, commentary 11 (‘A further element affecting the scope of reparation is the question of mitigation of damage. Even the wholly innocent victim of wrong-

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damages, as a principle, is applicable in a wide range of situations. It has been adopted in common law and in civil law countries, as well as in International Conventions and other international instruments.’26 This implies that the harmed party must take reasonable steps to reduce its losses. What steps are reasonable in a given situation may differ greatly depending on the facts of the case, but may include renegotiating contracts, redeployment of resources, or even abandonment of a losing investment.27 While a failure to take reasonable steps to reduce damages does not create responsibility, it may reduce the compensation due from the responsible party.28 F. Counterclaims and Setoff 9

The respondent may also assert a counterclaim, which may establish the claimant’s responsibility for some wrongful act and entitle the respondent to a setoff against the compensation due.29 A necessary question in international investment arbitration is a tribunal’s jurisdiction over the counterclaims in question.30 Generally, there must be a ‘necessary close connection between [the] counterclaim and the primary investment dispute,’ so that the submission of the counterclaims may reasonably be considered within the scope of the parties’ consent to arbitration.31 What constitutes such a close connection depends on the facts and the governing law of the particular case.32 Jurisdiction over counter-

26 27 28

29

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31

ful conduct is expected to act reasonably when confronted by the injury.’). This principle is also contained in the UNIDROIT Principles of International Commercial Contracts, Art. 7.4.8. See also Gabčíkovo-Nagymaros Project (Hungary v. Slovakia), Judgment, 25 September 1997, ICJ Reports 7 (1997); Middle East Cement Shipping and Handling Co. S.A. v. Egypt, ICSID Case No. ARB/99/6, Award, 12 April 2002, para. 167 (‘The duty to mitigate damages is not expressly mentioned in the BIT. However, this duty can be considered to be part of the General Principles of Law which, in turn, are part of the rules of international law which are applicable in this dispute (...)’). AIG Capital Partners, Inc. and CJSC Tema Real Estate Company v. Kazakhstan, ICSID Case No. ARB/01/6, Award, 7 October 2003, para. 10.6.4(1). See also CME v. Czech Republic (n. 3) para. 482. See Thomas Wälde and Borzu Sabahi (n. 7) 1096. ILC Articles (n. 9) Art. 31, commentary 11. See, e.g., in BRIDAS SAPIC and others v. Turkmenistan, ICC Case No. 9058/FMS/KGA, Third Partial Award and Dissent, 6 September 2000, paras. 45–53 (where the tribunal reduced the award by USD 50 million due to the claimant’s failure to abandon an unprofitable oilfield). Counterclaims are distinct from defences, which are discussed in Section G. of this Chapter below, because counterclaims do not respond to any allegations made by the claimant, but rather are the respondent state’s distinct allegations of claimant wrongdoing, arising out of the same subject matter. Counterclaims can exceed the original claim. See, e.g., Atlantic Triton v. Guinea, ICSID Case No. ARB/84/1, Award, 21 April 1986, 18(A) and (B) (where Claimant sought damages for approximately USD 795,861 while the counterclaim was for approximately USD 6,591,000). See, e.g., Article 46 of the ICSID Convention, ‘Except as the parties otherwise agree, the Tribunal shall, if requested by a party, determine any incidental or additional claims or counterclaims arising directly out of the subject-matter of the dispute provided that they are within the scope of the consent of the parties and are otherwise within the jurisdiction of the Centre.’ Saluka Investments B.V. v. Czech Republic, UNCITRAL, Decision on Jurisdiction over the Czech Republic’s Counterclaim, 7 May 2004, para. 27. See also ICSID Convention, Art. 46;

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claims has been accepted, for example, over alleged breaches by the claimant of the same contract which the claimant accused the respondent of breaching.33 Jurisdiction over counterclaims, however, has been denied where it was based on violations of host States’ tax, employment, or environmental laws and if they did not have a ‘close connection’ with the primary claim.34 G. Necessity

The state of necessity defence is among a group of defences in the customary 10 international law of State responsibility, which the ILC Articles call ‘circumstances precluding wrongfulness.’35 These defences excuse what under normal circumstances would be illegal acts. A state of necessity does not eliminate the obligation, but makes the non-performance of the obligation legal for the period of necessity.36 Once that period has elapsed, the obligation is again in force. As necessity justifies the commission of wrongful acts, it should ‘only rarely 11 be available,’ and therefore ‘is subject to strict limitations to safeguard against possible abuse’ under customary international law.37 Briefly,38 to preclude liability the wrongful act must be ‘the only way’ to protect an ‘essential interest against a grave and imminent peril.’39 The act cannot injure ‘an essential interest’ of the wronged State ‘or of the international community.’40 Where the ‘obligation in question excludes the possibility of invoking necessity’41 or the re-

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35

36 37 38

39 40

Paushok and others v. Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011, para. 693. Saluka v. Czech Republic (n. 31) para. 63. See Zeevi Holdings v. Bulgaria and The Privatization Agency of Bulgaria, UNCITRAL Case No. UNC 39/DK, Final Award, 25 October 2006, paras. 1217–1223 (where the tribunal ordered a USD 12,789,856.21 offset for the claimant’s breach of contract). See Saluka v. Czech Republic (n. 31) paras. 59–82; cf. Thomas Wälde and Borzu Sabahi (n. 7) 1097–1098 (‘Counterclaims may be raised based upon the violations of a host state’s tax laws. Or they may be based upon an investor’s alleged breach of domestic safety, employment, and environmental laws, which would render him liable to pay penalties which can be offset against the compensation due. If the issue is inextricably linked with the compensation issue and if the government raises it in the context of the investment dispute, the tribunal should normally have jurisdiction to consider such counter claims, at least if they are apt to reduce the compensation due’). ILC Articles (n. 9) Chapter V. Other defences in Chapter V precluding wrongfulness include consent by the injured party (Article 20), self-defence (Article 21), countermeasures in respect of an internationally wrongfully act (Article 22), force majeure (Article 23) and distress (Article 24). See generally James Crawford, The International Law Commission’s Articles on State Responsibility (Cambridge University Press, 2002) 160–190; Andrea K. Bjorklund, ‘Emergency Exceptions: State of Necessity and Force Majeure’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds) (n. 3) 461–492. ILC Articles (n. 9) Art. 25, commentary 1. ILC Articles (n. 9) Art. 25, commentary 2. For a comprehensive treatment of the conditions under which a state of necessity may be invoked and the resulting effects on liability in general, see Andrea Bjorklund (n. 35); Roberto Aguirre Luzi, ‘BITs & Economic Crises: Do States Have Carte Blanche?’ in Todd J. Grierson Weiler (ed), Investment Treaty Arbitration and International Law (Juris, 2008). ILC Articles (n. 9) Art. 25(1)(a). Id., Art. 25(1)(b).

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spondent contributed to the emergency situation in question, necessity cannot be invoked to preclude liability.42 12 More relevant for the issue of limitation on compensation, however, are the consequences of successful invocation of the state of necessity defence. In this connection, while necessity may preclude wrongfulness, it does not seem to preclude compensation. ILC Article 27(2)(b) states that ‘[t]he invocation of a circumstance precluding wrongfulness in accordance with this chapter is without prejudice to: (...) (b) the question of compensation for any material loss caused by the act in question.’ Commentary 6 to this article explains that ‘[s]ubparagraph (b) does not attempt to specify in what circumstances compensation should be payable.’43 Generally, the range of possible situations covered by chapter V of the ILC Articles is such that to lay down a detailed regime for compensation is not appropriate. Indeed, the Commentary to the ILC Articles notes that, ‘[i]t will be for the State invoking a circumstance precluding wrongfulness to agree with any affected States on the possibility and extent of compensation payable in a given case.’44 Tribunal decisions in international investment arbitration have not clarified this question.45 13 In addition to the customary rules governing the state of necessity covered by the ILC Articles, investment treaties may contain provisions which function in much the same way. These preclusion provisions seem to excuse a breach of the obligations created by the treaty if the conditions set forth in the provision are met,46 and hence result in zero compensation during the state of necessity. In 41 The example of certain humanitarian obligations in military circumstances is given. Id., Art. 25, commentary 19. 42 Id., Art. 25(2). 43 Authors have commented on the uncertainty created by ILC’s lack of clarity. See, e.g., Sergey Ripinsky and Kevin Williams (n. 1) 343 (‘[U]nder the ILC’s approach, once wrongfulness of a measure is excluded, compensation as a form of reparation cannot be required. At the same time, certain compensation for the material loss may, or even should be provided despite the absence of wrongfulness. The ILC’s approach may be justifiable as a matter of pure legal logic, but as a practical matter it is confusing because it fails to draw a distinction between compensation for wrongful conduct and compensation for conduct that is excusable, in terms of both the specific criteria triggering compensation and the appropriate measure and extent of compensation.’). 44 ILC Articles (n. 9) Art. 27, commentary 6. See also José E. Alvarez and Kathryn Khamsi, ‘The Argentine Crisis and Foreign Investors: A Glimpse into the Heart of the Investment Regime’ (2008–2009) YB Int’l Inv. L. & Pol’y 379, 401–402. 45 The tribunal in Continental Casualty v. Argentina did not award compensation for damages done during a state of necessity without directly addressing this question; the ICSID ad hoc annulment committee which heard the annulment challenge to the decision stated that ‘it must be understood as implicit that the Tribunal was of the view that Argentina was under no obligation to compensate Continental’ for damages during this period. Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, paras. 196, 320; Decision on Application for Partial Annulment, 16 September 2011, para. 126. 46 For example, Article XI of the Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment allows acts taken ‘for the maintenance of public order, (...) of international peace or security, or the protection of [the state’s] own essential security interests.’ The relationship between the rules governing necessity under customary international law as stated in the ILC Articles and those

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LG&E, for example, the tribunal noted that the defence of necessity applied for a period of 17 months (1 December 2001 until 26 April 2003) during which Argentina was not held liable for compensation.47 The application of this defence has received a mixed response from arbitral 14 tribunals. As of the date of this writing, the Argentine Republic had raised this defence in all investment treaty cases that it faced in the aftermath of the financial crisis of 2001–2003. Six tribunals rejected the defence.48 LG&E and Continental Casualty, as noted, accepted the defence and reduced the amount of compensation due to the claimants.49 Two annulment committees in Sempra and Enron annulled the original awards (which had also rejected the defence),50 because they had not properly applied the relevant principles on state of necessity.51 In both cases, the tribunals have been reconstituted and it remains to be seen whether they would accept Argentina’s necessity defence and, if so, whether they would reduce compensation on that basis.52

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49 50

51 52

found in investment treaties, including the effect on compensation, has been a major point of contention in a series of cases, and the subsequent annulment of certain of these decisions, arising from the Argentine financial crisis in the early 2000s. See generally José E. Alvarez and Kathryn Khamsi (n. 44). LG&E Energy Corp. and others v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, paras. 226, 228, 267 (where the tribunal noted that from 1 December 2001 to 26 April 2003, ‘Argentina was in a period of crisis during which it was necessary to enact measures to maintain public order and protect its essential security interests’; after that period, Argentina is liable to claimants for damages and in a separate award found Argentina liable to pay USD 57,400,000). See also Continental Casualty Company v. Argentina (n. 45) paras. 196, 320 (where the tribunal accepted the defence and noted that the measures taken by Argentina ‘contributed materially to the realization of their legitimate aims’ and ordered that no compensation was payable for all the substantive claims with the exception of a limited claim relating to treasury bills for USD 2,800,000 without interest and costs). See (i) CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 25 April 2005, paras. 304–331, 353–394 (this award was not subsequently annulled – CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Decision on Application for Annulment, 21 August 2007, paras. 101–136); (ii) Enron Corporation and Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 15 May 2007, paras. 288–345 (this award was subsequently annulled – see n. 48); (iii) Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 18 September 2007, paras. 328–397 (this award was subsequently annulled – see n. 48); (iv) BG Group plc v. Argentina, Ad hoc UNCITRAL Arbitration Rules, Final Award, 24 December 2008, paras. 388–412; (v) National Grid PLC v. Argentina, Award, Case 1:09-cv-00248-RBW, Ad hoc UNCITRAL Arbitration Rules, 3 November 2008, paras. 205–262; and (vi) Suez and others v. Argentina, ICSID Case No. ARB/03/19, Decision on Liability, 30 July 2010, paras. 229–243. See LG&E Energy Corp. and others v. Argentina (n. 47); Continental Casualty Company v. Argentina (n. 47). Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Decision on Argentina’s Application for Annulment of the Award, 10 June 2010; Enron Corporation and Ponderosa Assets L.P. v. Argentina, ICSID Case No. ARB/01/3, Decision on Application for Annulment, 30 July 2010. Sempra Energy International v. Argentina, Decision on Argentina’s Application for Annulment of the Award (n. 50) paras. 328–397; Enron Corporation and Ponderosa Assets L.P. v. Argentina, Decision on Application for Annulment (n. 50) paras. 347–405. The resubmission proceeding for the Sempra case was registered on 12 November 2010 and the tribunal was constituted on 21 April 2011. The resubmission proceeding for the Enron case was registered on 18 October 2010 and the tribunal was constituted on 29 June 2011.

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H. Speculative, Uncertain or Hypothetical Damages 15

As the Amoco tribunal noted, ‘[o]ne of the best settled rules of the law of international responsibility of States is that no reparation for speculative or uncertain damage can be awarded.’53 Applying this principle, arbitral tribunals have refused to calculate the amount of compensation using income-based methods such as the discounted cash flow or awarding lost-profits where the projects in question were not completed,54 or were at the early stages of development and lacked a track record of profitability,55 because it was uncertain whether such 53 Amoco International Finance Corp. v. Government of Iran, Iran–U.S. Claims Tribunal, Case No. 56, Partial Award, 14 July 1987, para. 238. See also LG&E Energy Corp. and others v. Argentina, ICSID Case No. ARB/02/1, Award, 25 July 2007, paras. 88–90 (‘It can only award compensation for loss that is certain (...). Prospective gains which are highly conjectural, “too remote or speculative” are disallowed by arbitral tribunals.’); CME v. Czech Republic (n. 3) Separate Opinion of Ian Brownlie, para. 66 (‘The principle denying recovery for speculative benefits has long been recognised in the practice of international tribunals.’). This principle has also been recognised in Article 7.4.3(1) of the UNIDROIT Principles of International Commercial Arbitration (‘Compensation is due only for harm, including future harm that is established with a reasonable degree of certainty.’). 54 See, e.g., Dadras International, and Per-Am Construction Corporation v. Iran and Tehran Redevelopment Company, Iran–U.S. Claims Tribunal, Case No. 567-213/215-3, Award, 7 November 1995, para. 276 (‘The Tribunal therefore finds that the damages claimed by PerAm as compensation for lost profits under the Contract are unduly speculative, and that PerAm has not established with a sufficient degree of certainty that the construction of the North Shahyad Development Project would have resulted in a profit for Per-Am. Consequently, PerAm’s claim for lost profits is dismissed for failure of proof.’); Asian Agricultural Products Limited v. Sri Lanka (n. 14) para. 107 (‘[T]he Tribunal’s opinion is established on considering the assumptions upon which the Claimant’s projection were based in the present case insufficient in evidencing that Serendib was effectively by January 27, 1987, a “going concern” that acquired a valuable “goodwill” and enjoying a proven “future profitability”, particularly in the light of the fact that Serendib had no previous record in conducting business for even one year of production.’). 55 See, e.g., William J. Levitt v. Iran, Iran–U.S. Claims Tribunal, Case No. 209 (297-209-1), Award, 22 April 1987, paras. 56, 58 (‘In the present instance, however, the basis of the claim for $19,456,100 under this head is highly speculative. (...) By the time the Contract came to an end only the initial stages of clearing and grading had been completed, and no construction work had begun on the buildings. The project had therefore reached only a very early stage. For these reasons the Tribunal finds that the Claimant has not established with a sufficient degree of certainty that the project would have resulted in a profit. The claim in this respect is therefore dismissed.’); Metalclad Corp v. Mexico, ICSID Case No. ARB(AF)/97/1, Award, 25 August 2000, paras. 120–121 (‘where the enterprise has not operated for a sufficiently long time to establish a performance record or where it has failed to make a profit, future profits cannot be used to determine going concern or fair market value. (...) The Tribunal agrees with Mexico that a discounted cash flow analysis is inappropriate in the present case because the landfill was never operative and any award based on future profits would be wholly speculative.’); Compañía de Aguas del Aconquija SA and Vivendi Universal SA v. Argentina, ICSID Case No. ARB/97/3, Award, 20 August 1997, para. 8.3.3 (‘the net present value provided by a DCF analysis is not always appropriate and becomes less so as the assumptions and projections become increasingly speculative. And, as Respondent points out, many international tribunals have stated that an award based on future profits is not appropriate unless the relevant enterprise is profitable and has operated for a sufficient period to establish its performance record. The Tribunal notes that even in the authorities relied on by Claimants, compensation for lost profits is generally awarded only where future profitability can be established (the fact of profitability as opposed to the amount) with some level of certainty.’).

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projects could generate profits in the future.56 In the same vein, in assessing the amount of future lost profits, arbitral tribunals, in the absence of provisions providing for automatic renewal of investment contracts, generally refuse to assume such contracts would have been renewed.57 Similarly, arbitral tribunals have refused to award compensation where the 16 damage is yet to materialise. In Occidental, for example, the tribunal rejected a claim for damages that would arise from claimant’s likely payment of certain VAT to Ecuador and the latter’s likely failure, in the future, to refund the VAT to which refund claimant was entitled.58 I. Limitations Arising Out of Contractually Agreed Obligations

In assessing the value of the aggrieved party’s losses, arbitral tribunals that 17 apply the Chorzów principle need to create a hypothetical scenario in which the unlawful act had not occurred and the aggrieved party would have continued to operate its business without having been affected by that act. With respect to the value of contractual rights or profits generated from contractual relationships, application of this principle requires assuming that the contract would have been performed, which in turn requires taking into account the specific provisions of the contract at issue, including any limitations that the parties might have set on

56 See Wena Hotels Ltd. v. Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, paras. 123–124 (where claim for lost opportunity and reinstatement costs were rejected as they were speculative); Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 355 (where the tribunal only awarded compensation on the basis of net book value and not lost profits using DCF since the contract had been terminated in the early stages and had not been materially performed). 57 See, e.g., Gemplus v. Mexico (n. 19) para. 49 (Part XII) (‘There was a possible extension thereafter of not more than ten more years, subject (inter alia) to the discretion of the Secretariat. Whilst the exercise of that discretion was not unfettered under Mexican law, the Tribunal considers that the Claimants’ claim for this second period of ten years is far too contingent, uncertain and unproven, lacking any sufficient factual basis for the assessment of compensation under the two BITs.’). See also CMS Gas Transmission Company v. Argentina (n. 48) paras. 196–199 (where the tribunal noted that the right to extension of a licence is ‘conditional and subject to a number of steps’); Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No ARB/05/16, Award, 21 July 2008, paras. 766–768 (where although claimants had argued that the contract would be renewed, they prepared their base compensation ignoring the possibility for renewal which the tribunal ultimately adopted). 58 Occidental Exploration and Production Company v. Ecuador, LCIA Case No. UN3467, Final Award, 1 July 2004, para. 114. In other cases as well, tribunals have rejected claimants’ prayer for future losses that have not occurred. See LG&E v. Argentina (n. 53) para. 89 (‘[L]ost future profits have only been awarded when “an anticipated income stream has attained sufficient attributes to be considered legally protected interests of sufficient certainty to be compensable.” Prospective gains which are highly conjectural, “too remote or speculative” are disallowed by arbitral tribunals.’ (emphasis supplied).

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the amount of compensation.59 For example, the ICSID tribunal in Kardassopoulos noted that although compensation was payable under a treaty: [t]his finding is without prejudice to a host State and an investor’s ability to contractually limit the compensation which may be owed following an expropriation where a treaty is also in play. Indeed, the Tribunal is loathe to accept the categorical denial of such an arrangement urged by the Claimants as a matter of law.60

18

Similarly, in Siag,61 the tribunal held that, in determining the amount of compensation for the expropriation of the claimant’s property, it had to take into account the terms of the claimant’s contract which provided that, in the event of a sale of the property, the claimant was entitled to retain only 50 % of the sale proceeds (the remainder of which would be paid to the State). The tribunal ruled that, ‘it is important to bear in mind also the terms upon which that interest was held. (...) [T]he Tribunal does accept that [the contractual term] had an effect on the value of the asset in the Claimants’ hands.’62 J. Equity

19

In addition to the various principles discussed above, compensation may also be reduced by the application of equity. Equity appears in international law both as a general principle of law and as equity ex aequo et bono, the latter requiring specific permission of the parties to the tribunal to decide the case based on notions of fairness rather than legal principles.63 In international investment arbitration, the application of equity by the tribunal may not be expressed explicitly as ex aequo et bono, but is often a necessary part of the discretion of the tribunal in awarding compensation. As there is no precise science in valuing losses and setting compensation, a tribunal deciding between equally plausible valuations and assumptions may make its decision based on general principles of equity.64 While a few tribunals have admitted resorting to equity (probably because of the risk of having the award annulled on the grounds that they manifestly exceeded their powers),65 others have used language which implies similar equitable con59 When applying the specific provisions of a contract in question, consideration must also be given to how the rules of the relevant domestic law governing the contract should be applied. From one point of view, the question of domestic law is confined to questions of fact in determining the provisions of the contract, while international law should be used to decide the dispute. Another view, however, is that domestic law may need to be applied as governing the application of the contract to the dispute. See Enron v. Argentina (n. 48) paras. 203–207 (discussing these viewpoints and holding a middle path that ‘both have a complementary role to perform.’); Total S.A. v. Argentina (n. 23) para. 39 (holding to the broader application of domestic law). 60 Kardassopoulos v. Georgia (n. 17) para. 481. A similar view was espoused in Ron Fuchs v. Georgia, ICSID Case No. ARB/07/15, Award, 3 March 2010, para. 481. 61 Waguih Elie George Siag and Clorinda Vecchi v. Egypt, ICSID Case No. ARB/05/15, Award, 1 June 2009. 62 Id., paras. 577–578. 63 See Statute of International Court of Justice, Art. 38(2), 26 June 1945, 33 UNTS 993. 64 Thomas Wälde and Borzu Sabahi (n. 7) 1103–1105.

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siderations.66 In the absence of an express ex aequo et bono provision, a cautionary approach is advisable when applying principles of equity. K. Conclusion

The principles discussed above can potentially limit the compensation that 20 could be paid to an investor. The actual application of these principles would depend on several factors such as, most importantly, (i) the circumstances surrounding the case, (ii) the conduct of the parties, (iii) the language of the treaty, and (iv) other equitable considerations. The overarching goal of these principles is to avoid over-compensating a claimant, which would go beyond the principles of reparation upon which international investment arbitration awards are based. While some of the principles discussed have been well established in interna- 21 tional investment arbitration, others remain ambiguous to some degree. This latter group will continue to be at issue in awards as the principles develop. Notably, this is the case for the principles of the state of necessity and its effect on compensation due, which remain unsettled among the multiple Argentine financial crisis cases, particularly in light of the annulment decisions.

65 See, e.g., Compañía del Desarrollo de Santa Elena SA v. Costa Rica, ICSID Case No. ARB/ 96/1, Final Award, 17 February 2000, para. 92 (quoting the Phillips Petroleum case, where it noted that ‘the Tribunal was required to exercise its own judgment, taking into account all relevant circumstances, including equitable considerations.’). See also Mark Kantor (n. 1) 116 (‘The use of equitable considerations in the computation of compensation amounts is not uncommon, even if it is not always admitted. (...) It also lies just beneath the surface of many judicial and arbitral decision.’). 66 See, e.g., CMS Gas Transmission Company v. Argentina (n. 48) para. 248 (where the tribunal stated the assumptions chosen in valuing the losses should have the parties ‘sharing some of the costs of the crisis in a reasonable manner.’).

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Patrick Dumberry A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. The Concept of Moral Damage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

C. Moral Damages in Investor-State Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Claims Submitted by Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Claims Submitted by States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 5 15

D. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22

Literature: Conway Blake, ‘Moral Damages in Investment Arbitration: a Role for Human Rights?’ (2012) 3(2) J. Int’l Disp. Settlement 371–407; Julien Burda, ‘Arbitrage international et réparation des préjudices moraux: quelques enseignements de la sentence CIRDI: Desert Line Projects LCC contre République du Yemen’ (2008) 48 La Revue Libanaise de l'Arbitrage Arabe et International 24–32; Jennifer Cabresa, ‘Moral Damages in Investment Arbitration and Public International Law’ in Ian A. Laird and Todd J. Weiler (eds), Investment Treaty Arbitration and International Law – Volume 3 (Juris, 2010); Wade M. Coriell and Silvia M. Marchili, ‘Unexceptional Circumstances: Moral Damages in International Investment Law’ in Ian A. Laird and Todd J. Weiler (eds), Investment Treaty Arbitration and International Law – Volume 3 (Juris, 2010); Patrick Dumberry, ‘Compensation for Moral Damages in InvestorState Arbitration Disputes’ (2010) 27(3) J. Int’l Arb. 247–276; Patrick Dumberry, ‘Satisfaction as a Form of Reparation for Moral Damages suffered by Investors and Respondent States in Investor-State Arbitration Disputes’ (2012) 3(1) J. Int’l Dispute Settlement 205–242; Stephen Jagusch and Thomas Sebastian, ‘Moral Damages in Investment Arbitration: Punitive Damages in Compensatory Clothing?’ (2013) 29(1) Arb. Int’l 45–62; Merryl Lawry-White, ‘Are Moral Damages an Exceptional Case?’ (2012) 15(6) Int’l Arb. L. Rev. 236–246; Lars Markert and Elisa Freiburg, ‘Moral Damages in International Investment Disputes: on the Search for a Legal Basis and Guiding Principles’ (2013) 14(1) JWIT 1–43; Matthew T. Parish, Annalise K. Nelson and Charles B. Rosenberg, ‘Awarding Moral Damages to Respondent States in Investment Arbitration’ (2011) 29(1) Berkeley J. Int’l L. 227–248; Borzu Sabahi, ‘Moral Damages in International Investment Law: Some Preliminary Thoughts in the Aftermath of Desert Line v. Yemen’ in Jaques Werner and Arif Hyder Ali (eds), A Liber Amicorum: Thomas Wälde – Law Beyond Conventional Thought (Cameron, 2010) 253–264; Ingeborg Schwenzer and Pascal Hachem, ‘Moral Damages in international Investment Arbitration’ in S. Kröll and L. Mistelis (eds), International Arbitration and International Commercial Law: Synergy Convergence and Evolution (Wolters Kluwer, 2011) 411–430; John R. Laird, ‘Moral Damages and Punitive Question in ICSID Arbitration’ (2012) 26(2) ICSID Rev.–FILJ 171–183; Jarrod Wong, ‘The Misapprehension of Moral Damages in Investor-State Arbitration’ in Arthur Rovine (ed), Contemporary Issues in International Arbitration and Mediation: the Fordham Papers 2012 (Martinus Nijhoff, 2013) 67–99.

A. Introduction 1

Moral damage is an elusive concept. As explained in 1923 by the Lusitania tribunal, even if moral damages are ‘difficult to measure or estimate by money standards’ it nevertheless remains that they are ‘very real’ and must therefore be compensated.1 Under Article 31 of the ILC Articles on State Responsibility, a State must, indeed, make full reparation for any ‘injury’ (both material and

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moral damages) caused to another State by an internationally wrongful act.2 In the past, several international tribunals, such as the International Tribunal for the Law of the Sea (ITLOS), the United Nations Compensation Commission (UNCC), the Ethiopian–Eritrea Claims Commission, as well as different human rights bodies and international employment tribunals have awarded compensation to individuals for moral damages. Numerous older international mixed claims commissions have also awarded compensation for moral damages suffered by foreign nationals.3 This chapter examines the novel issue of moral damages in the context of in- 2 ternational investment law. It offers a tour d’horizon of all cases (prior to 2012) where arbitral tribunals established under investment treaties have awarded monetary compensation for moral damages suffered by foreign investors as a result of treaty breaches committed by the host State of the investment.4 In one such case, Desert Line Projects LLC v. Yemen, the tribunal awarded USD 1 million in compensation to the claimant.5 The tribunal held that Yemen should provide compensation to a corporation for its officers’ psychological suffering (in this case, the ‘stress and anxiety of being harassed, threatened and detained’)6 directly resulting from physical actions, i.e. physical duress and other related measures of coercion, interference or intimidation conducted by army/police forces.7 The award marks the very first time, and thus far the only instance, where compensation was awarded for moral damages in the context of an investment treaty. This decision also contains the most comprehensive analysis to date on the question of moral damages in international investment law. In the recent case of Lemire v. Ukraine, the tribunal also examined the ‘exceptional’ circumstances’ under which a tribunal may award compensation for moral damages.8 Finally, the cases of Europe Cement9 and Cementownia10 have raised the un-

1 Opinion in the Lusitania Cases, U.S.–Germany Mixed Claims Commission, 1923, UNRIAA, vol. VII, 32. 2 Titles and Texts of the Draft Articles on Responsibility of States for Internationally Wrongful Acts Adopted by the Drafting Committee on Second Reading, Art. 31, U.N. Doc. A/CN.4/L. 602/Rev. 1.ILC, 26 July 2001 (‘ILC Articles on State Responsibility’). 3 For instance: Chevreau (France v. United Kingdom), 1931, UNRIAA, vol. II, 1113; Di Caro, Italy–Venezuela Mixed Claims Commission, 1903, UNRIAA, vol. X, 597; Heirs of Jean Maninat, France–Venezuela Mixed Claims Commission, 1905, UNRIAA, vol. X, 55; Gage, U.S.–Venezuela Mixed Claims Commission, 1903, UNRIAA, vol. IX, 226; Dispute Concerning Responsibility for the Deaths of Letelier and Moffitt, Decision of 11 January 1992, UNRIAA, vol. XXV, 1–19; I.L.R., vol. 88, 1992, 727. 4 This question is examined in detail in: Patrick Dumberry, ‘Compensation for Moral Damages in Investor–State Arbitration Disputes’ (2010) 27(3) J. Int’l Arb. 247–276. 5 Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008. 6 Id., paras. 179, 286. 7 Id., para. 290. 8 Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, 28 March 2011. 9 Europe Cement Investment & Trade S.A. v. Turkey, ICSID Case No. ARB(AF)/07/2, Award, 13 August 2009. 10 Cementownia ’Nowa Huta’ S.A. v. Turkey, ICSID Case No. ARB(AF)/06/2, Award, 17 September 2009.

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precedented issue of the proper remedy for moral damages suffered by a State in international investment law. B. The Concept of Moral Damage 3

The concept of moral damage is admittedly vague and uncertain. In the above-mentioned 1923 Lusitania case, which involved the sinking of the British liner Lusitania by a German submarine during the First World War, killing 1,198 people (including 128 U.S. nationals), the U.S.–Germany Mixed Claims Commission referred to the following examples of moral damages: ‘injury inflicted resulting in mental suffering, injury to his feelings, humiliation, shame, degradation, loss of social position or injury to his credit or to his reputation’.11 In its Commentaries to its Draft Articles on State Responsibility, the ILC provides the following illustration of the type of moral damages affecting an individual that can be compensated: ‘non-material damage is generally understood to encompass loss of loved ones, pain and suffering, as well as the affront to sensibilities associated with an intrusion on the person, home or private life.’12 A more comprehensive definition of moral damages was developed by Wittich: First, it includes personal injury that does not produce loss of income or generate financial expenses. Secondly, it comprises the various forms of emotional harm, such as indignity, humiliation, shame, defamation, injury to reputation and feelings, but also harm resulting from the loss of loved ones and, on a more general basis, from the loss of enjoyment of life. A third category would embrace what could be called non-material damage of a ‘pathological’ character, such as mental stress, anguish, anxiety, pain, suffering, stress, nervous strain, fright, fear, threat or shock. Finally, non-material damage would also cover minor consequences of a wrongful act, e.g. the affront associated with the mere fact of a breach or, as it is sometimes called, ‘legal injury’.13

4

To this list should be added one specific type of moral damages: injury to the credit and reputation of a legal entity, i.e. a corporation. It is evident that the distinction between material and moral damages is blurred in some circumstances.14

11 Opinion in the Lusitania Cases (n. 1) 40. 12 Commentaries to the Draft Articles on Responsibility of States for Internationally Wrongful Acts Adopted by the International Law Commission at its Fifty-Third Session (2001), Report of the ILC on the work of its Fifty-third Session, Official Records of the General Assembly, Fifty-sixth Session, November 2001, Supplement No. 10 (A/56/10), ch.IV.E.2), 252 (‘ILC Commentaries’). See also Article 28 in L.B. Sohn and R. Baxter, ‘Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens’ (1961) 55 AJIL 548–584: ‘Damages for bodily or mental harm, for mistreatment during detention, or for deprivation of liberty shall include compensation for past and prospective: (a) harm to the body or mind; (b) pain, suffering and emotional distress (…).’ 13 Stephan Wittich, ‘Non-Material Damage and Monetary Reparation in International Law’ (2004) 15 Finnish Yearbook of Int’l L. 329–330. 14 Examples are examined by Stephan Wittich (n. 13) 330.

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C. Moral Damages in Investor-State Disputes 1. Claims Submitted by Investors

Investors have claimed compensation for moral damages in several disputes. 5 At the time of writing this contribution (November 2011), the ‘mapping’ of these difference cases can be summarised as follows: – – – – –

one tribunal simply decided not to address the allegation raised by the claimant;15 two other tribunals also refused to examine claims on the ground that they lacked jurisdiction over the disputes;16 another tribunal dismissed the claim because of its late filing;17 in six cases, tribunals dismissed moral damages claims based on lack of evidence;18 the Benvenuti v. Congo tribunal concluded that the claim submitted by the claimant was unsupported by any evidence, but nevertheless awarded a small amount of money based on ex aequo et bono grounds;19

15 Helnan International Hotels AS v. Egypt, ICSID Case No ARB/05/19, Award, 7 June 2008. 16 Zhinvali Development Ltd. v. Georgia, ICSID Case No. ARB/00/1, Award, 24 January 2003, paras. 278–279, 280, 282. The claimant alleged having suffered moral damages as a result of defamatory comments by Georgia that caused harm to its reputation. The majority of the tribunal held that it lacked jurisdiction over the dispute since it did not qualify as an investment under Georgian law (the law under which the proceedings were instituted). Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003, para. 17.6. The tribunal held that the claimant’s cause of action based on Article 56 of the Ukrainian Constitution for ‘moral damages inflicted by unlawful decisions’ was beyond the scope of its jurisdiction which was limited to BIT breaches. 17 Bernardus Henricus Funnekotter, et.al. v. Zimbabwe, ICSID Case No. ARB/05/06, Award, 22 April 2009, paras. 139–140. 18 Técnicas Medioambientales Tecmed S.A. v. Mexico, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 198; Iurii Bogdanov, Agurdino-Invest Ltd. and Agurdino-Chimia JSC v. Moldova, SCC, Award, 22 September 2005, section 5.2; Société Ouest-Africaine des Bétons Industriels (SOABI) v. Sénégal, ICSID No. ARB/82/1, Award, 1 August 1984, paras. 6.22, 10.02; Victor Pey Casado and President Allende Foundation v. Chile, ICSID Case No. ARB/ 98/2, Award, 8 May 2008, 27, 266, 689, 704; Joseph Charles, Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability, 21 January 2010, paras. 449, 476 and Award, 28 March 2011. In Biwater Gauff (Tanzania) Ltd. v. Tanzania, ICSID Case No. ARB/ 05/22, Award, 24 July 2008, para. 808, the majority of the tribunal dismissed the investor’s claim because Tanzania’s violation of the BIT caused no actual damage. In his ‘Concurring and Dissenting Opinion’ (paras. 32, 33), Gary Born concluded that the host State’s actions had caused a moral damage to the investor. The majority of the tribunal disagreed with Mr Born and stated that it would have been ‘inappropriate’ to award any such moral damages in the circumstances of the case and in light of the investor’s conduct. The majority also noted that the claimant made no such claim. 19 S.A.R.L. Benvenuti & Bonfant v. Congo, ICSID Case No. ARB/77/2, Award, 8 August 1980; English translations of French original in: (1983) 8 YB Com. Arb. 144, at 150. The Italian investor claimed some CFA 250 million for ‘moral damages’ as a result of its expropriation in the People’s Republic of Congo (Congo-Brazzaville). Despite the lack of evidence of any moral damage, the tribunal nevertheless awarded the investor some CFA 5 million (i.e. EUR 8,000) in compensation based on equitable grounds as a result of ‘measures to which Claimant ha[d] been subject’ which had ‘certainly disturbed [its] activities’ (a reference to the

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–

in only one case (Desert Line Project) did a tribunal award compensation for moral damages.

The case of Desert Line Projects LLC v. Yemen involved a company from Oman building roads in Yemen. The tribunal concluded that the overall conduct of Yemen towards the investor fell ‘well short of the minimum standard of international law’20 and had breached the obligation to provide fair and equitable treatment under the BIT. The tribunal awarded the claimant USD 24 million in compensation. The investor also claimed compensation for moral damages in the amount of USD 104 million alleging continuing ‘harassment, threat and theft’ by armed groups against the company’s personnel as well as the subsequent arrest and detention by the army of three executives.21 The tribunal summarised the claimant’s contention as follows: ‘[t]he Claimant’s executives suffered the stress and anxiety of being harassed, threatened and detained by the Respondent as well as by armed tribes; the Claimant has suffered a significant injury to its credit and reputation and lost its prestige; the Claimant’s executives have been intimidated by the Respondent in relation to the contracts.’22 7 The tribunal first noted that the Respondent had ‘not questioned the possibility for the Claimant to obtain moral damages in the context of ICSID procedure.’23 The tribunal acknowledged that BITs’ ‘primarily aim’ at ‘protecting property and economic values’, but added that ‘they do not exclude, as such, that a party may, in exceptional circumstances, ask for compensation for moral damages.’24 According to the tribunal, ‘it is generally accepted in most legal systems that moral damages may also be recovered besides pure economic damages.’25 The tribunal noted that ‘it knows that it is difficult, if not impossible, to substantiate a prejudice of the kind ascertained in the present award.’26 In its decision, the tribunal quoted the aforementioned Lusitania case to show that non-material damages may be ‘very real, and the mere fact that they are difficult to measure or estimate by money standards makes them none the less real and affords no reason why the injured person should not be compensated’.27 The tribunal also stated that it was ‘generally recognised that [a] legal person (as opposed to a natural one) may be awarded moral damages, including loss of reputation, in spe6

20 21 22 23 24 25 26 27

occupation of the investor’s premises by the Congolese military, and the institution of criminal proceedings against Mr Bonfant, an officer of the company). It should be noted that the parties had agreed that the tribunal had the power to decide the dispute ex aequo et bono and that the amount of damage was determined solely on this basis. Desert Line v. Yemen (n. 5) para. 179. Id., paras. 19, 20, 26, 38. Id., para. 286. Id., para. 289. Id. Id. Id. Id.

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cific circumstances only’.28 The tribunal concluded that Yemen’s actions had caused moral damages in violation of the BIT: The Arbitral Tribunal finds that the violation of the BIT by the Respondent, in particular the physical duress exerted on the executives of the Claimant, was malicious and therefore constitutive of a fault-based liability. Therefore the Respondent shall be liable to reparation for the injury suffered by the Claimant, whether it be bodily, moral or material in nature. The Arbitral Tribunal agree with the Claimant that its prejudice was substantial since it affected the physical health of the Claimant’s executives and the Claimant’s credit and reputation.29

The tribunal held that Yemen was liable to make reparation for ‘moral dam- 8 ages, including loss of reputation’ for USD 1 million (without interest).30 It added that this amount for moral damages was ‘indeed more than symbolic yet modest in proportion to the vastness of the project’.31 The Desert Line award is interesting on many accounts.32 First, it confirms 9 that, similarly to many municipal legal orders, an injury to a corporation’s credit, reputation, and prestige is a form of moral damage that can be compensated in an award.33 Second, the award suggests that compensation can be awarded to a corporation to remediate the moral injury which has actually been suffered by physical persons (the corporation’s executives).34 Even though these are, in principle, two distinct types of damages, the tribunal’s approach may be explained by the fact that it would have had no jurisdiction over a dispute involving the executive’s own claim for moral damages. Other explanations have been put forward in doctrine: the tribunal may have concluded that the injury also had an impact on the performance of the company and, therefore, caused it some form of damages;35 the tribunal may have adopted, by analogy, the doctrine of ‘corporate espousal’, whereby damage to an employee is considered as done to the corporation itself.36 Third, the Desert Line tribunal ambiguously referred to the ‘exceptional cir- 10 cumstances’ under which compensation for moral damages can be claimed un-

28 29 30 31 32 33 34 35

Id. Id., para. 290. Id., paras. 291, 297. Id., para. 290. These issues are discussed in detail in Patrick Dumberry (n. 4) 266 et seq. Desert Line v. Yemen (n. 5) para. 286. Id. Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (BIICL, 2008) 311; Wade M. Coriell and Sylvia M. Marchili, ‘Unexceptional Circumstances: Moral Damages in International Investment Law’ in Ian A. Laird and Todd J. Weiler (eds), Investment Treaty Arbitration and International Law – Volume 3 (Juris, 2010) 12. 36 Borzu Sabahi, ‘Moral Damages in International Investment Law: Some Preliminary Thoughts in the Aftermath of Desert Line v. Yemen’ in Jaques Werner and Arif Hyder Ali (eds), A Liber Amicorum: Thomas Wälde – Law Beyond Conventional Thought (Cameron, 2010), 253, 259. See also: Julien Burda, ‘Arbitrage international et réparation des préjudices moraux: quelques enseignements de la sentence CIRDI: Desert Line Projects LCC contre République du Yemen’ (2008) 48 La Revue Libanaise de l'Arbitrage Arabe et International, 12–13, discussing the possibility that the company had suffered its own moral injury as result of those suffered by its officers.

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der investment treaties.37 The most recent case of Lemire suggests the existence of a high threshold of seriousness whereby compensation for moral damages is limited to ‘exceptional cases’ when the following conditions are met: –

– –

11

the State’s actions imply physical threat, illegal detention or other analogous situations in which the ill-treatment contravenes the norms according to which civilized nations are expected to act; the State’s actions cause a deterioration of health, stress, anxiety, other mental suffering such as humiliation, shame and degradation, or loss of reputation, credit and social position; and both cause and effect are grave or substantial.38

The Lemire tribunal applied this test to the facts of the case wherein the claimant had sought USD 3 million in compensation for moral damages resulting from alleged harassment measures adopted by Ukraine’s broadcasting authorities when rejecting his applications for new radio frequencies. The tribunal noted that the ‘excessive or disproportionate efforts which an applicant may have incurred when requesting administrative licences, by their nature, are most unlikely to give rise to moral damages, since the injury does not meet any of the three standards required for the existence of moral damages.’39 For the tribunal, Mr Lemire did not suffer ‘extraordinary stress or anxiety’ as a result of these efforts to obtain new radio frequencies.40 Mr Lemire also claimed compensation for the disrespect and humiliation caused by the authorities’ constant rejections of his applications. The tribunal acknowledged that these recurring rejections may have caused him ‘a loss of reputation’, but added that ‘this is not enough: the main question is to determine whether the injury inflicted is substantial.’41 For the tribunal, ‘the gravity required under the standard is not present’ since the injury he suffered ‘cannot be compared to that caused by armed threats, by the witnessing of deaths or by other similar situations in which Tribunals in the past have awarded moral damages’.42 The tribunal therefore rejected the moral damages claim based on the application of this high threshold of ‘exceptional circumstances’.

37 Desert Line v. Yemen (n. 5) para. 289. The Europe Cement tribunal (n. 9) para. 181, also referred to the ‘exceptional circumstances such as physical duress’ which could justify awarding compensation for moral damages. In the case of Waguih Elie George Siag & Clorinda Vecchi v. Egypt, ICSID Case No. ARB/05/15, Award, 1 June 2009, the tribunal, while rejecting the claimants’ request for punitive damages, mentioned in an obiter that ‘the recovery of punitive or moral damages is reserved for extreme cases of egregious behaviour.’ (para. 545, emphasis added). 38 Lemire v. Ukraine (n. 8) para. 333. 39 Id., para. 336. 40 Id., para. 337. On the issue of the repetitive inspections of Mr Lemire’s business, the tribunal ‘accept[ed] that inspections by a regulator, if improperly used as tools of intimidation against regulated entities, constitute egregious behaviour and an abuse of power, which can cause extreme stress and anxiety to the supervised and result in an entitlement to be compensated for the moral damage inflicted’ (id., para. 341). The tribunal nevertheless concluded that there was no such intimidation in the present case. 41 Id., para. 338. 42 Id., para. 339.

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Fourth, in its award the Desert Line tribunal refers to ‘the physical duress ex- 12 erted on the executives of the claimant’ which ‘was malicious and therefore constitutive of a fault-based liability’.43 Based on the principle of ‘objective’ responsibility which has long been adopted under international law,44 a State’s fault or malicious intent is not a necessary condition for a tribunal to award compensation for moral damages. In my view, a State’s fault or malicious intent will nevertheless be taken into account by tribunals when they actually quantify the amount of compensation to be awarded to remediate moral damages.45 This is because tribunals have a great deal of flexibility and discretion when determining the amount that will adequately compensate an investor for the moral damage suffered. Little is known about how the Desert Line tribunal came to the conclusion that USD 1 million was the proper amount to remediate the moral damages suffered by the investor.46 In my view, the amount of compensation awarded should be proportionate to the seriousness of the offence committed by a State and its degree of responsibility. In other words, a tribunal may award a greater amount of compensation for moral damages in a situation where the conduct of the State is especially malicious or shocking.47 Finally, in the case of Pey Casado v. Chile, the tribunal refused to award any 13 monetary compensation for moral damages for lack of proof, but nevertheless observed that the amount of compensation it awarded for material damages (USD 10 million) as well as its finding that Chile had breached the Spain–Chile BIT and that Mr Pey Casado had been the victim of a denial of justice, constituted in itself ‘substantial and sufficient moral satisfaction’ for him.48 A similar comment was also made by the Lemire tribunal.49 These two obiter dicta raise the question of whether or not a tribunal estab- 14 lished under a BIT could (or, indeed, should) remediate moral damages suffered by a foreign investor with the remedy of satisfaction. Article 37(2) of the ILC Articles indicates that the remedy of satisfaction can take different forms such as 43 Desert Line v. Yemen (n. 5) para. 290 (emphasis added). Similarly, in his dissenting opinion in the Biwater case (n. 18), Mr Born indicated that Tanzania had ‘deliberately conduct[ed] itself in a manner it knows at the time to be wrongful, disregarding the basic legal rights and protections of private parties’ causing moral damages to the investor (para. 33, emphasis added). 44 ILC Commentaries (n. 12) at 73. 45 Mr Gaetano Arangio-Ruiz, Special Rapporteur, ‘Second Report on State Responsibility’ in ILC (ed), Yearbook of the ILC (United Nations, 1989), vol. II, part one, 1–59 (A/CN.4/425), paras. 145, 180 (‘[I]t seems both logical and rational, as recognized by a number of authorities, that the presence or absence of fault, and, if there is fault, the degree of wilful intent or negligence, play some role in the determination of the degree of responsibility and therefore of the forms and degrees of the reparation due.’). 46 Future tribunals should be looking at international human rights law for guidance on quantification of moral damages: Borzu Sabahi (n. 36) 261–264; Wade Coriell (n. 35) 7. 47 Sergey Ripinsky (n. 36) 312; Borzu Sabahi (n. 36) 260. 48 Pey Casado v. Chile (n. 18) para. 704. 49 Lemire v. Ukraine (n. 8) paras. 339, 344. In an obiter dictum, the tribunal mentioned that ‘the acknowledgement in the First Decision [Decision on Jurisdiction and Liability, 2010] that Ukraine has indeed breached the BIT, and the present award of substantial compensation, are elements of redress which may significantly repair Mr Lemire’s loss of reputation.’

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an expression of regret or a formal apology. One of the most common forms of satisfaction is when a juridical body makes a declaration on the wrongfulness of an act committed by a State. Another form of satisfaction, know as ‘pecuniary satisfaction’, is the award of a ‘symbolic’ amount of monetary compensation. In my view, a mere declaration by a tribunal recognising the wrongfulness of acts committed by the host State is clearly an insufficient and inappropriate remedy to cover actual moral damages suffered by an investor.50 Monetary compensation remains the appropriate remedy for moral damages affecting an individual or a corporation. This is because such moral damages are clearly ‘financially assessable’.51 2. Claims Submitted by States 15

There are some internationally wrongful acts that may directly affect or injure a State with respect to its honour, dignity and prestige. One may think, for instance, of insults to State symbols, such as the national flag, of a violation of territorial integrity, a violation of the premises of embassies and consulates, an attack on ships and aircrafts, or an attack on heads of State or diplomatic/consular representatives.52 Of the three different methods of reparation recognised in Article 34 of the ILC Articles, the remedy of ‘satisfaction’ is considered the appropriate one to deal with ‘those injuries, not financially assessable, which amount to an affront to the State.’53 Numerous older arbitration tribunals54 as well as ICJ cases55 have held that satisfaction is the proper means of reparation for moral damages caused directly to a State. 50 This is discussed in: Patrick Dumberry, ‘Satisfaction as a Form of Reparation for Moral Damages suffered by Investors and Respondent States in Investor-State Arbitration Disputes’ (2012) 3(1) J. Int’l Disp. Settlement 205–242. 51 According to the ILC Commentaries (n. 12) 264, ‘material and moral damage resulting from an internationally wrongful act will normally be financially assessable and hence covered by the remedy of compensation.’ (emphasis added). 52 ILC Commentaries (n. 12) 264–265. 53 Id., at 264, see also at 244. 54 Affaire du Manouba (France v. Italy), 1913, UNRIAA, vol. XI, 463–479; Affaire du Carthage (France v. Italy), 1913, UNRIAA, vol. XI, 449–461; S.S. ‘I’m Alone’ (Canada v. United States), UNRIAA, vol. III, at 1618; Heirs of Jean Maninat, France–Venezuela Mixed Claims Commission, 1905, UNRIAA, vol. X, 55, 81–82; Case concerning the differences between New Zealand and France arising from the Rainbow Warrior affair, Ruling of 6 July 1986 by the Secretary-General of the United Nations, UNRIAA, vol. XIX, 199–221, at 213; Case concerning the difference between New Zealand and France concerning the interpretation or application of two agreements, concluded on 9 July 1986 between the two States and which related to the problems arising from the Rainbow Warrior Affair (New Zealand v. France), Award of 30 April 1990, UNRIAA, vol. XX, 217, at para. 109 et seq. 55 The Corfu Channel Case, Merits (United Kingdom v. Albania), Judgment of 9 April 1949, ICJ Rep. 1949, 4, at 35; Arrest Warrant of 11 April 2000 (Congo v. Belgium), Judgment of 14 February 2002, ICJ Rep. 2002, 3, at paras. 11, 75; The Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro), Judgment of 26 February 2007, ICJ Rep. 2007, paras. 462, 471; Certain Questions of Mutual Assistance in Criminal Matters (Djibouti v. France), Judgment of 4 June 2008, ICJ Rep. 2008, para. 204.

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Although, to date, no investment tribunal has ever awarded compensation to a 16 respondent State for moral damages, the issue was recently addressed in the cases of Europe Cement and Cementownia. Both tribunals declined jurisdiction over separate disputes filed by two Polish companies under the ECT based on the companies’ inability to prove their ownership of shares in the same two Turkish corporations which were parties to concession agreements that had been allegedly terminated by Turkey. Both tribunals described the claims as an ‘abuse of process’ by claimants.56 In Europe Cement, Turkey sought USD 1 million in compensation for the 17 moral damages it allegedly suffered to its ‘reputation and international standing’57 as a result of the ‘jurisdictionally baseless claim asserted in bad faith and for an improper purpose’58 which caused it ‘intangible but no less real loss’.59 For Turkey, such compensation ‘would be providing a form of satisfaction, even if the award were never to be paid’.60 Turkey therefore requested the remedy of satisfaction either in the form of monetary compensation (‘pecuniary satisfaction’) or (in the event that the amount would not be paid by the investor) in the form of a declaration by the tribunal acknowledging wrongfulness. Although the tribunal first noted that ‘conduct that involves fraud and an abuse of process deserves condemnation’,61 it ultimately decided not to award any compensation since ‘it [did] not consider that exceptional circumstances such as physical duress are present in this case to justify moral damages.’62 In any event, for the tribunal any ‘potential reputational damage’ suffered by Turkey would be ‘remedied by the reasoning and conclusions set out in this award, including an award of costs’.63 In Cementownia, Turkey had argued that ‘tribunals applying international law 18 may award to a State the remedy of satisfaction where it has suffered an intangible injury, such as injury to its reputation or prestige’, and added that ‘in investment treaty cases, compensation has been awarded where the injury was inflicted maliciously.’64 In its analysis, the tribunal first noted that ‘there is nothing in the ICSID Convention, Arbitration Rules and Additional Facility which prevents an arbitral tribunal from granting moral damages.’65 The tribunal distinguished the present claim from the Desert Line award where the ‘arbitral tribunal decided, on the basis of the obligations contained in the Bilateral Investment Treaty 56 57 58 59 60 61 62 63

Europe Cement v. Turkey (n. 9) para. 175; Cementownia v. Turkey (n. 10) paras. 117, 159. Europe Cement v. Turkey (n. 9) para. 177. Id. Id., para. 128. Id., para. 135. Id., para. 180. Id., para. 181. Id. The tribunal ordered that the claimant pay the respondent its full costs for the proceedings, including legal fees (some USD 3.9 million) as well as half of the arbitration costs (USD 129,000). 64 Cementownia v. Turkey (n. 10) para. 165 (emphasis added). 65 Id., para. 169.

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(BIT) between Yemen and Oman, in particular the obligation of security, that exceptional circumstances, such as physical duress suffered by the investor, justified the compensation.’66 In the present case, Turkey requested compensation for moral damages ‘based merely on a general principle, i.e., abuse of process’ and not on a BIT provision.67 For the tribunal, ‘it is doubtful that such a general principle may constitute a sufficient legal basis for granting compensation for moral damages.’68 The tribunal therefore dismissed Turkey’s claim for pecuniary satisfaction to remedy its moral damage. In any event, the tribunal added that although ‘a symbolic compensation for moral damages’ could indicate the tribunal’s condemnation of the claimant’s abuse of process, in the present case it was however more appropriate ‘to sanction the claimant with respect to the allocation of costs’ (in the amount of close to USD 5 million).69 Finally, the tribunal mentioned that ‘in any case, since the Arbitral tribunal has already accepted the Respondent’s request with respect to the fraudulent claim declaration, the Respondent’s objective is already achieved.’70 19 The reasoning of both tribunals supports the proper view that satisfaction, in the form of a tribunal’s declaration acknowledging wrongfulness, is the proper remedy for any moral damage suffered by a respondent State. It should be noted, however, that situations where an investor will commit a fundamental breach of international law directly affecting a State in its honour and dignity will be very rare in practice.71 Breaches of law typically giving rise to any moral damage to a State will normally occur in State-to-State relationship rather than in the context of investment.72 In any event, under most BITs a tribunal will simply have no jurisdiction over moral damages allegations submitted by a State.73 20 Some authors have recently argued that tribunals should award pecuniary satisfaction for moral damages to respondent States which prevail in ‘particularly 66 67 68 69 70 71 72 73

Id. Id., para. 170 (emphasis in the original). Id. Id., para. 171. Id., para. 171. Patrick Dumberry (n. 50). ILC Commentaries (n. 12) 264–265. In Limited Liability Company AMTO v. Ukraine, Arbitration Institute of the Stockholm Chamber of Commerce case no. 080/2005, Award, 26 March 2008, paras. 35, 116. In this case, Ukraine submitted a counterclaim claiming, inter alia, compensation in the amount of EUR 25,000 for ‘non-material injury’ for its damaged reputation resulting from ‘unfounded allegations’ raised by the investor in the proceedings about the collusion between two Ukrainian State-owned companies. The tribunal dismissed the claim on the ground that it did not have jurisdiction over counterclaims under the ECT: ‘The jurisdiction of an Arbitral Tribunal over a State party counterclaim under an investment treaty depends upon the terms of the dispute resolution provisions of the treaty, the nature of the counterclaim, and the relationship of the counterclaims with the claims in the arbitration. Article 26 (6) ЕСТ provides that the applicable law to an ЕСТ dispute is the Treaty itself and “the applicable rules and principles of international law”. The Respondent has not presented any basis in this applicable law for a claim of non-material injury to reputation based on the allegations made before an Arbitral Tribunal. Accordingly, the Arbitral Tribunal finds that there is no basis for a counterclaim of this nature and it is accordingly dismissed.’ (para. 118).

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egregious cases’ filed by investors where ‘a claim is vexatious or has been brought fraudulently or in bad faith’.74 This is because a respondent State’s ‘investment reputation’ would be ‘unfairly tarnished’ by baseless arbitration proceedings commenced by an investor (even in cases where the former ultimately prevails) and may result in lost investments.75 In my view, there are many shortcomings with the proposition advanced by this author. Thus, purported tarnished reputation and unproven losses of investments cannot be the foundation for allowing tribunals to award compensation for moral damages to respondent States in the context of arbitration proceedings instituted by an investor. This is the case even when the investor’s claim is frivolous, baseless and ultimately unsuccessful. By entering into a BIT, a State knows quite well that it may be the object of an arbitration claim (even a frivolous one). The reputation and international standing of a State is simply unaffected by the mere fact of its participation in arbitration proceedings under a BIT. In fact, it is difficult to conceive of any circumstances where a State would suffer from any moral damages in arbitration proceedings.76 In this context, Turkey and Ukraine’s recent requests for monetary compensa- 21 tion, as a form of satisfaction, to remediate alleged moral damages are quite surprising. This is because States are generally reluctant in international law to ask a tribunal to somehow quantify any moral injury suffered. Recent litigation cases between States shows that they prefer instead to request an apology from the responsible State or, more frequently, to ask a tribunal to issue a declaration of wrongfulness.77 D. Conclusion

The issue of moral damages is a novel one in the context of investment arbi- 22 tration. It has so far only been addressed in a handful of cases. The few tribunals that have dealt with moral damages have only analysed a limited range of issues. One type of issue that seems to be settled is the question of the proper remedy for moral damages depending on who is affected. Our analysis of recent investor-State case law shows, on the one hand, that monetary compensation is the appropriate remedy for moral damages affecting an individual or a corporation, while, on the other hand, satisfaction, in the form of a declaration of wrongfulness, would be the most appropriate form of reparation to remedy any moral damage suffered by a respondent State (even if such issues are, however, unlikely to frequently arise in the context of international investment law).

74 Matthew T. Parish, Annalise K. Nelson and Charles B. Rosenberg, ‘Awarding Moral Damages to Respondent States in Investment Arbitration’ (2011) 29(1) Berkeley J. Int’l L. 238. 75 Id., at 238–239. 76 Patrick Dumberry (n. 50). 77 See cases referred to in Patrick Dumberry (n. 50).

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John Y. Gotanda A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

C. Authority to award Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

D. The Interest Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The Starting Date (dies a quo) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The End of the Interest Period/Post-Award Interest. . . . . . . . . . . . . . . . . .

14 14 18

E. The Applicable Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20

F. Simple or Compound Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26

G. Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31

Literature: John Gotanda, ‘Awarding Interest in International Arbitration’ (1996) 90 AJIL 40–63; John Gotanda, ‘Compounding Interest in Interest: The Global Economy, Deflation, and Interest’ in Arthur Rovine (ed), Contemporary Issues in International Arbitration and Mediation, The Fordham Papers 2009 (Martinus Nijhoff, 2010); Mark Kantor, Valuation for Arbitration (Kluwer Law International, 2008) 261–287; Elihu Lauterpacht and Penelope Nevill, ‘Interest’ in James Crawford, Alain Pellet, and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 613–622; Irmgard Marboe, Calculation of Compensation and Damages in International Investment Law (Oxford University Press, 2009); Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2008).

A. Introduction 1

Awards of interest in international investment arbitration are of paramount importance. Because in international investment disputes there is often a lengthy period of time from when the claim arises until the actual payment of the award and the sums involved are significant, it is not uncommon for awards of interest to reach millions of dollars, and in some cases, even exceed the amount of the principal award.1 This chapter outlines the framework and considerations for the awarding of interest in an international investment dispute. B. Background

2

Interest is a sum paid as compensation for the temporary withholding of money. It is ordinarily recoverable without actual proof of loss because of the time value of money.2

1 See Kuwait v. American Independent Oil Co. (1982) 21 ILM 976; Compañía del Desarrollo de Santa Elena SA v. Costa Rica, ICSID Case No. ARB/96/1, Award, 17 February 2000, paras. 95, 107. 2 McCollough & Company, Inc. v. The Ministry of Post, Telegraph and Telephone of Iran, Award, 22 April 1986, 11 Iran–US CTR 3, 29.

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Interest serves three main functions in international investment law. Interest is awarded to: (1) compensate the claimant; (2) prevent unjust enrichment of the respondent; and (3) ensure efficiency in the arbitral process. The compensatory function of interest is aimed at fully compensating the claimant by restoring it to the position it would have enjoyed absent the breach. By refusing to pay the claimant immediately, a respondent deprives the claimant of the ability to invest the sums owed. Because of the loss resulting from this delay, one function of interest is to compensate the claimant for this loss. The second function of awarding interest is to prevent unjust enrichment of the respondent at the expense of the claimant. During the period the respondent wrongfully withholds money owed to the claimant, the respondents will benefit from the earning capacity of that money without compensating the claimant for its use. Therefore, the respondent is said to have unfairly benefitted from its use. The third function of an interest award is to promote efficiency. Without interest awards, respondents would be insufficiently deterred from promptly paying the sum owed. Additionally, without interest, the respondent may not take measures to avoid future litigation and might even delay the resolution of any disputes in order to continue benefitting from the unjust use of the sum owed to the claimant. Moreover, absent interest, claimants may be excessively deterred from international investing or may impose excessive precautions to avoid potential future disputes. Thus, interest awards function to encourage both parties to act reasonable in avoiding disputes and should a dispute occur, interest awards serve to promote a timely resolution. The goals of interest sometimes conflict. As discussed more fully below, the compensation function may favour an interest rate that makes a claimant whole for the loss of use of its money, while the restitutionary goal may favour a rate that removes the benefit from the respondent of having the use of the claimant’s money. In addition, the first two goals may be seen as substantive in nature, while the third is more procedural. In any event, today, most view the compensation function as the primary goal of interest.3 In the context of international investment law, interest can take two forms: compensatory interest (pre-award) or post-award interest. Claims for interest typically involve four issues: 1. 2. 3. 4.

Whether there exists the authority to award interest; What is the period over which interest accrues; What should the applicable rate of interest be; and Whether interest should accrue on a simple or compound basis?

3 See generally SGS Société Générale de Surveillance S.A. v. Paraguay, ICSID Case No. ARB/ 07/29, Award, 10 February 2012, para. 183 (stating ‘there can be no doubt that [interest] is an essential component of full reparation’; see also Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Award, 3 March 2010, paras. 659–661.

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3

4

5

6

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C. Authority to award Interest 9

The power of an arbitral tribunal to award interest has long been considered inherent as an integral part of the overall claim which it has a duty to decide.4 In Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina, the tribunal stated: Absent treaty terms or provisions in the governing law to the contrary, it is generally accepted that international tribunals may award interest to an injured claimant; indeed the liability to pay interest is now an accepted legal principle.5

Many BITs also provide for the payment of interest.6 For example, in RosInvestCo UK Ltd. v. Russia, the tribunal based its authority to award interest on the UK–Soviet Union BIT, which provided that in the event of expropriation, ‘interest at a normal commercial rate shall accrue until the date of payment.’7 11 The Draft ILC Articles on State Responsibility also provides for the payment of interest. Article 38 provides ‘Interest on any principal sum payable under this chapter shall be payable when necessary in order to ensure full reparation. The interest rate and mode of calculation shall be set as to achieve that result.’8 Accordingly, Article 38 confirms that the award of interest is part of the method to ensure full reparation, and it is inherent that the tribunal has the power to award interest whenever it has the power to award compensation. 12 In some cases, the parties’ agreement may also provide for payment of interest.9 In that case, tribunals typically enforce such provisions unless to do so would violate public policy.10 13 While there is no question today that tribunals typically have the authority to award interest in investment arbitrations, there are some circumstances where it 10

4 Iran v. United States, Case No. A19, Decision of 30 September 1987, 16 Iran–US CTR 285, 289–290. 5 Compañía de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 9.2.1. 6 See Ron Fuchs v. Georgia, ICSID Case No. ARB/07/15, Award, 3 March 2010 (using the lawful expropriation provision as authority to award interest and as base rate for unlawful expropriation); Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, 28 March 2011 (using the lawful expropriation provision as authority to award interest and as base rate in non-expropriatory breach). See also the model BITs of Chile, Croatia, Peru, Canada, Greece, Sweden, and the United States. 7 RosInvestCo UK Ltd. v. Russia, SCC Case No. Arb. V079/2005, Final Award, 12 September 2010, para 684. 8 See Article 38 of the Draft ILC Articles on State Responsibility; Sergey Ripinsky and Kevin Williams, Damages in International Investment Law 32 (British Institute of International and Comparative Law, 2008), 32. See also United Nations General Assembly Resolution 799 (VIII) (7 December 1953) (stating request for codification of principles of international law governing State responsibility). 9 See SGS Société Générale de Surveillance S.A. v. Paraguay, ICSID Case No. ARB/07/29, Award, 10 February 2012, para. 184; Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Award, 3 March 2010, paras. 659–660; Continental Casualty Company v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, para. 310; OKO Pankki Oyj and others v. Estonia, ICSID Case No. ARB/04/6, Award, 19 November 2007, para. 346. 10 R.J. Reynolds Tobacco Co. v. Iran, 7 Iran–US CTR 181, 191–192.

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may decline to do so. For example, if the claimant has caused a long delay, the tribunal may decline to award interest.11 In addition, if the tribunal calculates the damages as of the date of the award, there would be no need to separately award pre-award interest.12 Of course, in such cases, the tribunal may still award postaward interest.13 D. The Interest Period 1. The Starting Date (dies a quo)

It is a generally accepted principle that ‘Interest runs from the date when the 14 principal sum should have been paid until the date the obligation to pay is fulfilled.’14 In addition, many BITs similarly provide that the interest period begins to run on the date of the lawful expropriation.15 For example, in the model United States BIT, it provides in Article 6 that in the event of an expropriation, interest is due at a commercially reasonable rate, accruing from the date of the expropriation until the date of payment.16 While the language of many BITs only addresses the running of interest in 15 cases of lawful expropriations, in practice, many tribunals have used these clauses to support the awarding of interest from the date of any expropriation or other breach of a BIT.17 In Southern Pacific Properties v. Egypt, for instance, the tribunal stated that, generally in any expropriation it is logical that the dies a quo is the date on which the dispossession effectively took place because the deprivation has been suffered from that date.18 The same logic has been applied to nonexpropriatory breaches of BITs, usually in conjunction with a valuation of the

11 See generally Marjorie M. Whiteman, Damages in International Law 1937–1943 (US Government Printing Office, 1943). 12 See ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006, para. 520. 13 Ibid., para. 522. 14 Article 38 of the Draft ILC Articles on State Responsibility. See SGS Société Générale de Surveillance S.A. v. Paraguay, ICSID Case No. ARB/07/29, Award, 10 February 2012, para. 184; Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Award, 3 March 2010, paras. 659–660. 15 See, e.g., the 2012 U.S. Model Bilateral Investment Treaty, available at http://www.state.gov/ documents/organization/188371.pdf; the Canadian Foreign Investment Protection and Promotion Agreement Model, 2004, available at http://italaw.com/documents/Canadian2004-FIPAmodel-en.pdf; see also the Agreement between the Government of the Republic of Chile and the Government of the People’s Republic of China Concerning the Encouragement and the Reciprocal Protection of Investment, Art. 4; Agreement between the Government of the Kingdom of Sweden and the Government of the United Mexican States Concerning the Promotion and Reciprocal Protection of Investments, Art. 4. 16 See Article 6.3 of the Treaty Between the Government of the United States of America and the Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment (2004), available at http://www.state.gov/documents/organization/117601.pdf. 17 See, e.g., Southern Pacific Properties (Middle East) v. Egypt, Award, 20 May 1992, (1997) 106 ILR 502. 18 Ibid., para. 234.

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fair market value of the investment at a certain date. For example, in BG Group, Plc v. Argentina, the tribunal awarded interest from the date of the non-expropriatory breach, which the tribunal determined to have occurred on the date Argentina passed the emergency measures that were deemed to have violated the BIT’s provisions on fair and equitable treatment.19 16 In some cases involving non-expropriatory breaches of BITs or indirect expropriations, a few tribunals have permitted interest to accrue from the date of the filing of the request for arbitration. This approach is consistent with the laws of a number of countries, which require the respondent to receive notice of default before interest can begin to accrue.20 CME v. Czech Republic illustrates this practice. In that case, the tribunal used the date of arbitration as the dies a quo because it was only then that the respondent became aware of the breach of the BIT.21 According to the tribunal, the respondent was unaware it had breached the BIT because it indirectly expropriated the claimant’s investment. As such, the tribunal concluded that interest should begin to accrue only when they became aware of the breach and its obligation to pay damages, some six months after the expropriation was deemed to occur.22 17 On a few occasions, tribunals have also used the date of the award or even multiple dates as the dies a quo. In ADC v. Hungary for example, the tribunal calculated the value of the investment as of the date of the award. The tribunal thus declined to award compensatory interest because the award of lost profits already took into account time value of money and thus, to issue a significant award of compensatory interest would amount to double recovery by the claimant. Siemens AG v. Argentina illustrates practice of using multiple dates for determining the dies a quo.23 There, the tribunal awarded interest from three different dates, reflecting the different damages for each claim for which compensation was due. The tribunal took this approach in an attempt to best reflect the policy of ensuring full reparation without overcompensating the claimant. The tribunal found that the expropriation occurred on 18 May 2001, and awarded interest on the expropriation damages from this date. By contrast, the tribunal awarded interest on the damages for the post-expropriation costs as of 1 January 2002, the date when it concluded that most of these costs had been incurred. If the tribunal had awarded interest for these claims from the date of expropriation, the award would have overcompensated the claimant. Moreover, the tribunal awarded interest on damages for delayed payments prior to the expropriation as of 1 January 2000 because they were incurred in 1999.24 Such an approach fur19 BG Group, Plc v. Argentina, UNCITRAL, Award, 24 December 2007, paras. 366, 454. 20 For a comparative analysis of domestic approaches to interest, see John Gotanda, ‘Awarding Interest in International Arbitration’ (1996) 90 AJIL 40–63, 42–51. 21 See CME Czech Republic BV (The Netherlands) v. Czech Republic, UNCITRAL, Final Award, 14 March 2003, 9 ICSID Rep. 121, paras. 630–635. 22 Ibid. 23 See Siemens AG v. Argentina, ICSID Case No. ARB/02/08, Award, 6 February 2007, paras. 397–398.

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ther demonstrates the flexibility of tribunals when awarding interest to achieve the other goals of full reparation to the claimant and preventing overcompensation. 2. The End of the Interest Period/Post-Award Interest

Whereas compensatory interest typically accrues from the time of injury until 18 the demand for payment, post-award interest is payment on the award, and accrues from the date of the award until payment is made in full. This accrual period can be long if separate suits are required to enforce the award, making postaward interest of great consequence in some cases. Similar to compensatory interest, the goals of post-award interest are to: (1) compensate the successful party for the loss of the use of money; (2) incentivise the unsuccessful party to avoid frivolous appeals; and (3) encourage prompt compliance with the award. Although most tribunals routinely award post-award interest, the mechanics of the awards may differ. Most tribunals use the compensatory interest rate awarded and extend the period to cover the time from the award until full payment is made.25 By contrast, some tribunals award post-award interest separately. If they choose to award post-award interest separately, a tribunal may award only postaward interest, allow for a grace period after the date of the award, or award post-award interest in addition to compensatory interest but at a different rate.26 Awards of post-award interest may present unique complications regarding 19 conflict of laws if enforcement is sought in national courts. In such cases, national law may provide for a default rate of interest. For example, in the United States, a federal statute provides for interest to accrue on judgements issued by federal courts at a rate equal to the weekly average of the 1-year constant maturity treasury yield.27 Thus, once the federal court enters a judgement enforcing the award, the pre-award interest is subsumed in the court judgement, thus replacing the arbitration award, and post-award interest begins to run on judgement from that date. While few United States cases brought to enforce international investment awards in an investor-State dispute have directly addressed this issue, a notable international arbitration between two private parties has

24 Ibid. 25 See for example Vivendi v. Argentina (n. 5); PSEG Global Inc., et al. v. Turkey, ICSID Case No. ARB/02/5, Award, 19 January 2007, paras. 349–351; Southern Pacific Properties v. Egypt (n. 17). 26 See Wintershall A.G. v. Qatar, Award, 1989, 28 ILM 798, 809 (awarding only post-award interest); American Manufacturing & Trading, Inc. v. Zaire, ICSID Case No. ARB/93/1, Award, 21 February 1997 (awarding post-award interest only if not paid within 60 days of notification of award); Occidental Exploration and Production Company v. Ecuador, LCIA Case No. UN3467, Award, 1 July 2004 (awarding 2.75 % compensatory interest and 4 % postaward interest). If a different rate is applied, the tribunal has the same discretion as choosing the rate for compensatory interest and may use the rate in accordance with the law governing the substance of the dispute, the rate in accordance with the procedural law, or a rate that the tribunal deems ‘reasonable.’ See discussion infra. 27 See 28 United States Code § 1961 (2000).

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dealt with this conflict by limiting the post-award interest to the statutory rate.28 There, a London arbitrator awarded over USD 2.5 million in damages to the plaintiff at varying rates of interest that ranged from 5.7 % to 6.5 % per annum, compounded at three-month intervals, and the plaintiff sought enforcement of the award in a United States District Court. The district court entered a judgement enforcing the award, but noted that the arbitrator’s award of interest would run only until the date of the entry of the judgement. The court ruled that, after that date, the plaintiff was ‘entitled to post-judgment interest on the entire sum at the federal rate in effect on the date of judgment until the judgment has been satisfied and discharged.’29 Therefore, statutory interest rates for post-judgement interest may constitute an important constraint on awards of post-award interest if enforcement in national courts is required. E. The Applicable Interest Rate

Unlike the authority to award interest and the period over which interest accrues, the rules concerning the selection of the rate of interest are less developed. As with other areas of interest calculation, if the parties have agreed upon a rate or the applicable BIT provides for a rate, such agreement or treaty provision will govern.30 Absent such agreement or provision, several different approaches have developed to determine the interest rate to apply. 21 The first method is to apply the rate set by national law of the host country.31 The tribunal used this approach in Eastern Sugar B.V. v. Czech Republic, where the tribunal relied on the statutory interest rate of the Czech Republic when determining the applicable interest rate.32 This approach may fail to fully compensate the claimant because the statutory rates may not change periodically to reflect current economic conditions, such as inflation and currency devaluation.33 22 The second approach is the borrowing rate approach. Under the borrowing rate approach, the interest rate is determined based on the hypothesis that a respondent, by withholding money owed to a claimant, may force a claimant to borrow funds to account for the delayed expected payment. This practice is in accord with general business practices, recognising the reality that businesses habitually use debt financing rather than investing in low-risk investments such as certificates of deposit.34 To apply this method, the tribunal could use the prime rate (the rate charged by banks to its most creditworthy customers); the 20

28 Marnavi S.p.A. v. Advanced Polymer Sciences, Inc., C.A. No. 1:08-cv-00388 (SLR), 2009 U.S. Dist. LEXIS 40908 (D. Del. May 13, 2009). 29 Ibid., n. 5–12. 30 Sylvania Technical Systems Inc. v. Iran, Award, 27 June 1985, 8 Iran–US CTR 298, 320. 31 For a detailed discussion of how interest rates are set by countries around the globe, see John Gotanda (n. 20) 42–50. 32 Eastern Sugar B.V. v. Czech Republic, SCC Case No. 088/2004, Partial Award, 27 March 2007, paras. 373–375. 33 See, e.g. NY CPLR § 5004 (2004) (providing since 1981 for interest to accrue at 9 percent). See also, Sergey Ripinsky and Kevin Williams (n. 8) 373; see John Y. Gotanda (n. 20) 59–61.

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actual borrowing rate of the claimant; the cost of capital of the claimant; or the average borrowing rate. In Sylvania Technical Systems v. Iran, Judge Holtzman advocated for use of the prime rate as the measure of interest based on the premise that while ‘most businesses habitually borrow, fewer regularly invest in certificates of deposit.’35 The borrowing rate approach has also found support in the Principles of European Contract law and UNIDROIT Principles on International Commercial Contracts, both of which prescribe the use of the average short term lending rate to prime borrowers as the appropriate measure of interest.36 One criticism of the borrowing rate approach is that claimants may not actually borrow funds, and when they do, many cannot obtain funds at rates as low as the prime rate based on their credit rating which can fluctuate during the applicable period.37 As a result, some tribunals have used the prime rate as the floor for determining the rate of interest, upon which it may adjust the rate based on the circumstances of the case. For example, in S.D. Meyers, Inc. v. Canada, the tribunal concluded the prime rate was the most reasonable reflection of the loss but awarded an additional 1 % above the prime rate to compensate for the fact that only the most creditworthy and solvent borrowers can actually borrow funds at the prime rate.38 The third approach taken by tribunals is to award a rate of interest that the 23 tribunal determines is ‘fair’, ‘reasonable’ or ‘appropriate.’ A number of arbitral tribunals have adopted this approach and have selected an interest rate determined to be fair. In McCollough & Company, Inc. v. The Ministry of Post, Telegraph and Telephone of Iran, the tribunal adopted such an approach by setting the interest rate at 10 %.39 Although many tribunals use this approach with little discussion of the calculation, McCollough shed some light on determining a fair rate by listing several factors to be considered. The factors included: ‘(i) any pertinent contractual stipulations (…); (ii) the rules and principles of the law applicable to the contract; (iii) the nature of the facts generating the damage; (iv) the nature or level of compensation awarded, particularly if it extends to the lost profit or includes a profit in the costs to be reimbursed; (v) the knowledge that the defaulting party could have had of the financial consequences of its default for the other party; (vi) the rates in effect on the markets concerned; (vii) rates of inflation (…).’40 More recently, tribunals have awarded reasonable rates without elaborating on the factors leading to their determination. For example, in Impregilo S.p.A. v. Argentina, the tribunal found the requested rate of 15 % to be 34 Irmgard Marboe, Calculation of Compensation and Damages in International Investment Law (Oxford University Press, 2009) 338. 35 Sylvania Technical Systems v. Iran (n. 30) 321. 36 See Art. 9:509(1) PECL; Art. 7.4.9(2) of the UNIDROIT Principles of International Commercial Contracts. 37 Sylvania Technical Systems v. Iran (n. 30) 321. 38 S.D. Myers, Inc. v. Canada, UNCITRAL (NAFTA), Second Partial Award (Damages), 21 October 2002, paras. 304–307. 39 McCollough v. The Ministry of Post (n. 2) 29–30. 40 Ibid.

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excessive and concluded that interest of 6 % would be sufficient to make the claimant whole with no further discussion of the rate.41 24 The final approach, and the one that has been increasingly used by tribunals and advocated by commentators, is the investment alternatives approach.42 The investment alternatives approach, developed in Sylvania Technical Systems v. Iran, attempts to determine an interest rate based on the amount a claimant ‘would have been in a position to have earned if it had been paid in time and had the funds available to invest in a form of commercial investment in common use in its own country.’43 In Vivendi v. Argentina, for example, the tribunal rejected the claimant’s request for interest at a rate of 9.7 % because it felt that 6 % was a better proxy for the amount that the claimants could have earned on the money it lost when its concession was expropriated.44 To calculate the rate used in the investment alternatives approach, tribunals tend to use a risk-free rate as the base rate for the calculation.45 Recently, tribunals have added additional risk premiums above the risk-free rate because often investors will invest in opportunities which are not risk-free but contain an acceptable level of risk to the investor.46 For example in Alpha Projektholding GmbH v. Ukraine, the tribunal valued the expropriated investment as of the expropriation date.47 To bring this amount forward to the date of the award, the tribunal added interest equal to the ‘risk-free rate plus the market risk premium. [footnote omitted]’ The rate was determined to be 9.11 % supporting the tribunal’s decision by referencing the calculation submitted by the claimant.48 25 In short, floating rates are preferable to fixed rates because the former better reflects prevailing market conditions and can better account for currency fluctuations. Fixed rates can easily over- or undercompensate claimants for their losses depending on the prevailing market conditions, and fail to take depreciation into account. F. Simple or Compound Interest 26

The final step in calculating an award of interest is to determine whether the award of interest accrues on a simple or compound basis. An award of com41 Impregilo S.p.A. v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, para. 384. 42 See e.g. Santa Elena v. Costa Rica (n. 1); Vivendi v. Argentina (n. 5); LG&E Energy Corp, LG&E Capital Corp, and LG&E International, Inc. v. Argentina, ICSID Case No. ARB/02/1, Award, 25 July 2007. 43 Sylvania Technical Systems v. Iran (n. 30) 320. 44 Vivendi v. Argentina (n. 5) para. 9.2.8. 45 See Siemens v. Argentina (n. 23); LG&E v. Argentina (n. 42); BG Group, Plc v. Argentina (n. 19). 46 Gemplus S.A. and Talsud S.A. v. Mexico, ICSID Case Nos. ARB(AF)/04/3 and ARB(AF)/ 04/4, Award, 16 June 2010, paras. 16–24 (using BIT expropriation provision as basis for adding risk premium). 47 Alpha Projektholding GmbH v. Ukraine, ISCID Case No. ARB/07/16, Award, 8 November 2010, para. 513. 48 Ibid.

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pound interest means that the interest accruing in a certain period is added to the principal amount creating a new base amount on which interest is calculated for the next period.49 Thus, compounding has been known as awarding interest on interest. The shorter the compounding period, the faster the principal amount will grow, although the incremental benefits of shortening the period decline as the period shortens.50 By contrast, simple interest calculates the interest award by using the principal amount as the base rate throughout the period of time over which the interest amount is calculated.51 In other words, the interest owed for a certain period does not merge with the principal and become part of the base upon which future interest is calculated. Traditionally, arbitral tribunals restricted interest awards to only simple inter- 27 est. In fact, one tribunal noted, ‘[t]here are few rules within the scope of the subject of damages in international law that are better settled than the one that compound interest is not allowable.’52 However, beginning in 2000, tribunals began to take a more flexible approach to compounding, and today a number of tribunals are awarding compound interest.53 One tribunal explained the need to award compound interest in order to reflect the realities of modern financial instruments and to comply with the goal of awarding full compensation to the claimant.54 In Compañía del Desarrollo de Santa Elena SA v. Costa Rica, the tribunal, 28 after determining that the respondent had expropriated the claimant’s investment and that interest should run from the date of expropriation, turned to the issue of whether interest should be awarded on a simple or compound basis. The tribunal noted that although simple interest had been the predominant practice, compound interest was not excluded as a possible award.55 While reviewing past international jurisprudence and academic writings, the tribunal concluded that there was no uniform rule of law as to whether to award simple or compound interest, and thus, it was left to the discretion of the tribunal upon a review of the facts and circumstances.56 As applied to the case at hand, the tribunal noted that where a claimant lost the value of its investment without payment, the award should reflect what the investor would have earned if prompt payment was made and invested by the claimant at a prevailing interest rate.57 Therefore, the tri49 Compound interest can be summarised by the formula FA = PA [1+ (r/n)]^(nt) where FA = future amount; PA = principal amount; r = rate of interest; t = number of years and n = the number of compounding periods per year. Sergey Ripinsky and Kevin Williams (n. 8) 380. 50 Mark Kantor, Valuation for Arbitration (Kluwer Law International, 2008). 51 Simple interest can be summarised by the formula FA = PA (1 + rt) where FA = future amount; PA = principal amount; r = rate of interest; and t = number of years. Sergey Ripinsky and Kevin Williams (n. 8) 380. 52 R.J. Reynolds Tobacco Co. v. Iran (n. 10) 191. 53 See Santa Elena v. Costa Rica (n. 1) para. 97. 54 Wena Hotels, Ltd v. Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, 919. 55 Santa Elena v. Costa Rica (n. 1) para. 97. 56 Ibid., para. 103. 57 Ibid., para. 104. This underlying reasoning was previously used in international tribunals to award compound interest on rare occasions. See Kuwait v. Aminoil (n. 1).

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bunal awarded compound interest, not as a punitive measure but rather to fully compensate the claimant based on what could have been earned under the realities of the modern financial markets.58 29 Since then, many investment arbitration tribunals have followed suit and awarded compound interest.59 In fact, the presumption of simple interest has become so eroded that compound interest has come to be treated as the default position for international investment tribunals.60 30 The movement toward compound interest, however, has raised another issue – what is the appropriate compounding period? No uniform standards or rules exist to guide tribunals to a determination of the applicable compounding period.61 Several factors may aid a tribunal in determining the compounding period, such as: tying the compounding frequency to the frequency of the underlying investment opportunity forgone; avoiding a windfall for the claimant; and the need to ensure full reparation. A number of commentators have suggested that an annual compounding period would offer a readily available, conservative approach based on financial realities. Recent tribunal decisions seem to agree by awarding compound interest using primarily an annual or semi-annual compounding period.62

58 Santa Elena v. Costa Rica (n. 1) para. 105. 59 See PSEG v. Turkey (n. 25); Siemens v. Argentina (n. 23); Vivendi v. Argentina (n. 5); Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008; Cargill, Incorporated v. Mexico, ICSID Case No. ARB(AF)/05/2 (NAFTA), Award, 18 September 2009; Gemplus v. Mexico (n. 46); Joseph Charles Lemire v. Ukraine (n. 6); Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/ 07/6, Award, 7 July 2011. 60 See Vivendi v. Argentina (n. 5) para. 9.2.4 (noting ‘the award of compound interest is no longer the exception to the rule’). See also, Sergey Ripinsky and Kevin Williams (n. 8) 387; John Gotanda, ‘Compounding Interest in Interest: The Global Economy, Deflation, and Interest’ in Arthur Rovine (ed), Contemporary Issues in International Arbitration and Mediation, The Fordham Papers 2009 (Martinus Nijhoff, 2010) 261, 283. 61 Mark Kantor (n. 50) 275. See also, Thierry Sénéchal, ‘Present Day Valuation in International Arbitration: A Conceptual Framework for Awarding Interest’ in Filip De Ly and Laurent Lévy (eds), Dossiers V: Interest, Auxiliary and Alternative Remedies in International Arbitration (International Chamber of Commerce, 2008) (noting that no ICC standards guide the determination of the compounding period). 62 For cases in support of this proposition see, PSEG v. Turkey (n. 25); Siemens v. Argentina (n. 23); Vivendi v. Argentina (n. 5); Rumeli Telekom A.S. and Telsim Mobil Telekomikasyon Hizmetleri A.S. v. Kazakhstan (n. 59); Cargill, Incorporated v. Mexico (n. 59); Gemplus v. Mexico (n. 46); Joseph Charles Lemire v. Ukraine (n. 6); Tza Yap Shum v. Republic of Peru (n. 59). However, a few tribunal decisions have still rebuffed the use of compound interest, choosing to award only simple interest. See Eastern Sugar B.V. v. Czech Republic (n. 32) (decided based on national law); Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. Mexico, ICSID Case No. ARB (AF)/04/5 (NAFTA), Award, 21 November 2007 (decided using expropriation clause of BIT); Duke Energy Electroquil Partners & Electroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award, 18 August 2008 (decided based on national law); Saipem S.p.A. v. Bangladesh, ICSID Case No. ARB/05/07, Award, 30 June 2009 (decided using the expropriation clause of the BIT); RosInvestCo UK Ltd. v. Russia (n. 7) (decided using the expropriation clause of the BIT).

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G. Concluding Remarks

The awarding of interest by tribunals deciding international investment deci- 31 sions has undergone significant change in recent years. In the past, tribunals had a tendency to award only simple interest at rates fixed by domestic law. However, recent cases have shown that tribunals are more willing to award interest at base rates reflecting prevailing market conditions. Also, tribunals are routinely awarding compound interest with more frequent compounding periods than in the past. These developments reflect a greater understanding of law, economics, and finance, and how those disciplines affect the goal of providing an injured party with appropriate monetary relief.

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Chapter 10: Obligations of Investors Karsten Nowrot I. Introduction: Of Old ‘Private’ and New ‘Public’ Investors’ Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Towards a Merger of Investors’ Rights and Responsibilities: Underlying Reasons for the Current Policy Shift in Investment Law . . . . . . . . . . . . III. Obligations of Investors: Relevant Sources of Investment Law . . . . . . . . .

5 10

A. International Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Direct Obligations of Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Indirect Obligations of Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Obligations to tolerate Regulatory Measures. . . . . . . . . . . . . . . . . . . . .

10 11 18 22

B. Obligations Arising from other Sources of Investment Law. . . . . . . . .

25

1

IV. Implications for the Realm of International Investment Dispute Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V. Normative Expectations under Soft Law and other International Steering Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

34

A. OECD Guidelines for Multinational Enterprises . . . . . . . . . . . . . . . . . . . . .

38

B. ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41

C. United Nations Global Compact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43

30

D. United Nations Guiding Principles on Business and Human Rights

45

VI. Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47

Literature: Andrew Clapham, Human Rights Obligations of Non-State Actors (Oxford University Press, 2006); Jarrod Hepburn and Vuyelwa Kuuya, ‘Corporate Social Responsibility and Investment Treaties’ in Marie-Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (Kluwer, 2011) 589– 609; Beatriz Huarte Melgar, Karsten Nowrot and Wang Yuan, The 2011 Update of the OECD Guidelines for Multinational Enterprises: Balanced Outcome or an Opportunity Missed? (TELC, 2011); Peter Muchlinski, ‘Corporate Social Responsibility’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), International Investment Law (Oxford University Press, 2008), 637–687; Peter Muchlinski, ‘Regulating Multinationals: Foreign Investment, Development, and the Balance of Corporate and Home Country Rights and Responsibilities in a Globalizing World’ in José E. Alvarez and Karl P. Sauvant (eds), The Evolving International Investment Regime (Oxford University Press, 2011) 30–59; UNCTAD, World Investment Report 2011 (United Nations, 2011) Chapter III.

I. Introduction: Of Old ‘Private’ and New ‘Public’ Investors’ Obligations 1

‘Obligations of investors’ do until now in general not feature prominently as a topic in treatises on international investment law. This frequently displayed disregard has in the past surely not been the result of a common and deplorable wilful neglect of an important issue. Rather, it merely reflected one of the central characteristics of this area of law. As already indicated by the fact that most of the currently more than 2.900 BITs are titled ‘Treaty Concerning the Promotion

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and Protection of Investments’ or in line with some variations thereof, international investment law is traditionally – and also today – primarily concerned with the protection of foreign investors and their investments.1 In furtherance of these goals, most investment treaties so far confine themselves to stipulating reciprocal obligations of the contracting State parties and do not impose any direct legal responsibilities on investors under international law. In light of these findings, it is not infrequently perceived that the question of 2 investors’ obligations is of a rather recent nature. This appears to be only partly true. The issue of investors’ responsibilities is in principle far from being new. With regard to their business conduct, also foreign investors have always voluntarily or involuntarily been entangled in a web of legal obligations, e.g. towards their private contractors, their shareholders, investment insurers and most certainly their host countries on the basis of the respective domestic law and investor-State contracts. In order to more clearly identify the indeed rather novel aspects of this subject and thus to explicate as well as conceptualise the ideas behind the catch phrase ‘obligations of investors’ as currently increasingly referred to in the discourses on investment law, it is useful to distinguish between the just mentioned conventional ‘private’ legal obligations entered into or incumbent upon foreign investors on the one side and their new potential ‘public’ responsibilities on the other side.2 Far from merely referring to their duties under the public law of the host State, the normative ordering idea of ‘public’ obligations of investors adopts a considerably broader perspective by emphasising their responsibilities towards the societies in which they operate. The common underlying motives and reasonings of this otherwise quite multi-faceted concept can be summarily characterised as an emerging understanding that, first, foreign investors are – as a kind of quid pro quo for the legal protection they enjoy under investment agreements3 – expected and required to contribute in the course of their business activities to the promotion and realisation of other public interest concerns like the protection of human rights, core labour and social standards as well as the environment based on internationally recognised standards, and that, second, these expectations and obligations should be somehow addressed in international investment treaties as well as other sources of investment law themselves. Admittedly, also the perception inherent in this concept that private investors 3 and other business actors are – beyond their motive to make profit – expected to

1 See, e.g., Jeswald W. Salacuse, The Three Laws of International Investment (Oxford University Press, 2013) 355 et seq.; Jeswald W. Salacuse, The Law of Investment Treaties (Oxford University Press, 2010) 109 et seq. 2 Generally on a respective distinction between private and public obligations with regard to corporations, see already, e.g., David S. Ruder, ‘Public Obligations of Private Corporations’ (1965) 114 U. Pa. L. Rev. 209–229. 3 UNCTAD, Social Responsibility, UNCTAD/ITE/IIT/22 (2001) 5; Peter Muchlinski, ‘Corporate Social Responsibility’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), International Investment Law (Oxford University Press, 2008) 637, 643.

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serve the public interest is not entirely new. At the domestic level, the origins of the underlying idea of corporate social responsibility itself date back already some centuries ago.4 Concerning its implications in the field of international investment relations, as early as in the 1770s no lesser person than Edmund Burke remarked on the activities of a distant predecessor to today’s transnational corporations, the East India Company,5 that ‘the prosperity of the natives must be previously secured, before any profit from them whatsoever is attempted.’6 Within the international regime governing foreign investments itself, however, these concerns have been conventionally for the most part addressed in separate fora and on the basis of distinct steering approaches that remained outside of the realm of modern international investment law in the narrower sense of the meaning.7 Whereas from the end of the 1950s onwards, the protection of foreign investors was and is explicitly enshrined in investment agreements in the form of legally binding obligations of the contracting State parties, the requirements of these private actors to contribute to the promotion of community interests had been, beginning in the 1970s, until recently more or less exclusively listed in soft law or other non-binding instruments like codes of conduct.8 It is indeed only in the course of the previous decade that the issue of investors’ public obligations and the feasibility as well as necessity to incorporate these concerns in the respective investment agreements have emerged on the international level as a major topic in the discourses on and practice of investment law. With the linkages between investment protection and investors’ responsibilities being now increasingly emphasised and thus the idea of a merger of respective rights and duties in investment treaties gaining ground, a valid argument could currently be made that any new textbook on international investment law that does not also cover these questions would ‘display an anachronistic perception of the subject as one born out of historical circumstances that are no longer the principal features of the globalizing economy and society that we are now experiencing.’9 4 See, e.g., ISO Advisory Group on Social Responsibility, Working Report on Social Responsibility, 30 April 2004, para. 1. 5 Generally on the chartered trading corporations as predecessors of modern transnational enterprises, see, e.g., Ann M. Carlos and Stephen Nicholas, ‘“Giants of an Earlier Capitalism”: The Chartered Trading Companies as Modern Multinationals’ (1988) 62 BHR 398–419. 6 Cited after: Thomas R. Metcalf, Ideologies of the Raj (Cambridge University Press, 1994) 19. 7 On this observation see already Jeswald W. Salacuse, ‘Towards a New Treaty Framework for Direct Foreign Investments’ (1985) 50 J. Air L. & Com. 969, 1008; as well as more recently, e.g., Peter Muchlinski, ‘Multinational Enterprises as Actors in International Law: Creating “Soft Law” Obligations and “Hard Law” Rights’ in Math Noortman and Cedric Ryngaert (eds), Non-State Actor Dynamics in International Law (Ashgate, 2010) 9, 28 et seq. 8 On these soft law instruments see infra, mn. 34 et seq. 9 Peter Muchlinski (n. 3) 638; see in this connection also, e.g., UNCTAD, World Investment Report 2011 (United Nations, 2011), 111 (‘important investment policy development in recent years’); UNCTAD, Investment and Enterprise Responsibility Review (United Nations, 2011); Clara Reiner and Christoph Schreuer, ‘Human Rights and International Investment Arbitration’ in Pierre-Marie Dupuy, Francesco Francioni and Ernst-Ulrich Petersmann (eds), Human Rights in International Investment Law and Arbitration (Oxford University Press, 2009) 82, 87 (‘the debate is ongoing and the conclusions reached will presumably evolve’); Jennifer A. Zerk,

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II. Towards a Merger of Investors' Rights and Responsibilities

Against this background, this chapter intends to evaluate the current state and 4 future potential of these public obligations of investors as a normative ordering idea in the realm of international investment law. It begins with an identification of the primary reasons for the current policy shift on the issue of investors’ obligations (II.). Subsequently, the legal sources of investors’ responsibilities will be discussed, thereby focussing primarily on existing as well as potential obligations under investment agreements (III.). Thirdly, the approaches to this issue in as well as its implications for the realm of international investment dispute settlement are addressed (IV.), followed by an overview of normative expectations concerning the conduct of investors on the basis of soft law and other non-binding steering mechanisms (V.). The chapter will conclude by providing an outlook on the future development of investors’ obligations and the chances as well as challenges arising from this issue for the evolution of international investment law (VI.). II. Towards a Merger of Investors’ Rights and Responsibilities: Underlying Reasons for the Current Policy Shift in Investment Law

The underlying reasons for the increasing emphasis on investors’ obligations 5 are most certainly manifold. In an attempt to systemise this plurality of factors from the perspective of investment law, one might initially draw a distinction between – mutually reinforcing – ‘external’ causes on the one side and ‘internal’ developments on the other side. Prominently among the external factors whose implications reach well be- 6 yond the rather specific realm of international investment relations are the growing importance of and attention currently devoted to the activities of non-State actors in the international system as well as the corresponding intensified discussion on whether and how to integrate them into the global legal order as addressees of rights, but especially also of responsibilities concerning the promotion of community interests.10 In the present context, it is particularly noteworthy that among the different categories of non-State actors concerned, transnational corporations – the dominant type of foreign investors11 – are literally at the centre of these discourses. In order to illustrate this perception, one only needs to draw attention to the ever-growing literature on respective international Multinationals and Corporate Social Responsibility (Cambridge University Press, 2006) 280 (‘the tone of the discussion has changed’). 10 See generally, for example, Andrew Clapham, Human Rights Obligations of Non-State Actors (Oxford University Press, 2006); Jean d’Aspremont (ed), Participants in the International Legal System: Multiple Perspectives on Non-State Actors in International Law (Routledge, 2011); Philip Alston (ed), Non-State Actors and Human Rights (Oxford University Press, 2005). 11 Christian Tietje, ‘The Law Governing the Settlement of International Investment Disputes – Structures and some Recent Developments’ in Christian Tietje (ed), International Investment Protection and Arbitration (Berliner Wissenschafts-Verlag, 2008) 17, 32; Andreas Kulick, Global Public Interest in International Investment Law (Cambridge University Press, 2012) 57.

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obligations of transnational corporations12 as well as numerous related initiatives such as – at the global level – the recently concluded work of the Special Representative of the UN Secretary-General on the Issue of Human Rights and Transnational Corporations and other Business Enterprises, John G. Ruggie13 or – on a regional basis – the EU Strategy 2011–14 for Corporate Social Responsibility presented by the European Commission in October 2011.14 Furthermore, the 1990s bore witness to numerous civil lawsuits in the domestic courts of many States against corporations based on alleged human rights violations committed by them while operating abroad or by their foreign subsidiaries, the best known and most controversially discussed example being the respective claims brought in the United States under the Alien Tort Claims Act.15 7 These broader discourses and developments undoubtedly also exercise a considerable influence on the current policy shift in investment law. Indeed, even within the general discussions it is precisely the comparatively strong protection enjoyed by non-State economic actors under international investment law that is frequently referred to as indicating the need to also highlight the responsibilities of and stipulate respective obligations for investors. To mention but one example, the following excerpt taken from Ruggie’s 2008 Report vividly illustrates this proposition: Take the case of transnational corporations. Their legal rights have been expanded significantly over the past generation. This has encouraged investment and trade flows, but it has also created instances of imbalances between firms and States that may be detrimental to human rights. The more than 2,500 bilateral investment treaties currently in effect are a case in point. While providing legitimate protection to foreign investors, these treaties also permit those investors to take host States to binding international arbitration, including for alleged damages resulting from implementation of legislation to improve domestic social and environmental standards (…) At the same time, the legal framework regulating transnational corporations operates much as it did long before the recent wave of globalization.16

12 From the numerous contributions see, e.g., Alice de Jonge, Transnational Corporations and International Law (Edward Elgar, 2011); Surya Deva, Regulating Corporate Human Rights Violations (Routledge, 2012); Adam McBeth, International Economic Actors and Human Rights (Routledge, 2010) 243 et seq.; Karsten Nowrot, ‘Reconceptualising International Legal Personality of Influential Non-State Actors: Towards a Rebuttable Presumption of Normative Responsibilities’ in Fleur Johns (ed), International Legal Personality (Ashgate, 2010) 369– 392; Elisa Morgera, Corporate Accountability in International Environmental Law (Oxford University Press, 2009). 13 For the latest report see Human Rights Council, Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework, UN Doc. A/HRC/17/31, 21 March 2011. 14 Communication from the European Commission, A Renewed EU Strategy 2011–14 for Corporate Social Responsibility, COM(2011) 681 final, 25 October 2011. 15 See on this, e.g., Jeffrey Davis, Justice Across Borders – The Struggle for Human Rights in U.S. Courts (Cambridge University Press, 2008); Sarah Joseph, Corporations and Transnational Human Rights Litigation (Hart, 2004). 16 Human Rights Council, Protect, Respect and Remedy: A Framework for Business and Human Rights, UN Doc. A/HRC/8/5 7 April 2008, paras. 12–13; see in this connection also, e.g., Human Rights Council, Business and Human Rights: Further Steps towards the Operationalization of the ‘Protect, Respect and Remedy’ Framework, UN Doc. A/HRC/14/27, 9 April 2010, para. 20 et seq.; Human Rights Council, Business and Human Rights: Towards Operationaliz-

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A second, albeit closely related, external factor worth mentioning is the in- 8 creasingly important role played by civil society groups on the international scene. While previously largely absent from the evolution of the normative structure on foreign investments, NGOs are more recently also actively involved in and concerned with the rule-making and enforcement processes in this area of law, with calls as well as suggestions for an international regulation of foreign investors being quite high on their agenda.17 A telling example is the ‘Model International Agreement on Investment for Sustainable Development’, published by the International Institute for Sustainable Development (IISD) in April 2005 that provides, inter alia, for a quite extensive list of investors’ obligations.18 Aside from these external causes and influences, however, surely also internal 9 aspects and thus structural developments within the realm of international investment law itself have to be taken into account when assessing the reasons for the growing emphasis on obligations of investors. In particular since the beginning of the 1990s, international investment law has for a variety of reasons emerged as one of the most dynamic and practically important fields of international law in general and international economic law in particular. As already frequently pointed out, the expanding scope of application as well as the notably increased effectiveness of this regime have considerable repercussions on the legal relationship between the host State and the foreign investor. Whereas on the one side the foreign investors have – particularly on the basis of access to effective international legal remedies – experienced in recent years a remarkable strengthening of their legal status,19 the issue arose on the other side as to the respective implications for the regulatory autonomy enjoyed by the host States. It is by now increasingly recognised among governments of industrialised and developing countries, practitioners and scholars alike, that at the level of designing investment agreements as well as in the realm of investor-State arbitration proceedings, the central challenge lawmakers and arbitrators are as of today ever more faced with is to provide for an appropriate and thus acceptable balance be-

ing the ‘Protect, Respect and Remedy’ Framework, UN Doc. A/HRC/11/13, 22 April 2009, para. 30 et seq.; Human Rights Council, Business and Human Rights: Mapping International Standards of Responsibility and Accountability for Corporate Acts, UN Doc. A/HRC/4/35, 19 February 2007, para. 2 et seq.; Ole Christian Fauchald and Jo Stigen, ‘Corporate Responsibility before International Institutions’ (2009) 40 Geo. Wash. Int’l L. Rev. 1025, 1053 et seq. 17 On the importance of NGOs as a contributing factor to the current policy shift in investment law see, e.g., Peter Muchlinski, ‘Regulating Multinationals: Foreign Investment, Development, and the Balance of Corporate and Home Country Rights and Responsibilities in a Globalizing World’ in José E. Alvarez and Karl P. Sauvant (eds), The Evolving International Investment Regime (Oxford University Press, 2011) 30, 33 et seq. 18 The text of the IISD Model Agreement is available on the internet at http://www.iisd.org/pdf/ 2005/investment_model_int_agreement.pdf; see also, e.g., Mahnaz Malik, ‘The IISD Model International Agreement on Investment for Sustainable Development’ in Marie-Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (Kluwer, 2011) 565–584. 19 See also Yun-I Kim, ‘Investment Law and the Individual’, ch. 13.I., 1587–1603 and Rainer Hofmann, ‘The Protection of Individuals under Public International Law’, ch. 2.III., 46–63.

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tween the legally protected economic interests of foreign investors and the domestic steering capacity or ‘policy space’ of host States to allow them to pursue the promotion and protection of other public interest concerns.20 As a consequence of these developments and in order to avoid a serious ‘backlash’ against the international investment regime as a whole,21 a broader discussion on possible ‘counterweights’ to investors’ rights is gaining momentum in recent years with the option of stipulating obligations of foreign investors in investment agreements being among the approaches seriously and prominently considered in this regard.22 III. Obligations of Investors: Relevant Sources of Investment Law A. International Investment Agreements 10

The current normative structure of international investment relations is clearly dominated by treaty law. The at present already more than 2,850 BITs together with roughly 340 other international agreements that provide for investment provisions23 constitute the public international law ‘backbone’ of this legal regime. Against this background, it is hardly surprising that this source of investment law also occupies a prominent position in the current discourses on and practical approaches to the issue of investors’ obligations. In order to conceptualise the respective proposals and their implementation in investment treaty practice from a systematic perspective, it is helpful to distinguish between three different types of legal obligations of investors, namely direct obligations of conduct, indirect obligations of conduct as well as what might be characterised as obligations to tolerate. 20 Generally on these developments UNCTAD, World Investment Report 2014 (United Nations, 2014) 116 et seq.; UNCTAD, World Investment Report 2013 (United Nations, 2013) 102 et seq.; UNCTAD, Investment Policy Framework for Sustainable Development (United Nations, 2012); UNCTAD, World Investment Report 2010 (United Nations, 2011) 86 et seq.; José E. Alvarez, ‘The Public International Law Regime Governing International Investment’ (2009) 344 RC 193, 308 et seq., 434 et seq.; Karsten Nowrot, International Investment Law and the Republic of Ecuador: From Arbitral Bilateralism to Judicial Regionalism (TELC, 2010) 9 et seq.; Suzanne A. Spears, ‘The Quest for Policy Space in a New Generation of International Investment Agreements’ (2010) 13 J. Int’l Econ. L. 1037–1075. 21 On this perception see, e.g., Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung and Claire Balchin (eds), The Backlash against Investment Arbitration (Kluwer, 2010); Asha Kaushal, ‘Revisiting History: How the Past Matters for the Present Backlash Against the Foreign Investment Regime’ (2009) 50 Harv. Int’l L. J. 491–534; Karsten Nowrot, ‘Transnational Corporations as Steering Subjects in International Economic Law: Two Competing Visions of the Future?’ (2011) 18 Ind. J. Global Legal Stud. 803, 830 et seq. 22 UNCTAD, Development Implications of International Investment Agreements, IIA Monitor No. 2 (2007) 6 et seq.; see also, e.g., Commission on Human Rights, Human Rights, Trade and Investment, Report by the High Commissioner for Human Rights, UN Doc. E/CN.4/Sub. 2/2003/9, 2 July 2003, paras. 37 et seq.; WTO, Communication from China, Cuba, India, Kenya, Pakistan and Zimbabwe, WTO Doc. WT/WGTI/W/152, 19 November 2002; Peter Muchlinski (n. 17) 39 et seq.; Glen Kelley, ‘Multilateral Investment Treaties: A Balanced Approach to Multinational Corporations’ (2001) 39 Colum. J. Transnat’l L. 483, 521 et seq. 23 UNCTAD, World Investment Report 2013 (United Nations, 2013) 101.

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1. Direct Obligations of Conduct

The first category in this regard concerns legal obligations of investors as ex- 11 plicitly stipulated and directly addressed to them in BITs and other investment agreements. Although at first sight probably the most expected and natural approach in light of common regulatory techniques, this normative steering method has de lege lata until now not gained anything even close to widespread recognition in investment treaty practice. This observation does not imply that the inclusion of investors’ obligations in investment agreements is without precedent. Early examples can be found in a number of regional treaties concluded by developing countries since the 1980s. The Community Investment Code of the Economic Community of the Great Lakes Countries, signed on 31 January 1982, stipulates in its Article 19 that any authorised investor benefiting from the economic, financial and tax advantages under the regime established by this agreement shall agree to and is thus required to, inter alia, ‘respect and ensure staff rights’, ‘establish and keep to a programme for training local manpower and promoting the advancement of managerial staff who are nationals of the member countries of the Community’ as well as ‘see to the protection of the environment’.24 In addition, the Articles 17 and 19 of the Charter on a Regime of Multinational Industrial Enterprises in the Preferential Trade Area for Eastern and Southern African States of 21 November 1990 list a number of obligations incumbent upon multinational enterprises and their subsidiaries. Among them are the duties to ‘produce goods of acceptable quality at competitive prices’, to supply information concerning the ownership of the shares, to ‘refrain from entering into restrictive business practices’ and to contribute to a ‘Special Development Tax’.25 More recently, the Investment Agreement for the Common Market for East- 12 ern and Southern Africa (COMESA) Common Investment Area, adopted on 22/23 May 2007, states in its second part – tellingly titled ‘rights and obligations’ – the objectives of the agreement ‘to provide COMESA investors with certain rights in the conduct of their business within an overall balance of rights and obligations between investors and Member States’ (Article 11). In this regard, the treaty stipulates in its Article 13 initially merely the largely undisputed obligation of foreign investors to ‘comply with all applicable domestic measures of the Member State in which their investment is made’, a provision which for example is also included in Article 10 of Annex 1 of the Southern African Development Community (SADC) Protocol on Finance and Investment as approved by the SADC Summit in Lesotho on 18 August 2006.26 More noticeable and specific, however, Article 16 of the 2007 COMESA Investment Agreement 24 Community Investment Code of the Economic Community of the Great Lakes Countries, 31 January 1982, reprinted in UNCTAD, International Investment Instruments: A Compendium, Vol. II (United Nations, 1996) 251 et seq. 25 Charter on a Regime of Multinational Industrial Enterprises in the Preferential Trade Area for Eastern and Southern African States, 21 November 1990, reprinted in ibid., at 427 et seq.

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also proscribes in connection with the issue of movement of labour that, while investors have in principle the right ‘to hire technically qualified persons from any country’, they are required to ‘accord a priority to workers who possess the same qualifications and are available in the Member State or any other Member State’ of COMESA.27 In addition, a number of countries like for example Ghana and Botswana have included respective provisions on investors’ obligations in their model BITs.28 13 From a broader perspective, already these few examples further support the for valid reasons overwhelmingly shared perception that modern public international law does no longer recognise any kind of numerus clausus of international legal subjects, but constitutes also in this regard an increasingly encompassing, open and thus inclusive system.29 Consequently, there are in general also no systematic objections to an incorporation of private entities like foreign investors in the international legal order as addressees of obligations enshrined in investment treaties. In other words, stipulating direct legal obligations of conduct for this category of non-State actors in respective international agreements is, from the point of view of general public international law, undoubtedly a possible and admissible option when discussing potential regulatory techniques aimed at ensuring an appropriate balance in the realm of investment treaty practice between the legal protection granted to foreign investors on the one side and their responsibilities towards the societies in which they operate on the other side. And indeed, it is also precisely this first type of investors’ obligations that has in particular in recent years attracted considerable attention and support in the literature. Among the wide range of legal responsibilities proposed and discussed in this regard are substantive and procedural obligations aimed at the protection of human rights, core labour and social standards as well as the environment, but also duties ensuring fair competition, providing for non-financial reporting, preventing corruption and even obligations of a more active character like requirements to contribute to the host States’ economic development.30 26 Southern African Development Community (SADC) Protocol on Finance and Investment as approved by the SADC Summit in Lesotho, 18 August 2006, available at http://www.sadc.int/ investment/database/key-documents. 27 Investment Agreement for the COMESA Common Investment Area, 22/23 May 2007, available at http://vi.unctad.org/files/wksp/iiawksp08/docs/wednesday/Exercise%20Materials/invagreec omesa.pdf. 28 See on this UNCTAD, World Investment Report 2011 (United Nations, 2011) 120; Wolfgang Alschner and Elisabeth Tuerk, ‘The Role of International Investment Agreements in Fostering Sustainable Development’ in Freya Baetens (ed), Investment Law within International Law (Cambridge University Press, 2013) 217, 228. 29 See, e.g., Christian Tietje (n. 11) 32; Karsten Nowrot, ‘Legal Consequences of Globalization: The Status of Non-Governmental Organizations under International Law’ (1999) 6 Ind. J. Global Legal Stud. 579, 621. 30 See on this for example Omar E. García-Bolívar, ‘Sovereignty vs. Investment Protection: Back to Calvo?’ (2009) 24 ICSID Review–FILJ 464, 483 et seq.; Jeswald Salacuse (n. 1) 108; Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2010) 145 et seq.; Graham Mayeda, ‘Sustainable International Investment Agreements: Challenges and Solutions for Developing Countries’ in Marie-Claire Cordonier

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In the realm of civil society and its increasing occupation with the issues of 14 investors’ obligation, it is in particular the alternative approach adopted by the already mentioned IISD Model International Agreement on Investment for Sustainable Development that has received quite positive responses.31 This applies first and foremost also to its comprehensive stipulation of direct obligations of conduct for foreign investors in Part Three of the Model Agreement. The respective legal responsibilities include, inter alia, compliance with the laws and regulations of the host State (Article 11), conducting in the pre-establishment phase a social and environmental impact assessment (Article 12), refraining from corruption (Article 13), promotion of human rights and core labour standards (Article 14) as well as disclosure of information (Article 15).32 Despite these proposals and the by now in principle almost generally recog- 15 nised need to introduce at least some changes to the traditional normative framework on international investments in order to retain or provide for an adequate counterbalance to the legal protection enjoyed by foreign investors, the incontrovertible fact remains that most countries are still more than reluctant to stipulate respective direct obligations of investors in international agreements. This overall rather reserved attitude does not merely reflect a lack of political will, scepticism towards respective innovations and probably a so far quite successful resistance from the side of the business community. Rather, it can also be attributed to certain substantive and procedural challenges connected with the implementation of such a regulatory approach in treaty practice. From a substantive law perspective the complex issues arise which standards 16 on precisely what concerns should be included in international investment treaties as binding obligations of investors as well as how detailed the respective provisions need to be phrased in order to provide for a workable guidance for

Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (Kluwer, 2011) 539, 544 et seq.; Peter Muchlinski (n. 17) 39 et seq.; Megan Wells Sheffer, ‘Bilateral Investment Treaties: A Friend or Foe to Human Rights?’ (2011) 39 Denv. J. Int’l L. & Pol’y 483, 507 et seq.; Joseph E. Stiglitz, ‘Regulating Multinational Corporations: Towards Principles of Cross-Border Legal Frameworks in a Globalized World Balancing Rights and Responsibilities’ (2008) 23 Am. U. Int’l L. Rev. 451–558; Luke E. Peterson, Human Rights and Bilateral Investment Treaties (Rights & Democracy, 2009) 14 et seq.; Howard Mann, International Investment Agreements, Business and Human Rights: Key Issues and Opportunities (IISD, 2008) 13 et seq.; Vicente Yu and Fiona Marshal, Investors’ Obligations and Host State Policy Space (IISD, 2008) 4 et seq.; Todd Weiler, ‘Balancing Human Rights and Investor Protection: A New Approach for a Different Legal Order’ (2004) 27 B.C. Int’l & Comp. L. Rev. 429, 437 et seq.; see also, e.g., Commission on Human Rights (n. 22) paras. 37 et seq.; UNCTAD (n. 22) 6 et seq. 31 Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration (Oxford University Press, 2007) 22 (‘innovative and constructive’); Peter Muchlinski (n. 17) 59 (‘the IISD Model Agreement offers a useful, though by no means uncontroversial, step forward’); Marc Jacob, International Investment Agreements and Human Rights (INEF, 2010) 40 (‘considerable achievement’); for further responses see, e.g., Mahnaz Malik (n. 18) 577 et seq. On the IISD Model Agreement see also already supra, mn. 8. 32 For further details see also Mahnaz Malik (n. 18) 570 et seq.; Peter Muchlinski (n. 17) 48 et seq.

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these actors’ conduct. In addition, the relationships between these stipulations in investment agreements and, first, the domestic law standards of the host States as well as, second, other more specific international legal regimes on, for example, the protection of human rights and the environment as well as the promotion of core labour and social standards would need to be addressed.33 A mere incorporation by reference of existing international agreements on respective issues – an approach well-known from other areas of international economic law as, inter alia, evidenced by Article 2 of the TRIPS Agreement in the realm of the WTO – would ultimately amount to an unreflected application to private persons and entities of obligations originally addressed to States only and thus might not adequately take into account the distinctive challenges and need for modifications resulting from such a regulatory technique in light of the different spheres of responsibility of and means available to governmental and non-State actors respectively. As rightly emphasised in the literature, providing feasible and acceptable answers to all these substantive questions in practice has most certainly the potential to considerably complicate and prolong the negotiating and drafting processes on new bilateral or regional – not to mention multilateral – investment agreements.34 17 However, the idea of including direct obligations of conduct for foreign investors in international treaties does not only give rise to substantive law issues. Equally important is the procedural question how respective obligations should be enforced. Traditional investment treaty regimes proceed on the conceptual basis of stipulating obligations of the host States to guarantee certain standards of protection that can in turn be enforced by foreign investors of other contracting parties through the respective investor-State dispute settlement clauses. This currently still predominant treaty approach does not – and obviously need not – provide any procedures for the enforcement of investors’ obligations. In order to be effective, incorporating respective direct legal responsibilities thus first and foremost also requires a decision on and inclusion of new enforcement venues, another step that would considerably modify the normative structure of investment agreements.35 That said it is not implied that respective proposals have not yet been made and even occasionally implemented in investment treaty practice.36 Rather, this finding merely illustrates another obstacle that is very likely to have contributed to the presently still clearly visible reluctance of most countries to stipulate direct obligations of investors in international agreements. Thereby, it also explains why, despite the more recently recognised need for a 33 See also, e.g., Peter Muchlinski, ‘Policy Issues’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), International Investment Law (Oxford University Press, 2008) 3, 37 et seq.; Peter Muchlinski (n. 3) 681 et seq.; Marc Jacob (n. 31) 36 et seq. 34 Peter Muchlinski (n. 3) 681; Efraim Chalamish, ‘The Future of Bilateral Investment Treaties: A De Facto Multilateral Agreement?’ (2009) 34 Brook. J. Int’l L. 303, 353. 35 See also, e.g., Omar E. García-Bolívar (n. 30) 484 (‘It seems that the most difficult task would be to devise the enforcement mechanisms for those obligations, (…).’). 36 See on this infra, mn. 30 et seq.

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certain reformation of investment law, states in general have until now in investment treaty practice primarily taken recourse to more indirect approaches when dealing with the issue of investors’ responsibilities. To them the analysis now turns. 2. Indirect Obligations of Conduct

Among these regulatory techniques is the inclusion of what might be charac- 18 terised as indirect obligations of conduct for foreign investors. This second category refers to provisions in international investment treaties that do not stipulate obligations as directly addressed to investors but require the contracting parties to the agreements to consider and adopt measures aimed at regulating as well as guiding the behaviour of these private actors. For example, Article 72 of the Economic Partnership Agreement between the CARIFORUM States and the European Union and its member States, titled ‘behaviour of investors’, foresees that the parties ‘shall cooperate and take, within their own respective territories, such measures as may be necessary, inter alia, through domestic legislation, to ensure that’ investors comprehensively abstain from engaging in corruptive business practices (lit. a), act in accordance with core labour standards as stipulated in the ILO (International Labour Organization) Declaration on Fundamental Principles and Rights at Work (lit b), do not ‘manage or operate their investments in a manner that circumvents international environmental or labour obligations arising from agreements’ signed and ratified by the parties (lit. c) as well as ‘establish and maintain, where appropriate, local community liaison processes’ (lit. d).37 The Investment Agreement for the COMESA Common Investment Area provides in its Article 7 para. 2 lit. d that the CCIA Committee shall be responsible for ‘making recommendations to the Council on any policy issues that need to be made to enhance the objectives of this Agreement’. Thereby, it explicitly refers to ‘the development of common minimum standards relating to investment in areas such as’ environmental and social impact assessments, labour standards, respect for human rights and corruption.38 In addition, this category of indirect obligations also encompasses respective provisions whose scope of application is not limited to the behaviour of foreign investors. To mention but one example, Article 9 of the BIT between Japan and Iraq of 7 June 2012 stipulates that ‘[e]ach Contracting Party shall ensure that measures and efforts are undertaken to prevent and combat corruption regarding matters covered by this Agreement in accordance with its laws and regulations’.39 From a broader perspective, the category of indirect obligations of conduct 19 also encompasses provisions in investment agreements that signal a commitment 37 Economic Partnership Agreement between the CARIFORUM States and the European Union and its Member States, reprinted in OJ, L 289/I/3, 30 October 2008. 38 On this Agreement see also already supra, mn. 12. 39 Agreement between Japan and the Republic of Iraq for the Promotion and Protection of Investment, 7 June 2012, available at http://unctad.org/sections/dite/iia/docs/bits/japan_iraq.pdf.

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to corporate social responsibility by the contracting parties. This approach is clearly gaining ground in current treaty practice.40 A number of agreements emphasise the importance of these issues in their preambles. Among them is the BIT between Austria and Kosovo of 22 January 2010 whose preamble expresses the ‘belief that responsible business behaviour, as incorporated in the OECD Guidelines for Multinational Enterprises, can contribute to mutual confidence between enterprises and host countries’ and takes ‘note of the principles of the UN Global Compact’.41 Furthermore, the FTA between Albania and the EFTA States of 17 December 2009, for example, includes an acknowledgement of ‘the significance of responsible corporate conduct and its contribution to sustainable economic development’ and in this regard expresses the support by the parties ‘to efforts for the promotion of relevant international standards’.42 Other FTAs even provide in their investment chapters specific provisions asking the parties to encourage corporations – and thus the primary type of foreign investors – to fulfil the societal expectations on their business conduct. A vivid example is Article 816 of the FTA between Canada and Colombia that entered into force on 15 August 2011: Each Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their internal policies, such as statements of principle that have been endorsed or are supported by the Parties. These principles address issues such as labour, the environment, human rights, community relations and anti-corruption. The Parties remind those enterprises of the importance of incorporating such corporate social responsibility standards in their internal policies.

20

Related stipulations are also enshrined, inter alia, in Article 810 of the 2009 FTA between Canada and Peru, Article 9.17 of the 2010 FTA between Canada and Panama43 as well as in Article 16 of the BIT between Canada and Benin of 40 See also, e.g., UNCTAD, World Investment Report 2011 (United Nations, 2011) 119 et seq.; Jarrod Hepburn and Vuyelwa Kuuya, ‘Corporate Social Responsibility and Investment Treaties’ in Marie-Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (Kluwer, 2011) 589, 601 et seq. 41 Agreement between the Government of the Republic of Kosovo and the Government of the Republic of Austria on Promotion and Protection of Investments, 22 January 2010, available at http://www.mfa-ks.net/repository/docs/Marrveshja_Ks-Aus_(anglisht).pdf. See also, e.g., August Reinisch, ‘Austria’ in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013) 15, 21. 42 Albania–EFTA Free Trade Agreement, 17 December 2009, available at http://www.efta.int/~/ media/Documents/legal-texts/free-trade-relations/albania/EFTA-Albania%20Free%20Trade %20Agreement.pdf. See also, e.g., the Preamble of the Free Trade Agreement between the EFTA States and Peru, 24 June/14 July 2010 (‘affirming their support to the principles of corporate governance in the United Nations Global Compact’), available on the internet at http:// www.efta.int/~/media/Documents/legal-texts/free-trade-relations/peru/EFTA-Peru%20Free %20Trade%20Agreement%20EN.pdf. 43 Canada–Colombia Free Trade Agreement, 15 August 2011; Canada–Peru Free Trade Agreement, 1 August 2009; Canada–Panama Free Trade Agreement, 14 May 2010. The texts of all three FTAs are available on the internet at http://www.international.gc.ca/trade-agreementsaccords-commerciaux/agr-acc/index.aspx?lang=en&view=d. See also, e.g., Pierre-Olivier Savoie, ‘Reservations, Corporate Social Responsibility and other Mechanisms in Support of Sustainable Development in Canada’s Model Foreign Investment Promotion and Protection

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January 2013.44 Furthermore, in a Joint Declaration concerning Guidelines to Investors attached to the Association Agreement between Chile and the European Union as well as its Member States of 18 November 2002, the contracting parties ‘remind their multinational enterprises of their recommendation to observe the OECD Guidelines for Multinational Enterprises, wherever they operate’.45 In addition, Norway presented a – in many ways – quite innovative draft model BIT, that was released in December 2007 for public comments. It stipulated in its Article 32 that the ‘Parties agree to encourage investors to conduct their investment activities in compliance with the OECD Guidelines for Multinational Enterprises and to participate in the United Nations Global Compact.’ For a variety of reasons, however, the project was abandoned by the Norwegian government in June 2009.46 Finally, attention should in this connection be drawn to the already quantitatively potentially quite far-reaching implications resulting from the fact that the European Parliament in its resolution on the future European international investment policy of 6 April 2011 ‘asks the Commission to include, in all future agreements, a reference to the updated OECD Guidelines for Multinational Enterprises’ and ‘[r]eiterates, with regard to the investment chapters in wider FTAs, its call for a corporate social responsibility clause and effective social and environmental clauses to be included in every FTA the EU signs.’47 Although this last mentioned type of provisions does in its current form not 21 envision any legally binding obligations for foreign investors, it is surely noteworthy in the present context already for its explicit recognition of investors’ public responsibilities. The creation of certain linkages as a result of these developments between the previously largely separated realms of international investment agreements and the protection of investments enshrined therein on the one side and expectations on the conduct of investors on the other side48 is another

44

45

46 47

48

Agreement’ in Freya Baetens (ed), Investment Law within International Law (Cambridge University Press, 2013) 232, 238 et seq. Agreement between the Government of Canada and the Government of the Republic of Benin for the Promotion and Reciprocal Protection of Investments, January 2013, available at http:// www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/fipa-apie/benintext.aspx?lang=eng. Agreement establishing an association between the European Community and its Member States, of the one part, and the Republic of Chile, of the other part – Final act, 22002A1230(01), available at http://eur-law.eu/EN/Agreement-establishing-association-European-Community-Member-States-one,398717,d. See on this Damon Vis-Dunbar, ‘Norway Shelves its Proposed Model Bilateral Investment Treaty’ (2009) ITN 7. European Parliament Resolution on the future European international investment policy, 2010/2203(INI), 6 April 2011, paras. 27–28; see also, e.g., European Parliament resolution on corporate social responsibility in international trade agreements, 2009/2201(INI), 25 November 2010; European Parliament resolution on EU-Canada trade relations, P7_TA(2011)0257, 8 June 2011, paras. 8, 11 and 12; European Commission communication, Towards a comprehensive European international investment policy, COM(2010) 343 final, 9. See generally also Jörn Griebel, ‘The New EU Investment Policy Approach’, ch. 4.III.D., 304–325. On the traditional separation between these two realms see already supra, mn. 3.

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obvious indication that the idea of a merger of investors’ rights and responsibilities is slowly but steadfastly gaining momentum in investment treaty practice. 3. Obligations to tolerate Regulatory Measures

The most indirect and at the same time in the current practice of investment agreements most widely used approach to what can, at least in a broader sense, also be related to the issue of investors’ responsibilities finds its manifestation in the incorporation of various regulatory techniques primarily aimed at securing as well as enlarging the policy options of host countries to pursue other legitimate public interests. Three emerging trends in the processes of investment treaty making are particularly worth noticing in the present context. 23 Prominent among these regulatory developments is a specification – and thus almost naturally also certain modification – of the traditionally rather broadly phrased standards of investment protection. This approach has since the beginning of the previous decade been quite frequently taken recourse to in the practice of investment agreements.49 To mention but one example, Paragraph 4 lit. b of Annex 10-B of the FTA between the USA and Oman of 19 January 2006 stipulates that ‘[e]xcept 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.’50 A second method concerns the inclusion of provisions explicitly emphasising the regulatory autonomy of the host States to address issues relating to the public interest. In this regard, Article 10.20 of the Comprehensive Economic Partnership Agreement between India and Malaysia of 18 February 2011 proscribes that ‘[n]othing in this Chapter shall be construed to prevent: (a) a Party or its regulatory bodies from adopting, maintaining or enforcing any measure, (…) consistent with this Chapter that is in the public interest, including measures to meet health, safety or environmental concerns.’51 Fi22

49 For a more detailed evaluation see, e.g., UNCTAD, World Investment Report 2010 (United Nations, 2011) 87 et seq.; Suzanne A. Spears (n. 20) 1048 et seq.; Karsten Nowrot (n. 20) 20 et seq., 36 et seq. 50 Oman–US Free Trade Agreement (OFTA), 19 January 2006, available at http://www.ustr.gov/ trade-agreements/free-trade-agreements/oman-fta/final-text; see also Para. 4 lit. (b) of Annex B of the 2012 U.S. Model Bilateral Investment Treaty, available at www.ustr.gov/sites/default/ files/BIT%20text%20for%20ACIEP%20Meeting.pdf; for related provisions see also, e.g., Annex 2 of the ASEAN Comprehensive Investment Agreement, 26 February 2009, available at http://www.aseansec.org/documents/FINAL-SIGNED-ACIA.pdf; and Annex 10 of the Comprehensive Economic Partnership Agreement between Japan and India, 16 February 2011, available at http://www.mofa.go.jp/region/asia-paci/india/epa201102/index.html. 51 Comprehensive Economic Partnership Agreement between India and Malaysia, 18 February 2011, available at http://commerce.nic.in/trade/IMCECA/title.pdf; see also for example Article 11.11 of the FTA between Australia and the US, Australia–US Free Trade Agreement (AUSFTA), 43 ILM 1248, 1 January 2005, available at http://203.6.168.65/fta/ausfta/final-text; the Articles 102 et seq. of the Economic Partnership Agreement between Japan and the Philippines, 11 December 2008, available at www.mofa.go.jp/region/asia-paci/philippine/epa0609/ index.html; as well as Article XVII (2) of the BIT between Canada and Ecuador, Agreement between the Government of Canada and the Government of the Republic of Ecuador for the

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nally, also the increasingly visible stipulation of broader exception and justification clauses that allow for a deviation from core treaty provisions under certain conditions and occupy already for quite some time an important position in the regulatory framework of world trade law is a notable development in the present context.52 Respective examples are provided by Article 17 of the ASEAN Comprehensive Investment Agreement of 26 February 2009,53 Art. 6.11 of the Comprehensive Economic Partnership Agreement between India and Singapore of 29 June 2005,54 Article 99 of the Economic Partnership Agreement between Japan and the Philippines of 9 September 200655 as well as already by Article XVII (3) of the BIT between Canada and Ecuador of 29 April 1996.56 All of these rather novel provisions do not proscribe legal responsibilities 24 concerning the conduct of foreign investors directly under the respective agreements. In addition, and contrary to the category of indirect obligations of conduct as discussed above,57 they – based on the language employed – also do not even explicitly refer to these actors and the desirability to regulate and guide their behaviour. Nevertheless, a closer examination reveals that they bear an undeniable relationship to the issue of investors’ obligations. It is their common underlying purpose to strengthen and widen the policy space of the contracting parties and, in this regard, they are also primarily intended to reserve for host countries the possibility to impose obligations on investors under domestic law. From the point of view of the rather broadly phrased protection previously enjoyed by foreign investors under most investment agreements, these provisions can, from a systematic perspective and based on their underlying intention, therefore be construed and perceived as indeed also stipulating on the side of foreign investors – more specific and at least partly also new – corresponding obligations to tolerate regulatory measures of host States in furtherance of certain public interest concerns.

52

53 54 55 56 57

Promotion and Reciprocal Protection of Investments, 1 2027 UNTS 196, 6 June 1997, available at http://www.unctad.org/sections/dite/iia/docs/bits/canada_ecuador.pdf. Generally on these types of clauses in investment treaty practice also, e.g., Andrew Newcombe, ‘General Exceptions in International Investment Agreements’ in Marie-Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (Kluwer, 2011) 355–370; Suzanne A. Spears (n. 20) 1059 et seq.; Andrew Newcombe and Lluis Paradell, Law and Practice of Investment Treaties (Kluwer, 2009) 500 et seq.; Alessandra Asteriti, ‘Waiting for the Environmentalists: Environmental Language in Investment Treaties’ in Rainer Hofmann and Christian J. Tams (eds), International Investment Law and its Others (Nomos, 2012) 117, 132 et seq.; Catharine Titi, The Right to Regulate in International Investment Law (Nomos, 2014) 169 et seq. ASEAN Comprehensive Investment Agreement, 26 February 2009, available at http:// www.aseansec.org/documents/FINAL-SIGNED-ACIA.pdf. Comprehensive Economic Partnership Agreement between India and Singapore, 29 June 2005, available at http://commerce.nic.in/trade/international_ta_framework_ceca.asp. See n. 51. See n. 51; see also, e.g., Articles 12, 24 et seq. of the 2007 Norway Draft Model Bilateral Investment Treaty. On the last-mentioned project see already supra, mn. 20. See on this supra, mn. 18 et seq.

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B. Obligations Arising from other Sources of Investment Law

In addition to BITs and other international agreements containing investmentrelated chapters, the present regime on the protection of foreign investments comprises a conglomerate of various interconnected legal sources and other normative steering instruments. In light of this finding, also an evaluation of investors’ obligations should not confine itself to a discussion of treaty law, but must necessarily reflect the respective multi-dimensional character of international investment law itself. 26 While the field of customary international law is until now still largely silent on the issue of specific legal responsibilities of foreign investors,58 the lion’s share of obligations to be complied with by these actors in the course of their business activities has, as already indicated, always found and still finds its basis in the various applicable laws as well as other regulations of the host States in question. These issues cannot and need not be elaborated on in the present contribution. From the perspective of investment law, however, it is noteworthy that also domestic laws specifically dealing with the area of foreign investments are increasingly not merely addressing questions of admission of investments and rights granted to investors, but also stipulate respective obligations for these actors. For example, the 2006 Law on Investment of Vietnam proscribes in Article 20 that investors are not only required to comply with all domestic law, but also, inter alia, to ‘respect the honour and dignity of employees and the customs of Vietnam’ (para. 4) as well as to ‘create favourable conditions for employees to establish or participate in political organizations and socio-political organizations’.59 Paragraph 29 of the 2004 Investment Act of Guyana explicitly highlights the obligation of investors to ‘take all measures necessary and appropriate to ensure that the facilities, factories, products and activities of their investment enterprises protect (…) the natural environment [and] the health and safety of workers and the general public’.60 In addition, related provisions can for instance be found in the Articles 56 to 58 of the Gambia Investment and Export Promotion Act 2010.61 Admittedly, these norms often refer to the standards proscribed for under specific domestic legislation and could in so far thus – at first 25

58 That said, attention should nevertheless be drawn to the relevance of general customary international law for the conduct of foreign investors, in particular with regard to the recognition of individual criminal liability for certain international crimes. See on this, e.g., Andrew Clapham (n. 10) 244 et seq.; Philipp Ambach, ‘International Criminal Responsibility of Transnational Corporate Actors Doing Business in Zones of Armed Conflict’ in Freya Baetens (ed), Investment Law within International Law (Cambridge University Press, 2013) 51–81; Antonio Cassese and Paola Gaeta, Cassese’s International Criminal Law (Oxford University Press, 2013). 59 The Vietnamese 2006 Law of Investment is available on the internet at http://www.vietnamlaws.com/freelaws/Lw59na29Nov 05CIL[10Apr06].pdf. 60 The Guyana Investment Act is available at http://www.moftic.gov.gy/Publications/investment %20act.pdf. 61 The Gambia Investment Act is available at http://www.gipfza.gm/Portals/1/downloads/ GIEPA_Act_2010.pdf.

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sight – be regarded as merely reiterating the general, and in itself rather superfluous obligation, to comply with the laws of the host State. Nevertheless, there is also an independent value and function attributable to them, if only because they explicitly signal the importance attached by the host country to the realisation of other public interest concerns, thereby surely exercising a certain influence on the legitimate expectations of potential foreign investors.62 State contracts, agreements concluded between the host country or a govern- 27 mental entity and a foreign investor, provide another traditional source of investors’ obligations in the realm of international investment law.63 Whereas customarily mostly limited to a stipulation of conventional ‘private’ obligations of foreign investors, these legal instruments have, however, more recently also become the focus of attention in the discourses on investors’ ‘public’ responsibilities.64 The ‘Principles for Responsible Contracts: Integrating the Management of Human Rights Risks into State-Investor Contract Negotiations’, published on 25 May 2011 by the UN Special Representative on Business and Human Rights, serve as an illustrative example.65 From a systematic perspective, two main issues are worth highlighting in this regard. On the one side, a number of standard provisions like in particular so-called stabilisation clauses are increasingly viewed with suspicion due to their potential to also prevent or at least deter governments from applying new laws and policies aimed, inter alia, at the protection of human rights, the environment and core labour standards to respective investors.66 On the other side, State contracts have also themselves been ‘discovered’ as a possible legal instrument for imposing certain public responsibilities on foreign investors. Among the obligations recently proposed in this connection are community engagement, human rights audits, responsibilities for the use

62 On the concept of investor’s legitimate expectations and its relevance in connection with the fair and equitable treatment standard see, e.g., Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2012) 145 et seq.; and Marc Jacob and Stephan Schill, ‘Fair and Equitable Treatment’, ch. 8.I., 700–763. 63 Generally on State contracts and the law applicable to them see, e.g., Jan Ole Voss, The Impact of Investment Treaties on Contracts between Host States and Foreign Investors (Martinus Nijhoff, 2011) 15 et seq.; and André von Walter, ‘Investor-State Contracts in the Context of International Investment Law’, ch. 3.I., 80–92. 64 On the distinction between private and public obligations see already supra, mn. 2. 65 Human Rights Council, Principles for Responsible Contracts: Integrating the Management of Human Rights Risks into State-Investor Contract Negotiations, UN Doc. A/HRC/17/31/Add. 3, 25 May 2011. 66 Ibid., at 12 et seq.; see also, e.g., Andrea Shemberg, Stabilization Clauses and Human Rights, Research Project conducted for the International Finance Corporation et al., 27 May 2009, available at http://www.ifc.org/ifcext/enviro.nsf/AttachmentsByTitle/p_StabilizationClausesandHumanRights/$FILE/Stabilization+Paper.pdf; Jorge Daniel Taillant and Jonathan Bonnitcha, ‘International Investment Law and Human Rights’ in Marie-Claire Cordonier Segger, Markus W. Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (Kluwer, 2011) 57, 62 et seq.; Jernej Letnar Černič, ‘Corporate Human Rights Obligations under Stabilization Clauses’ (2010) 11 German L. J. 210–229; Cordula A. Meckenstock, Investment Protection and Human Rights Regulation (Nomos, 2010) 65 et seq.

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of security personnel, and providing access to effective non-judicial grievance mechanisms for affected individuals and communities.67 28 A more indirect, but potentially quite effective mechanism available for the fostering of investors’ public responsibilities is investment insurance.68 The respective steering functions and potential of international, regional as well as national investment insurance schemes and export credit agencies are increasingly being emphasised in the discourses on possible incentive-based approaches to the incorporation of foreign investors in the broader processes of public interest realisation.69 Thereby, two levels of implementation need to be distinguished. At the initial stage, implications resulting from the envisioned investment project for the protection of human rights and the environment as well as for other public interest concerns can serve as relevant criteria for the decision on whether to grant the investment insurance applied for. This approach is in general already quite frequently adopted in the practice of public investment insurance. Furthermore, in case of a positive evaluation, it is also possible to include respective requirements as direct obligations of the investor concerned in the insurance contracts themselves. A vivid example for this regulatory option is provided by the 2010 MIGA Draft Contract of Guarantee for Equity Investments.70 Its Article 12.1 proscribes that the guarantee holder shall, inter alia, ‘comply with and abide by all laws and regulations of the Host Country in implementing the Investment Project, including environmental laws and regulations and those that protect core labor standards’ (lit. d), operate the project ‘in compliance with the requirements of the Performance Standards and Environmental Guidelines’ (lit. e),71 refrain from engaging in corruption and related practices (lit. f) and ‘allow 67 See, e.g., Human Rights Council (n. 65) 16 et seq.; Bruno Simma, ‘Foreign Investment Arbitration: A Place for Human Rights?’ (2011) 60 ICLQ 573, 594 et seq. 68 Generally on this for example Andreas R. Ziegler and Louis-Philippe Gratton, ‘Investment Insurance’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), International Investment Law (Oxford University Press, 2008) 524–548; and Kaj Hobér and Joshua Fellenbaum, ‘Political Risk Insurance Investment Treaty Protection’, ch. 12.I., 1518–1552. 69 See, e.g., Human Rights Council, Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework, UN Doc. A/HRC/ 17/31, 21 March 2011, 9 et seq.; Human Rights Council, Protect, Respect and Remedy: A Framework for Business and Human Rights, UN Doc. A/HRC/8/5, 7 April 2008, paras. 39 et seq.; Rekha Oleschak, ‘Export Credit and Investment Insurance Agencies – Extraterritorial Obligations of Home-States of Investors’ in August Reinisch and Christina Knahr (eds), International Investment Law in Context (Eleven, 2008) 115–139; Markus Krajewski, ‘Menschenrechtliche Anforderungen an Investitionsgarantien der Bundesrepublik Deutschland’ in Dirk Hanschel, Sebastian Graf Kielmansegg, Uwe Kischel, Christian Koenig and Ralph A. Lorz (eds), Mensch und Recht – Festschrift für Eibe Riedel (Duncker & Humblot, 2013) 1113– 1126. 70 MIGA Draft Contract of Guarantee for Equity Investments, 10 September 2010, available on the internet at http://www.miga.org/documents/disclosure/Contract%20of%20Guarantee%20for%20Equity%20Investments.pdf. 71 See MIGA Performance Standards on Social and Environmental Sustainability, 1 October 2007, available on the internet at http://www.miga.org/documents/performance_standards_social_and_env_sustainability.pdf. On the respective environmental guidelines see for example the information provided under http://www.ifc.org/ifcext/sustainability.nsf/Content/ EHSGuidelines.

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MIGA to conduct environmental and developmental monitoring’ of the insured project and the enterprise in question (lit. m). Finally, attention should also be drawn to the at present quite intensively dis- 29 cussed possibility of obligations for investors under the law of their home States while operating abroad.72 In the absence of respective provisions in investment agreements dealing with this issue,73 such an extraterritorial application of national legal regulations requires, under general public international law, the existence of a recognised jurisdictional basis as well as an exercise of this jurisdiction in a reasonable manner. Aside from the legal challenges connected to this approach, among them the determination of a multinational corporation’s nationality, it is sufficient to note that States are, first, currently under public international law in general not required and, second, overall still rather reluctant to unilaterally regulate the extraterritorial activities of private business actors in the present context.74 Nevertheless, there are a number of international agreements that explicitly require the contracting state parties to provide for an extraterritorial application of their domestic laws with regard to certain issues that are also of considerable relevance for the conduct of foreign investors. This applies for example to the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, proscribing, inter alia, in Article 4 (2) that ‘[e]ach Party which has jurisdiction to prosecute its nationals for offences committed abroad shall take such measures as may be necessary to establish its jurisdiction to do so in respect of the bribery of a foreign public official.’75 IV. Implications for the Realm of International Investment Dispute Settlement

The idea of investors’ responsibilities does not involve issues of substantive 30 law alone. This concept also entails a strong procedural dimension by giving rise to the questions where and by which means respective obligations can be enforced. Aside from the domestic courts of host and home countries as suitable fora for the enforcement of many of the obligations discussed above, it is first and foremost the possible approaches to this issue in as well as its implications for the currently predominant regime of international investment dispute settle72 See, e.g., Human Rights Council, Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework, UN Doc. A/HRC/ 17/31, 21 March 2011, 7; Peter Muchlinski (n. 17) 56 et seq.; Muthucumaraswamy Sornarajah (n. 30) 155 et seq. 73 See, however, for example the respective proposals included in Articles 17 and 31 of the IISD Model International Agreement on Investment for Sustainable Development (n. 18). 74 Generally on these issues and findings, see Human Rights Council, Business and Human Rights: Further Steps towards the Operationalization of the ‘Protect, Respect and Remedy’ Framework, UN Doc. A/HRC/14/27 of 9 April 2010, paras. 46 et seq.; Peter Muchlinski, Multinational Enterprises and the Law (Oxford University Press, 2007) 125 et seq., 526 et seq.; Jennifer Zerk (n. 9) 104 et seq., 145 et seq. 75 The text of the Convention is available at http://www.oecd.org/dataoecd/4/18/38028044.pdf.

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ment that are of particular interest from the perspective of investment treaty law. Whereas the treaty provisions implicitly stipulating investors’ obligations to tolerate regulatory measures76 can be quite easily integrated in and thus do not fundamentally alter the system of investor-State arbitration, a different finding, as already indicated,77 appears to be warranted concerning the inclusion of direct obligations of conduct for foreign investors in investment agreements. 31 Already in light of the fact that until now very few investment treaties proscribe respective direct obligations, it is not surprising that this issue has hardly been dealt with in the practice of investment arbitration. This does not imply that the conduct or rather ‘misconduct’ of investors is not increasingly taken recourse to by investment tribunals when determining whether a specific investment is covered by the scope of application of an investment agreement or whether the host State has actually violated a protection standard enshrined therein. However, it needs to be emphasised that the respective legal consequences of ‘investments made in breach of fundamental principles of the host State’s law, e.g. by fraudulent misrepresentation or the dissimulation of true ownership’ as currently quite intensively discussed in arbitral practice,78 and the implications of other forms of ‘unconscionable conduct’ on the side of the foreign investor,79 do not concern direct investors’ obligations in the narrow sense of the meaning. Rather, they more closely resemble, in the context of international investment law, behavioural expectations being incumbent upon investors on the basis of the principle of good faith,80 a violation of which does not give rise to compensation, but ‘merely’ results in a legal disadvantage with the investor forfeiting the protection under the respective investment agreement.81 76 See supra, mn. 22 et seq. 77 See supra, mn. 17. 78 Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, para. 104; see also, e.g., World Duty Free Company Ltd. v. Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, paras. 138 et seq.; Plama Consortium Ltd. v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, paras. 112 et seq.; Inceysa Vallisoletana S.L. v. El Salvador, ICSID Case No. ARB/03/26, Award, 2 August 2006, paras. 181 et seq.; Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, paras. 100 et seq.; as well as on this issue Zachary Douglas, ‘The Plea of Illegality in Investment Treaty Arbitration’ (2014) 29 ICSID Review–FILJ 155–186; Gabriel Bottini, ‘Legality of Investments under ICSID Jurisprudence’ in Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung and Claire Balchin (eds), The Backlash against Investment Arbitration (Kluwer, 2010) 297– 314. See also Katharina Diel-Gligor and Rudolf Hennecke, ‘Investment in Accordance with the Law’, ch. 6.II.D., 566–576; Ralph Alexander Lorz and Manuel Busch, ‘Investment in Accordance with the Law – Specifically Corruption’, ch. 6.II.E., 577–590. 79 Azinian et al. v. Mexico, ICSID Case No. ARB(AF)/97/2, Award, 1 November 1999, (2000) 39 ILM 537, 553 et seq.; see also Peter Muchlinski, ‘“Caveat Investor”? The Relevance of the Conduct of the Investor under the Fair and Equitable Treatment Standard’ (2006) 55 ICLQ 527, 536 et seq. 80 On the principle of good faith as the basis of these behavioural expectations see also, e.g., Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, paras. 100, 106 et seq.; Plama Consortium Ltd. v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 144. 81 Karsten Nowrot (n. 20) 40.

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That said, a comparable indirect approach particularly in the form of counter- 32 claims initiated by the host country in investor-State arbitration proceedings has nevertheless also occasionally been suggested with regard to the enforcement of investors’ direct obligations of conduct as stipulated in investment agreements. For example the 2005 IISD Model International Agreement on Investment for Sustainable Development82 foresees in its Article 18 that, inter alia, a host or home State may raise a breach of an investor’s obligation under Article 13 (anticorruption) as an objection to jurisdiction of an investment tribunal (lit. a), that ‘[w]here a persistent failure to comply with Articles 14 or 15 is raised by the host state defendant or an intervener in a dispute settlement proceeding under this Agreement, the tribunal hearing such a dispute shall consider whether this breach, if proven, is materially relevant to the issues before it, and if so, what mitigating or off-setting effects this may have on the merits of a claim’ (lit. d), and that a ‘host state may initiate a counterclaim before any tribunal established pursuant to this Agreement for damages resulting from an alleged breach of the Agreement [by an investor]’ (lit. e). From the perspective of traditional international investment law, the attractiveness of this more indirect approach lies undoubtedly in its procedural connectivity and thus the possibility to incorporate it in the present system of investor-State arbitration. And indeed, it can also be found in one of the very few current investment agreements that actually include direct obligations for investors. Article 28 (9) of the 2007 Investment Agreement for the COMESA Common Investment Area83 stipulates in this connection: A Member State against whom a claim is brought by a COMESA investor under this Article may assert as a defence, counterclaim, right of set off or other similar claim, that the COMESA investor bringing the claim has not fulfilled its obligations under this Agreement, including the obligations to comply with all applicable domestic measures or that it has not taken all reasonable steps to mitigate possible damages.

However, there are potentially also more far-reaching and advanced procedu- 33 ral options on how to enforce investors’ direct obligations of conduct in the realm of international investment arbitration, the implementation of which would admittedly require certain modifications of the currently predominant framework of investment dispute settlement. Among them is the possibility to grant host States a right to actively initiate respective proceedings against foreign investors, an approach so far uncommon under investment treaties and even in the practice of contract-based investor-State arbitration still quite rarely taken recourse to.84 Furthermore, it has even sporadically been proposed in the literature to also consider the option of providing for standing of, inter alia, individu82 See already supra, mn. 8. 83 See on this Agreement also supra, mn. 12. 84 On the limited number of cases see, e.g., Mehmet Toral and Thomas Schultz, ‘The State, the Perpetual Respondent in Investment Arbitration? Some Unorthodox Considerations’ in Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung and Claire Balchin (eds), The Backlash against Investment Arbitration (Kluwer, 2010) 577–602; Gustavo Laborde, ‘The Case for Host State Claims in Investment Arbitration’ (2010) 1 J. Int’l Disp. Settlement 97–122.

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als, juridical persons and indigenous communities in the host States to launch respective claims for compensation against foreign investors based on a violation of obligations imposed on them in an investment agreement.85 Although undoubtedly a rather innovative idea to cope with the challenge of how to ensure access to effective remedial processes for other actors negatively affected by an investment,86 it appears, considering the reluctance displayed by States in this regard, currently quite unlikely that this approach will acquire a prominent position in the enforcement regimes established by investment treaty law any time soon. V. Normative Expectations under Soft Law and other International Steering Mechanisms

This chapter has so far primarily focused on the issue of investors’ obligations from the perspective of international investment law in a narrower, legally binding sense of the meaning. And indeed, as shown in the previous sections it is precisely this more hard law oriented, ‘legalistic’ approach to investors’ public responsibilities and in particular the question of whether and how to address them in investment agreements themselves that has recently emerged as one of the major topics in this area of law. That said, the present contribution would surely be incomplete without also discussing the normative expectations on foreign investors and their business activities arising from soft law as well as other non-binding international instruments. Despite some notable developments in the realm of investment treaties, it remains for the time being a fact that – at the global level – the normative ordering idea of public obligations of investors still finds its manifestation largely in steering mechanisms outside the traditional sources of the law of nations.87 35 Respective efforts to create codes of conduct and other guiding instruments for some categories of foreign investors started on the international plane in the beginning of the 1970s. Not all of these projects were successfully concluded. One of the first major undertakings in this regard, the attempts to establish a ‘Code of Conduct on Transnational Corporations’ under the auspices of the United Nations that gained momentum in the wake of the endeavour of in particular many developing countries to create a so-called ‘New International Economic Order’ and saw the publication of three draft versions in June 1982, Febru34

85 See, e.g., Todd Weiler (n. 30) 437 et seq.; Efraim Chalamish (n. 34) 351; see, however, also for a critical comment on such proposals Howard Mann (n. 30) 14 (‘In the view of this author, such an approach is illusory, given the costs of international arbitration processes in many cases, and the difficulties in mounting such cases before tribunals designed for commercial law purposes rather than enforcement of legislation or obligations against corporations.’). 86 Generally on this issue Francesco Francioni, ‘Access to Justice, Denial of Justice, and International Investment Law’ in Pierre-Marie Dupuy, Francesco Francioni and Ernst-Ulrich Petersmann (eds), Human Rights in International Investment Law and Arbitration (Oxford University Press, 2009) 63, 71 et seq. 87 See also, e.g., UNCTAD, World Investment Report 2011 (United Nations, 2011) 111.

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ary 1988 as well as June 1990, was for a variety of reasons abandoned in the year 1992.88 More recently, the same fate awaited for example the ‘Norms on the Responsibility of Transnational Corporations and Other Business Enterprises with Regard to Human Rights’ as approved by the UN Sub-Commission on the Promotion and Protection of Human Rights on 13 August 2003, but subsequently shelved and ultimately more or less silently buried by the former Commission on Human Rights.89 However, these failures should not give rise to the impression that there is a shortage of steering mechanisms in the realm of corporate social responsibility. Quite to the contrary, it is rather the continuous proliferation of standards and the resulting fragmentation as well as inconsistencies and overlaps that constitute some of the major systemic challenges the various different actors involved in this field are currently confronted with.90 As of today, literally thousands of respective instruments have been and con- 36 tinue to be developed under the framework of international organisations, by multi-stakeholder initiatives, business associations as well as individual corporations.91 Many of these standards are sector-specific and thus only apply to certain industries. A considerable number of them also addresses only some public interest concerns. Furthermore, most of them are, with regard to their scope of application, not limited to international investment but cover all types of economic activities. In addition, some of these instruments focus only, or at least primarily, on the conduct of particular categories of business actors, especially transnational corporations. Nevertheless and disregarding the applicability of individual standards in specific cases, it is generally recognised that all these corporate social responsibility mechanisms are in their totality of significant relevance also for foreign investors. Frequently going beyond of what is stipulated 88 For the third and final draft of this instrument see Draft Code of Conduct on Transnational Corporations, UN Doc. E/1990/94, 12 June 1990. Generally on this project, the respective negotiations and its ultimate abandonment see, e.g., Peter Muchlinski (n. 74) 660 et seq.; Sidney Dell, The United Nations and International Business (Duke University Press, 1990) 55 et seq.; Arghyrios A. Fatouros, ‘The UN Code of Conduct on Transnational Corporations: A Critical Discussion of the First Drafting Phase’ in Norbert Horn (ed), Legal Problems of Codes of Conduct for Multinational Enterprises (Kluwer, 1980) 103–125. 89 Norms on the Responsibility of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, UN Doc. E/CN.4/Sub.2/2003/12/Rev. 2 (2003). See on this, e.g., David Weissbrodt and Muria Kruger, ‘Human Rights Responsibilities of Businesses as Non-State Actors’ in Philip Alston (ed), Non-State Actors and Human Rights (Oxford University Press, 2005) 315–350; Larry Catá Backer, ‘Multinational Corporations, Transnational Law: The United Nations’ Norms on the Responsibility of Transnational Corporations as a Harbinger of Corporate Social Responsibility in International Law’ (2006) 37 Colum. Hum. Rts. L. Rev. 287–389. 90 See, e.g., UNCTAD, World Investment Report 2011 (United Nations, 2011) 113; Karsten Nowrot, The 2006 Interim Report of the UN Special Representative on Human Rights and Transnational Corporations: Breakthrough or Further Polarization? (TELC, 2006) 6 et seq. 91 UNCTAD, World Investment Report 2011 (United Nations, 2011) 111 (‘a complex, multilayered, multifaceted and interconnected universe of standards’). From the very numerous contributions on the concept and standards of corporate social responsibility see, e.g., UNCTAD, Investment and Enterprise Responsibility Review (United Nations, 2011); Ramon Mullerat (ed), Corporate Social Responsibility (Kluwer, 2011).

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as legal requirements,92 they outline and clarify additional public obligations these actors are expected by society to comply with in the course of their investments and other business activities. Despite being from a formal perspective merely of a non-legally binding character, their considerable normative steering potential is further emphasised by the fact that they increasingly also provide for often quite elaborated compliance promotion and enforcement mechanisms such as reporting requirements, certification programmes, monitoring processes, and complaint procedures. 37 In the course and for the purposes of this chapter, it is neither possible nor necessary to provide an in-depth evaluation of all or even many of these standards. Rather, in the following a selective overview will be given on four of the best-known as well as in practice most authoritative and influential steering instruments in this regard. It is first and foremost them that also some more recently concluded international investment agreements at least implicitly refer to when stressing the importance of ‘internationally recognized standards of corporate social responsibility’.93 A. OECD Guidelines for Multinational Enterprises 38

Already for quite some time, the OECD Guidelines for Multinational Enterprises occupy a prominent position among the normative guiding instruments aimed at clarifying the societal expectations on the conduct of investors. Originally adopted by the OECD Ministerial Council and adhering governments on 21 June 1976 as an annex to the Declaration on International Investment and Multinational Enterprises, the OECD Guidelines were subsequently amended on five occasions with the most recent and rather comprehensive updating process having been successfully concluded in May 2011.94 Contrary to what its title might imply, this code of conduct is with regard to its personal scope of application not only concerned with multinational enterprises but, first, also addressed to the currently forty-two adhering countries95 and, second, applies as well to 92 Generally on the multi-dimensional relationship between legal regulations and corporate social responsibility standards Karsten Nowrot, The Relationship between National Legal Regulations and CSR Instruments: Complementary or Exclusionary Approaches to Good Corporate Citizenship? (TELC, 2007) 6 et seq. 93 Article 816 of the FTA between Canada and Columbia, 15 August 2011. See on this as well as generally on this development in investment treaty practice supra, mn. 19 et seq. 94 For the text of the updated OECD Guidelines as well as accompanying documents see OECD Guidelines for Multinational Enterprises, 2011, available at http://www.oecd.org/dataoecd/ 43/29/48004323.pdf. On the origins of the OECD Guidelines, their content as well as the recent review process see Beatriz Huarte Melgar, Karsten Nowrot and Wang Yuan, The 2011 Update of the OECD Guidelines for Multinational Enterprises: Balanced Outcome or an Opportunity Missed? (TELC, 2011) with numerous further references. 95 See the respective sentences in paragraph 1 of the OECD Guidelines: ‘The Guidelines provide voluntary principles and standards for responsible business conduct consistent with applicable law and internationally recognised standards. However, the countries adhering to the Guidelines make a binding commitment to implement them (…).’

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corporations that are not multinational in character having their seat in the territory of one of these States.96 Furthermore, it is noteworthy that concerning their material scope of application, the OECD Guidelines as a result of the 2011 update now also explicitly deal with and provide guidance on the controversially discussed question of what is frequently referred to as ‘supply chain responsibility’ of business actors,97 an issue whose relevance for foreign investors hardly requires further explanation. The main part of the OECD Guidelines, containing the substantive and proce- 39 dural recommendations as addressed to corporate entities, comprises eleven chapters. The first two overarching sections, titled ‘Concepts and Principles’ as well as ‘General Policies’ respectively, address questions such as the normative character of this instrument, its relationship to domestic laws of the home and host States, its scope of application as well as the role played by adhering governments in promotion and enforcement of the Guidelines. In addition, these chapters stipulate general guiding principles – among them the due diligence approach, engagement with relevant stakeholders, respect for internationally recognised human rights, and the development of effective self-regulatory practices and management systems – that respective corporations are expected or encouraged to comply with when implementing the more specific recommendations as enshrined in the subsequent sections. These following nine chapters together with the respective commentaries attached to them each deal with and provide guidance on a specific issue and its implications for business conduct, namely with regard to questions of disclosure and reporting (III.), respect for human rights (IV.), employment and industrial relations (V.), environmental concerns (VI.), the combating of bribery, bribe solicitation and extortion (VII.), the protection of consumer interests (VIII.), science and technology (IX.), competition laws and policies (X.) as well as matters of tax compliance (XI.).98 Aside from providing a rather comprehensive list of substantive and procedu- 40 ral recommendations, the OECD Guidelines also distinguish themselves by establishing an in part comparatively sophisticated implementation framework, thereby mirroring the more general trend of an increasing emphasis on the development of ‘soft’ regulatory promotion and enforcement techniques including grievance mechanisms in the realm of non-mandatory steering regimes in order to foster the necessary effectiveness and credibility of these approaches.99 The respective implementation procedures and the institutional framework entrusted 96 See, e.g., paras. 5 and 6 of the Concepts and Principles of the OECD Guidelines. 97 For a more comprehensive evaluation see Beatriz Huarte Melgar, Karsten Nowrot and Wang Yuan (n. 94) 25 et seq. 98 Concerning a more detailed overview of these chapters including the amendments introduced as a result of the 2011 update see Beatriz Huarte Melgar, Karsten Nowrot and Wang Yuan (n. 94) 33 et seq. 99 Generally on effectiveness and credibility as two of the key criteria for the evaluation of corporate social responsibility initiatives Human Rights Council, Business and Human Rights: Mapping International Standards of Responsibility and Accountability for Corporate Acts, UN Doc. A/HRC/4/35, 19 February 2007, para. 56 et seq.

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with administering them find their legal basis in the Decision of the Council on the OECD Guidelines of 25 May 2011 and the ‘Procedural Guidance’ attached thereto.100 At a decentralised level, the implementation activities are assigned to National Contact Points (NCPs) to be established in all adhering countries.101 Aside from informational and promotional activities, the most notable function assigned to NCPs concerns their central role in the ‘resolution of issues that arise relating to the implementation of the Guidelines in specific instances’.102 This complaint procedure or non-judicial grievance mechanism, giving all stakeholders concerned the possibility to file a formal complaint to a governmentbacked institution against a corporation based on an alleged non-compliance with the OECD Guidelines, has gained increasing recognition in recent years.103 As of June 2014, 185 respective complaints had been filed against one or more individual corporations by NGOs and individuals alone.104 At the centralised level of the OECD itself, it is primarily the Investment Committee that is entrusted with the task of facilitating a coordinated and uniform application of the Guidelines. Corresponding to the growing importance of investors from developing countries and other non-adhering States in the international economic system as highlighted in the Preface of the Guidelines, the OECD Investment Committee ‘shall engage with non-adhering countries on matters covered by the Guidelines in order to promote responsible business conduct worldwide’.105 With regard to its more inward-oriented functions, the Committee, assisted by the OECD Secretariat, plays for example an important role in the supervision of NCPs106 and issues clarifications on the content of the OECD Guidelines in particular also with regard to ‘specific instances’.107 In light of this last mentioned competence, it is thus arguable that the Investment Committee occupies a status that is at least to a certain extent comparable to a dispute settlement appellate institution.

100 Reprinted in: OECD Guidelines for Multinational Enterprises, 2011, 67 et seq. 101 See para. 11 of the Concept and Principles of the OECD Guidelines and para. I.1 of the respective OECD Council Decision. On the composition and functions of NCPs see also Beatriz Huarte Melgar, Karsten Nowrot and Wang Yuan (n. 94) 45 et seq. 102 Para. I.1 of the OECD Council Decision, 25 May 2011. 103 On the procedure for specific instances see part I.C. of the Procedural Guidance. 104 See OECD Watch, Quarterly Case Update, June 2014, available at http://oecdwatch.org/ publications-en/Publication_4084. 105 See para. II.3 of the OECD Council Decision, 25 May 2011. 106 See para. II.2 of the Procedural Guidance. 107 Paras. II.1 and II.2 lit. c of the Procedural Guidance; generally on the functions of the Investment Committee and the OECD Secretariat in connection with the OECD Guidelines see also Beatriz Huarte Melgar, Karsten Nowrot and Wang Yuan (n. 94) 51 et seq.

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B. ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy

In line with the focus of the ILO, the Tripartite Declaration of Principles Con- 41 cerning Multinational Enterprises and Social Policy as being another well-established corporate social responsibility instrument of particular relevance for foreign investors primarily contains recommendations on business and investor’s conduct in the field of labour and industrial relations. Adopted by the ILO Governing Body on 17 November 1977 and last amended in March 2006,108 this code of conduct as well has a wider personal scope of application than its title might initially suggest. In addition to multinational enterprises, its standards are also addressed to governments, the employers’ and workers’ organisations of home and host States as well as national corporations.109 Among the issues covered by the specific recommendations as enshrined in the ILO Tripartite Declaration are questions of employment opportunities including non-discrimination in this regard, security of employment, and the facilitation of training for all levels of employees.110 In addition, the code of conduct deals with working conditions including safety and health standards as well as the elimination of child labour, and promotes the observance of principles of industrial relations such as respective aspects of freedom of association, collective bargaining and access of workers to effective grievance mechanisms.111 Concerning an adequate implementation framework for the promotion of 42 these recommendations, the approach currently adopted by the ILO Tripartite Declaration clearly leaves considerable room for improvement,112 especially if compared to the respective mechanisms established with regard to the OECD Guidelines.113 At present, two main follow-up instruments are employed. First, the ILO Subcommittee on Multinational Enterprises conducts periodic surveys whereby member States as well as national employers’ and workers’ organisations provide information on their experience with the Declaration. For a variety of reasons, this approach has even by the ILO itself ‘not been viewed as a success’.114 Second, a Procedure for the Examination of Disputes Concerning the Application of the Tripartite Declaration by Means of Interpretation, adopted in 108 The current version of the ILO Tripartite Declaration and its accompanying documents are available at http://www.ilo.org/empent/Publications/WCMS_094386/lang--en/index.htm. Generally on this instrument see also, e.g., Roger Blanpain and Michele Colucci, The Globalization of Labour Standards – The Soft Law Track (Kluwer, 2004); Andrew Clapham (n. 10) 211 et seq.; Peter Muchlinski (n. 74) 473 et seq. 109 See ILO Tripartite Declaration, paras. 4 and 11. 110 Ibid., paras. 13–32. 111 Ibid., paras. 33–59. 112 Concerning a similar critical perception see also, e.g., Andrew Clapham (n. 10) 216 et seq.; Roger Blanpain and Michele Colucci (n. 108) 76 et seq. 113 See on this supra, mn. 40. 114 International Labour Conference, Report of the Chairperson of the Governing Body, June 2011, 22, available at http://www.ilo.org/wcmsp5/groups/public/---ed_norm/---relconf/documents/meetingdocument/wcms_156124.pdf.

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November 1980 and last modified in March 1986, provides for the possibility of clarifications at the request of governments and a limited circle of employers’ and workers’ organisations, but has rarely been successfully applied in practice.115 Against this background, it is encouraging that the ILO started in November 2010 a formal process aimed at reviewing and potentially modifying the follow-up mechanisms of the Tripartite Declaration.116 C. United Nations Global Compact 43

Contrary to the two previously introduced instruments, the UN Global Compact is a membership-based steering regime.117 Founded in 1999 at the initiative of the then UN Secretary-General Kofi Annan, the Global Compact comprised, as of June 2014, of more than 8,0007,900 business enterprises as well as almost 4,200 other participants, among them UN agencies, civil society organisations, business associations, cities, academic institutions and trade unions.118 At the substantive core of this initiative lies the expectation that participating companies will contribute, in the course of their business activities as well as by way of other joined and individual initiatives, to the advancement of ten principles in the areas of human rights, environmental protection, labour and social rights, as well as anti-corruption. In the field of international human rights, participating enterprises agree to ‘support and respect the protection of internationally proclaimed human rights’ (Principle 1), as well as to ensure that ‘they are not complicit in human rights abuses’ (Principle 2). Concerning the realisation of international labour and social standards, the Global Compact asks the individual business actors to ‘uphold the freedom of association and the effective recognition of the right of collective bargaining’ (Principle 3), to contribute to the ‘elimination of all forms of forced and compulsory labour’ (Principle 4), to the ‘effective abolition of child labour’ (Principle 5), as well as to the ‘elimination of discrimination in respect of employment and occupation’ (Principle 6). In the realm of environmental protection, companies ‘should support a precautionary approach to environmental challenges’ (Principle 7), are encouraged to ‘undertake initiatives to promote greater environmental responsibility’ (Principle 8), and are asked to ‘encourage the development and diffusion of environmentally 115 The Procedure is available at http://www.ilo.org/empent/Publications/WCMS_094386/lang-en/index.htm. 116 See on this, e.g., International Labour Conference (n. 114) 22 et seq.; ILO, Report of the Tripartite Ad Hoc Working Group on the Follow-up Mechanism of the MNE Declaration, 23 February 2012, GB.313/POL/9(Rev.), available at http://www.ilo.org/wcmsp5/groups/ public/---ed_norm/---relconf/documents/meetingdocument/wcms_173721.pdf. 117 For a more detailed evaluation of the Global Compact, including its origins, institutional structure and the so-called ‘integrity measures’ provided for, see for example Andreas Rasche and Georg Kell (eds), The United Nations Global Compact (Cambridge University Press, 2010); Karsten Nowrot, The New Governance Structure of the Global Compact (TELC, 2005) with further references. 118 See the information provided at http://www.unglobalcompact.org/participants/search.

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friendly technologies’ (Principle 9). These original nine principles were, on the occasion of the ‘Global Compact Leaders Summit’ in New York on 24 June 2004, supplemented with the proposition that companies ‘should work against all forms of corruption, including extortion and bribery’ (Principle 10). In order to secure the observance of these ten substantive principles by partic- 44 ipating business actors and thus to advance the goals pursued by this initiative, the steering regime of the Global Compact also provides for a number of socalled ‘integrity measures’. Aside from a Policy on the Use of the Global Compact Name and Logos,119 participating companies are required to report annually on their efforts in implementing the values and expectations stipulated in the ten principles or face the sanctions of becoming listed as ‘non-communicating’ on the Global Compact website and, following a period of one year under this status, of losing their membership.120 In addition, all individuals and other actors are granted the possibility to file a formal complaint to the Global Compact Office against any participating company based on an alleged ‘systematic or egregious abuse of the Global Compact’s overall aims and principles’.121 D. United Nations Guiding Principles on Business and Human Rights

The most recent addition to the circle of important steering instruments being 45 of relevance for foreign investors in the realm of corporate social responsibility are the Guiding Principles on Business and Human Rights as endorsed by the UN Human Rights Council in its resolution 17/4 on 16 June 2011.122 This document is the result of a rather comprehensive research, consultation, and evaluation process that started with the appointment of John G. Ruggie as Special Representative of the UN Secretary-General on the Issue of Human Rights and Transnational Corporations and other Business Enterprises in July 2005.123 Developed at the request of the Human Rights Council,124 the Guiding Principles are primarily aimed at specifying and operationalising the conceptual policy 119 UN Global Compact, Policy on the Use of the Global Compact Name and Logos, last updated 19 February 2013, available at http://www.unglobalcompact.org/AboutTheGC/Global_Compact_Logo/GC_Logo_Policy.html. 120 Policy for the ‘Communication on Progress’, last updated 1 March 2013, available at http:// www.unglobalcompact.org/docs/communication_on_progress/COP_Policy.pdf. 121 See Note on Integrity Measures, last updated 12 April 2010, para. 4, available at http:// www.unglobalcompact.org/docs/about_the_gc/Integrity_measures/Integrity_Measures_Note_EN.pdf; as well as Karsten Nowrot (n. 117) 27 et seq. 122 Resolution 17/4 is reprinted in: Report of the Human Rights Council, UN Doc. A/66/53 (2011), 136 et seq. For the text of the Guiding Principles see Human Rights Council, Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework, Annex, UN Doc. A/HRC/17/31, 21 March 2011. See also, for example, Radu Mares (ed), The UN Guiding Principles on Business and Human Rights: Foundations and Implementation (Martinus Nijhoff, 2012). 123 On the activities of the Special Representative see for example the information provided at http://www.ohchr.org/en/Issues/TransnationalCorporations/Pages/SRSGTransCorpIndex.aspx. 124 See Human Rights Council Resolution 8/7, 18 June 2008, para. 4.

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framework ‘Protect, Respect and Remedy’ as presented by the Special Representative already in April 2008.125 46 In line with the underlying framework they intend to make applicable in practice, the Guiding Principles should not be viewed as a ‘traditional’ code of conduct that stipulates more or less specific societal expectations on the activities of economic actors and, in this regard, provides for a number of implementation mechanisms. Rather, in the eyes of their author, they aspire to be ‘an authoritative focal point’ that is meant to serve as a ‘coherent and comprehensive template’ for the allocation of responsibilities in the realm of business and human rights.126 Therefore, the Guiding Principles are most appropriately to be understood as an overarching conceptual outline of future directions for the application and development of other soft as well as hard law instruments in this field. Nevertheless, aside from elaborating on the obligations of States to protect against human rights infringements by business actors (Guiding Principles No. 1 to 10), this document contains in its principles 11 to 31 also a considerable number of recommendations on the implementation of the corporate responsibility to respect human rights. These recommendations include the approach of human rights due diligence and the need for and effectiveness of non-judicial grievance mechanisms that apply in particular also to foreign investors and, more generally, are due to the accentuated status enjoyed by the Guiding Principles likely to exercise a notable influence on the evolution of respective regulatory approaches in international investment law in the years to come. VI. Outlook 47

The issue of investors’ public obligations towards the societies in which they operate is unlikely to vanish from the discourses on and practice of international investment law any time soon. Closely intertwined with and stimulated by the broader discussions on how to integrate non-State actors into the normative structure of the international system, numerous developments justify the conclusion that this subject has emerged as an important component of the current processes aimed at what can be qualified as no less than a reformation of this area of law by rebalancing the rights and obligations of States and investors. Thereby, it is undeniable that at present many countries still display a rather reserved attitude, especially when it comes to stipulating direct legal investors’ obligations in investment agreements. And indeed, in the same way as several other concerns in the realm of international investment relations, also the normative ordering idea of public responsibilities of investors will probably always find its expression in various different steering instruments – domestic and transnational ones, 125 Human Rights Council, Protect, Respect and Remedy: A Framework for Business and Human Rights, UN Doc. A/HRC/8/5, 7 April 2008. 126 Human Rights Council, Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework, UN Doc. A/HRC/17/31, 21 March 2011, Introduction, paras. 5 and 14.

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in the fields of hard and of soft law. However, already in light of the fact that today’s international investment law first and foremost comprises treaties, also this source of law cannot and – as indicated by an emerging practice – will not be immunised from the ongoing efforts to approach and address the issue of respective investors’ responsibilities in appropriate ways. That said, it is not implied that a simple and straightforward generalised an- 48 swer exists to the question of how to incorporate obligations of investors in international investment treaties themselves. As already indicated, various challenges on the level of substantive as well as procedural law arise and need to be adequately addressed in the implementation of this regulatory approach in practice.127 As a result, it might very well be that the search for workable and acceptable solutions eventually leads to paths so far less taken in treaty practice and that, consequently, new generations of investment agreements will bear in many ways only a remote resemblance to what they once were. This is most certainly rather a medium- or even long-term perspective. Nevertheless, the efforts to meet these challenges appear worth continuing, not least in light of the chances also arising from them. The continued viability of international investment law can only be secured if this legal framework is generally perceived as reflecting an equilibrium between the protection of foreign investors on the one side and the rights and interests of the host States as well as their populations on the other. In this regard, providing for politically feasible, acceptable, and thus sustainable answers to the questions surrounding the multi-faceted investors’ obligations is surely among the main tasks that need to be accomplished.

127 See supra, mn. 15 et seq.

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Chapter 11: Dispute Resolution I. Alternatives to Investment Arbitration1

Jan K. Schäfer A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The Concept of ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Mediation Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Promoting ADR in Commercial Dispute Resolution . . . . . . . . . . . . . . . . 4. ADR’s Inroads Into the Field of Investor-State Disputes . . . . . . . . . . . . 5. Overview of Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 7 12 15

B. Advantages of Making Use of ADR Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General Advantages of ADR Methods in Solving Disputes. . . . . . . . . 2. Specific Advantages of ADR Methods in Investor-State Disputes

16 17 18

C. References to ADR Methods in Investment Protection Instruments . . . . 1. Multi-Tier Investor-State Dispute Resolution Clauses. . . . . . . . . . . . . . . a) Notifying a Treaty Dispute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Cooling-Off Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Negotiations and Consultations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Reference to ADR Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) The Binding Dispute Resolution Mechanism . . . . . . . . . . . . . . . . . . . . . . 2. No Limitation of the Use of ADR Methods . . . . . . . . . . . . . . . . . . . . . . . . . .

24 25 26 29 31 33 38 41

D. Recent Initiatives Undertaken to Explore and Promote the Use of ADR in Investment Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Academic Interest in ADR in Investor-State Disputes. . . . . . . . . . . . . . . a) The Coe Article and Practitioners’ Comments. . . . . . . . . . . . . . . . . . . . b) The Salacuse Article. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The UNCTAD Research Initiative on Alternatives to Arbitration . .

46 48 49 53 57

E. The 2012 IBA Rules for Investor-State Mediation . . . . . . . . . . . . . . . . . . . . . . . 65 1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 2. Overview of Topics of IBA Mediation Rules. . . . . . . . . . . . . . . . . . . . . . . . . 68 3. The Provisions of the IBA Mediation Rules in Detail . . . . . . . . . . . . . . . 71 a) Article 1 – Scope of Application. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 b) Article 2 – Commencement of Mediation . . . . . . . . . . . . . . . . . . . . . . . . . . 74 c) Article 3 – Independence and Impartiality of Mediator . . . . . . . . . . 76 d) Articles 4, 5 and 6 – Designation, Resignation and Replacement of Sole Mediator and Co-Mediators . . . . . . . . . . . . . . . . . . . . . . . . . 78 e) Article 7 – Role of Mediator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 f) Article 8 – Conduct of the Mediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 g) Article 9 – Mediation Management Conference . . . . . . . . . . . . . . . . . . 91 h) Article 10 – Privacy and Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . 94 i) Article 11 – Settlement and Termination of Mediation . . . . . . . . . . . 97 j) Article 12 – Costs and Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 4. Early Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 F. Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Literature: Tillmann Rudolf Braun, ‘Investor-State Mediation: Is there a Future?’ in Arthur W. Rovine (ed), Contemporary Issues in International Arbitration and Mediation (Martinus 1 The views expressed in this article are personal to the author and do not necessarily represent the views of King & Spalding LLP or its clients.

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I. Alternatives to Investment Arbitration Nijhoff, 2010) 374–388; Jack J. Coe, ’Towards a Complementary Use of Conciliation in Investor-State-Disputes – A Preliminary Sketch’ (2005) 12 UC Davis J. Int’l L. & Pol’y 7–46; Jeswald W. Salacuse, ‘Is There a Better Way? Alternative Methods of Treaty-Based, InvestorState Dispute Resolution’ (2007) 31 Fordham Int’l L. J. 138–185; Margrete Stevens and Ben Love, ‘Investor